Q&A: Pete O'Neil of Colliers International on Greater Phoenix Multifamily Market

August 17, 2017

The latest Multifamily Market Report by Colliers International has found that Greater Phoenix continues its strong multifamily real estate performance, with the first half of 2017 posting increasing rents, strong construction and strengthening investment activity.

 

Some key findings include:

  • A vacancy rate of 5.9 percent, which is identical to the rate a year ago.

  • Approximately 1,200 new units delivered to the Phoenix/Encanto area in the last 12 months.

  • Average rental rates of $977, up 6.3 percent in the last 12 months.

  • Greater Phoenix currently constructing 12,200 units and planning 17,000 more.

  • A year-to-date median sale average of $102,147 for multifamily properties.

 

Colliers International Research Director Pete O'Neil offered his thoughts on the strength of today's Greater Phoenix multifamily market. Here is what he has to say:

 

Q: What reasons are there for a seasonal vacancy uptick during the second quarter?

 

A: Vacancy in Greater Phoenix usually rises in the summer months of the second quarter because of the presence of part-year residents. Vacancy has gone up during the second quarter every year since 2011— even as the prevailing market trend has been of vacancy improvement. The rate then goes down in the third and fourth quarters when the temperatures cool down.

 


Q: With 12,200 units currently under construction in the city and 17,000 planned, at what rate do you see those units filling up?

 

A: Absorption has been averaging approximately 5,500 units per year since 2009, and we are anticipating a slightly higher figure (about 6,000-6,500 units) in 2017 and 2018. The units under construction will come online over the next 24 months, so absorption should be in line with new development, keeping vacancy close to the figure.



Q: Would you say the multifamily market has remained strong because of the rising rental rates, or despite them? Why?

 

A: I would say that the rise in rents is a reflection of the strength of the market. Renter demand has been very strong, vacancy is tight, and that is fueling the rent growth.

 


Q: Did this year's Multifamily Market Report come away with any surprising findings? If so, what were they?

 

A: Not really. The sharp rise in rents (up 5 percent in the first half of 2017) was stronger than we anticipated, but not completely unexpected. Other than that, most of what happened during the second quarter is a continuation of trends that have been in place for the past several years.



Q: There are some Phoenix areas where vacancy is rising with new developments coming in. Do you predict these numbers will go down once the new developments are completed and open for awhile?

 

A: The long-term vacancy rate in Greater Phoenix averages between 8 percent and 9 percent and there are only a few submarkets that are above that figure. I think it is unlikely that vacancy rates will go down dramatically from where they are now. There will be some fluctuation from quarter to quarter or year to year in some areas, but I imagine vacancy rates will likely remain pretty close to where they are now. Also, we will likely continue to see heavy levels of new construction in the years ahead, so even as new units lease up over time, there will be several more years of new developments to fill.



Q: What do you think might explain the 13 percent rise in apartment property sales from first quarter to second quarter?

 

A: There are several factors fueling the rise in property sales during the second quarter. The first is the surge in property fundamentals. Vacancies are tight, rents are on the rise, and these factors are attracting buyers. In addition, there was more product out on the market in recent months; the number of properties available for sale was limited during the first quarter. This could continue in the coming years—one of the impacts of rising construction is that there will be more new properties available for acquisition. Financing shouldn’t be overlooked.  Interest rates are low, which makes it easier to underwrite deals.

 

We find ourselves in a point in time where it is good to be a buyer or a seller. Existing owners see prices at their highest point in a decade and cap rates are low. They see this as a good time to realize some profits. Prospective buyers see low vacancy, strong renter demand and healthy rent growth and envision additional revenue growth in the years to come. This market sentiment is triggering investment activity, a trend we expect to continue.

 

 

Q: Overall, would you describe the Greater Phoenix market as a smart place to rent and invest in?

 

A: Well, it certainly has been a good place to invest over the past several years. Phoenix is a high-growth market, which supports the multifamily market and creates investment opportunities. There is a large inventory of properties and there is traditionally a significant amount of transaction activity (often more than 100 transactions per year), so there are opportunities. Phoenix has traditionally been a market that has had a lot of construction to keep pace with growth, which has created some competitive threats from new supply to existing owners. And because housing has been fairly affordable, there are some upward limits on rents.

 

Greater Phoenix is a good place to rent. There is a steady wave of new, high-end units coming online for renters to choose between, as well as a large block of units built from 1995-2007.  The Phoenix market is one that covers a very large geography, so renting allows residents to be able to move within the metro area to accommodate job changes. Greater Phoenix also has had a history of in-migration of 50,000 new residents per year, and forecasts call for that figure to accelerate in the years to come. As new residents land in Greater Phoenix, renting for the first year or two is often a preferred option before purchasing a home. 

 

For a look at the full Multifamily Market Report, click here

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