Phoenix, AZ Multifamily Month-by-Month Overview

January 2023

 Transaction Velocity

• In January, there were 11 multifamily property sales of 5+ units in Maricopa County.
• This time last year (12/18/21 – 1/18/22), there were 41 multifamily property sales of 5+ units in Maricopa County.
• This indicates that transaction velocity was down about (-73.2%).

 

Sales Comps

• Average Price Per Door: $222,556
• Average Price Per Square Foot: $317
• Average Price Per Door (12/19/21 – 1/19/22): $278,637
• Average Price Per Square Foot (12/19/21 – 1/19/22): $342

 

The 10 Yr Treasury is a good indicator of where the Fed sets its benchmark lending rates. In January, it sat at 3.37%, and we typically see lenders being about 200 BPS above this spread, so we could assume that lending would be around the 5.3% rate for stabilized multifamily assets. The Fed plans on a couple more rate hikes, but the market is likely to stabilize, which will, in turn, create more certainty.

 

Two Types of Buyers Out There:

 

• Option #1: Buy assumable rate deals on a high basis. This allows the buyer to cash flow from day 1, but the deal likely has no more upside, as the seller is still getting top-of-the-market pricing.

 

• Option #2: Buy a deal at a low basis or below market value but with a higher interest rate. These deals will have upside when rates go down but will be very light on cash-on-cash returns. Most of these sellers don’t want to adjust pricing any lower. Instead, they will likely refinance.

 

Notable Comps:

 

6821 N 45th Ave, Glendale, AZ 85301 – 28 Units: Sold for $7,950,000 or $283k per unit. This was this buyer’s 3rd purchase in Arizona, and picked it up with assumable financing (Option #1).

 

1221 N 85th Pl, Scottsdale, AZ 85257 – 24 Units: Sold for $8,000,000 or $333k per unit. This buyer is based in AZ and partnered with another owners in NY. They purchased the property all-cash at a low basis at a 5.5% cap rate (Option #2).

 

February 2023

Transaction Velocity

• In February, there were 7 multifamily property sales Sub 100 units in Maricopa County.
• This time last year (1/20/2022 – 2/20/2022): 35 multifamily properties traded (Sub 100 units in Maricopa County).
• Transaction velocity YoY is -80.0%
• In January, transaction velocity was down about 73% YoY, so in that case, the market in February was still trending negatively as far as sales go (-7% compared to last month).

 

Here’s How Other Product Types Compare:

• Office Transactions: -48.28% YoY
• Retail Transactions: -32.69% YoY
• Industrial Transactions: -56.10% YoY

 

Sales Comps

• Average Price Per Door (Past 1 Month): $224,404
• Average Price Per Square Foot (Past 1 Month): $328
• Average Price Per Door (1/20/22 – 2/20/22): $251,865
• Average Price Per Square Foot (1/20/22 – 2/20/22): $333

 

Multifamily transactions came to the biggest halt, mainly due to the market being overinflated and the multifamily buyer pool heavily relied on lending. For example, the industrial sector did not slow as much because business owners needed to make moves for business expansion purposes, and there were more all-cash transactions. Industrial owners are far less concerned with interest rates.

 

Lending/Interest Rates

In early January, Freddie Mac SBL (small balance loans designed specifically for smaller multifamily properties) announced a 40bps decrease and dropped their lending rates to the low fives. After a few weeks of Freddie Mac SBL offering strong terms, the Fed announced a 20bps hike on 2/13 and another 20bps hike on 2/17.

 

• January 17, 2023: 10 Yr Treasury: 3.37%
• February: 10 Yr Treasury: 3.81%

 

Average Leverage in the Market from Recent Comps

Most deals are still getting done with conventional lending, along with a couple of loan assumptions and alternative creative financing options.

 

• Average LTV across conventional loans: 57%

 

Notable Comps

631 N 4th Ave (4th Avenue Apartments): Buyer in a 1031 exchange out of California purchased this for $243,750 per unit and a record price per square foot for a vintage apartment building at $549 per foot. This results in approximately a 4% cap rate on current financials.

 

March 2023

Sales Comps: Maricopa County Under 100 Units

• (2/16/2023 – 3/16/2023): 5 Transactions (3 out of 5 of these deals were 4plexes, and one was a new development townhome project. Safe to say, the middle market for vintage products isn’t moving at the moment.)
• (2/16/2022 – 3/16/2023): 37 Transactions
• Transaction Velocity YoY: -86.5%

 

Year-to-Date Transactions: Maricopa County Under 100 Units

• Last Year (1/1/2022 – 3/16/2022): 83 Transactions
• This Year (1/1/2023 – 3/16/2023): 17 Transactions
• Transaction Velocity YTD YoY: -79.5%

 

Pricing

• Average Price Per Unit Last Year (1/1/2022 – 3/16/2022): $230,030
• Average Price Per Unit This Year (1/1/2023 – 3/16/2023): $230,730

 

The Average Price Per unit year-over-year explains why transaction velocity is so slow, interest rates have climbed tremendously, but pricing hasn’t adjusted accordingly. Also, sellers still see deals getting done at high pricing and wonder why they can’t achieve that same pricing, but the reality is that those buyers are drying up, and ultimately sellers will have to come down on pricing if they do choose to sell.

