Why Investors Are Exiting California in Favor of Phoenix

It started before the pandemic, but the trend has only gained steam in the last 12 months. California investors are exiting the market. Regulatory challenges and low cap rates in the state are driving investors to greener pastures—namely Phoenix.

“We are seeing a big migration of California investors into Phoenix. If you think about what is happening in California right now, there is really restrictive rent control, statewide lockdowns and an eviction moratorium that has been extended. There are a large percentage of California investors that want to exit the state for those reasons,” Tom Jonsson, multifamily director at James Capital Advisors, tells GlobeSt.com.

The exodus is driven by more than just regulatory challenges in California. The Arizona metro has all of the solutions that are giving California buyers a headache. Phoenix is business friendly, has better multifamily returns and a growing economy, both in terms of population growth and job growth. “In the last year, cap rates for multifamily properties in California were below 3%,” says Jonsson. “Because there has been so much demand from California investors, you are now seeing deals in Phoenix that were selling at a 5% cap rate fall to sub 4%.”

California buyers are in a position to be very competitive on pricing in a market like Phoenix and still outperform California assets. “If you are a California investor and you are used to buying at a 3% cap rate subject to rent control, going into Phoenix and getting 100 to 150 basis points higher is very attractive,” says Jonsson, adding that the business-friendly environment is a cherry on top. “Plus, there is no rent control or regulation, and it is a business friendly state.”

Institutional investors in Phoenix are also finding better opportunities to buy large, quality assets. “You have a number of people looking to move out of the state for the legislative trends, but there are also investors that are want to exchange up into bigger assets. In Los Angeles, there aren’t a lot of large assets for investors to chase,” says Jonsson. “These investors can’t get the deal size that they need. Many of them are going to markets like Phoenix that have a greater number of larger assets of 100-plus units.”

However, Jonsson reiterates that legislative challenges are the primary reason that investor’s exiting en masse—not better returns or opportunities. “Given the pandemic and the trends in the last 12 months, more and more investors are simply trying to get out of California for legislative reasons,” he says.

This trend is unique to multifamily assets. Industrial properties, on the other hand, are keeping investors in the state. “I have a client that is buying industrial in California because it is a great asset class and we don’t have the constraints of rent control, but he isn’t touching multifamily in California because you can’t make money anymore in the asset class,” says Jonsson. “They want to own in Phoenix and a handful of other markets, like Texas, that offer great upside.”