Jim Crews is no stranger to apartments. An executive managing director at brokerage Cushman & Wakefield, he has worked in multifamily property for more than 20 years in Phoenix, which for the past five years has been the fastest-growing city in America. He’s never seen it busier.

“I get three calls a week with people saying, ‘Hey, we want to invest money in Arizona, and we want to invest money in apartments,'” Crews told CoStar News. “I have never, ever experienced a time where it was a better time to be a seller, and it’s never been as competitive on the buy side.”

Multifamily executives across the industry, from building to development to sales, say the demand in Phoenix’s apartment market has been several years in the making and only accelerated by the pandemic. Now more residents from California and other more expensive places are moving to Phoenix for its relative affordability, agreeable weather and fast-growing tech sector.

And Phoenix is just a dramatic example of what’s happening in many other Southwestern U.S. cities, from Las Vegas to San Antonio, as transplants and companies from gateway cities flock to their more affordable and business-friendly climates.

Several Sun Belt and Southwestern cities are setting national records in year-over-year rent growth, reflecting the sharp uptick in demand from renters relocating to the area and would-be homebuyers deciding to remain in the rental market. Phoenix had rent growth of 19.9% for the year ending July 28, and Las Vegas posted rent growth of 18.6% during that same time, according to CoStar. For Phoenix, the previous record for year-over-year rent growth over the past 20 years came in the first quarter of 2019, when it was 7.5%, said David Kahn, director of market analytics for CoStar Group in Atlanta.

Those figures represent the highest all-time rates of year-over-year rent growth for those cities since 2000. They also represent some of the strongest year-over-year rent growth in any city in the nation since 2000. Two of the markets that had larger increases were the San Francisco Bay Area, with more than 20% growth during the dot-com bubble in 2001, and New Orleans, with more than 30% in 2007 when it recovered from Hurricane Katrina.

The year-over-year increases in Phoenix, Las Vegas and other Southwest and Sun Belt cities are “by far the strongest rent growth for those areas ever,” Kahn said. “It’s unprecedented.”

All this demand is presenting challenges for developers and builders, though. The shortage of essential construction supplies like steel and lumber has led building costs to rise to “unprecedented” heights, Joe Pecoraro, a project executive on Skender’s multifamily team, told CoStar News.

Building Material Shortages

McShane Construction Co. is ordering construction materials as soon as it’s awarded a project. Before the shortage, the company could afford to wait as long as six months in some cases to order certain materials or appliances, such as lighting fixtures.

“We’d rather err to the side of getting it ordered and having it sit in a warehouse here,” said Jim Kurtzman, senior vice president of McShane’s southwest regional office, in an interview.

There’s also a shortage of subcontractors who can address the surge in construction underway in Phoenix, Kurtzman said. From time to time, the company has opted to fly in subcontractors from around the country to work on sites, simply because there aren’t any local subs available to take the job.

“At some point, you’re probably limited by the subcontractor base here,” Kurtzman said. “That’s really what it comes down to. That’s what all of us are fighting. There’s only a handful of framers who can do a 100-unit multifamily deal. It’s not an endless supply.”

But supply shortages are just one indicator of the bigger issue of apartment demand across the Southwest. Most real estate executives and analysts say that to understand the trends playing out in the region, one must look at Phoenix. On top of that demographic push, major tech and manufacturing companies such as Lucid Motors, Taiwan Semiconductor Manufacturing Co. and Intel have all announced plans to invest billions of dollars in the city, a move expected to lead to the creation of thousands of new jobs and a need for more apartments.

Perhaps the biggest economic expansion underway in Phoenix is Taiwan Semiconductor Manufacturing’s $12 billion semiconductor manufacturing facility, getting built on more than 1,100 acres in north Phoenix. That project is expected to be up and running by 2024 and create about 2,000 jobs. Recent reports from local media indicate the company’s investment in Phoenix could reach $30 billion.

Intel, the computer chip giant based in Santa Clara, California, is expanding its Arizona manufacturing capabilities by $20 billion and plans to create 3,000 jobs that the company estimates will lead to the indirect creation of 15,000 additional jobs.

Lucid Motors, an electric vehicle manufacturer based in Newark, California, recently completed the first phase of its 999,000-square-foot manufacturing plant on 590 acres in Casa Grande, Arizona, just outside Phoenix. The company said it could expand to more than 5 million square feet in four phases with the capacity to build 400,000 vehicles a year by 2028.

Taxes, Regulation

Businesses are drawn to Southwest cities because of relatively business-friendly tax policies as well as a lack of the natural disasters that plague California, from earthquakes to wildfires, Crews said. In the case of Phoenix, the region is also home to two large universities: Arizona State University, which has an enrollment of more than 70,000, and the University of Arizona, where more than 30,000 students are enrolled.

“We have a much more educated, knowledgeable work base,” Crews said. “It’s all underneath the radar, but there are a lot of tech jobs here.”

All that high-tech development is translating into demand for businesses in multifamily and housing. Single-family developers haven’t kept pace with the population growth of Phoenix, leaving apartment landlords and developers to benefit from the supply shortage, according to a CoStar analysis. Roughly 21,000 apartment units are being built right now and, once completed, they’ll grow the city’s multifamily stock by about 6.2%, according to CoStar.

Developers are also diving headfirst into single-family rental development, too. More than half of the housing units completed in Phoenix’s West Valley market were build-to-rent homes, according to CoStar.

“We’re like the poster child, the epicenter, for this build-to-rent, lower-density” development, Crews said.

Five years ago, Phoenix represented between 5% and 10% of McShane Construction’s portfolio in the United States. Today, that figure has swelled to more than 30%, Kurtzman said.

“It’s only gotten busier” than it was in January, Kurtzman said, when he told CoStar News he couldn’t remember a time when the Phoenix multifamily market had more activity.

Investor interest is robust, too. Multifamily sales volume in the first three months of 2021 was the highest quarterly sales volume on record for Phoenix, according to CoStar.