Phoenix Multifamily Market Report: A Deep Dive into Overbuilding, Market Shifts, and Economic Resilience

Phoenix, Arizona —a city often heralded as a beacon of economic opportunity and growth—is now facing the very real consequences of its breakneck pace of development. The latest data from the multifamily housing market exposes significant cracks in the foundation of what was once considered one of the hottest real estate markets in the country. Let's take a detailed look at the current state of the Phoenix multifamily market, examining key metrics, trends, and forecasts that reveal a complex and increasingly precarious situation.

The Phoenix multifamily market has been on a rollercoaster ride, with sharp fluctuations in demand, supply, and pricing. As of mid-2024, the market is showing signs of strain, with key statistics indicating that the boom may be turning into a bust. Here's a breakdown of the latest data:

These numbers tell a story of a market that is struggling to balance supply and demand. While there is still significant demand for rental units, the pace of new construction is outstripping the market's ability to absorb these units, leading to rising vacancies and declining rents.

Vacancy Rate Dynamics:

Vacancy rates in Phoenix have risen modestly, from 10.8% at the end of 2023 to 11.1% by mid-2024. While a 30-basis point increase may not seem alarming at first glance, it represents a worrying trend in a market where supply continues to flood in. The market-wide vacancy rate has been inching up, driven by a surge in new construction that has outpaced leasing activity. This is particularly concerning in high-growth areas like Downtown Phoenix and Tempe, where the influx of luxury apartments has led to a glut of unoccupied units.

Absorption Trends:

Net absorption—a critical metric indicating the net change in occupied units—has shown signs of improvement, with 16,000 units absorbed over the past 12 months. This is a significant increase from the pre-COVID five-year average of 7,200 units. However, the majority of this absorption has been concentrated in newly delivered luxury complexes, leaving a significant portion of the market, particularly mid-tier properties, struggling to attract tenants.

Rent Growth (or Lack Thereof):

The days of double-digit rent growth in Phoenix are behind us. The market has seen a -1.9% decline in asking rents over the past year, a sharp contrast to the nearly 20% annual gains witnessed during the post-COVID boom of 2021. This decline in rent growth is a clear signal that the market is saturated, with supply far outpacing demand.

Phoenix has been the epicenter of a construction frenzy, with developers rushing to capitalize on the city’s population growth and economic expansion. However, this aggressive approach to building has created significant challenges.

Construction Statistics:

These numbers are staggering, and they place Phoenix among the top markets in the nation for new apartment construction. But while the sheer volume of new units might seem like a positive indicator of growth, it’s becoming increasingly clear that the market may have overextended itself.

Luxury Overload:

The bulk of new construction in Phoenix has been concentrated in luxury properties. These 4 & 5 Star developments were designed to attract high-income renters, but the market for these units is quickly becoming saturated. Vacancy rates in luxury properties have increased dramatically, with many new developments struggling to achieve stabilized occupancy levels. For example, AVE Phoenix Sky , a luxury residential tower near Roosevelt Row, is already offering significant rent concessions—two months of free rent—to attract tenants.

Geographical Concentration:

The construction boom is not evenly distributed across the Phoenix metro area. Downtown Phoenix and Tempe are the primary recipients of new developments, accounting for about a quarter of the current pipeline. These areas have seen an influx of luxury high-rises, targeting young professionals and renters by choice. However, the sheer volume of new supply in these submarkets is leading to intense competition among property owners, driving up vacancy rates and pushing down rents.

In the Valley’s western suburbs, the situation is similar. Developers have added more than 15,500 units to the North West Valley and South West Valley submarkets since 2020. This has led to a dramatic increase in competition, with local property managers reporting sluggish lease-up times and difficulties in maintaining occupancy rates.

Build-to-Rent (BTR) Surge:

One notable trend within the construction boom is the rise of Build-to-Rent (BTR) developments. BTR projects, which are single-family homes built specifically for rental purposes, have been particularly popular in the West Valley. These projects accounted for about a third of all deliveries in the area since 2020. While BTR developments offer an alternative to traditional multifamily units, they are also contributing to the overall supply glut in the market.

The Implication of Overbuilding:

The aggressive construction activity in Phoenix is a double-edged sword. On one hand, it has spurred economic growth, creating jobs and providing much-needed housing options. On the other hand, it has led to an oversupply of units, particularly in the luxury segment. This oversupply is driving up vacancy rates and putting downward pressure on rents, which could ultimately lead to a market correction.

