Research & Forecast Report

GREATER PHOENIX | MULTIFAMILY2Q 2015

Market Rents Maintain Their Upward TrajectoryKey Takeaways > Despite a modest uptick during the second quarter, the Greater Phoenix multifamily rate is only slightly higher than all-time lows.

> Strong renter demand for apartments is prompting an active development environment. This year is forecast to be the strongest annual delivery of new units since 2008-2009.

> Rents have been rising at a rapid pace, driven higher by tight vacancy conditions, an improving economy and the delivery of newer, more expensive units in desirable submarkets. Rents are forecast to continue to strengthen in the second half of the year.

> Investment activity has been healthy, with transaction volume increasing, prices pushing higher and cap rates ticking a bit lower. Strong operating conditions are expected to continue to promote sales activity.

Greater Phoenix Multifamily Market

The Greater Phoenix multifamily market recorded mixed performance in the second quarter. Vacancy ticked higher, which is a fairly common occurrence in the Phoenix metro as some seasonal residents retreat to cooler climates to avoid the summer heat. Despite the short-term vacancy uptick, the rate is still at its second-lowest point over the past 10 years. While vacancy inched up over the past few months, rents continue to rise. Following a gain of more than 2 percent in the first quarter, asking rents surged by more than 1.5 percent in the second quarter. This robust rent growth is being recorded at a time when rentals are becoming increasingly attractive and owners are upgrading existing units in efforts to fuel NOI growth.

Investment activity has been healthy thus far in 2015, with prices and activity levels outpacing last year’s figures and cap rates compressing slightly. Tight vacancies and rising rents will continue to attract buyers

Summary Statistics Phoenix Market

Vacancy Rate 6.1%

Change from 2Q 2014 (bps) -80

Asking Rents Per Month

$850

Change from 2Q 2014 5.7%

Median Sales Price Per Unit (YTD)

$68,800

Average Cap Rate 5.7%

Market IndicatorsRelative to prior period

MarketQ2 2015

Market Q2 2014

Vacancy

Rents

Transaction Activity

Price Per Unit

Cap Rates

2 Greater Phoenix Research & Forecast Report | 2Q 2015 | Multifamily | Colliers International2

to the market in the coming quarters, although a few owners may choose to take some profits following a more than 60 percent increase in the median price over the past five years. These conditions, along with available and affordable financing, should continue to fuel transaction activity between now and the end of the year.

MULTIFAMILY SALES ACTIVITY

Submarket Name 2Q 2015 Vacancy

2Q 2014 Vacancy

Annual Vacancy Change (BPS)

2Q 2015 Asking Rents

2Q 2014 Asking Rents

Annual Rent Change (%)

Chandler 4.6% 6.2% (160) $972 $908 7.0%

Gilbert/Superstition Springs 4.9% 5.3% (40) $889 $837 6.2%

Deer Valley/N Peoria 4.9% 5.9% (100) $907 $857 5.8%

Ahwatukee Foothills 4.9% 6.1% (120) $933 $887 5.2%

NW Black Canyon 5.0% 6.7% (170) $727 $693 4.9%

S Phoenix/Laveen 5.1% 8.1% (300) $859 $776 10.7%

S Mesa 5.1% 7.3% (220) $767 $717 7.0%

S Paradise Valley 5.3% 5.2% 10 $736 $641 14.8%

Union Hills/Cave Creek 5.3% 7.0% (170) $819 $807 1.5%

N Mesa 5.4% 5.5% (10) $728 $683 6.6%

S Gilbert/Queen Creek 5.5% 4.8% 70 $971 $907 7.1%

S Scottsdale 5.5% 6.1% (60) $1,051 $982 7.0%

Central City/Sky Harbor 5.6% 6.8% (120) $1,256 $1,119 12.2%

Goodyear/Avondale 5.6% 5.5% 10 $849 $818 3.8%

North Mountain 5.8% 4.6% 120 $800 $741 8.0%

S Tempe 5.8% 5.4% 40 $946 $885 6.9%

N Scottsdale/Fountain Hills 5.8% 6.1% (30) $1,073 $1,015 5.7%

Glendale 5.8% 7.6% (180) $650 $623 4.3%

Peoria/Sun City 6.1% 6.7% (60) $854 $860 -0.7%

Metrocenter 6.4% 6.6% (20) $665 $623 6.7%

N Paradise Valley 6.6% 5.7% 90 $1,001 $961 4.2%

W Central Phoenix 6.6% 7.1% (50) $586 $588 -0.3%

Maryvale/Estrella 6.7% 8.3% (160) $661 $634 4.3%

E Mesa/Apache Junction 8.2% 9.3% (110) $843 $810 4.1%

E Central Phoenix 8.9% 8.9% - $809 $762 6.2%

Central Black Canyon 9.2% 9.8% (60) $576 $573 0.5%

N Central Phoenix/Alhambra 9.4% 10.3% (90) $849 $796 6.7%

NE Central Phoenix 9.7% 7.1% 260 $1,030 $900 14.4%

Central Phoenix/Encanto 10.2% 7.8% 240 $1,005 $932 7.8%

N Tempe 10.6% 10.1% 50 $989 $943 4.9%

Recent Transactions in the Market

Greater Phoenix Multifamily Market (continued)

3 Greater Phoenix Research & Forecast Report | 2Q 2015 | Multifamily | Colliers International

Employment: > Employment in the Greater Phoenix area has been steadily expanding in recent years. During the past 12 months, employers have added 53,200 jobs, a 2.9 percent gain. Growth was strongest toward the end of last year, however, and gains thus far in 2015 have been modest.

