WESTERN SNAPSHOT, AUGUST 2008

Phoenix Multifamily Market

Metropolitan Phoenix remains one of the nation’s top, long-term markets for growth. The city’s historically strong job growth has fallen flat in 2008, which is attributable to losses related to housing. The construction and finance sectors should have completed their job decreases, and modest employment growth should return in late 2008 or early 2009. Unemployment in the area stands at 3.6 percent, well below the national average of 4.9 percent.

While Phoenix is not immune to the national economic slowdown, indicators are strong for extended success in the apartment industry. The city’s multifamily market has experienced a decrease in construction and job growth in the midst of housing and credit market problems. An excess supply of housing continues to mount, and defaults and foreclosures are expected to be above the national average in 2008. For-sale housing demand has been diminished by credit availability and stricter qualification standards, which should favorably impact rent demand during the short-term.

Multifamily market fundamentals have recently deteriorated with increased vacancies and concessions paired with negligible lease rate growth. Vacancy in 2007 rose to 10.2 percent, up from 7.8 percent at year-end 2006. Average rental rates did rise during 2007 from just more than $780 to the $800 range. Shadow market rentals and condominium reversions are diluting the overall multifamily tenancy figures. This will push vacancy rates modestly higher in the short-term.

New construction will add approximately 5,500 to 6,000 multifamily units to the market in 2008 and 2009. New construction starts will decrease, however, as investment capital for new development is now extremely difficult to obtain. Expect to see effects of that tightening in second half 2009 and 2010, serving to assist recovery.

During first quarter 2008, there were approximately 10,200 new units under construction throughout metro Phoenix. The main hubs of new construction are found in the north Phoenix area along the Black Canyon Freeway and near Deer Valley Airport, as well as in southwest Phoenix. Job growth in those submarkets is driving the demand for new construction. Downtown Phoenix also is experiencing some construction activity. The Desert Ridge and Southeast Valley areas are the focus of planned future development, but initiation of those proposed projects has yet to take place. Development of new properties is primarily being led by Fairfield Residential, Trammel Crow Development, Grey Development and Trillium Residential.

Multifamily sales activity has dropped rather dramatically in 2008. During the first half of the year, only 15 properties have been sold, and the remainder of 2008 should continue at that pace. The prediction here is that only 30 to 40 properties total will be sold in 2008, a significant decrease from previous years when the market saw 139 properties sold in 2007, 173 properties sold in 2006 and 206 properties sold in 2005.

Investors are still showing interest in the Phoenix marketplace, but are on the sidelines awaiting shifts in market conditions. The gap between buyer and seller price expectations is impeding successful sales negotiations throughout Phoenix.

The metro Phoenix apartment market should see significant strengthening in 2010 through 2012 with job and population growth rebounding to normalcy, combined with a significant decrease in single-family and multifamily construction. The prevailing belief is that the operational environment of the metropolitan Phoenix apartment market may reach unprecedented levels with vacancy rates in the low single-digit range.

Todd Braun and Jim Crews are senior director and director, respectively, of Cushman & Wakefield of Arizona Inc.’s Capital Markets Group.

©2008 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.