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Phoenix Multifamily Market Report – May 2023

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Phoenix Multifamily Market Report – May 2023

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Chris Nebenzahl

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Phoenix Apartment Fundamentals Mired in a Slog Amid New Supply, Softening Demand

During and immediately after the COVID-19 pandemic, the Phoenix apartment market was one of the best performing metro areas in the nation. However, as migration has slowed, relative prices have soared, and new development has boomed, the multifamily market in the desert has quickly soured. Intermediate to long term demand drivers will remain especially migration. In fact, recent data from the U.S. Census Bureau showed that Maricopa County was the fastest growing county in the nation for domestic migration between July 1, 2021 and June 30, 2022. Yet the short-term challenges to property performance and rent growth will be immense in the coming years.
Phoenix Market Snapshot
Radix Rent and Operating Performance

According to Radix data, Phoenix multifamily fundamentals lag the national average with rent, occupancy, and traffic having fallen meaningfully on a year-over-year basis. Supply will continue to put downward pressure on rents and occupancy as the pace of new construction in Phoenix reaches new heights.

Traffic and Leasing Have Slowed After Record Pace

  • Properties across the Phoenix metro are averaging 8 tours per property per week, slightly under the national average of 8.6 tours per week according to Radix’s weekly traffic data.
  • Traffic is strongest in the Central Phoenix South, West Mesa, South Scottsdale and North Tempe submarkets. These four submarkets all average more than 10 tours per property per week and are the only submarkets in the Valley averaging double-digit traffic. Demand is highest in the neighborhoods east of downtown around ASU and the intersection of the 101 and 202 freeways.
  • Many of the same submarkets also represent the fastest traffic growth in Phoenix. North Tempe and South Scottsdale have added more than a tour per property per week in the past month, while South Tempe/Ahwatukee has added nearly 1.5 tours per property over the past month.
  • Unsurprisingly, Mesa, Tempe, and Scottsdale submarkets dominate leasing as well, as properties are averaging more than 3 new leases signed per week.
  • Further north, the Deer Valley submarket is also averaging 3 tours per property on a weekly basis.
Phoenix Traffic and Leases
Source: Radix

New Supply Impacting Occupancy and ATR

  • While traffic and leasing are strongest in the more densely populated submarkets of Mesa and Scottsdale, occupancy remains highest in East Mesa and North Scottsdale/Fountain Hills. Occupancy is also strong in North Glendale/Peoria in the northwest corner of the metro. These submarkets represent the highest occupancy rates in Phoenix, however, new supply is impacting nearly all submarkets, as the leading submarkets for occupancy only maintain an average rate of 94.5%
  • On the opposite side of the spectrum, Glendale South lags with an average occupancy of 92.6%, and Central Phoenix South, while showing signs of improvement, still maintains occupancy of just 93.3%. As a reflection of how quickly occupancy has cooled, the Central Phoenix South occupancy rate was 95.4% a year ago.
  • Properties average 18 units available to rent across the metro.
  • Strong traffic in South Scottsdale is a welcome sight for many operators in the submarket as it currently leads the metro with an average of 23 apartments available to rent per property. Not far behind are the submarkets of Paradise Valley, Maryvale and Deer Valley, which all average 22 units available.
 
 
Phoenix Occupancy Rate
Source: Radix

Softening Demand Leads to Declining Rents, Rising Concessions

  • According to Radix, net effective rents are down across the Valley, as new supply has softened demand for existing stabilized deals. On a year-over-year basis, only the Sunnyslope submarket has posted rent growth. All other markets have seen net effective rents fall by 1 percent or more.

  • Through the spring leasing season, some submarkets are showing signs of growth. Paradise Valley, Deer Valley, and South Mesa all registered 30 basis points of NER growth last week. However rents in each of these submarkets are at least $100 below the metro average and have experienced significant rent declines in the past year.

  • The most expensive rents remain in the South and North Scottsdale submarkets where average net effective rent is more than $1,900.

  • As new supply has hindered rent growth, it has also led to increased concessions across the market. Concessions are up in every submarket compared to this time last year, with concessions in the hot Central Phoenix South and South Scottsdale Submarkets averaging more than double the metro average. Concessions will likely remain, as new supply is absorbed.

Phoenix NER May 2023
Source: Radix

New Supply Pipeline

  • The development pipeline in Phoenix can be viewed through multiple lenses. There are 95 projects currently under construction in the metro, according to data from BuildCentral. Coupled with the significant new supply that has been delivered in the past 2 years, there is a lot of lease up inventory for existing properties to compete with.

  • However, the existing construction pipeline represents only 20 percent of the entire development pipeline, as there are currently 351 projects in various planning stages across the Valley. Some of these projects will be canceled, as interest rates and softening fundamentals will make it difficult for developers to build, but even if a fraction of the deals in the planning stages get built, Phoenix is looking at long term supply pressures that will have negative impacts on property operations.

Pc
Source: BuildCentral

Employment Trends 

  •  The Phoenix job market continues to grow as employment remains the one stalwart in today’s economy. Over the past 12 months, more than 66,000 new jobs have been added in the Valley, and the unemployment rate is staggeringly low at 2.9%.
  • Despite some headline bankruptcies like Carvana and the closure of Silicon Valley Bank, both of which have had significant impacts on employment in Phoenix, the job market continues to expand.
New Jobs Added in Phoenix
Source: Bureau of Labor Statistics
Phoenix Unemployment
Source: Bureau of Labor Statistics

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