Demand Shifts to Larger Apartment Floor Plans in Phoenix

A shift in renter preference toward larger bedroom units since the onset of the pandemic has created a disconnect between new supply and demand, at least in the near term.

The change in preference toward larger bedroom units has similarities to previous downturns, but the pandemic has also created some new trends. First, renters facing financial challenges due to the downturn are likely taking on roommates to reduce their expenses. This occurred in Phoenix during the Great Recession, and studio vacancies climbed to a high of 16%. More unique to the current situation is the prevalence of remote working. Last March, employers transitioned workers from the office to remote work, and many renters are still working from home.

Higher-income renters, tired of a makeshift office setup taking over a living room or kitchen counter space, are seeking additional room for a dedicated office. Lastly, the Phoenix market is attracting people from more expensive and denser cities, again as work-from-home allows people to work from anywhere. But limited single-family inventory has forced some would-be homeowners to rent. These families are renting larger units as they wait for available homes.

The Phoenix construction pipeline is robust, though most construction starts began before the pandemic and before the shift in preference. More than 18,000 apartments are underway and slated to deliver over the next few years. Of that total, studio units account for about 1 in 5 rentals under construction. Most of that construction is concentrated in urban neighborhoods in downtown Phoenix and Scottsdale, Arizona. Yet, CoStar estimates that studio demand has been the weakest among the bedroom types over the past four quarters. As a result, studio vacancies have risen about 30 basis points since the first quarter of 2020, to 8.6%. When isolated, that’s not a substantial jump. But in that period, overall vacancies compressed 70 basis points due to a steeper decline among larger floor plans.

Vacancies among studio apartments are on the rise while the rate compresses for three-bedroom units.

Vacancies are the lowest among two- and three-bedroom units, sitting below 6%. CoStar estimates that demand has been the greatest for two-bedroom units over the past four quarters. About 5,100 two-bedroom units are under construction across the Phoenix metropolitan area. These units, along with three-bedroom apartments, which account for the lowest share of construction, likely won’t sit vacant for long, should demand continue at a similar pace over the next several quarters.

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