New Apartment Builds Inflate Multifamily Pricing in Phoenix

Multifamily prices are surging in Phoenix, according to research from Colliers International. For the last several years, Phoenix multifamily sales have been largely driven by value-add deals. In the second quarter of this year, there was a shift with more new construction, class-A assets trading hands. As a result, the average price per unit has increased from $100,000 in 2017 to $164,000 in the second quarter.

“We have had this huge increase in pricing. Part of that was because we have built a lot of new complexes in the last few years, and those complexes have sold. We are building a lot of very expensive class-A apartment buildings,” Pete O’Neil, research director in greater Phoenix for Colliers International, tells GlobeSt.com. “The median price in the second quarter was $164,000 per unit and year to date we are up to $131,000 per unit. Last year, we were at $100,000 per unit. Activity has accelerated in the second quarter by about 10% and we are seeing a change in the mix of the product that is selling. This is a good indicator for our market.”

This shift really illustrates a new evolution in the Phoenix multifamily market. For the past several years, value-add investors have benefited from the improving market conditions. Now, core investors are arriving to purchase new construction product. “Phoenix has traditionally been a value-add market, and we have certainly seen value-add plays,” says O’Neil. “Our vacancy in multifamily was 13% at the peak and now we are at the 5% range. As the vacancy rate dropped, the value-add play was very popular. We have seen rent growth in the 5% to 6% range. I will be interested to see how the trend of newer units plays out in the second half of the year.”

The sale of new construction apartment buildings also illustrates the healthy renter demand and the absorption of new product. “There was some concern that we were building too many apartment buildings and if there was enough renter demand,” explains O’Neil. “We have seen that those complexes are filling up at pretty good rents, although not the rents that were expected in some cases. Those assets have really begun to trade, as a result.”

The construction pipeline remains strong, but stable. As a result, there isn’t concern about the delivery of new apartment product. “We have about 10,000 units under construction, and that is similar to what it was a year ago,” adds O’Neil. “It is holding steady. We have been delivering in the neighborhood of 5,000 units a year, so we are adding about 2% inventory growth per year. That is robust, but we are also adding population at about 2% per year.”

The multifamily activity is nothing new. It has been the darling of the Phoenix market, has it has in most markets. O’Neil expects the market to continue to be a top performer, as long as for-sale product is kept in check. “Multifamily has really been the shining star in our market for the last several years,” he says. “As long as we aren’t building a lot of new houses, which we haven’t been, there seems to be a pretty healthy preference for these brand new well-located apartment buildings.”