Research & Forecast Report

GREATER PHOENIX | MULTIFAMILYQ4 2017

Rents Continue on an Upward Trajectory Key Takeaways > The fourth quarter closed out a very strong 2017 in the Greater Phoenix multifamily market. There has proven to be sufficient renter demand in the market to absorb the new inventory coming online. With vacancy levels remaining low, rents are posting healthy gains.

> Vacancy ticked up 20 basis points during the fourth quarter, reaching 5.9 percent. Despite the modest rise in the final few months of 2017, vacancy is 10 basis points lower than one year ago.

> Asking rents rose 6.8 percent in 2017, ending the year at $994 per month. This marked the third straight year where asking rent gains exceeded 6 percent.

> With rents on an extended upswing, multifamily prices are pushing higher. The median price rose 6 percent in 2017, topping $110,000 per unit. Cap rates compressed slightly, averaging in the mid- to low-5 percent range for most of the year.

Greater Phoenix Multifamily MarketThe Greater Phoenix multifamily market closed out another strong year in 2017. Vacancy inched higher in the fourth quarter, but the rate is still lower today than it was one year ago. Vacancy has remained in a very tight range since the second half of 2014, with the rate never ticking above 6.5 percent or below 5.0 percent.

The vacancy rate has remained low even as a wave of new units has come online. Deliveries peaked in 2017 and the pace of new construction will likely slow in the year ahead. While the number of new units forecast to come online in 2018 will mark a dip from the 2017 total, deliveries are being spread across a greater number of submarkets than in recent years. More than half of the submarkets in Greater Phoenix have units currently under construction, with activity picking up in areas such as Peoria, Goodyear and Avondale.

Summary Statistics Phoenix Market

Vacancy Rate 5.9%

Change from 4Q 2016 (bps) -10

Asking Rents (per month) $994

Change from 4Q 2016 6.8%

Median Sales Price (per unit YTD) $110,200

Average Cap Rate (YTD) 5.5%

Market IndicatorsRelative to prior period

MarketQ4 2017

Market Q4 2016

Vacancy

Rents

Transaction Activity

Price Per Unit

Cap Rates

2 Greater Phoenix Research & Forecast Report | Q4 2017 | Multifamily | Colliers International2

Sales of multifamily buildings were very consistent throughout 2017. During the fourth quarter, transaction velocity was nearly identical to figures for the first three quarters of the year. The underlying health of the market is driving investor demand, particularly as new projects

get leased up and rents continue to tick higher. Cap rates compressed in 2017, particularly during the second half of the year. Cap rates averaged 5.5 percent during the past 12 months, a modest decline from 2015 and 2016 levels.

SUBMARKET STATISTICS

Submarket Name 4Q 2017 Vacancy

4Q 2016 Vacancy

Annual Vacancy Change (BPS)

4Q 2017 Rents

4Q 2016 Rents

E Mesa/Apache Junction 3.4% 4.7% (130) $1,000 $926

W Central Phoenix 4.2% 4.9% (70) $856 $821

N Mesa 4.6% 5.1% (50) $833 $800

Chandler 4.8% 5.9% (110) $1,110 $1,043

Gilbert/Superstition Springs 4.9% 5.8% (90) $1,040 $982

NW Black Canyon 5.0% 5.9% (90) $836 $798

Peoria/Sun City 5.2% 5.8% (60) $974 $942

S Scottsdale 5.3% 4.9% 40 $1,306 $1,187

North Mountain 5.3% 6.4% (110) $871 $846

Goodyear/Avondale 5.4% 5.8% (40) $1,004 $943

N Scottsdale/Fountain Hills 5.5% 5.8% (30) $1,264 $1,181

N Paradise Valley 5.5% 5.3% 20 $1,120 $1,046

S Mesa 5.7% 6.3% (60) $926 $853

Central City/Sky Harbor 5.8% 5.6% 20 $1,314 $1,271

Deer Valley/N Peoria 5.9% 5.4% 50 $1,017 $974

S Phoenix/Laveen 5.9% 5.6% 30 $906 $851

S Tempe 6.0% 5.9% 10 $1,061 $991

Maryvale/Estrella 6.0% 5.6% 40 $770 $721

S Paradise Valley 6.1% 10.0% (390) $1,017 $945

Union Hills/Cave Creek 6.1% 5.8% 30 $977 $916

E Central Phoenix 6.1% 6.1% - $918 $856

Glendale 6.1% 6.6% (50) $756 $723

N Tempe 6.2% 5.9% 30 $1,159 $1,086

S Gilbert/Queen Creek 6.2% 5.1% 110 $1,167 $1,054

Ahwatukee Foothills 6.4% 6.4% - $1,089 $1,013

N Central Phoenix/Alhambra 6.4% 6.9% (50) $902 $855

Central Phoenix/Encanto 6.9% 6.1% 80 $1,105 $1,067

Central Black Canyon 7.7% 7.1% 60 $686 $615

Metrocenter 8.2% 8.4% (20) $776 $765

NE Central Phoenix 10.5% 7.7% 280 $1,104 $1,077

Greater Phoenix Multifamily Market (continued)

3 Greater Phoenix Research & Forecast Report | Q4 2017 | Multifamily | Colliers International

Employment: > The pace of employment growth in Greater Phoenix cooled in 2017, with 37,300 net new jobs added, a 1.9 percent gain. In 2016, more than 56,000 new positions were created and employers expanded payrolls by an average of more than 53,000 positions per year from 2012-2016.

> One segment of the market that has been a recent source of expansion has been construction. Employment in the construction sector grew by 7.3 percent in 2017 with the addition of 7,600 new workers. Single-family housing permitting rose by 10 percent in 2017, topping 20,000 units for the year. As more new homes break ground, construction employment will continue to rise.

