Investors looking to purchase or build multifamily housing properties in the Valley are finding a market that is cooling but still active, making it hard for first-time investors to get in the game. We are far away from the market fever pitch we reached in 2021 when low-interest rates and high demand for rental units created a boon for experienced and first-time investors. Commercial real estate mortgage brokers are seeing a multi-family market in 2023 that looks distinctly different with Phoenix seeing a decrease in rents after two years of rapid growth and interest rates at their highest rate in the last two decades. However, a continued interest in people migrating to Phoenix is keeping the demand for rental units high. This high demand is balancing the market with experienced investors with deep pockets still remaining in the multifamily game at the expense of inexperienced and less wealthy investors.

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High-interest rates have been the main barrier to entry for prospective multifamily investors. There are investors who would absolutely love to build new rental units; however, it is expensive to borrow money meaning only well capitalized groups can afford to get into the market. If interest rates were lower we would not see  the same slowdown in the multifamily market. All the pieces for a booming market are there. The supply of housing is relatively low compared to the demand. The main driver preventing investors from trying to meet that demand is interest rates keeping the price of entry too high.

High interest rates and cautious lenders mean only the most experienced players are able to enter the market. These investors have built multifamily complexes and have a strong net worth. It is hard to sell bank lenders to new developers in the market because banks are worried about liquidity. This means that multifamily investors have to bring in their equity as well as another deposit to ensure they have liquidity.

There is more of a push for purchasing apartment complexes and renovating current units, value add properties, over new multifamily builds. It is easier to get financing to renovate existing buildings as opposed to ground up development. However, one area of new builds that is still seeing a lot of investor interest is in build-for-rent communities. These are single-family subdivisions classified as multifamily as the developer will rent the units as opposed to selling the newly built homes.. There is a high demand for build-for-rent because it serves as a good stop-gap for residents who might not want to commit to a home purchase but still need the space a single-family house gives. Investors love the idea of build-for-rent because rents for a single-family home are higher on average and tenant turnover is on average lower. Build-for-rent investors are interested in building in across the valley as well as having an interest in Casa Grande, Maricopa and other tertiary AZ markets as land in those areas is more widely available and housing demand is high.

The multifamily market is on the cusp of really booming again. However, as long as interest rates remain high the only people who are competitive in this market are going to be experienced and well capitalized developers and operators. If interest rates drop sometime next year I would not be surprised to see more investors entering the multifamily market. If interest rates don’t drop we can expect to see more of the same with demand for new rentals remaining high, but only a select few players working to meet that demand.

Author: Tom Hartje is a Lender Portfolio Manager atIntegrity Capital LLC a commercial mortgage brokerage in Scottsdale Arizona. Integrity Capital specializes in helping investors find financing for multifamily projects and other commercial properties.