Market Spotlight: Phoenix, AZ MSA
Breneman Capital has developed a predictive appreciation model we’ve dubbed our “Market Outlook Model” for multifamily values. The model’s primary purpose was to focus on the fundamentals - understanding how each market has performed historically and why it behaved the way it did. The model references historic multifamily appreciation rates from 2000 to 2022 and is backtested with an array of statistics spanning Economic, Demographic, Affordability, New Supply, Apartment Fundamentals, and Single-Family Home data. Through this analysis, we determined which data points are predictive of multifamily appreciation over the past 22 years and which are not. Moreover, we can precisely pinpoint the specific indicators that are the primary drivers for each market’s performance. Each market is ranked by the sum of its indicators, weighted by their actual correlations and statistical significance with appreciation.
Our model comprises the 37 largest markets across the country, 16 of which were determined to have had above-average appreciation rates for 2022. In the coming months, we will release new articles profiling our model's results and the benefits of investing in each market.
In this article and in our analysis, “Phoenix” refers to the Phoenix-Mesa-Scottsdale, AZ MSA.
Phoenix was the consensus #1 overall market in 2019, 2020, and 2021 in our Market Outlook Model. In 2022, it was the #2 overall market with a score of 1.33x the average appreciation rate of the 37 largest markets in the US.
Phoenix is the oft-forgotten gem of the Southwest. With its warm climate, vibrant culture, and diverse economy, it’s no wonder that investors are beginning to take note of this region as a prime destination for multifamily property investment.
In this article, we'll cover the many benefits of investing in multifamily properties in the Phoenix. You'll learn about the region's economic growth and stability, the area’s strong job market, its affordability for renters, and much more.
1) Best property tax laws in the entire country
The State of Arizona passed Rule A in 2012, which enacted the following laws:
Assessments (known as Limited Property Value) may never exceed 5.0% increases year-over-year.
Assessments can never exceed Market Value (known as Full Cash Value).
Properties are not reassessed upon sale.
This set of laws create a greater degree of certainty when projecting future property tax expenses, and thus reduces risk for investors. Because Phoenix has a long history of above average rent growth, this also allows for greater Net Operating Income growth and asset appreciation compared to other high growth sunbelt markets with less favorable property tax laws.
Caps for increases on assessed values and property taxes are extremely unique across the country, let alone growth markets in the sunbelt. The combination of Phoenix’s long-term growth and advantageous property taxes present one of the best prospects for multifamily appreciation.
2) Track record of rent growth and appreciation outperformance
The best predictor of rent growth and appreciation is prior performance, and Phoenix is the leader in rent growth and appreciation. We examined performance data for the period between 2013-2019 in order to sample the most “normal” time period for the economy (excludes performance during the Great Financial Crisis as well as the onset of the pandemic and the hyper-demand that soon followed). The results are astounding:
Appreciation: 14.4%/year (2013-2019)
Rent Growth: 7.3%/year (2013-2019)
We then observed the data as far back as it was available (2000 for appreciation and 2005 for rent growth) through 2019:
Appreciation: 7.4%/year (2000-2019)
Rent Growth: 4.0%/year (2005-2019)
Source: Yardi Matrix data for both rent growth and appreciation, calculation by Breneman Capital.
3) Economic Growth and Stability
The Phoenix region has seen steady economic growth for several years. According to the U.S. Census Bureau, it was the fastest-growing metropolitan area between 2010-2020, with a population increase of over 11.2%.
This growth is expected to continue through 2030 and beyond as more businesses and renters move into the area to take advantage of its low cost of living during a recessionary environment.
The region also boasts an impressive job market, with unemployment rates consistently below 3.6%. In addition, many key industries—including finance, healthcare, government (Phoenix is the state capital), aerospace manufacturing, tourism, retail trade—are growing steadily in the Phoenix-Mesa-Scottsdale area and are resistant to recessionary pressures (unlike technology, for example).
This provides multifamily property owners a reliable source of income with a tenant base that is employed in resilient industries or nearby ones that support them (such as transportation and logistics).
4) Affordability and High Quality of Life for Renters
The MSA’s cost of living is lower than the national average, meaning renters pay prices that are more affordable than other markets across the country for similar quality housing.
According to RentCafe, the median rent in Phoenix-Mesa-Scottsdale is $1,590 as of December 2022—significantly lower than many other markets of similar size and relevance.
The Phoenix-Mesa-Scottsdale area is also known for its excellent quality of life. The region has a diverse population and culture, with world-class recreation and a wealth of attractions available given the region’s 300+ days of sunshine each year. The Phoenix area is also proximate to other notable destinations including Tucson, Flagstaff, Sedona, and Prescott - perfect for vacations and weekend getaways.
From the Sonoran Desert to the White Tanks Mountains to the Grand Canyon, Arizona has some of the most diverse landscapes and natural beauty of any state in the country. In addition, the Phoenix-Mesa-Scottsdale MSA offers countless restaurants, museums, galleries, theaters, and other cultural institutions that make it an attractive destination for renters who are looking for more than just affordable housing. Scottsdale in particular is well-renowned for its nightlife and amenities, attracting millions of visitors each year.
5) Infrastructure and Transportation
Local governments have invested significantly in the region’s infrastructure and is well-connected via highways, railroads, and airports. This ensures easy access for residents when commuting to work or traveling out of town.
In addition, the area has a robust public transit system that consists of light rail, bus lines, and shuttle services. This means that those who choose not to drive can have access to reliable transportation options at an affordable cost.
Phoenix has also become a critical logistics hub with many companies choosing to locate on the west side of the valley in Glendale as a cheaper alternative to the Inland Empire in California. The Wall Street Journal released a video detailing this: Why a 17-Mile Stretch of Arizona Highway Is a Booming Logistics Hub.
Final thoughts: investing in Phoenix, AZ
The Phoenix-Mesa-Scottsdale metropolitan area is an ideal market for those seeking to invest in multifamily real estate. Buoyed by its economic growth, affordable housing options, quality of life, and transportation infrastructure, it’s no wonder that investors are taking notice of this region as a great place to invest.
Arizona has the most favorable property tax laws in the country, helping yield outsized appreciation and returns for real estate investors. The multifamily market in Phoenix consistently dominates the national rankings for the highest appreciation and rent growth. For all these reasons, investing in the Phoenix-Mesa-Scottsdale MSA is a wise strategy for anyone seeking exposure to multifamily investment.
Ready to invest in the Phoenix-Mesa-Scottsdale MSA? At Breneman Capital, we focus on helping investors like you invest passively in the Phoenix real estate market as well as other select markets across the country.
About Breneman Capital
Breneman Capital is a private real estate investment management firm specializing in the multifamily property sector. Breneman Capital employs a deliberate investment approach, leveraging data analytics and proprietary technology to generate superior risk-adjusted returns for investors.
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