While commercial real estate developers continue to build new apartments in the Phoenix area, market forces — including strong population and job growth — will continue to keep available inventory at record-low levels while driving the cost of living even higher, according to a recent report.
Industry analyst Marcus & Millichap recently released its Multifamily Market Report for the Phoenix Metro Area, which details a continuing building boom in the coming year.
The Phoenix area specifically recorded the estimated net in-migration of more than 75,000 residents, the second highest total in 14 years. These demographic tailwinds will continue to fuel record-low apartment vacancy in 2021 and nationally leading effective rent growth,” the first-quarter 2021 report states.
Even while the metro area is expected to add 12,000 new apartment units by the end of the year — an increase of 3.3% overall in the area — rents are expected to rise again by 7.2%, pushing the average effective rent price up to $1,338 per month.
Even as new apartments open up, supply cannot keep up with demand.
Phoenix Commercial Advisors also pointed to nation-leading population growth as a factor driving higher rents in a report released in January.
“According to the U.S. Census Bureau’s 2020 population estimates, Texas, Florida and Arizona topped the list of states that added the most residents in the past year, while California’s population took a major hit. Many people are swapping the West Coast for Arizona and Central Texas — a years-long trend that’s only accelerated during the pandemic,” the report found.
Even with the pandemic, the state still grew by 1.78% — adding an estimated 129,558 people between July 1, 2019, and July 1, 2020, according to the report.
Rising rents in Phoenix proper will lead more renters seeking affordable housing to move toward suburban neighborhoods, which could drive further employment opportunity and spur population growth in the West Valley, Marcus & Millichap predicts.
“The pipeline of new inventory will be insufficient in meeting demand in 2021, however. Residents seeking relatively affordable accommodations will continue to gravitate to the western side of Phoenix, where construction is still in the nascent stages of picking up,” the report states. “Numerous completions in the central metro area, as well as the surrounding cities of Gilbert, Scottsdale, Goodyear and Peoria, will attract new residents and prospective employees of firms that are establishing facilities in these areas.”
Last year, the market area’s vacancy rate fell to 3.8% — the lowest rate in 20 years. By the end of this year, even with so many new developments slated, the vacancy rate is expected to fall even further to 3.3%, according to the report.
Thomas Brophy, national director of research and analytics for the Cooke Family Team at Colliers International, said today’s market pressures are the result of a decades-long trends, including a slowdown in affordable housing developments and increasing priority on building luxury apartments.
“In 2016, it was the last time that we had that really big bump in deliveries,” Mr. Brophy told Daily Independent. “And at the time, what I was hearing from a lot of municipalities and planning departments was, ‘We have too much multifamily construction. We kind of want to pump the brakes because we don’t want to overbuild.’”
He said city officials used to see apartment developments through the lens of what was being built back in the ’90s, which included many projects marketed to younger, less-affluent residents. These projects often featured units with stacked washer-dryer combos, linoleum floors and more basic amenities.
A resulting slowdown in new apartment development, paired with continued strong demand for rental units has just gotten worse, leading to some of the lowest multifamily vacancy rates ever seen in the area.
By third-quarter 2016, market saturation for multifamily had reached 92% — meaning, only 8% of apartment units within the market were available to rent, nearing the historical minimum availability at that time, Mr. Brophy said.
“It was the highest occupancy we’d seen since 1978, when we hit 96.8%, which was the highest occupancy reading ever in the Phoenix metro,” he said. “And right now, where we’re at is 95.6%.”
Since then and leading to the start of the last decade, apartment developments were largely aimed at the starter-home market — to renters saving up to move into a single-family home who did not want high rents or need deluxe furnishings.
But as market changes following the Great Recessions forced migration away from standalone homes and back into rentals; the passage of Arizona’s controversial Senate Bill 1070 immigration law also drove a lot of residents out of the area, especially those who’d lived in less-expensive apartments.
These and other market factors led commercial real estate developers to invest mainly in high-end, luxury apartments designed for higher earners with the prospect long-term residence.
And by now, most of what has been developed during the past decade has featured amenities more representative of a permanent home, but with none of the hassles or economic risks that go along with traditional homeownership, Mr. Brophy explained.
“What investors did is they changed their tack,” he said. “Whereas what they did before 2010 was more of a minimalist approach where you didn’t need all the bells and whistles, the nature of what we’re building now has really changed.”
Subsequently, at a time when mass migration into Arizona from California and other states led to greater demand for all forms of housing, the rental market was mainly only adding new units for those seeking expensive luxury apartments — leaving everyone else to compete for a historically low inventory of unoccupied units.
As expected, high demand and low supply drives prices higher, which is what has been observed in the Phoenix market year after year since. Pair that with a record-low availability of houses in the market and the situation has become dire for anyone without good income and great credit, Mr. Brophy suggested.
And if, as Marcus and Millichap predicts, the vacancy rate this year falls to 3.3%, that will be just one-tenth of a percentage point less than the all-time demand reached back in 1978.
As a result, rent prices are only likely to continue their record-pace climb, Mr. Brophy explained.
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