> Employment in white-collar sectors of the economy were largely responsible for the slowdown in employment growth. The professional and business services and the financial activities sectors each added fewer than 4,000 jobs in 2017, after combining to expand by more than 20,000 positions in 2016.

Construction: > New apartment development peaked in 2017, with more than 8,800 units coming online. Deliveries were concentrated in Southeast Valley cities including Gilbert and Tempe, as well as in the Central Phoenix/Encanto submarket in Phoenix.

> The pace of deliveries is forecast to slow modestly in 2018. At year-end 2017, there were approximately 10,000 units under construction, compared to the more than 12,500 units that were under construction one quarter earlier.

> Multifamily permitting was very consistent during the last three quarters of 2017, averaging approximately 2,300 units per quarter. Permitting for multifamily units inched up 4 percent from the third quarter to the fourth quarter. For the year, multifamily permitting was down 8 percent from the 2016 total.

Vacancy: > While construction of new units has been active in recent years, absorption has been strong, and vacancy has remained in a tight range. During the fourth quarter, the rate ticked up 20 basis points to 5.9 percent. Even after accounting for the rise in the final few months of 2017, vacancy in Greater Phoenix is 10 basis points lower than one year ago.

> Five of the submarkets in Greater Phoenix have vacancy rates below 5 percent, up from only three submarkets that had rates that low one year ago. Even submarkets such as Chandler and Gilbert/Superstition Springs, which have each received significant amounts of new supply in recent years, have been able to maintain vacancy rates below 5 percent.

> The prevailing trend in the Greater Phoenix multifamily market has been one of stable vacancy. More than 75 percent of the submarkets in the market have vacancy rates that are within 100 basis points of their respective vacancy rates one year ago.

Employment Overview

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4 Greater Phoenix Research & Forecast Report | Q4 2017 | Multifamily | Colliers International

Rents: > Asking rents in the Greater Phoenix multifamily market continued to rise in the fourth quarter, although the pace of growth slowed a bit. Asking rents inched up 0.7 percent during the fourth quarter, reaching $994 per month. Asking rents rose 6.8 percent in 2017, building on a nearly identical gain in 2016.

> More than half of the submarkets in Greater Phoenix have average asking rents above the $1,000 per month threshold. One year ago, only one-third of submarkets had rental rates topping $1,000 per month.

> Asking rents in the Class A segment trended higher in 2017, ending the year at $1,631 per month. The rents that Class A buildings are achieving are playing a significant role in the pace of new development.

Investment Trends: > Sales of apartment properties inched down by 3 percent from the third quarter to the fourth quarter, continuing a trend of minimal volatility in the number of properties changing hands. Transaction activity was very consistent from quarter-to-quarter in 2017. For the full year, the number of properties sold lagged the 2016 total by approximately 5 percent.

> After rising in the middle of the year, the median price ticked a bit lower in the final few month of 2017. The median price during the fourth quarter was $117,100 per unit, 7 percent lower than the median price from the third quarter. The median sales price in 2017 was $110,200 per unit, up 6 percent from the 2016 median price.

> Cap rates dipped slightly during the fourth quarter, reflecting the continued investor demand for multifamily properties in the local market. Cap rates averaged 5.3 percent in sales during the fourth quarter, and the average for all of 2017 was 5.5 percent.

MULTIFAMILY SALES ACTIVITY

Property Name Street Address Units Sales Price Price per Unit

Lakeview at Superstition Springs 1849 S Power Rd., Mesa 676 $101,000,000 $149,408

The Highland 1601 E Highland Ave., Phoenix 350 $75,250,000 $215,000

Solano Village 5220 W Northern Ave., Glendale 260 $24,000,000 $92,308

Recent Transactions in the Market

Quarterly Rent Trends

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Outlook: The Greater Phoenix multifamily market is positioned for another year of strong performance in 2018. Vacancy has declined in four of the past five years, even as more than 32,000 new units have been delivered to the market during this time. Persistent renter demand for apartments has more than offset the impact of new inventory, driving vacancies lower and pushing rents higher. Looking forward to 2018, vacancy may inch higher—an annual increase of approximately 50 basis points is likely—but rents should continue to advance at a healthy pace. Metrowide average asking rents will top $1,000 per month as early as the first quarter of 2018.

With property revenues on the rise, the local investment market should remain strong in the year ahead. Property sales have followed a consistent arc over the past 18 months, with little quarterly fluctuation in sales velocity. Pricing has trended steadily higher and cap rates have compressed slightly, even as interest rates have ticked up a bit. The Federal Reserve will likely increase interest rates a few times in 2018, and there are some additional market pressures that could push lending rates higher. To this point in the cycle, the market has shown an ability to absorb interest rate hikes without slowing transaction activity, a trend that is likely to continue due to the strong investor demand for local multifamily properties.

5 North American Research & Forecast Report | Q4 2014 | Office Market Outlook | Colliers International

Copyright © 2018 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

Colliers International | Greater Phoenix2390 E. Camelback Road, Suite 100 Phoenix, AZ 85016+1 602 222 5000colliers.com/greaterphoenix

FOR MORE INFORMATIONBob MulhernSenior Managing Director | Greater Phoenix+1 602 222 5038 Bob.Mulhern@colliers.com

Jim Keeley SIOR

Founding Partner | Scottsdale Office+1 480 655 3300 Jim.Keeley@colliers.com

Pete O’NeilResearch Director | Greater Phoenix+1 602 222 5029Pete.ONeil@colliers.com

Construction and Permitting Forecast

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