With 137 apartment projects under construction and another 99 planned in metro Phoenix, some are beginning to wonder if the market is in danger of being overbuilt.
Not yet, analysts say.
“At this point, with the shortage of housing, the continued strong net migration and the very low vacancy, the short-term answer is no,” said Jim Kasten, associate broker for Commercial West USA in Scottsdale. “Having said that, with more than 12,000 units forecast to be completed in the last half of this year, we expect an increase in vacancy rates and probably some pressure on rental rates for the higher-end apartments.”
During the first half of this year, there were 5,094 units totaling 26 projects completed and 12,469 units totaling 61 projects forecast for completion in the next six months, according to Commercial West USA’s second quarter market update.
“This would bring the total for 2021 to 17,563 units (among) 89 projects — almost double the amount completed annually for the past three years,” according to the report. “The final total is typically less than forecast, but stsill expect many to meet the anticipated year-end time frame.”
Still bullish on Phoenix
Scottsdale-based Greenlight Communities LLC is bullish on metro Phoenix, investing $450 million to build more than 3,000 units of its Cabana brand apartment communities across Phoenix.
After paying $3.8 million for land in July, plans call for beginning construction this month on a 250-unit just west of the southwest corner of Crismon and Southern avenues in Mesa.
Called Cabana Southern, that property will cost about $42 million to develop and is expected to be open in fall 2022. This is Greenlight’s ninth Cabana project.
That new community will include Blink Charging Co. (Nasdaq: BLNK, BLNKW) stations.
That’s part of a 5-year agreement between Miami Beach, Florida-based Blink Charging Co. and Greenlight Communities that will include 58 Blink-owned EV charging stations at Greenlight communities across metro Phoenix.
With average rents ranging between $1,100 and $1,600, Greenlight Communities has two projects underway in Goodyear. Its Cabana Hayden is ready for move-in and Cabana 99th and Cabana Power are currently leasing for September move-in.
Average effective asking rents — representing all apartment sizes — are at $1,483 a month in Phoenix, about $66 below the U.S. average, according to a new report from RealPage.
Still trailing demand
Even with all those projects, there’s still not enough units being built to meet demand, especially as tens of thousands of jobs are being created, said Kyle McDonough, principal and co-founder of Tower Capital.
Tower Capital arranged financing for 11 deals in July totaling $126.9 million across metro Phoenix, he said. Of those, $114 million was for multifamily projects and build-to-rent communities in the Valley.
Adam Couch, market analyst for RealPage, said metro Phoenix is experiencing strong capital flow into the apartment sector.
“Current construction levels are nearly three times the volume seen right before the Great Financial Crisis in 2008,” Couch said.
“Even though that might initially sound concerning for owners and operators, remember that demand is the other important side of the equation,” Couch said. “Phoenix has been a popular destination for those looking to relocate from expensive West Coast markets and offers diverse economy, resulting in demand consistently outpacing supply volumes for much of the past decade.”
This has kept apartment performance metrics in great shape, especially rent growth, he said.
“Annual gains are the strongest across the nation and come in above 15% in both the Class A and Class B units, with Class C apartments also yielding solid returns,” Couch said.
With historic low vacancy rates for all class apartments in metro Phoenix, it’s obvious that demand is far greater than supply, said Kasten.
“Apartment demand is always driven by population and population is driven by jobs,” he said. “Not only does our area have many quality jobs, but companies continue to locate and relocate to our area — providing more jobs. As such, our population will continue to boom and the demand on more apartments will continue.”
Asking rents grew 3.4% in July, the second largest monthly hike in the nation, according to data released by RealPage today.
That monthly increase took rents up 21.6% year-over-year — the largest annual increase among the nation’s 50 largest apartment markets, according to that study.
By comparison, U.S. rents jumped 2.2% in July and were up 8.3% year-over-year. Annual rent growth hit an all-new record high, surpassing the last record set in 2000 and 2001 during the dot-com boom, according to that RealPage report.
The Phoenix market is in a supply-demand imbalance, where more renters competing for fewer available units, said Peter O’Neil, research director for NorthMarq.
“Vacancy in the second quarter was just 4.1%, the lowest figure on record,” O’Neil said. One year ago, vacancy was 5.7%, and that was lower than the market’s long-term average.”
An accelerating pace of leasing activity has fueled this sharp decline in vacancy rates, O’Neil said.
“In the 12-month period ending in the second quarter, renters moved int a net of more than 15,000 apartment units, more than doubling the average levels since 2015,” he said. “The rapid pace of renter move-ins has increased competition for renters looking for available units, causing rents to soar. Local rents rose more than $100 per month in the second quarter alone. Current average rents are up more than 18% from one year ago.”
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