December 6, 2024

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Investors Partners, and Friends,

In this month's Rockview Review, we dive into the factors shaping Phoenix’s multifamily market and why we see today as an opportune time for disciplined investment in the region.

Phoenix remains one of the most dynamic growth markets in the U.S., driven by population growth, corporate expansion, and a steady influx of high-wage jobs. While recent oversupply concerns have raised questions about the market’s near-term outlook, we believe these challenges present a unique opportunity for strategic investors to capitalize on long-term growth.

We hope you find it valuable, and as always, let us know if you have any questions.

Navigating Phoenix's Supply Wave

• In the past year, Phoenix delivered 24,000 multifamily units—more than three times its pre-COVID five-year average. This surge represents one of the largest supply injections since the 1980s.
• An additional ~29,600 units are set to deliver next year (RealPage), constituting 7% of the total market inventory, making Phoenix the sixth most aggressively built apartment market in the nation.

Understanding the Concentration of Supply Across Phoenix’s Submarkets

Phoenix’s development pipeline is concentrated in key areas, each with unique supply/demand dynamics:

1. Central Core (28.9% of total pipeline): High-density luxury projects dominate, offering significant concessions due to intense competition. Demand is driven by proximity to major employers like Arizona State University and Banner Health.
2. West Valley (47.1%): Build-to-Rent dominates, with 17,500 units delivered since the pandemic, creating lease-up challenges. Steady demand comes from families and workforce renters attracted by affordability and infrastructure investments.
3. Southeast Valley (23.1%): Significant new development fueled by corporate expansions from TSMC, Intel, and Amazon. Strong demographics and tech-driven job growth ensure consistent absorption and low vacancy rates.
4. North Phoenix (16.2%): Limited new supply maintains stability in premium rental markets. Affluent renters drive demand, supported by proximity to employment hubs and retail centers.
5. South Phoenix (13.9%): Emerging growth areas with moderate new supply and improving infrastructure. Middle-income renters seeking affordability sustain demand in these submarkets.

Bridging the Supply and Demand Gap

• Rapid inventory growth has pushed vacancy rates in Phoenix to 12.4%, with rents declining by 2.3% over the past year. Over 40% of properties now offer concessions, including six to eight weeks of free rent in luxury developments, highlighting intense competition across the market.
• While the supply surge presents near-term challenges, Phoenix’s robust economic fundamentals and sustained population growth provide a critical counterbalance.
• Recent demand data from RealPage ranks Phoenix as the top apartment market in the nation as of YE 3Q24, with absorption expected to outpace new deliveries once the construction pipeline slows, driving market stabilization and long-term growth.

• Phoenix's rapid apartment delivery pace is set to peak around 4Q24 of this year, after which the supply pipeline will steeply drop off.

Why Phoenix's Long-Term Outlook Remains Strong

Despite elevated supply pressures, Phoenix’s economic vitality continues to underpin demand for rental housing:

• Job Growth: Over the past year, Phoenix added 45,400 jobs, with total employment now 240,000 above pre-pandemic levels—the third-largest gain in the United States. Major corporate expansions by TSMC and Intel further reinforce Phoenix’s emergence as a high-tech manufacturing hub.
• Population Growth: Phoenix’s population grew by 1.4% over the past year, outpacing the national average. Its affordability and proximity to major urban centers, particularly Southern California, continue to attract young professionals and families.
• Educational and Workforce Support: Arizona State University, with an enrollment of over 152,000 students, contributes a steady pipeline of skilled labor to support the region’s growing industries.
• Resilient Rental Market: Net absorption totaled 19,000 units in the past year—nearly triple the pre-pandemic average of 7,200 units. Workforce housing, particularly 3-star properties, absorbed 5,300 units during this period, highlighting broad-based demand across market segments.

Phoenix's population is expected to continue to grow at a high pace for years to come.

The Opportunity to Invest in Phoenix Today

While the current oversupply presents short-term headwinds, it also creates opportunities to acquire assets at recalibrated valuations, with strong prospects for long-term returns.

• Market Adjustment: The pipeline is expected to taper significantly by the end of 2025, providing a clearer picture of long-term supply-demand dynamics.
• Valuation and Yield Opportunities: Higher vacancy rates and declining rents have adjusted asset valuations, offering attractive entry points for strategic investors.
• Conservative Underwriting: The "higher for longer" interest rate environment has shifted market expectations, encouraging disciplined underwriting practices that account for lease-up challenges, rental concessions, and realistic operating expenses.

Phoenix remains a vibrant, high-growth market with strong fundamentals and compelling long-term potential. By targeting resilient submarkets and employing a disciplined investment approach, Rockview Capital is well-positioned to deliver strong returns for our investors in the years ahead.

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Until next time,

Rockview Capital LLC