Investment Activity Heating Up with Rents on the Rise

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1 Research & Forecast Report GREATER PHOENIX MULTIFAMILY 2 Investment Activity Heating Up with Rents on the Rise Key Takeaways > > The third quarter proved to be another period of healthy operating conditions in the Greater Phoenix multifamily market. Even as deliveries picked up, vacancies tightened and rents rose. With renter demand for apartments elevated, local conditions will remain strong for at least the next several quarters. > > Vacancy dipped 2 basis points during the third quarter, reaching 5.7 percent. The rate is unchanged from one year ago. Vacancy has been at or below 6 percent for the past two years. > > Rents have continued to advance at a healthy pace. Asking rents rose 1 percent during the third quarter, reaching $987 per month. Asking rents are up 6.4 percent from one year ago. > > Investment conditions in the Greater Phoenix multifamily market strengthened during the third quarter. Sales velocity ticked higher, the median price rose and cap rates compressed. A strong close to the year is likely. Greater Phoenix Multifamily Market Conditions remained strong in the Greater Phoenix multifamily market during the third quarter. The local vacancy rate inched lower, following a modest seasonal uptick during the second quarter. Vacancy has remained in a very tight range since dipping under 6 percent in early 2. While vacancy is low, the rate has averaged a bit higher in 2 than the average during the same period in 2 and a modest rise could occur in the coming quarters as new units come online. Development of apartments has been a force in the Greater Phoenix multifamily market for the past several years, and to this point in the cycle, the pace of net absorption has closely tracked the rate of new construction. This strong demand continues to prompt new development. There are projects totaling more than 12, units currently under way, up nearly 6 percent when compared to one Market Indicators Relative to prior period Vacancy Rents Transaction Activity Price Per Unit Cap Rates Summary Statistics Phoenix Market Vacancy Rate 5.7% Change from 3Q 2 (bps) Asking Rents (per month) $987 Change from 3Q 2 6. Median Sales Price (per unit YTD) Market 2 $16, Average Cap Rate (YTD) 5.7% Market 2

2 Greater Phoenix Multifamily Market (continued) year ago. After being concentrated in just a few areas in recent years, apartment construction is occurring in a greater number of submarkets throughout the Valley, as vacancy has tightened and rents have pushed high enough to justify new development. The investment market followed up a healthy second quarter with additional gains during the third quarter. Sales activity ticked higher, cap rates compressed slightly and prices surged. The rise in prices reflects the strength in the market; the median price topped $1, per unit in 2 and will post an additional gain this year. SUBMARKET STATISTICS Submarket Name 3Q Vacancy 3Q 2 Vacancy Annual Vacancy Change (BPS) 3Q 2 Rents 3Q 2 Rents W Central Phoenix 4.1% 5. (11) $838 $832 Goodyear/Avondale % (1) $1,5 $941 E Mesa/Apache Junction 4.7% 5. (7) $973 $899 Chandler 5.% 5. (4) $1,17 $1,53 N Paradise Valley 5.% 6.1% (11) $1,72 $1,29 Gilbert/Superstition Springs (4) $1,27 $965 S Phoenix/Laveen % (1) $99 $874 NW Black Canyon 5.3% 5.5% (2) $831 $788 N Central Phoenix/Alhambra 5. 7.% () $892 $951 N Mesa % 5 $83 $79 N Scottsdale/Fountain Hills 5.5% 6. (11) $1,232 $1,1 E Central Phoenix 5.5% 5.3% 2 $922 $873 Union Hills/Cave Creek % (5) $976 $9 Maryvale/Estrella 5. 5.% 6 $763 $726 S Scottsdale 5.7% 5.5% 2 $1,38 $1,6 N Tempe 5.7% 5. 5 $1,6 $1,89 Deer Valley/N Peoria 5.7% 5.% 7 $1,24 $975 Peoria/Sun City 5.7% 5.7% - $97 $9 S Gilbert/Queen Creek % $1,1 $1,83 S Mesa % 3 $895 $844 Central City/Sky Harbor 5.9% $1,27 $1,282 S Tempe 5.9% 4. $1,8 $1, North Mountain 5.9% 6. (3) $879 $842 Glendale % 7 $748 $7 Metrocenter % (7) $781 $758 Ahwatukee Foothills 6.5% 6. 3 $1,82 $1, Central Black Canyon 6.5% 11. (53) $66 $68 S Paradise Valley $1,22 $77 Central Phoenix/Encanto % 23 $1,94 $1,4 NE Central Phoenix $1,79 $1,55 2 Greater Phoenix Research & Forecast Report 2 Multifamily Colliers International

