Four Areas Lead the Way in Phoenix Region’s Apartment Building Boom

Article originally posted on CoStar on March 10, 2023

Over 35,000 New Units Are in the Pipeline

The Phoenix region is fresh from an unprecedented apartment building boom that peaked in the last quarter of 2022, and recent statistics suggest that the wave of new supply has outrun demand, an imbalance that could become particularly acute in some of the areas most favored by multifamily developers.

Over the course of 2022, Phoenix added more than 16,500 new multifamily units, representing the third-biggest supply increase in the United States, behind only New York and Dallas-Fort Worth. More than 35,000 additional apartments are currently under way, giving Phoenix one of the most aggressive development pipelines in the country.

The substantial construction pipeline is peaking just as rental demand has slowed. High inflation and economic uncertainty are stalling the launch of new renter households, causing Phoenix’s apartment vacancy to rise from a 10-year low of 5.1% in the third quarter of 2021 to 9.3% as of this writing. Meanwhile, annual rent growth has turned negative in every area of the Phoenix region.

The majority of this new construction is being built for luxury apartment communities, which could disproportionately pressure fundamentals among four- and five-star properties. While the underlying demographic and economic tailwinds that have supported the Phoenix apartment market remain in place and will benefit the area over the long-term, conditions could weaken in the next 12 to 24 months as new supply is digested.

From a geographic perspective, builders have been busiest in four particular parts of the Phoenix metropolitan area.

Downtown Phoenix and Tempe have been the primary focus, with about 5,600 units and 4,400 units underway, respectively. These regions boast an attractive quality of life and urban-like amenities with a variety of bars, restaurants and shopping options. As a result, young professionals have gravitated to these areas as they offer some of the only true live-work-play lifestyles in the Valley of the Sun. Additionally, Arizona State University, and the nearly 55,000 students enrolled at its main campus, supplies Tempe with a steady base of renters.

The eastern part of Phoenix has also seen a big surge of new development. The East Valley, Chandler and Gilbert have a combined 7,800 units underway. The highly diversified employment base in this sprawling suburb sustains median household incomes that trend above the rest of greater Phoenix, encouraging the construction of high-end luxury product.

Phoenix’s rapidly growing west-side suburbs have been a target for development too. The North West Valley and South West Valley areas have more than 6,600 rentals under construction, cumulatively. The major population centers of Goodyear, Tolleson, Surprise and Glendale have seen tremendous growth over the past decade, driven by relative housing affordability and the West Valley’s growing role in national supply chains.

An emerging asset class — single-family build-to-rent properties — has driven much of the West Valley’s growth over the past few years. These properties combine the amenities of a single-family home with the convenience of apartment rentals. CoStar has tracked the completion of more than 3,600 single-family rental units in the West Valley since 2019 and another 1,300 of these units are underway.

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