Financing costs and a shrinking pool of buyers have split Phoenix’s multifamily market. Properties with four or fewer units continue to trade. Five-unit-and-larger buildings sit unsold, with buyers and sellers far apart on price. Patrick O’Sullivan, Broker and Owner of get MULTIfamily, has a front-row view of both sides. His firm combines brokerage and in-house property management, giving him direct visibility into transactions and the properties themselves.
Phoenix’s Two Multifamily Markets
Phoenix multifamily is often discussed as a single market, but O’Sullivan says it is more accurately understood as two distinct markets. Two- to four-unit properties continue to attract buyers and close regularly. Five-unit-and-greater deals, by contrast, are largely stalled. They sit on the market longer, require deeper price reductions, and in many cases do not trade at all.
The root of the split is financing. Properties with four or fewer units qualify for conventional residential mortgages, which carry lower down payment requirements, broader lender availability, and more competitive interest rates than the commercial loans required for larger assets. In a high-rate environment, the cost and availability of capital determine whether a deal can close.
“It’s easier for a two-to-four unit property because you can still get residential financing on that,” O’Sullivan says. “Properties that are five units or greater have fewer options.”
Who Is Buying Small Multifamily
The financing gap widens further when you consider who is buying each property type and why. Two- to four-unit buyers are a diverse group with motivations that go beyond pure investment returns. One buyer might purchase a triplex to house a family member in one unit while renting the others. Another might be completing a 1031 exchange and needs a smaller asset to absorb the remaining proceeds. A third might simply be entering real estate investment for the first time and finds a duplex more manageable than a 20-unit apartment building.
This range of motivations creates a deeper and more resilient market for small multifamily properties. Even when investment returns are marginal, other buyer motivations sustain demand. As O’Sullivan puts it, “There are a lot more people with sub-one million than three million plus, so there are more buyers for it.”
The five-unit-and-greater segment has no equivalent cushion. Those buyers are almost exclusively investors whose decisions are governed by return calculations. When the numbers don’t work, investors walk away. Right now, the numbers aren’t working for most of them.
Cap Rate Gap Stalling Sales
The stalemate in the five-plus-unit segment stems from a persistent pricing gap between buyers and sellers. O’Sullivan says buyers are seeking seven-cap pricing to justify the risk and cost of capital at current interest rates. Many sellers remain anchored to valuations from 12 to 24 months ago and are holding out for five-and-a-half- to six-cap.
Buyers right now want seven caps. Sellers still want five and a half, six. There’s that separation,” O’Sullivan says.
That gap of 100 to 150 basis points carries real financial consequences. On a $3 million property, the difference between a seven cap and a six cap represents approximately $500,000 in value. Sellers unwilling to accept that reduction are choosing to hold rather than sell, which is why deal volume in the five-plus segment has dropped sharply. O’Sullivan notes that sellers without a pressing reason to move, such as a 1031 exchange deadline, a partnership dissolution, or a distress situation, are largely waiting for conditions to improve.
Where Rent Pressure Is Worst
Phoenix’s oversupply story is not uniform across submarkets. Tempe stands out as the most difficult area, where heavy construction paired with softening demand has pushed rents down more sharply than in other parts of the metro. Class B and C properties elsewhere in Phoenix are leasing, but it requires patience and flexibility on pricing.
The benchmark to watch is time on market. Properties priced correctly are leasing within 30 to 60 days. Anything beyond 60 days is almost always a pricing problem, not a product problem.
Concessions have become a standard part of the leasing toolkit across the market. Landlords and managers have used free first months, reduced move-in costs, lower base rents, and, in some cases, gift cards to close leases, adjusting their approach based on each prospective tenant’s needs. There is no single concession strategy working universally right now. Flexibility is the common thread among properties that are leasing within a reasonable timeframe.
What Phoenix Investors Should Know
For investors actively looking to deploy capital in Phoenix, the two- to four-unit segment offers a more liquid and accessible entry point. The broader buyer pool provides a clearer exit path, and residential financing reduces the equity required at acquisition.
In the five-plus-unit segment, buyers should plan for roughly 40% down rather than the 25% that may have been standard in earlier market conditions. More importantly, underwriting to in-place rents without stress-testing lease turnover is a common and costly mistake. A property advertising a 7 cap based on long-tenured rents that sit above market may no longer deliver that return once those leases turn over.
“In year two, a third of your tenants are going to be at the market rate, not at the higher rate,” O’Sullivan says. “What does that do for your projection? Can you still cash flow?”
The discipline, O’Sullivan says, is underwriting to current market rents rather than the rents a seller is currently collecting. That distinction is where advertised returns and actual returns most often diverge in today’s Phoenix market.
What to Watch in 2026
O’Sullivan’s near-term outlook for Phoenix is cautious. He expects vacancy to remain elevated and is watching whether the wave of recently absorbed units holds. His concern is that some of those leases were signed by tenants who were rushed through aggressive concession campaigns and may not be well qualified. If that plays out, eviction rates could tick up over the next 12 months, putting additional pressure on already stretched owners.
On the sales side, there is little relief in sight unless interest rates fall meaningfully or sellers adjust their price expectations. Rising supply is tipping the balance toward buyers, which should put further downward pressure on prices. Until transaction volume picks up, the smaller end of Phoenix’s multifamily market will likely remain the more active segment and the one where most investors can still find deals that pencil out.
