Phoenix Multifamily Submarkets Overlooked by Developers are Producing Strongest Rent Growth

Multifamily submarkets that were overlooked by developers early in the cycle, now continue to post the strongest annual rent growth figures. The North Phoenix, East Valley and West Valley submarkets highlight this trend, boasting some of the metro’s tightest fundamentals and outsized year-over-year rent gains in the second quarter of 2018.

The luxury apartment supply wave that made its way through the metro primarily focused on higher-income submarkets that boasted strong office – using employment growth, such as Tempe, Chandler and Old Town Scottsdale. Peripheral submarkets have had a dearth of construction for most of the cycle, including three of the four largest submarkets by inventory – North Phoenix, East Valley and West Valley. Combined, these submarkets contain nearly 40 percent of Phoenix’s market-rate apartment units. However, they have received less than 10 percent of the metro’s new supply since 2010.

As Phoenix continues to outpace the National Index in terms of jobs, population and income growth, consistent demand for apartments is prevalent throughout the Valley. With minimal supply-side pressure in North Phoenix, East Valley and West Valley, vacancies have steadily compressed to all-time lows in each submarket in the second quarter of 2018. Tight fundamentals in these areas have translated into robust year-over-year rent gains. As of mid-June, North Phoenix is the number one submarket for rent growth at more than 8 percent annually, while East Valley and West Valley are not far behind with 6.7 percent and 6.6 percent gains, respectively.

These submarkets share more in common than outsized rent growth. Affordability is a major draw for renters in these areas and each of these submarkets has rents well below the metro average of $1,020. A low base of rents and record-low vacancies are enabling landlords to push rents aggressively.

Value-add investors have also made big splashes in supply-thirsty peripheral submarkets like North Phoenix, East Valley and West Valley. Aging apartments are pervasive in these areas, and without competition from luxury apartment developers, investors have been able to justify substantial rent increases after upgrading older units and amenities.

Multifamily developers are finally beginning to target overlooked multifamily submarkets outside of the metro’s core. West Valley and East Valley currently have more units under construction than at any point in this cycle, but inventory will only modestly expand in these submarkets when projects deliver. North Phoenix continues to be passed over by developers as current units under construction would only increase inventory by 0.5 percent.

The lack of new supply in peripheral submarkets will likely sustain their robust apartment fundamentals and vacancies near all-time lows. If recent history is any indication, the future of these submarkets will continue to produce the strongest rent growth in the metro because of strong demand for affordable apartments and value-add plays by investors who do not have to compete with new luxury units.

By Michael Petrivelli