3 Employment: > > Employment growth in Greater Phoenix is expanding, but at a more modest pace than in recent years. During the past 12 months, employers have expanded payrolls by 1.7 percent, adding 34,3 net new jobs. This represents a slowdown from earlier periods; one year ago, employers were adding workers at a 3.7 percent annual pace. > > One sector that is growing at a much more conservative pace is professional and business services. A year ago at this time, more than, professional jobs had been added to this sector compared. Year over year through the third quarter of 2, only 3, jobs have been added, a growth rate of.9 percent. > > The retail segment has been a slight drag of the market. Over the past year, retail employment has contracted by 3 jobs, a dip of.1 percent. The outlook has brightened heading into the holiday shopping season. Retailers Panda Express and Sprouts together will add 8 jobs as new stores open. Year over Year Jobs Added (s) Employment Overview Number of Jobs 5% 3% 1% % Year-over-Year Employment Change Construction: > > Multifamily deliveries picked up momentum in the third quarter, with more than 2,5 units coming online. Year to date, approximately 5,8 apartments have been delivered, up percent from completions in the first three quarters of 2. > > Apartment construction will continue to be active, with more than 12,6 units currently under construction and another, planned units. One year ago, projects totaling fewer than 7,9 units had broken ground. > > Multifamily permitting crept a bit lower during the third quarter, with fewer than 2,1 permits pulled, down 6 percent from the second quarter. Year to date, approximately 6, multifamily permits have been issued, down from permits for nearly 7, units at this point in 2. Units Construction Trends: Major Submarkets Comple ons 2-2 Under Construc on 4, 3,5 3, 2,5 2, 1,5 1, 5 Vacancy: Quarterly Vacancy Trends > > Multifamily vacancy in Greater Phoenix has been quite steady for the past several quarters, recording only modest dips or upticks since 2. During the third quarter, vacancy fell 2 basis points to 5.7 percent. The rate is identical to the figure from the third quarter of last year. > > The East Mesa/Apache Junction submarket posted a vacancy rate of 4.7 percent in the third quarter, one of the three submarkets where vacancy is below 5 percent. Vacancy in the submarket is down 7 basis points from one year ago. > > There are a few submarkets where new development is being concentrated, which could cause some short-term rises in vacancy as new units come online. Vacancy in the Gilbert/ Superstition Springs submarket is low at 5.2 percent, but there are more than 1,1 units currently under construction in the submarket. The rise in supply will likely put upward pressure on vacancy rates in the submarket. Vacancy Rate 8.% 7.5% 7.% 6.5% 6.% 5.5% 5.% 4.5% 4.% 3 Greater Phoenix Research & Forecast Report 2 Multifamily Colliers International

