Apartment Market Chills for First Time in Years

PHOENIX-The Phoenix multifamily market has hit its peak and is cooling off, according to a new survey by the Phoenix office of Marcus & Millichap.

“After years of explosive growth in the Phoenix area, the apartment market has begun to cool,” says David Wetta, the regional manager of Marcus & Millichap. “Although Phoenix may have experienced a crescendo in terms of vacancy and rental growth last year, strong market fundamentals will keep demand elevated.”

One of the key indicators is that vacancy rates are inching upward all over the Valley. At the start of the year, the overall vacancy rate was 7.4% and has climbed nearly a half percentage point through the first half of the year.

Rent growth is stagnant in a sharp turn from prior years when it spiked as much as 5% to 8% in some submarkets. In the next 12 months, rent is forecast to rise and average of just 3%.

Meanwhile, concessions–a free month’s rent and free utilities–are becoming more prevalent as more units come on line. Some planned units will be put on the backburner although it’s still a go for a little more than 7,000. Last year, 8,600 new apartments were brought to the market, but this year just 6,000 were under construction at the mid-year mark. Over the next 12 months, 7,300 new apartments will deliver.

The Valley is poised for just 3% job growth this year, equating to 54,000 new jobs. That’s a solid figure, but off from the pace of what the metro area has experienced in several strong years of back-to-back growth.

The market’s peak for apartment owners may have come last year, Wetta says, but sales remain strong and values up. “Many apartment owners have experienced tremendous appreciation within a relatively short period of time,” he says. “Investors throughout the country have descended upon Phoenix, ultimately driving up prices and pushing cap rates down.”

Although the volume of apartment sales during the first half of 2001 was strong, with a total of $363 million, the median price of units remained steady at approximately $35,000. “Investors should be realistic though, the bottom is not falling out of the market, nor is the impressive growth of the past few years expected to continue,” Wetta says. “However, the Phoenix apartment market will continue to appeal to investors looking for solid long-term investments.”

The median price paid for class B apartments has jumped considerably, Wetta says, going from $37,000 per unit a year ago to nearly $50,000 per unit in today’s market. The per unit increase most likely is a direct result of the short supply in class B properties and increased interest by investors in the older complexes, which are boasting a considerably lower turnover than the upscale class A apartments.