WESTERN SNAPSHOT, JULY 2007

Phoenix Multifamily Market

Growth defines Phoenix, whether it’s the city’s population, economy or job market. Phoenix as a whole has been experiencing tremendous growth for a number of years, and the multifamily market has reaped the benefits.

As in much of the rest of the country, the condo conversion market is correcting itself, leaving in its wake a dearth of new construction, record-high single-family home prices and, as a result, a strong investment-buyer market.

Hot Phoenix submarkets are still the locations surrounding new transportation corridors, primarily in the southeast and northwest valley. There is a shortage of available multifamily land throughout the city but especially in these locations. These areas also tend to have some of the highest concentration of well-paying jobs and are extremely desirable to the apartment developer.

There is very little new apartment construction in Phoenix’s pipeline — only 5,000 units in development — especially relative to the net in-migration and job growth. Although job growth and net in-migration is slowing, Phoenix is still Number 1 in the country for both. In 2006, Phoenix added more than 100,000 new jobs, and 2007 will add approximately 70,000 more. The general consensus is that rental rates will continue to increase through 2007 and 2008 because of the lack of new inventory. This is further exacerbated by the rising cost of single-family housing in Phoenix, which is approaching new record-highs. The only housing option remaining in the face of rising costs for many Phoenix residents is apartments.

Lease trends are stronger overall, however there is a short and small cycle of the condo reversions that is calling for short-term concessions in the market. With condo reversions coming back into the rental pool, many of these properties are quite vacant, and the owners of the properties are offering concessions which are not in sync with the health of the market in order to hasten the lease-up cycle. When a property is not well occupied, some of these owners are offering concessions of more than 2 months free on a 12-month lease. These concessions are having a ripple effect, causing competing properties to offer larger concessions to attract residents. It’s thought that this concessionary market will not last much past the end of 2007 when most of the un-leased units will be absorbed.

Phoenix’s multifamily investment market remains extremely active with the job growth and net in-migration. The perception is that rental rates will continue to improve significantly, a key driver in the investment sector. Cap rates remain extremely low, and prices per unit continue to increase as rental rates continue to improve, though not as fast as they have in prior years.

Multifamily vacancy remains healthy in Phoenix at 7.3 percent. It is expected to increase slightly in the second quarter of this year, as is the case every year with “snowbirds” and students exiting the Phoenix market. In the third and fourth quarters, vacancy rates will continue to tighten, which is also one of the best times for rent increases.

Rents are currently at $723 per unit, which is up slightly from last year at this time. Rental rates across the valley increased 6 percent in 2006, with similar rental rate growth expected at the finish of this year.

Active multifamily developers in the Phoenix market include Trillium Residential, Gray/Clow, Fairfield Residential and Trammel Crow Residential. Of many active developers in the marketplace, these noted developers have the most units, highest profile and most unique apartment properties in the area.

Today’s investor in the Phoenix multifamily market is starkly different from what it was just 1 year ago. In 2005 and 2006, the majority of buyers were condo converters while today there are virtually none. The active buyer today is a local or regional private buyer, often times using institutional equity to acquire large, high-quality apartment properties.

First quarter sales volume was up approximately 20 percent from the first quarter of 2006 at slightly more than $1 billion in total volume. This year’s totals should finish slightly behind the 2006 sales volume; there is simply less inventory available on the market this year.

Concessions are expected to diminish through the last half of 2007, which will provide support for rental rate increases in the second half of 2007. Phoenix has had concessions in the marketplace that average 1 month off on a 12-month lease and a half month on a 6-month lease. Expect concessions to decrease to levels similar to 2005 and 2006 when it was more common to waive fees rather than offering free rent. Multifamily investment should remain strong as more and more investment groups continue to eye Phoenix’s perceived rent growth in the coming years.

Brad Goff is a principal with Apartment Realty Advisors in Phoenix.

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