Multifamily Leads Phoenix Investment Market

Multifamily is leading Phoenix investment activity—and for good reason. In the last few years, Phoenix has benefited from economic growth and diversity, population growth and strong job growth. This has created a real need for housing and has contributed to strong and sustained rent growth. These fundamentals fit the investment profile of most investors. But, in addition, Phoenix is also serving investors better yields than they would get in other major West Coast markets. In fact, the cap rate spread between Phoenix and California is 75 to 100 basis points.

“Over the last year, an influx of out-of-state and international buyers looked for higher returns in Phoenix,” Jessica Morin, senior research analyst at CBRE, tells GlobeSt.com. “While cap rates vary widely depending on multiple factors, in general, the cap rate spread between Phoenix and California can range between 75-100 bps for comparable multifamily properties. Furthermore, rising interest rates, hedging costs, and comparatively low cap rates in primary markets will shift institutional and international investors’ focus to dynamic secondary markets, including Phoenix, in search of returns.”

In addition to strong returns, the Phoenix market also has a cost advantage for renters, and that has allowed landlords to increase rents, providing for stable future rent growth as well. This is particularly true for renters coming from more expensive markets. “Despite strong rent growth, the market has a comparative cost advantage over other markets of a similar size, which gives landlords additional leverage to push rents,” says Morin. “We expect 2019 to look similar to 2018 in terms of employment growth, which will drive demand for Phoenix multifamily. Supply-side pressures (increasing cost of construction and limited construction labor) will also keep new inventory in a healthy balance with demand.”

Investors have focused on markets with job and population growth. Tempe specifically has been a favorite spot for multifamily investment. “Submarkets near employment centers with restaurants and entertainment are attracting multifamily investment,” says Morin. “This includes Tempe, which is home to Arizona State University, one of the largest public universities in the country with over 50,000 students at the Tempe campus. Scottsdale and downtown Phoenix are also capturing investor interest because of the growing millennial population that is attracted to the live-work-play atmosphere in these areas.”

This year, Morin expects similar multifamily investment activity and rent growth. “Investors are increasingly looking to Phoenix because of the strong economic momentum and demand drivers that are supporting low vacancy and strong rent growth,” she says. “By sales volume, multifamily led all other property types in 2018 and we expect interest to be healthy in 2019.”