 

Optimism

Inflation Cooling: The March inflation report came out on March 15, 2023 and indicated the Fed has been doing its job. Down .4% from the previous month, we are now sitting at 6.0% with the Fed’s target of 2.0% – still a bit far away in the distance but trending in the right direction.

 

April 2023

Q1 Sales Transactions Maricopa County Under 100 Units

• Last Year: (1/1/2022 – 3/31/2022): 99 Transactions
• This Year: (1/1/2023 – 3/31/2023): 21 Transactions
• Transaction Velocity Q1 2023: -79%

 

Maricopa County #1 For Numeric Growth (2022)

• According to the U.S. Census Bureau, Maricopa County numerically had the highest net in-migration in 2022. +56,831 New Residents in 2022.
• Number one County for Numeric Decline: Los Angeles, California -90,704

 

California 1031 Exchange Buyers (Floods and Delayed Exchange Timelines)

• The California 1031 Exchange buyers have been a hot topic of the Phoenix multifamily market, typically in the context of talking with owners about the value of their property and saying, “This is likely going to be a 1031 buyer out of California.” Meaning that they are likely going to be overpaying because they are on a tight timeline.  

 

• What’s the real reason CA 1031 buyers are moving their money into Phoenix? Well, typically, there are a few reasons: No rent control, cheap property taxes, business-friendly laws and regulations, and net in-migration vs. out-migration. 

 

• However, CA 1031 buyers haven’t found themselves in a squeeze as of late due to the IRS extending deadlines in California, Alabama, and Georgia due to the recent disasters they have experienced. California 1031 exchange timelines are extended until October 16, 2023, meaning they don’t have to identify or close up until that date, which allows them to spend more time “shopping” and less time pursuing properties here in Phoenix. 

 

• Kyle Inman’s interpretation – The market will see more activity in the second half of the year, particularly a good amount of deals going under contract two to three months before October 16, 2023. 

 

Cap Rates & Spreads Between Interest Rates

• Cap Rate Incline Q1 YoY: 120 BPS
• On December 5, 2021, the 10 Yr Treasury sat at 1.35%; in April, it sat at 3.50%, a 215 BPS increase. Cap rates have moved up to 120 BPS, meaning they still have another 95 BPS.
• In April, cap rates stood at 5.62%, meaning that for transaction velocity to pick up, the market will continue to move upwards towards 6.6% cap rates. Or interest rates fall.

 

May 2023

Sales Transactions YOY Maricopa County Under 100 Units:

• Last Year: (1/1/2022 – 5/31/2022): 191 Transactions
• This Year: (1/1/2023 – 5/31/2023): 43 Transactions
• Transaction Velocity: -77.5%

 

Institutional Sales Volume-Sales Transactions YOY Maricopa County Under 100 Units:

• Last Year: (1/1/2022 – 5/31/2022): 81 Transactions
• This Year: (1/1/2023 – 5/31/2023): 11 Transactions
• Transaction Velocity: -86.4%

 

Scottsdale with the Sharpest Rent Decline in the Nation

• According to GlobeSt., Scottsdale had the sharpest month-over-month rent decline in May (-0.9%). 

• GlobeSt. Tracks across all builds, so this mainly has to do with A-Class properties in Scottsdale. 

• The majority of the vintage apartment deals (50’s, 60’s, 70’s, 80’s) built deals are probably largely unaffected. 

• This could be a good thing for vintage apartment owners; as the A-Class deals become less affordable, tenants seek surrounding areas (Holiday Park, 70th St, 68th St, Giants Spring Training Stadium area). 

 

Sales of Phoenix Apartment Properties Sink in Opening Quarter of 2023

• This is the lowest level of quarterly sales in six years, aside from the pandemic-driven pause in mid-2020.
• $782 million worth of multifamily property traded hands in the opening three months of 2023, a 74% decline from the same period a year earlier.

 

Consumer Price Index Data

• CPI’s April rent data showed a cooling for the first time in two years. Several studies have shown a 12-month lag effect on rent data.
• Rent is the largest determining factor for inflation (shelter).
• CPI rent inflation is highly predictable because it will follow the path of asking rents.
• While inflation sat at 5.0% in March and only had a slight decline to 4.9% in April, this now caught-up data should reflect going forward in May’s consumer price index update.

 

Fed Meeting

• The May Fed meeting was on May 2 and May 3. At that meeting, they announced a 25 basis point increase, putting the federal fund’s target rate range at 5.00%-5.25%.

