Despite record market growth, affordability remains a challenge

By Matt Roy and Philip Haldiman

Independent Newsmedia

Apartment construction can’t keep pace with demand, driving rents ever higher and adding to an affordable-housing shortage in the Valley.

This trend is borne out in data recently reported by ABI Multifamily Apartment Brokerage & Advisory Firm in their Phoenix Metropolitan Statistical Area Multifamily report for the first quarter of 2019, which reveals some encouraging growth numbers.

There are currently more than 14,000 apartment units under construction and, counting complexes of 10 units or more, area inventory comprises more than 371,000 units as of March 2019.

Roland Murphy

But despite lots of new construction, lack of overall availability helps keep rents high, according to Roland Murphy, ABI’s director of research in Phoenix.

“There was a report that came out about a year-and-a-half ago that listed the rate of construction necessary to meet demand in most mid-sized U.S. markets between mid-2017 and 2040,” Mr. Murphy said. “Phoenix needed to build between 11,000 and 11,500 units each year in order to be on pace.”

However, according to projections based on Q1 results and other factors, the Phoenix area will likely only deliver between 6,000 and 9,000 new units by year end, he said.

“Our best year ever, we delivered 9,300,” Mr. Murphy added. “Our existing inventory is inadequate and we are not constructing at a sufficient pace to catch up to our backlog, much less meet our projected and even existing demand.”

Lagging supply to meet demand is only one reason for rising rent rates in the Valley.

“There are a few factors that go into Phoenix’s very hot pace of rent growth. Construction and land costs are up, so rents are likely to go up to make return on investment,” he said.

Strong employment and population growth also contribute to rising rents, as people from Back East who are used to paying 50% to 100% more per month, enter the Phoenix rental market, Mr. Murphy said.

In Phoenix proper, where the median household income reported by the U.S. Census Bureau is $52,080 annually, the average apartment rent is $1,036.

While many experts recommend rent and associated housing expenses not exceed 30% of monthly gross income, many earners are already maxed out as rents continue to increase.

But while Valley apartment inventory continues to grow apace, most new complexes are aimed at the Class A, or high-rent, luxury market, according to Mr. Murphy.

“80 to 88% of new construction is Class A,” he said. “The workforce affordable housing … with a rental point around $950, that’s not getting built pretty much at all.”

West Valley trends

Some West Valley communities are seeing renewed growth in the apartment market and rents are somewhat lower, as in Glendale where the average monthly was a more reasonable $957 per month as of Q1.

In Peoria, permits for new apartment projects spiked dramatically in 2017 after years of stagnation, Peoria Today reported in February in a story based on public records obtained by the newspaper.

The community news outlet requested building permits issued by the city of Peoria to understand how growth is impacting the area, including a six-year snapshot of building permits issued for new single-family, multifamily and commercial projects.

After approving 15 multifamily construction permits, followed by only three and then none in 2014, 2015 and 2016 respectively, the city approved 156 permits in 2017.

However, in 2018 the city approved no apartment projects again.

Three large-scale apartment projects currently under construction will add another 1,000 units when completed. Those projects include:

• Plaza del Rio Apartments,13310 N. Plaza del Rio Blvd., consisting of 333 units on 15.72 acres. The project is now under construction.
• Paradise at P83, near 75th Avenue and Paradise Lane, consisting of 352 units, in 3- and 4-story buildings on 16.1 acres. The project’s building permits and civil improvement plans are in review.
• Parc at Roundtree, near 83rd and Olive avenues, consisting of 275 units in 2-story carriage units and 3-story apartment buildings on 18.5 acres. Building and civil improvement plans are in review.

Benjamin J Katz, a Realtor with Lake Pleasant Real Estate, said 2017 was the hot year to buy multi-family.

“Investors building those saw a demand in multi-family and they all jumped on those at the same time,” he said. “It was the ‘play.’”

Mark Stapp

Mark Stapp, executive director of Arizona State University’s Master of Real Estate Development program, said up until about two years ago, almost all the new multifamily was being built in the East Valley, focused on Tempe and Scottsdale as well as downtown Phoenix, but the trend is changing for the West Valley.

“Most of the apartment growth had been in the central and east Valley due to the ability to charge rents high enough to warrant or support development. That has begun to change in the West Valley as growth and incomes rose,” Mr. Stapp said. “These past several years, demand and wages in certain parts of the West Valley has now increased such that investors and developers see opportunity.”

Many of the approved multifamily permits are infill projects in the mature areas of the city, south of Bell Road.

City of Peoria Planning Director Chris Jacques said he’s not sure what the market demand driver was that shifted increased interest to the multi-family housing sector in 2017, but he suggested interest is perhaps in response to the changing socioeconomics — more and more people are getting married later in life, buying a house later in life, starting a family later and desire the ease and mobility that come with a rental scenario.

He said the city continues to see a steady interest in smaller infill properties and multi-family development beyond that time period and to today.

Peoria has also seen particular interest in horizontal units, which have a moderate density of around 10-12 units per acre and are seen as a hybrid between a single-family living environment without the obligation of a mortgage or maintenance responsibilities, he said.

“In general, we’ve been advised that these product types are marketed to young professionals, empty-nesters and others that seek a mobile lifestyle choice,” Mr. Jacques said.

In neighboring Surprise, investors are considering building more apartments as well.

Scott Phillips

Scott Phillips, vice president at Carefree Partners, said his firm continues to see interest in new multifamily developments in the West Valley, with properties already under construction in Phoenix and others in preliminary stages of development in Surprise.

“We’re working on a couple of multifamily deals — actually three multifamily deals in Surprise — and we’re under construction with one up in north Phoenix,” Mr. Phillips said.

The north Phoenix project, which closed in October, will comprise 280 units on 12 acres. The three projects in Surprise are only in initial discussions now, but if approved will add an estimated 800 more multifamily units to the market.

While volume remains high, the variety of multifamily offerings also appears to be on the rise, according to Mr. Phillips.

“What’s interesting about this market is we’re seeing solid activity on the multifamily-type product,” Mr. Phillips said. “But there’s also a wider variety of multifamily product than we’ve seen. So, everything horizontal apartments to garden apartments to higher density age-restricted housing, it’s a wider variety — especially in the West Valley — than we have seen.”

So-called horizontal apartments — which are essentially standalone single-family, single-story structures like traditional houses but designed and managed like apartments – represent a watch-worthy trend in the local housing market, he said.

“They seem to have really solid rent numbers and great occupancy and a lot of people are finding that attractive, so I think it’s part of the mix going forward,” Mr. Phillips said. “I suspect the growth of it slows down over time, but who knows.”

Age-restricted medium and high-rise apartments area also an expected area of continued growth, he added.