Research & Forecast Report

GREATER PHOENIX | MULTIFAMILYQ2 2017

Rents Spike, Brightening the Second-Half Outlook Key Takeaways > The Greater Phoenix multifamily market recorded an active first half of 2017, with significant levels of new development and net absorption. These trends are forecast to continue in the second half of this year.

> Vacancy rose 30 basis points in the second quarter to reach 5.9 percent. Although there was a brief uptick during this period, the rate is identical to where it was at this point last year. Seasonal vacancy rises are common during the second quarter.

> Rents continue to push higher at an accelerating pace. Asking rents have advanced by 5 percent year to date and are up 6.3 percent during the past 12 months. Average asking rents reached $977 per month in the second quarter and are forecast to top $1,000 per month by the end of the year.

> The investment market displayed strengthening signals during the second quarter of 2017. More properties are trading at a higher price, and cap rates compressed to the mid-5 percent range.

Greater Phoenix Multifamily MarketThe Greater Phoenix multifamily market continues to record favorable conditions. The outlook for the second half of this year remains optimistic, despite a modest uptick in vacancy during the second quarter. The rise in vacancy was largely seasonal; the Greater Phoenix multifamily vacancy rate has risen during the second quarter in each of the past seven years. The vacancy rise in the summer months is not changing the overall direction of the market, which is one that is in its eighth year of a sustained improvement cycle.

Developers are responding to the ongoing renter demand for high-end rentals by bringing new units to the market. Deliveries have averaged approximately 5,800 units per year since 2013, and approximately 3,300 units have come online in the first half of this year.

Summary Statistics Phoenix Market

Vacancy Rate 5.9%

Change from 2Q 2016 (bps) 0

Asking Rents (per month) $977

Change from 2Q 2016 6.3%

Median Sales Price (per unit YTD) $102,147

Average Cap Rate (YTD) 5.7%

Market IndicatorsRelative to prior period

MarketQ2 2017

Market Q2 2016

Vacancy

Rents

Transaction Activity

Price Per Unit

Cap Rates

2 Greater Phoenix Research & Forecast Report | Q2 2017 | Multifamily | Colliers International2

Renter demand is proving strong enough to more than offset the new construction. Central Phoenix and North Central Phoenix are hot spots for recent development. Projects totaling more than 750 units along 16th Street north from Highland Avenue to Colter Road will come online in in the next 12 months.

The second quarter was an active period for the local investment market. Sales velocity picked up, prices rose and cap rates compressed. With property performance healthy across the market, there is a broad mix of assets changing hands. Cap rates in newer product in areas such as Tempe and Chandler are averaging around 5 percent, while some older properties are changing hands with cap rates closer to 6 percent.

SUBMARKET STATISTICS

Submarket Name 2Q 2017 Vacancy

2Q 2016 Vacancy

Annual Vacancy Change (BPS)

2Q 2017 Asking Rents

2Q 2016 Asking Rents

E Mesa/Apache Junction 4.3% 5.0% (70) $969 $895

W Central Phoenix 4.4% 4.9% (50) $809 $615

Maryvale/Estrella 4.6% 4.8% (20) $750 $725

Gilbert/Superstition Springs 4.9% 4.4% 50 $1,020 $972

N Mesa 4.9% 4.8% 10 $837 $782

NW Black Canyon 5.0% 5.6% (60) $824 $786

Goodyear/Avondale 5.0% 5.0% - $988 $922

S Phoenix/Laveen 5.2% 7.2% (200) $906 $903

N Paradise Valley 5.2% 5.6% (40) $1,076 $1,060

S Mesa 5.4% 4.9% 50 $889 $838

E Central Phoenix 5.5% 5.5% - $896 $846

North Mountain 5.8% 5.3% 50 $875 $841

S Tempe 5.8% 5.4% 40 $1,058 $1,000

Chandler 5.9% 5.1% 80 $1,084 $1,053

Ahwatukee Foothills 5.9% 5.1% 80 $1,059 $1,023

Deer Valley/N Peoria 5.9% 4.7% 120 $1,019 $967

Glendale 6.0% 5.4% 60 $743 $704

Union Hills/Cave Creek 6.0% 5.9% 10 $978 $910

S Gilbert/Queen Creek 6.1% 5.3% 80 $1,099 $1,043

S Scottsdale 6.1% 5.2% 90 $1,315 $1,121

N Scottsdale/Fountain Hills 6.3% 7.0% (70) $1,222 $1,155

N Central Phoenix/Alhambra 6.4% 6.5% (10) $874 $902

Central Black Canyon 6.5% 12.9% (640) $655 $607

Peoria/Sun City 6.6% 5.9% 70 $961 $914

N Tempe 6.9% 10.0% (310) $1,176 $1,072

Metrocenter 7.2% 6.9% 30 $778 $732

Central City/Sky Harbor 7.3% 6.9% 40 $1,290 $1,308

NE Central Phoenix 7.7% 9.1% (140) $1,059 $1,054

S Paradise Valley 8.6% 5.0% 360 $1,033 $757

Central Phoenix/Encanto 9.0% 7.0% 200 $1,090 $1,050

Greater Phoenix Multifamily Market (continued)

3 Greater Phoenix Research & Forecast Report | Q2 2017 | Multifamily | Colliers International

Employment: > The Greater Phoenix employment market continued to expand, with employers adding 52,000 net new jobs during the past 12 months. The pace of growth has slowed modestly; year-over-year, total employment has expanded by 2.7 percent, compared to a 3.1 percent increase at this time last year.