 

Los Angeles Mansion Tax

• As of April 1, 2023, the property transfer tax rates in Los Angeles have changed.
• The base tax rate is 0.45%. Any property under $5 million is taxed 0.45% upon transfer.
• The new tax rate is 4.45% for properties valued between $5 million and $10 million.
• The new tax rate is 5.95% for properties valued at $10 million or more.
• This applies to all types of real estate in the City of L.A., including commercial, residential, and vacant land.
• For example, a commercial property that sold for $10 million in March 2023 had a transfer tax of $45,000; now, that property would be taxed $595,000. (5.95% x $10,000,000 = $595,000)
• This could hurt L.A. development, as fewer investors are inclined to develop here.

 

Owners would likely just charge 5.0% more for their properties if they were to sell, making the margins tighter for the buyer and likely hurting transaction velocity as fewer investors look to purchase there.

 

Out of 178 random apartment sales in Maricopa County over the past year, 61 or 34% of the buyer pool came from California.

 

This could go one way or another for Phoenix Apartment owners. Either more people will sell because they don’t like the tax and the new laws they keep enforcing and continue to 1031 into Phoenix, further boosting our economy and prices, or they will hold the properties because of the tax long-term, slowing down our transaction velocity (less 1031 buyers).

 

A Housing Bust Comes for Thousands of Small-Time Investors.

Source: Wallstreet Journal

This article has been circulating everywhere throughout the multifamily industry and has been the talk of the month. Arbor Realty Advisors (agency lender) foreclosed on 3,200 apartments in Houston. Applesway Investment Group was the property owner and had been on a buying spree before purchasing these properties. They took loans out at the peak of the market (late 2021) with variable-rate mortgages and high leverage (80%). One of the mortgages at one of the properties had jumped from 3.4% at origination to 8.0%.All the L.P. s lost millions. It is important to note that most syndicators are really good at what they do, but the market might see more of this pop up soon. This is a good reminder to make sure you really trust who you are giving your savings.

 

Current Activity

• 8 Units are listed at 4925 E Indian School Rd in Arcadia.
• 6 Units are listed at 1402-1406 W Whitton Ave in Midtown Phoenix.
• 17 Units in escrow at 864 E Chandler Blvd in Chandler.

 

June 2023 and First 6 Months of 2023 Update

June 2023 Sales Transactions YOY

• June 2022: 29 Transactions
• June 2023: 5 Transactions
• Transaction Velocity: -83%

 

Sales Transactions First 6 Months of 2022 vs. 2023 (Maricopa County Multifamily Under 100 Units)

• Last Year: (1/1/2022 – 6/30/2022): 217 Transactions
• This Year: (1/1/2023 – 6/30/2023): 52 Transactions
• Transaction Velocity H1 2023: -76%

 

General Market Thoughts

While the market has been slow, it has been a great time to meet with owners to build long-term relationships. Two weeks ago, Kyle Inman traveled out to California and had the pleasure of meeting with 10 owners across Los Angeles and Orange County who currently own multifamily in Phoenix. It was great to sit down with everyone and discuss what is happening in the Phoenix multifamily market and gauge how investors’ portfolios are performing. The general consensus is that everyone who had purchased with fixed-rate debt in the mid 3’s to low 4’s is doing just fine. Across the board, it doesn’t seem that anyone is having any issues keeping their building full, while some have been able to raise rents throughout the year. Kyle Inman has run into some owners who are experiencing some distress and who purchased with floating rate debt throughout 2021 and early 2022. A good amount of these deals have hit the market, and a flood of them still exists. Another key takeaway is that a large amount of capital is still sitting on the sidelines, just waiting to find the right deal.

 

Phoenix with the Largest Rent Decline YOY

According to economist Jay Parsons over at Real Page Analytics, Phoenix saw the sharpest decline in YoY effective rent change on new leases (-4.1%). Keep in mind that this is heavily weighted toward new A-Class apartment buildings, which could be viewed as a benefit to vintage multifamily owners. As A-Class buildings become less affordable and are enduring a correction in lease renewal rates, it will likely push more renters into a more affordable B or C-class option.

 

Behind Phoenix, we saw Las Vegas at (-3.5%), Sacramento, CA, at (-2.4%), and Austin, TX, at (-1.6%).

 

On the Contrary – Scottsdale is on the Rise

According to Rent Cafe, Scottsdale ranked as the third best place for renters to live in 2023, and the south mostly dominates the list, such as Charleston, Plano, Atlanta, Raleigh, and Austin — to name a few. Rent Cafe utilized a variety of metrics to come to this conclusion, such as the cost of living, the local economy, and quality of life. According to Inman, it seems like this city is only getting better as the years go on – largely due to new development, high-end shopping and dining, unbeatable golf courses, and sun 300 days out of the year.