Higher mortgage rates could strengthen Arizona apartment market - AZ Big Media

As mortgage rates remain high, making homeownership increasingly unaffordable, the multifamily housing sector in Arizona may see benefits from longer tenant stays and a slowdown in new residential construction, according to a recent report from Marcus & Millichap. The firm's October 2026 Housing Research Brief indicates that rising borrowing costs are shifting housing demand in a way that could favor apartment owners and investors, especially in growing areas like metro Phoenix and Tucson.

With mortgage rates surpassing 7%, many potential homebuyers are delaying their purchases. Meanwhile, homeowners who secured lower mortgage rates are hesitant to sell, leading to decreased housing mobility and potentially extending the duration that households remain renters. Marcus & Millichap reports that the percentage of renters renewing their leases climbed to 57.6% in September, which is more than five percentage points higher than the average recorded between 2015 and 2019. This trend is likely to result in more stable occupancy rates and lower turnover for operators of Arizona apartments.

The report also highlights how rising interest rates are a key factor in shaping housing decisions across the country. Following the Federal Reserve's rate hike in September, which raised the target range to 3.75% to 4%, the average 30-year mortgage rate reached 7.28% as of October 1. These elevated financing costs have made homeownership particularly challenging for first-time buyers, reinforcing the financial benefits of remaining in existing homes or rental properties. In Arizona, where housing affordability is a significant issue, these national trends may help maintain demand for apartments even amidst economic uncertainties that affect household finances.

However, Marcus & Millichap warns that higher interest rates may also limit rent growth by slowing down job creation and household formation. Another notable finding from the report is the decline in residential construction activity. In August, seasonally adjusted building permits were more than 25% lower than their peak in early 2022, and housing completions fell to their lowest level since late 2018. The combination of high borrowing costs and expensive labor and materials is making new residential development increasingly difficult.

This slowdown in construction could ultimately benefit existing apartment properties in Arizona. In metro Phoenix, where significant apartment development in recent years has intensified competition among landlords, a decrease in new projects could lead to a more favorable supply-and-demand dynamic for current apartment communities.

Homebuilders are also adapting their strategies to entice buyers. The report found that in September, 66% of homebuilders across the nation offered incentives such as mortgage-rate buydowns and assistance with closing costs, while 38% lowered prices. Despite these efforts, builder confidence dipped to its lowest level in a year.

The evolving housing landscape may also present new opportunities for investors in Arizona's commercial real estate market. According to Marcus & Millichap, the combination of higher borrowing costs and upcoming loan maturities may compel some apartment owners to either contribute more equity or sell their properties instead of refinancing at elevated rates. This scenario could create acquisition opportunities for investors interested in multifamily properties.

At the same time, improving fundamentals in the apartment sector could help narrow the differences between seller expectations and buyer offers. The research indicates nine consecutive months of national effective rent growth through August, alongside a decrease in the use of rental concessions. These trends point to a strengthening of property-level cash flow, which could bolster investor confidence and stimulate transaction activity.

For Arizona, the implications of these trends could be significant. The combination of longer tenant durations, fewer new construction projects, and enhanced apartment operations may lead to improved conditions for multifamily property owners. Nevertheless, the overall outlook will continue to depend on factors such as economic growth, employment trends, financing costs, and how quickly existing apartment supplies are absorbed. Ultimately, Marcus & Millichap's research suggests that the same high mortgage rates that complicate homeownership could also help stabilize the fundamentals of the apartment market, potentially serving as a key performance driver as the market heads into 2027.