By Jesse Fisher
The Arizona rental market continues to capture attention as new data and reports released over the past week paint a complex picture of changing dynamics. Investors and real estate professionals across the state are watching closely as recent numbers on rental rates, vacancy rates, and rental demand indicate an evolving landscape with both opportunities and challenges for anyone interested in the Arizona rental property sector.
Recent reporting from AZ Big Media and The Arizona Republic reveals that the overall pace of rent increases has eased compared to the feverish spikes experienced during and immediately following the pandemic. However, while rent growth is softening, prices remain significantly higher than pre-pandemic levels. According to a new update from Apartment List released in early June 2024, the median rent for a two-bedroom apartment in Phoenix stands at $1,565, reflecting a year-over-year rise of about 2.1 percent. Tucson, Arizona’s second-largest metro area, recorded even more modest annual rent growth at 1.4 percent, with the median two-bedroom rent registering at $1,275. These numbers represent a continuation of the broad trend toward slower rent appreciation that began in the latter half of 2023.
The moderation in rent hikes is not surprising when viewed alongside new data on vacancy rates across major Arizona markets. The latest report from Colliers International, also released this week, showed that Phoenix’s multifamily vacancy rate ticked up to 9.6 percent at the end of May 2024, a stark difference from the sub-5 percent rates seen during the height of the post-pandemic rental boom. Tucson’s vacancy rate is lower at 7.1 percent, yet it too has been rising steadily over the past 12 months. Analysts cite an influx of new apartment completions as a primary driver, with Phoenix alone seeing more than 15,000 new rental units come online since January 2023. This wave of new supply is outpacing current absorption rates, contributing to the softening rental market seen in both metropolitan Phoenix and outlying suburbs.
Demand for rentals in Arizona, while still robust by historical standards, is being challenged by shifting economic and demographic patterns as well. Surveys from the Arizona Housing Coalition and the National Apartment Association suggest that some renters—especially younger Millennials and Gen Z residents—are opting for roommate arrangements or moving in with family to offset high living costs. The retention rate for tenants renewing leases has dipped modestly across Arizona’s largest cities as a result, making it more challenging for landlords to achieve full occupancy without offering concessions. Major property management companies in Phoenix have responded by promoting more flexible lease terms and providing incentives such as reduced security deposits or rent discounts for longer leases.
Despite cooling momentum, real estate investors and developers are finding reasons to remain engaged in the Arizona rental market. Some observers see indications that stabilization is near. As high mortgage rates persist across the United States, the relative affordability advantage of renting versus buying is likely to remain pronounced through the second half of 2024. The Arizona Association of Realtors noted in a recent weekly digest that prospective homebuyers are staying put in rentals longer as they wait for mortgage rates or home prices to come down. This is expected to underpin baseline rental demand, even as new supply exerts downward pressure on rents in the short term. Investors equipped to weather a period of elevated vacancy rates and slower rent growth may be well-positioned to benefit once the pipeline of new construction shrinks and the market finds a new equilibrium.
A closer look at specific submarkets uncovers additional layers of nuance. Scottsdale and Tempe, which historically have commanded premium rents, are seeing rates flatten as a dense cluster of new luxury apartment complexes enter the market. According to this week’s Yardi Matrix report, Class A properties in Scottsdale achieved average rents of $2,150 in May, nearly identical to one year ago. However, Class B and C properties in West Valley communities such as Glendale and Avondale are still eking out moderate rent increases, as these areas attract renters displaced by elevated costs in more expensive parts of the urban core. In Tucson, demand continues to be bolstered by the presence of the University of Arizona and stable job growth in the healthcare sector, but even here operators are reporting more turnover and a need for targeted concessions to attract and retain tenants.
For multifamily investors with an appetite for value-add projects, the current climate may present attractive entry points. Cap rates have inched upward in the past several quarters, overtaking rent growth as rising vacancies exert pressure on net operating incomes. This shift puts buyers in a stronger negotiating position compared to the intensely competitive deal-making environment of 2021 and early 2022. Many institutional investors have paused acquisition activities as they wait for greater clarity, opening the door for smaller regional operators with local expertise to pursue properties with upside potential through renovation, repositioning, or improved management.
The supply-demand balance will bear close watching in the months ahead. According to forecasts from the Arizona Department of Housing, new apartment deliveries across metro Phoenix are expected to slow down after 2024 as the current pipeline of projects under construction is completed, and tighter capital market conditions make it harder for new developments to break ground. This could set the stage for rental vacancies to eventually decline and rent growth to pick up again, albeit at a less dizzying pace than the recent past. In the meantime, investors are advised to pay extra attention to submarket dynamics, including local employment trends, public infrastructure investments, and changes to Arizona’s property tax structure, all of which can affect both income potential and operational costs.
Short-term rental markets, including those serviced by Airbnb and Vrbo, have also been in the news, with recent city council decisions in Phoenix and Scottsdale placing new regulations on vacation rentals. While these measures have caused some concern among short-term rental hosts, they could ultimately benefit traditional long-term rental property owners by restricting the supply of homes available for short stays. This policy shift, combined with stable in-migration from other states, could provide an additional layer of support for rental demand by the end of this year.
Another emerging trend is the increasing interest in build-to-rent communities. National firms such as Progress Residential and American Homes 4 Rent continue to expand their presence in Arizona, developing professionally managed rental home subdivisions catering to residents who want the benefits of a single-family home without the commitment of ownership. New projects coming online in the far East Valley and parts of Tucson reflect the belief among institutional investors that a substantial segment of the population will remain renters for the foreseeable future, either by choice or necessity.
Ultimately, the latest wave of news and data suggests that the Arizona rental market is in a period of transition rather than facing a major downturn. The combination of rebounding supply, slightly softer rents, and rising vacancies may temporarily challenge landlords, but broader economic fundamentals and demographic trends still favor long-term demand for rental housing in the state. Astute investors will need to stay nimble, tracking pocket-level variations and being willing to adjust strategies as the balance of power between landlords and tenants shifts over time. Arizona’s journey from a fast-growth rental hotspot to a more balanced market is well underway, bringing with it both caution flags and new opportunities for those invested in the state’s real estate future.