Phoenix Apartment Rents Decline for Fourth Straight Month

Article originally posted on CoStar on November 8, 2023

Average asking rents in Phoenix declined 0.8% in October, marking the fourth consecutive month of rent losses and the largest monthly drop since the global financial crisis.

After remaining flat through the first half of 2023, rents at Phoenix multifamily properties began falling in late summer and have remained on a downward trajectory since then.

Though seasonal factors typically cause rent growth to ease in the back half of the year, it is rare for lease rates to outright decline. In the five years leading up to the onset of the pandemic, the Valley averaged 0.4% growth in October.

Much of the rent growth weakness can be attributed to Phoenix’s substantial construction pipeline. Through the first three quarters of 2023, developers completed about 12,700 net new apartment units, one of the strongest three-quarter periods in several decades. Though demand has been rebounding so far this year, it was not enough to absorb the aggressive schedule of completions, causing vacancies to rise and rents to weaken.

Many local property managers have responded to the heightened competition from new supply by lowering rents or increasing discounts to attract renters. The share of Phoenix properties offering discounts has steadily risen from the mid-single digits in 2021 to over 30% as of this year’s third quarter.

Midpriced apartments have been disproportionately affected. The average asking rent at three-star properties declined 1% in October, contributing to a 3.6% decrease year over year. Counter to trends seen at the national level, this segment saw stronger rent growth than four- and five-star buildings during 2021’s demand boom, peaking at over 22% annually. But now that the tide is turning, it has been declining the most quickly. October marked the sixth consecutive quarter where three-star buildings led all other segments in rent losses.

Conversely, one- and two-star buildings, which are more insulated from new buildings, have held up better. The average asking rent in this segment fell 0.5% last month and is down less than 1% year over year.

The supply waves are expected to continue over the short term. Multifamily builders have over 32,000 units under construction, the fourth most in the United States. Though some projects may be delayed due to financing challenges, property performance is expected to remain tepid through 2024 as the new supply is digested.