4 Rents: > > Asking rents in the Greater Phoenix multifamily market continue to show steady progress with average asking rents for the third quarter of 2 are $987 per month, up 6.4 percent year over year. Rents over the past three years have increased at a healthy pace, averaging growth of 5.8 percent annually. > > Asking rents in the Central Phoenix/Encanto submarket reached $1,94 per month in the third quarter, 5.2 percent higher than one year ago. Rents in the submarket are pushing higher in part because of the more than 1,2 new units that have been delivered thus far in 2. > > Newer units continue to command higher rents, although the pace of growth has been cooling off. Asking rents in apartments built since 2 were $1,4 per month in the third quarter, or $1.45 per square foot, per month. This represents a 3.7 percent increase from one year ago. The strongest annual growth has been occurring in 197s- and 198s-vintage units. Investment Trends: > > Sales of apartment properties ticked up by 3 percent from the second quarter to the third quarter, and activity has been fairly consistent throughout 2. Year to date, sales velocity is down 7 percent from the same period in 2. > > Following a spike in the second quarter, the median price in transactions during the third quarter rose another 8 percent to $125,8 per unit. The median price year to date is $16, per unit, up from $,9 per unit in 2. > > Cap rates ticked lower during the third quarter, averaging 5.4 percent. For the full year, cap rates have averaged 5.7 percent, nearly identical to the 2 average. With investor demand healthy, cap rates will likely remain near current ranges. Asking Rent per Month Median Price per Unit (s) Quarterly Rent Trends $1,25 $1, $975 $95 $925 $9 $875 $85 $825 $8 $775 $75 $725 Investment Trends $12 $1 $8 $6 $4 $2 $ Per Month Per SF YTD Price per Unit Cap Rate $1.25 $1.2 $1. $1.1 $1.5 $1. $.95 $.9 $.85 $.8 1% 9% 7% 5% Asking Rent per SF Average Cap Rate Recent Transactions in the Market MULTIFAMILY SALES ACTIVITY Property Name Street Address Units Sales Price Price per Unit The Heritage at Deer Valley 31 W Yorkshire Dr., Phoenix 832 $125,5, $,841 The Lofts at Rio Salado 3 N Parkside Dr., Tempe 466 $75,5, $2, Vistara 25 S Coronado Rd., Gilbert 366 $73,2, $2, 4 Greater Phoenix Research & Forecast Report 2 Multifamily Colliers International

5 Outlook: The Greater Phoenix multifamily market is on pace for another strong year of property performance in 2 and the preliminary forecasts for 218 look favorable as well. The most telling indicator in the local multifamily market has been the robust renter demand for units that has kept vacancy low even as a wave of new units has come online. This year will mark the fourth straight year of deliveries totaling at least 5,5 units. In that time, the local vacancy rate has declined by approximately basis points. Looking ahead, vacancy is unlikely to trend much lower in the years ahead, but the rate should remain near the current figure. Employment Forecast The local investment market is poised to close 2 on an upswing. Momentum has been building for the past six months, and the fourth quarter is typically a period of heightened activity as investors try to close deals ahead of year end. Proposed tax policy changes have increased some of the uncertainty in the investment market, and some owners may choose to sell assets under the current laws when the taxable impact of a transaction is known. Tax implications aside, property fundamentals will remain quite strong for at least the next months, and with vacancies low and rents on the rise, there will be significant investor demand for multifamily assets in Greater Phoenix. Rent Forecast 7, 4.% $1,1 1% 6, 3.5% $1,5 Net Employment Change 5, 4, 3, 2, 1, 3.% 2.5% 2.% 1.5% 1.%.5% Year-over-Year Change Average Asking Rent $1, $95 $9 $85 $8 $75 % Year-over-Year Rent Change * Jobs Gained/Lost.% $ * Asking Rents - Construction and Permitting Forecast Vacancy Forecast 11, 1 1, 9, 8, 1% Permits/Units 7, 6, 5, 4, 3, 2, Vacancy Rate 1, * MF Permits Comple ons % * FOR MORE INFORMATION Bob Mulhern Senior Managing Director Greater Phoenix Bob.Mulhern@colliers.com Jim Keeley SIOR Founding Partner Scottsdale Office Jim.Keeley@colliers.com Pete O Neil Research Director Greater Phoenix Pete.ONeil@colliers.com Copyright 2 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report. Colliers International Greater Phoenix 239 E. Camelback Road, Suite 1 Phoenix, AZ colliers.com/greaterphoenix 5 North American Research & Forecast Report Q4 2 Office Market Outlook Colliers International