CoStar Market Insights: An Abundance of New Apartment Supply, but Lack of Affordable Units Cause of Concern
Phoenix continues to lead the nation in apartment rent growth, as demand outpaces elevated levels of new supply.
As cited in the latest CoStar Phoenix Apartment Webinar, robust rent growth, both in apartments and single-family homes, and a shift in supply, represent a significant shift in the Greater Phoenix growth model.
While Phoenix used to be known for its large and fast-growing supply of affordable homes, single-family homebuilding has slowed. Multifamily developers are attempting to meet pent-up demand for housing that began when residential development came to a near standstill from 2009 to 2012. The rising need for housing, fueled by robust job growth and net migration, has motivated multifamily developers to increase the pace of construction.
Phoenix had more apartments built over the past four quarters than it has in any four-quarter period in over a decade. More than 7,300 units were completed over the past 12 months, and an additional 15,000 units are underway. Traditional submarkets such as Tempe, North Scottsdale and Chandler continue to receive a bulk of new deliveries. However developers have zeroed in on Downtown Phoenix over the past several quarters. The once sleepy Downtown Phoenix is now considered one of the few true live/work/play areas in the metro, which wasn’t the case even five years ago.
While sustained levels of heightened supply may be a red flag for some, new supply is warranted, especially in some of the tightest East Valley submarkets, where vacancy has fallen below 5%. Nevertheless, there is growing concern that construction is almost entirely limited to luxury units, creating a burden on mid- to lower-income earners. Vacancies for mid-tier properties dropped below 5% and annual rent growth surged 10%. Despite unrelenting rent growth, the metro area still maintains its position as an affordable market, especially for its size. About 20% of a median income earners goes towards paying rent in Phoenix compared to upwards of 30% in Southern and Northern California.
Looking forward, demand for apartments is expected to lose some steam as the economy slows and homeownership edges up. For the remainder of 2019 and throughout the forecast period, new supply is expected to outpace new demand. This will put slight upward pressure on vacancies. Despite the uptick, vacancies in the market will remain relatively tight compared to its historical average.
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