Phoenix Multifamily on Solid Ground: Q&A

Having been active in the market's multifamily sector for several years, Next Wave Investors’ Principal points out Phoenix’s strengths.

Jordan Fisher, Principal, Next Wave Investors. Image courtesy of Next Wave Investors

Jordan Fisher, Principal, Next Wave Investors. Image courtesy of Next Wave Investors

The Phoenix multifamily market has fared relatively well, despite the negative impact the COVID-19 outbreak has had on most markets. Occupancy in stabilized properties declined just 30 basis points year-over-year, to 95.0 percent as of June, according to Yardi Matrix data. Although transaction volume softened last year, property values held strong, with the average price per unit inching up 1 percent, to $166,540, and surpassing the U.S. average for the first time this decade.

In the past few years, the metro has become a competitive market for both businesses and residents. In the interview below, Next Wave Investors Principal Jordan Fisher shares the reason behind the multifamily sector’s growth in Phoenix, as well as what keeps drawing investors to the metro.

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What does Phoenix have to offer to investors?

Fisher: Phoenix offers a high quality of life, relative affordability compared to many other major Western markets and an ever-growing population of skilled workers. Ranked first in the U.S. for population growth for four consecutive years, the market has been steadily attracting businesses and residents from California and other states.

This delivers strong upside potential for investors who understand how to execute on value-add strategies in order to transform older, under-managed multifamily properties into cash-flowing assets. Our firm has been an active investor in this market for several years, benefiting from the continued high demand for quality, upgraded apartment homes.

As more investors enter the Phoenix market, competition for value-add opportunities intensifies. How are you adjusting your acquisitions and dispositions strategy?

Fisher: Because Next Wave has been active in the Phoenix area for several years—and we’ve brought many multifamily investments full cycle here—we’re highly tuned into the market. This has enabled us to nimbly adjust to and benefit from fluxes in competition and available inventory without any significant changes to our core strategies.

For example, we recently capitalized on high investor demand with the sale of La Estrella Vista, a 96-unit multifamily community in the Far West submarket of Phoenix. In less than 18 months of ownership, we increased the property’s operating income by more than 25 percent through the implementation of our proven value-add program, ultimately delivering an upgraded, cash-flowing asset to the new buyer. We continue to evaluate acquisition opportunities in Phoenix that are aligned with our strategy. We also target multifamily acquisition opportunities in the Greater Arizona, Nevada and Utah areas and other key Western markets.

According to Yardi Matrix data, despite a decrease in total transaction volume year-to-date through July, the average price per unit in Phoenix surpassed the U.S. average for the first time this decade. How do you explain this growth?

Fisher: Phoenix in particular has seen pricing rise substantially compared to pre-pandemic values. This is in part due to Arizona’s lower-than-average prices and dropping interest rates. The pandemic has also been a catalyst for accelerated in-migration as residents relocate from California and other coastal markets seeking more affordable lifestyles. This increasing demand has resulted in more investors looking to diversify their portfolios with Phoenix assets.

How can investors land good multifamily deals in Phoenix, considering the strong competition and high prices?

Fisher: Investors looking to enter the Phoenix market will benefit from leveraging any existing relationships with brokers or other partners who are already established in the market. Because we were active in Phoenix prior to the most recent influx of investor interest, Next Wave is well-positioned to identify diamond-in-the-rough assets that could be a fit for our portfolio. These items are key to identifying the right investment opportunities in the current market climate.

Are other markets as competitive as Phoenix when it comes to value-add opportunities?

Fisher: While competition is increasing throughout many of our other target markets, including Tucson, Ariz., Las Vegas and Salt Lake City, we’re still actively seeking the right investments in these areas. This strategy will enable us to capitalize on continued growth while leveraging our relationships and understanding of demand drivers and resident expectations.

That said, we’re also bullish on expanding into other up-and-coming markets to diversify and develop new economies of scale. For example, we recently acquired Shiloh Park Townhomes, a 73-unit multifamily community in Plano, Texas. This market currently holds the No. 1 spot for technology job growth in the country and features strong fundamentals including a high median income and high-quality educational systems.

What are your predictions for the Phoenix multifamily market in 2021?

Fisher: Multifamily collections outperformed expectations throughout 2020. Interestingly, many of the top performers have been Class B and C assets. Occupancy rates in Phoenix also remain strong, perhaps even stronger than before the pandemic. Based on these fundamentals, we see the runway for growth in Phoenix extending through 2021 and beyond.

That said, high competition and rising prices will be the primary challenges to overcome. Investors who can foster and forge relationships in the market and find their niche will be best-positioned to benefit from the region’s anticipated growth over the next few years.

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