Apartment Construction Falls Short of Residential Demand; Rent Skyrockets

Economic growth underpins strong apartment absorption.

Corporate expansions continue to drive in-migration as companies and job seekers seek refuge from the high costs found in other major metros. Allstate Insurance is building a new corporate campus that will provide employment for approximately 2,500 people. Other companies like Voya Financial and Nationwide Insurance have brought new jobs to Phoenix, supporting the second highest net migration in the country last year. Strong in-migration, when paired with job growth at 3.3 percent over the past four quarters, should prove favorable for household formation in the market. The increased rental demand tightened vacancy and bolstered the nation’s best annual rent growth.

Investors see further upside as market liquidity soars.

Acquiring apartment assets in Phoenix has become a top priority for many private and institutional capital sources as investors see continued strong fundamentals driving superior rent growth into the next year and later. Investment sales activity for properties above $20 million skyrocketed in the first half of 2019 and if the current pace of closings continues, the market could see historical record volume for the full year. The increased demand for assets has created a highly competitive bidding environment for all asset types and locations. Newly developed mid-rise and garden properties are heavily targeted acquisitions throughout the Valley. Locations that attract extra attention include: South Scottsdale, Tempe and the close-in western suburbs. Many of these locations are highly coveted for their live/work/play focus, which tends to attract highly valued professional renter households. In addition, the deep inventory of 1980s and 1990s apartment properties in the market’s inventory has allowed value-add opportunity purchases to endure. Recent sales for these assets have been focused in the city of Phoenix and Tempe. Overall, elevated investor engagement and strong liquidity should continue into 2020 as both buyers and sellers view current pricing as advantageous with pro forma rent growth staying well above the national average.

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