Phoenix Cap Rates Tightened Last Year in Phoenix

In what could be the end of its upward trend as the coronavirus outbreak rages on, cap rates in Phoenix compressed across nearly all asset classes in the second half of 2019. According to a new report from CBRE, multifamily, industrial, retail and hotels all saw reduced cap rates. While the fundamentals for each asset class is different, the Phoenix market has benefitted from population and job growth.

Apartment cap rates are the lowest in the market, in the low 5% range. In the second half of 2019, cap rates decreased by 9 basis points to 5.11% for infill-stabilized assets and by 11 basis points to 5.37% for suburban assets. “Phoenix has consistently been the top multifamily rent growth market nationally for the last two years,” Matt Pesch, a broker at CBRE, tells GlobeSt.com. “Investors are currently driving down current yields with the expectation that this outperforming growth will continue into the future.”

The low cap rates helped to drive investment sales volumes. “The current cap rate environment has certainly helped drive sales volume,” says Pesch. “As pricing has continued to move upward, we’ve seen more clients monetize their position much sooner than they underwrote at acquisition.”

While the market will likely be disrupted by the coronavirus outbreak—although it is too soon to know the extent—the first quarter saw continued cap rate compression. “So far through the first quarter, we’ve seen cap rates decrease by 25-50 basis points from where they were late last year,” says Pesch. “There is more capital seeking multifamily assets than there are available investment opportunities. Given the current interest rate environment and depth of capital in the market, we expect modest cap rate compression to continue.”

The industrial asset class is also leading the market in low cap rates. Class-A industrial cap rates decreased by 50 basis points to 5%, and the average rate for acquisitions of all tiers and classes of stabilized assets fell 17 basis points to 6.13%. “Cap rate compression is driven by strong leasing activity, overall economic diversification and the market’s proximity to coastal markets where pricing is even higher,” Dan Calihan, a broker at CBRE, tells GlobeSt.com. “Investment activity is up and sale volume is strong as metro Phoenix continues to see an infusion of institutional capital.”

Again, the future of the market is unpredictable at the moment, but Calihan said that the market remained active in the first two months of the year. “We are very bullish on industrial asset pricing for 2020 and have seen robust activity in the first two months of the year,” he says. “Sellers’ expectations have been exceeded and as assets are attracting numerous quality bidders.”