Market Swings From One Extreme to Another As Drop in Apartment Rent Follows Record Growth in 2021
The 2023 Phoenix apartment market will likely perform a lot like the second half of 2022, as softer demand for rentals becomes the norm. A shift in market dynamics became evident over the summer as the robust renter demand that underpinned unprecedentedly strong performance in 2021 began to evaporate.
Net absorption, the net change in units occupied over a given period, was tepid through 2022 as inflation and economic uncertainty stalled the creation of new renter households. At the same time, a record supply of new apartment construction, most of which was expensive four- and five-star rated properties, hit the market, causing vacancy to rise substantially and asking rents to decline.
At the end of last year, Phoenix’s average asking rents recorded their first year-over-year decline since mid-2010, when the market was recovering from the global recession. CoStar’s daily rent series shows apartment rents in Phoenix peaking in June 2022 and then declining rapidly through the back half of the year. As a result, rents ended 2022 down -0.5% from a year earlier, compared to 3.7% growth at the national level. Phoenix joined its desert counterpart, Las Vegas, where average rents declined -1.1%, as the only other major multifamily market to see apartment rents decrease last year.
Geographically, areas that saw the strongest outperformance in 2021 are now seeing the greatest weakness. Old Town Scottsdale, Chandler, and North Scottsdale neighborhoods in Phoenix had annual rent growth soar above 24% in 2021, which has given way to a more precipitous decline of -3.8%, -2.1% and -2.0%, respectively. These parts of the Valley have a concentration of luxury multifamily properties, which have felt the strongest impact of new supply and lower demand.
It is important to note that although top-line rents are declining, average rates are still more than 10% above where they would have been assuming the pre-COVID rate of growth. In some respects, owners who participated in the aggressive run-up in rents in 2021 are now playing with house money. Moving forward, landlords will likely shift their focus to in-place tenants to achieve gains. By most estimates, existing renters have rent-to-income ratios in the favorable 20% to 25% range and are often leasing at a discount compared to what new tenants would pay. Owners will likely aim to reduce this loss to lease in the coming year to offset reduced demand from new renters walking in the door.
Moving forward, more than 14,000 new apartment units are expected to be added in Phoenix this year, which will outpace move-ins from new renters. Asking rent growth is forecast to remain tepid and higher concession packages should be anticipated.
Over the long term, the underlying demand drivers that have benefited apartment owners in the past cycle are expected to remain in place. The diversifying local economy, rapid population growth, and favorable quality of life support the outlook. Nevertheless, market participants should brace for a weaker leasing climate for the time being.