> The leisure and hospitality sector, which is fueled by business and recreational travel, added 15,000 jobs during the past year for a growth rate of 7.1 percent. This is the fastest pace of expansion in the sector in more than a decade.

> Another sector that displayed robust job growth was education and health services. This sector added 11,900 jobs over the past year, a pace of 4.2 percent. Growth is being led by Banner Health, which recently announced an acquisition of 32 urgent care facilities, and added 4,000 workers thus far in 2017.

Construction: > Multifamily development has been quite active. More than 1,800 units came online during the second quarter, up 23 percent from the first quarter total. During the past 12 months, more than 5,800 units have come online, a 2.2 percent increase to inventory.

> Apartment construction is forecast to gain momentum in the coming quarters. Currently, there are more than 12,200 units under construction and another 17,000 planned units. One year ago, there were fewer than 10,000 units under way.

> Permitting activity was strong in the second quarter with more than 2,300 permits pulled, an increase of over 21 percent from the first few months of the year. Although activity picked up in the second quarter, multifamily permitting in the first half of 2017 was down 16 percent from activity levels in the previous year.

Vacancy: > After a decline in the first few months of 2017, vacancy in the Greater Phoenix multifamily market ticked up 30 basis points to 5.9 percent. The rate remains unchanged from where it was one year ago.

> The North Mesa submarket posted a vacancy rate of 4.9 percent in the second quarter, one of the five submarkets in the Valley with a rate below 5 percent. Over the past two years, the vacancy rate in the submarket has averaged 4.8 percent.

> While vacancy is generally low throughout Greater Phoenix, there are some areas where the rate is rising in response to new development. Vacancy in the Central Phoenix/Encanto submarket reached 9 percent during the second quarter, 200 basis points higher than one year ago. More than 1,200 new units have been delivered in the submarket during the past 12 months, increasing the local inventory by more than 15 percent.

Employment Overview

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Quarterly Vacancy Trends

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Construction Trends: Major Submarkets

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Completions 2015-2017 Under Construction

4 Greater Phoenix Research & Forecast Report | Q2 2017 | Multifamily | Colliers International

Rents: > For the past several years, asking rents have continued to rise at an accelerating pace in the Greater Phoenix multifamily market. In the second quarter, the asking rate reached $977 per month, or $1.15 per square foot, per month. This is a year-over-year increase of 6.3 percent.

> South Scottsdale posts the highest average rental rate of any submarket in Greater Phoenix. Asking rents in the submarket reached $1,315 per month in the second quarter, up more than 17 percent from one year ago. There are more than 600 units scheduled to come online during the second half of this year in the submarket, which could put upward pressure on concessions.

> While Class A properties posted the largest rent increase, there was prominent rent growth throughout all property classes in the second quarter. Asking rents in Class A buildings advanced 8.7 percent to reach $1,450 per month. Annual increases in Class B and Class C properties are averaging between 6 percent and 7 percent.

Investment Trends: > Sales of apartment properties rose 13 percent from the first quarter to the second quarter. Despite the recent surge in transactions, total sales activity in the first half of 2017 was down 8 percent from the levels in the first half of last year.

> In the second quarter, properties trading had a median price of more than $116,000 per unit, an increase of over 21 percent from the previous period. Nine properties changed hands at more than $150,000 per unit during the second quarter, after only a handful of sales topped this pricing threshold during the first quarter. Year to date, the median price is $102,147 per unit.

> Cap rates compressed as prices pushed higher. The average cap rate in transactions during the second quarter was 5.5 percent, down from 5.8 percent in the first quarter. Year to date, cap rates have averaged approximately 5.7 percent.

MULTIFAMILY SALES ACTIVITY

Property Name Street Address Units Sales Price Price per Unit

Andante Apartments 15801 S 48th St., Phoenix 576 $85,250,000 $148,003

Onnix 1500 E Broadway Rd., Tempe 659 $77,050,000 $116,919

Arcadia Cove 2252 N 44th St., Phoenix 432 $71,500,000 $165,509

Recent Transactions in the Market

Quarterly Rent Trends

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$0.85

$0.90

$0.95

$1.00

$1.05

$1.10

$1.15

$1.20

$1.25

$725

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$825

$850

$875

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$950

$975

$1,000

Asking Rent per SF

Aski

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Per Month Per SF

Investment Trends

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Outlook: The Greater Phoenix multifamily market is positioned for a strong second half of the year. Vacancies have fluctuated a bit as new units come online—with a few submarkets showing intermittent, short-term vacancy rises—but the rate is generally stable and well below the market’s long-term average. These tight vacancy conditions are setting the stage for rapid rent growth. Asking rents advanced by approximately 5 percent in the first half of 2017 and are on pace to post the strongest annual gains in the past 10 years.

Sales of local multifamily buildings have been accelerating for the past several years, reaching a peak in 2016. Through the first half of this year, sales velocity has lagged 2016 levels, but the market is still on pace for significant volume in 2017. Prices surged in the second quarter, in part due to an increased number of newer properties changing hands. With development continuing at a robust pace, there should be additional opportunities to acquire new multifamily development going forward.

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

Copyright © 2017 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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* Year End Forecast

Vacancy Forecast

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* Year End Forecast

Rent Forecast

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2010 2011 2012 2013 2014 2015 2016 2017*

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Employment Forecast

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