> While nearly every industry has been adding jobs, the strongest growth is being recorded in the traditionally high-paying professional and business services sector. Over the past year, 11,800 professional jobs have been added in Greater Phoenix, a 3.9 percent increase. Additions in this segment should support renter demand for the new Class A units coming online in the market.

> Northern Trust will be one of the companies adding high-wage jobs in the Phoenix metro in the coming years. The banking company announced plans to add 1,000 jobs in Tempe in the coming years, with the positions featuring an expected average salary of $82,000 per year.

Construction: > Approximately 5,800 units have come online in Greater Phoenix over the past 12 months, increasing metrowide inventory by more than 2 percent in that time.

> Construction has been largely concentrated in two adjacent submarkets. Since the beginning of 2014, nearly 1,500 units have come online in South Scottsdale, while nearly 1,200 units have been delivered in North Tempe. These submarkets feature the jobs and the numerous amenities that are fueling renter demand.

> The development of new units will persist in the coming quarters, as there are projects totaling more than 7,000 units currently under construction in Greater Phoenix. North Tempe will continue to lead the way with new supply growth, as there are more than 1,500 units under construction in the submarket.

Vacancy: > Apartment vacancy in Greater Phoenix ticked higher in the second quarter—a fairly common seasonal trend—rising from 5.7 percent to 6.1 percent. Compared to one year ago, the rate has improved by 80 basis points, and the current vacancy is the second-lowest figure in the past 10 years.

> Only two submarkets in Greater Phoenix have vacancy rates above 10 percent, the metro area’s long-term vacancy average. One of the submarkets with a double-digit vacancy rate is North Tempe, at 10.6 percent. Vacancy in North Tempe routinely rises in the second quarter as the school year for Arizona State University ends; the submarket’s vacancy rate has averaged 6.5 percent during the school year since 2014.

> The submarkets with the lowest vacancy rates are located in the high-growth submarkets in the Southeast Valley. Vacancy in Chandler ended the second quarter at just 4.6 percent, while the rate in the Gilbert/Superstition Springs submarket is 4.9 percent.

Employment Overview

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Quarterly Vacancy Trends

Quarterly Vacancy Trends (page 3 Bo�om)

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Construction Trends: Major Submarkets

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4 Greater Phoenix Research & Forecast Report | 2Q 2015 | Multifamily | Colliers International

Rents: > Asking rents continue to push higher throughout Greater Phoenix, reaching $850 per month in the second quarter. Current asking rents are 5.7 percent higher than one year ago, and have increased 3.8 percent in just the first half of 2015.

> Some of the areas that are recording the strongest rent increases are located in infill locations in northeast Phoenix. Submarkets including South Paradise Valley, Northeast Central Phoenix and Central City/Sky Harbor have all recorded year-over-year asking rent increases exceeding 10 percent.

> While rents are increasing across the board, the strongest gains are being recorded at the top tier of the market. Class A asking rents have increased 7.2 percent over the past 12 months, ending the second quarter at $1,242 per month or $1.27 per square foot.

Investment Trends: > Sales of apartment properties ticked up 4 percent from the first quarter to the second quarter, and activity levels in the first half of this year were up 23 percent from the first half of last year. Sales velocity has been steadily trending higher over the past few years.

> While the number of properties changing hands rose in the second quarter, prices dipped somewhat. The median price fell from $73,100 per unit to $63,700 per unit from the first quarter to the second quarter. For the first half of this year, the median price reached $68,800 per unit, 2 percent higher than the 2014 median price.

> Average cap rates have settled in at approximately 5.7 percent in multifamily property sales thus far in 2015. Last year, the average cap rate was just under 6 percent.

Quarterly Rent Trends

Quarterly Rent Trends (page 4 Top)

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Outlook: Renter demand for multifamily units is expected to remain strong in Greater Phoenix in the second half of this year, but deliveries of new units will continue at an accelerated pace. With both new supply and demand on the rise, metrowide vacancy is forecast to largely level off this year, following a five-year run where the rate was cut in half, from over 13 percent to under 6 percent. While the delivery of new units is not going to present a short-term threat to the market, there could be a bit of an oversupply condition in the years ahead when homeownership trends ultimately change course.

Over the past decade, the homeownership rate in Greater Phoenix has fallen by nearly 10 full percentage points to just above 60

percent. Some of this was the result of changing demographics, but much of the decline has to do with the volatility in the local housing market. Given the cyclical nature of the housing market, there will likely be a change of direction in the next few years, when renters will transition into homeownership. It remains to be seen precisely how this transition will impact renter demand for multifamily units, particularly in the newer apartment communities at the highest end of the rent spectrum. These units have been well received in the current climate, which largely favors renting over homeownership. As market forces change, particularly if lending standards become less restrictive, there could be some uncertainty for newer, more expensive product.

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

Copyright © 2015 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 MulhernManaging 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

Construc�on and Permi�ng Forecast

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Vacancy Forecast

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