The Phoenix multifamily investment market, once a hotbed of activity, is now cooling off rapidly. Higher interest rates, coupled with weaker rent growth and occupancy projections, have led to a significant slowdown in sales activity.

Sales Volume Decline:

This dramatic decline in sales volume is a clear indication that the market is undergoing a correction. The average cap rate has increased by 150 to 200 basis points since early 2022, reflecting the higher cost of debt and the growing uncertainty in the market.

Distressed Sales:

Investors who purchased properties at the peak of the market are now facing significant losses. Several high-profile transactions illustrate the challenges facing the market. For example, Skywater at Town Lake in North Tempe was sold in January 2024 for $112 million, a 30% decrease in value from its purchase price just 18 months earlier. The previous owner had financed the acquisition with a five-year floating-rate mortgage, and the rising interest rates led to a dramatic increase in the cost of servicing this debt.

Another example is Hadley North Scottsdale , a 4 Star property that was sold for $96 million in March 2024. The seller had purchased the property for $145 million in May 2022, resulting in a 34% loss in value over a 22-month holding period.

The Mismatch Between Buyers and Sellers:

One of the key challenges in the current market is the growing gap between buyers' and sellers' pricing expectations. Sellers, many of whom purchased properties at the peak of the market, are reluctant to accept the lower valuations that buyers are now willing to pay. This has led to a stalemate in the market, with fewer transactions taking place.

However, there is still some activity, particularly among newly built properties by merchant developers. In 2023, about 50% of sales volume came from properties that sold within two years of delivery. This is a significant increase from the 15% share seen in 2021 and 2022, indicating that some investors are still willing to take on newly delivered assets, albeit at more conservative valuations.

Future Outlook:

Looking ahead, the Phoenix multifamily sales market is likely to remain challenging. The combination of rising interest rates, declining property values, and a glut of new supply will continue to weigh on investor sentiment. However, there may be opportunities for savvy investors to acquire distressed assets at discounted prices, particularly if the market experiences further declines.

Despite the challenges facing the multifamily market, the broader Phoenix economy remains resilient. The city continues to attract new residents and businesses, thanks to its strong job growth, affordable cost of living, and business-friendly environment.

Job Growth:

Phoenix has one of the strongest job markets in the country, with employment growth outpacing most other major metros. The city’s diversified economy, which includes strong sectors like technology, manufacturing, and healthcare, has helped it weather economic downturns better than many other regions.

Major Investments:

Phoenix continues to attract significant investment from major employers. Taiwan Semiconductor Manufacturing Company (TSMC) is expanding its North Phoenix semiconductor plant, bringing its total investment to $65 billion . This expansion is expected to attract up to 45 additional businesses to the region, further boosting job growth and economic activity.

Similarly, Intel is investing $20 billion in its Chandler campus, where it is building two new fabs alongside its four existing ones. These investments are not only creating thousands of high-paying jobs but are also strengthening Phoenix’s position as a hub for advanced manufacturing and technology.

Population Growth:

Phoenix’s population continues to grow, driven by its relative affordability and strong job market. The city added over 336,000 residents in the past year, making it one of the fastest-growing metros in the country. This population growth is a key driver of demand for housing, both for-sale and rental, and is helping to support the long-term outlook for the multifamily market.

The Big Question: Can Phoenix Absorb the New Supply?

The critical question facing the Phoenix multifamily market is whether the city’s economy can absorb the massive influx of new housing units. While the strong job market and population growth are positive indicators, the sheer volume of new supply is daunting.

The market’s ability to stabilize will depend on several factors, including the pace of job growth, the level of interest rates, and the willingness of investors to take on new projects. If the market can absorb the new supply without further increases in vacancy rates or declines in rents, it may be able to avoid a more severe correction. However, if the current trends continue, the market could face significant challenges in the coming years.

The Phoenix multifamily market is at a critical juncture. The next 12 to 24 months will be crucial in determining whether the market can stabilize or if it will continue its downward trajectory. The city’s rapid growth has brought both opportunities and challenges, and the coming years will reveal whether Phoenix can navigate these turbulent waters.

For developers, investors, and residents, the message is clear: proceed with caution. The market is shifting, and those who fail to adapt may find themselves on the wrong side of the curve. As always, we’ll be here to provide the insights and analysis you need to stay ahead of the game.

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