When it Comes to Apartments, Phoenix Remains One of Best Rent Growth Markets in the U.S.

CoStar Market Insights: Phoenix Trails Only Las Vegas for Achieving Highest Annual Rent Gains in the Multifamily Sector.

Phoenix continues to pay dividends for investors who bet on its multifamily market. At the end of 2018, year-over-year rent growth for apartments averaged roughly 7 percent in the Phoenix metropolitan area, second to only Las Vegas among
major U.S. markets.

The biggest rent gains were seen in the mid-quality Class B apartments, or 3-Star assets, which posted the strongest average rent gains for the second consecutive year. This segment of the market saw rent growth of 7.6 percent, or 600 basis points higher than the average for the Phoenix metropolitan area as a whole.

After an inundation of new luxury apartments flooded the Phoenix market, renovating less expensive Class B apartment properties offered a more affordable price point for renters searching for higher end units akin to 4- and 5-Star without the rent premium often required in new construction units.

Investors who purchased slighted dated apartments in need of renovations have favored Class B properties, like the recently renovated Scottsdale 59 apartment complex.

In Phoenix, the average monthly rent for a Class B unit renovated in 2013 or later is approximately $900 per month, about 70 percent less than the average rent for a Class A apartment delivered in the same time period.

Strong renter demand in this market niche, coupled with a large rent gap between renovated older units and newly delivered ones, has empowered landlords to push rents aggressively once units are upgraded.

Although the middle of the rental apartment market in Phoenix continues to outperform, its strong national ranking in average rent growth is largely attributed to the resurgence in the expensive, Class A apartments. After back-to-back years of relatively pedestrian figures, year-over-year rent growth at the top of the market was on par with the overall Phoenix average of 7 percent.

Despite developers adding more than 6,500 units in 2018, or roughly 5.3 percent of total multifamily units, vacancies among the highest quality and most expensive apartments tightened by 900 basis points.

And as thousands of new residents pour into the metropolitan area each month, the case for Phoenix being an undersupplied market despite the recent apartment construction boom continues to build.

Somewhat surprisingly, the most affordable 1- and 2-Star apartments, or Class C properties, is the only segment of the market that saw average rents increase at a slower rate than during the previous year. After producing nearly a 5 percent average gain in 2017, year-over-year rents grew just slightly slower at about 4.7 percent.

Although renter demand remains strong in this slice of the market — vacancies compressed by 500 basis points in 2018 — low household incomes are likely feeling the squeeze of rent hikes more than Class A and B renters. As a result, Class C landlords may not have the leeway to push rents as aggressively as their counterparts.

This could signal a warning sign to apartment investors in the Phoenix market: If rents are increased too quickly, the affordability that drives demand here might disappear.

Even after posting the second-best apartment rent growth in the nation, the rental apartment market in Phoenix appears positioned for further gains. Robust job gains and strong immigration trends continue to bolster the outlook for Phoenix’s apartment market.

The combination of these factors have contributed to a record level of investment in 2018. Nearly $6 billion worth of multifamily properties traded hands in Phoenix last year, with the market’s average price per unit appreciating by an astounding 28 percent from 2017.