Apartment Rent Growth Trends Continue in Early 2019 as Phoenix Enjoys a ‘Golden Age’ for Multifamily Property

CoStar Market Insights: Both Affluent and Affordable Submarkets are Seeing Rents Soar

Phoenix has consistently ranked among the top multifamily rent growth markets in the nation in recent years, and strong rent gains early in 2019 indicate no change in that trend is expected any time soon.

The Phoenix multifamily market is in the midst of a golden age, with vacancies trending near all-time lows despite an ongoing construction boom. Robust job and population growth, buttressed by strong in-migration from residents of pricey coastal markets, are fueling unprecedented housing demand.

In recent years, apartments located in areas with low rents, limited new construction, and tight vacancies experienced the strongest rent gains. Submarkets with large but dated inventories and strong demand for workforce housing, such as East Valley and Deer Valley, epitomized this trend.

The affordability dynamic has sustained above-average rent gains in the East Valley and Deer Valley submarkets so far this year. Vacancies in these areas are among the lowest in metro Phoenix, and apartment construction has only recently seen an uptick after being overlooked by developers for most of this economic cycle.

Several of the more affluent neighborhoods in Phoenix featuring new, luxury units have also seen a surge in year-over-year rent increases.

In early 2019, Chandler, a city southeast of Phoenix, is boasting the strongest apartment rent growth in the metro region by a considerable margin. Supply-driven pressure has not, to this point, had a dampening effect on slowing rent growth in Chandler.

This mirrors the dynamic playing out in the larger metropolitan area. In fact, rent gains are accelerating from last quarter’s robust figures, and Chandler’s Class A units are outperforming its Class B and C apartments.

Part of the reason for this trend stems from the fact that average rents the premium Class A apartments are not much more expensive than Class B units—a 16 percent premium in Chandler versus a 33 percent gap for the Phoenix market as a whole. The narrow price difference entices many renters to move up to a higher-quality unit at a minimal cost.

Planning efforts and infrastructure improvements over the course of a few decades have transformed Chandler from farm town to tech hub. Since 2000, the population has grown from 177,000 to roughly 250,000. Companies such as Intel, Allstate Insurance, Deloitte and Orbital ATK are in various stages of expansion with plans to add thousands of jobs in the area.

At the other end of the multifamily rent spectrum, strong demand from renters in swanky Old Town Scottsdale has also driven average rents higher despite elevated levels of construction. Although it already commands some of the highest rental rates in Phoenix, the submarket’s rent growth is outperforming the metropolitan area’s average this quarter.

Unlike Chandler, Class A apartment units in Old Town Scottsdale command a hefty premium over less-expensive Class B units—roughly 45 percent—steering many renters seeking affordability to the middle segment of the market.

Multifamily investors should have plenty of opportunities to capitalize on the nation-leading rent growth in the Phoenix apartment market if current job and population trends hold.

However, any slowdown in the national economy would likely impact the local market as it did last cycle.

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