Bisnow consulted two experts at Walker & Dunlop, SVP Brandon Harrington and VP Matt Steffen (below, left and right), to learn about the three most significant market forces influencing Phoenix real estate.

Cap Rates

Cap rates continue to compress in terms of in-place net operating income at closing, and will likely continue to do so with so many private equity tranches allocated to real estate opportunities that are generating consistent returns, Matt and Brandon tell us.

Cap rate compression occurs when investors flood the market with cash, competing for a limited supply of properties, and signals general bullishness and confidence in real estate as a lucrative repository for their funds’ money.  

Properties differentiated by class with varying degrees of risk that would be stratified under normal circumstances with more discriminating investors all get lumped together. A saturated market rewards investors who can think creatively and assume some entrepreneurial risk by considering alternatives to core.

Millennial Renters

With over $1.4 trillion in outstanding student loans, buying a home is becoming less feasible or desirable for Millennials, further affecting demand for rental housing. 

Millennials enjoy the sense of community afforded by newer rental properties and fostered by property managers, who are increasingly leveraging technology to simplify tenants' lives, bring residents together for a neighborhood feel and promote sustainability initiatives important to Millennials, according to Brandon and Matt.

With services such as Airbnb, Millennials are more mobile, seeking shorter-term leases that afford them flexibility and pre-installed on-site amenities that are functional upon their arrival. Co-living, gaining traction in DC and New York, takes these trends to extremes, providing Millenials dorm-like accommodations.

Interest Rates

Brandon tells us “despite record low interest rates, many of our clients are still requesting floating rate debt with flexible prepayment terms in Arizona. Why? Further price appreciation is anticipated,” and they don’t want to lock in a fixed-rate contract when the market may trend more favorably in the future.

With over $10 trillion in negatively yielding sovereign debt outstanding, interest rates will likely remain low, as creditors seem desperate for dependable cash streams. The new global economy is an ecosystem marked by interdependence and highly mobile capital, so the yield on a German bond has a direct and unexpectedly profound impact on a local real estate investor’s interest rate.

Matt says, “Investors in Phoenix still need to consider how they are modeling their exit cap rates and how to overcome the erosion of value in a rising cap rate environment,” preparing for the inevitable pendulum swing from the current situation.

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