Greater Phoenix Blue Chip

THE MISMATCH BETWEEN SUPPLY AND DEMAND CONTINUES FOR APARTMENTS

Fourth Quarter, 2025

Elliott D. Pollack & Company

Permits in the single-family market in October declined a significant 28.8% compared to year-earlier levels.  October was the twelfth consecutive month of single family permit year-over-year declines in Greater Phoenix.  The only good news is that the year-over-year comparisons should become easier going forward.  However, the fundamentals for single-family home purchases have not changed much.  As a result, the absolute year-over-year numbers (as opposed to the percentage change) will probably not be very impressive in the near term.

The primary focus of this quarter’s commentary is the multifamily market.  The mismatch between new supply and demand continues to hamper the Phoenix apartment market, according to an analysis of data collected by CoStar, released on November 30^th.  The report painted a picture of a wave of construction that has up until recently overshadowed a very strong absorption picture.  The growth story now appears to be shifting in favor of absorption.  The 16,000 units of net absorption over the last 12 months was far in excess of the pre-COVID five-year average of 7,200 units and the 2023-2024 average of 11,477.  The reality is that absorptions have been growing at explosive rates since late 2022 and appear to have reached their peak over the last year.  This makes sense for a number of reasons.  The major factor, though, is interest rates.

The extremely low level of interest rates in the first three years of this decade made apartment investing look very promising.  From 2020 through the first half of 2023, permits for new apartments were very high and well exceeded absorptions.  When interest rates turned up, apartment construction started slowed markedly.  The peak of 8,258 permits in early 2023 slowed to 1,770 permits in the third quarter of 2025.  (That being said, there are still 21,000 apartment units under construction at present.)

After years in which the moving 12-month total of apartments under construction exceeded the 12-month total of apartment absorption, we now seem to have entered a period when absorption will exceed new construction.  This was to be expected for two reasons.

• First, the lag between new permits and a completed building can be 2-3 years or more.
• And second, while the demographics of Greater Phoenix should be very favorable for single family-homes at this time, the unusually negative affordability situation has pushed many of those who would normally be purchasing a home for the first time into the rental market. That is the main reason the apartment market remained as strong as it did.

Those dynamics drove apartment vacancies to levels not seen in years.  Now, given the current dynamics, the good news is that the number of new apartment units delivered will continue to slow while the absorption rate is likely to remain higher than normal.  This will result in vacancies declining from their current level of 12.9% in Greater Phoenix.

It could still take a couple of years, though, before vacancy rates in the Valley fall below 10%, but it’s a start.  Once the vacancy rates fall below 10%, the decline in rents that started in mid-2022 (on a per-square-foot basis) could end in the not-too-distant future.

GREATER PHOENIX BLUE CHIP: RESIDENTIAL