The Housing Market: A window into our economy!

by RaeAnne Marsh

Taking housing as a barometer of the economy, Metro Phoenix is looking pretty good. Multifamily developments, especially, seem to be sprouting on every block, and one of the biggest complaints heard in development circles is there is a shortage of construction workers — a situation exacerbated by the fact that the construction sector has shown the greatest growth rate (12.7 percent).

“The shortage of construction workers is having an impact on real estate now and resulting in reduced housing starts,” says Don Morrow, senior vice president at NAI Horizon. And of the 8,000 to 9,000 new apartment buildings going up each year in Metro Phoenix, says Charles Steele, JLL managing director, “That is similar to — or maybe even a little less than — what we’ve built in recent years, and we are absorbing all of that new product.” And he adds, “We have actually absorbed more units than we’ve built every year since the recession, so even this high level of new apartment construction is not meeting metro Phoenix’s annual demand.” 

A driving force in this growth is the high rate of employment. But Ryan Sarbinoff, vice president and Phoenix regional manager with Marcus & Millichap, describes two trends that are impacting housing: The majority of the population is living paycheck to paycheck and does not have the money for a down payment on a house or a condo. And even among those who do, there is a preference for the flexibility of a six- or 12-month lease.

Low unemployment figures alone don’t account for the increased demand, Sarbinoff points out. “Some people have been out of the workforce so long, they’re no longer in the unemployment numbers — those with disabilities, for instance — but are now able to find employment. They’ve been living with family but are now looking for their own place to live.” This has spiked the demand for class B and C apartments.

Apartments are also reaping the benefit of a dearth of entry-level homes, a situation exacerbated by construction costs and the shortage of labor mentioned above by Morrow. As Sarbinoff points out, proximity to employment centers is important, and developers have to go “sixty to ninety minutes out to find dirt that’s cheap enough — and that’s too far for an employee to commute.”

Employment and Population Growth on Housing

“Fundamentally, employment is the strongest and healthiest creator of demand for new housing,” says Ramey Peru, associate vice president with Colliers International in Arizona. But it’s a mutually supportive relationship, and Morrow notes that the economy is the fuel that propels the real estate engine-and in particular the residential market — “And right now, as we look at the fuel gauge, the tank is pretty full.” The elements he credits as having the most critical impact housing are job growth and population growth – most specifically in-migration, observing, “As jobs are created, the people have come to fill them.” 

Optima Kierland

Urban high-rise condos

Optima Kierland Center’s first tower, 7120 Optima Kierland, is sold out. Sales began in April 2016 and closed 220 homes over a nine-month period, making it the fastest-selling community in the Valley, with triple the number of sales compared to the local market. Optima’s next condominium tower, 7180 Optima Kierland, began sales earlier this year. 

Says Crel Vogel, sales manager at Optima Kierland, “The location is incredibly important to our buyers. The Kierland location is one of the main drivers of the buyers’ purchase, in addition to the elevated amenities and visionary architecture. Optima Kierland is in a desirable neighborhood steps away from the remarkable dining, shopping and nightlife of Kierland Commons and Scottsdale Quarter. It’s a community passionately dedicated to enhancing healthy, balanced and enriched lifestyles.”

Morrow cites an article by Rent Café, which reported — from data released by the US Census Bureau — that Maricopa County led all counties in the nation for population growth over the time period from 2012 through 2017 and was the top area in the U.S. for net migration. It’s a trend of “affordable migration,” with people moving from the more expensive metro areas to more affordable second-tier metro areas like Metro Phoenix.

But that very growth of employment and population has impacted the rental rates. “Phoenix tied with Las Vegas as the national leader in rental rate growth,” says Peru. “The flipside of that is we are not as affordable as we have been in the past.”

In fact, Dr. Christopher Thornberg of Beacon Economics, speaking recently at the economic forum presented by Alliance Bank of Arizona, stated, “Largely due to the state’s continued population growth, the housing market continues to advance, with increases in the median home price and a rise in construction permits.” With these economic indicators, Dr. Thornberg projected that Arizona’s economy will continue to grow and add jobs over the next year, with nearly every industry expected to contribute to overall growth. 

The Employment Picture

“Large-scale master-planned communities generate significant economic activity,” says Brad Chelton, senior vice president for Brookfield Residential’s Arizona market. A developer and homebuilder, its projects here include the large-scale Eastmark community in Mesa and the master-planned Alamar in Avondale, which broke ground just a month ago. “It starts with tremendous construction expenditures in and around the community and then quickly leads to higher sales and property tax receipts for the local municipality, increased retails sales at local retailers and restaurants and increased school district funding and growth generated by new residents and families,” he explains. “Ultimately, having a high concentration of predominately college-educated residents in a community serves as a competitive advantage for economic and business development within the City and is a very important factor when competing for new employers to locate or expand their business.” 

Morrow shared research that showed the Phoenix Metropolitan Statistical Area added 65,000 new jobs to the civilian labor force from March 2017 through March 2018, and 86,800 in calendar year 2018. “We have had sustained job growth for some time now, and the number of people employed in our area is the highest number in history,” he says, noting, “Much of the growth is organic as companies already here continue to expand; however, much of the growth is from California companies relocating to Arizona primarily because it is a less expensive business environment.”

Toll Brothers

Single-family development in Queen Creek

Toll Brothers, the nation’s leading builder of luxury homes, has launched its “introduction to luxury” new line of home designs priced from the upper $200,000s at The Crossings at Meridian in Queen Creek. This is the first time Toll Brothers has built a community at this price point in Arizona.

“Toll Brothers is known for building estate-sized homes for the high-end of the market. The Crossings at Meridian comes at a much lower price point with the same quality design and craftsmanship of a Toll Brothers home,” says Matthew Trinklein, sales manager at The Crossings at Meridian. “Home buyers in this price range are thrilled, and we’ve learned that there’s extraordinary demand.”  

A lot of job growth has been in the tech sector — “We are now sometimes referred to as the ‘Silicon Desert,” Morrow says — with financial services and insurance among other leading industries. But unemployment being at the extremely low 4.5 percent will make it harder to fill new jobs, he observes. “In fact, there is currently a shortage of labor in many areas, including construction, technology and healthcare.”

The Arizona Office of Economic Opportunity released a report in February projecting Arizona will add 165,691 jobs over a two-year period. From the third quarter of 2018 through the second quarter of 2020, Arizona’s employment is expected to increase from 3,015,242 to 3,180,933, representing an annualized growth rate of 2.7 percent — an increase from last year’s projection of 2.4 percent and more evidence of Arizona’s continued acceleration over the last 12 months.

Zeroing in on sectors Morrow identified, the report says Arizona is projected to see the highest job growth rates in construction (5.8 percent) and manufacturing (3.6 percent), with the largest job gains expected in the education and health services and the professional and business services sectors — although gains are projected across all 11 of Arizona’s top industries, according to the Arizona Commerce Authority. 

“Phoenix’s employment growth is as diversified as we’ve ever seen. These are long-term, sustainable jobs in areas like healthcare, technology, insurance and banking that are expected to provide extended growth. That diversification is further incentivizing multifamily investors to come here,” says JLL managing director John Cunningham.

Thornberg supports the observation that the robust labor market has contributed to a much-improved residential real estate market — although not quite at the pre-Subprime Mortgage Crisis levels — with specific figures: Phoenix’s median home price of$258.300 is an increase of 7.3 percent from September 2017 to September 2018; 42.3 percent over the past five years. Additionally, the increase in home values (and rental rates, which have increased by 7.2 percent in Phoenix) has driven developers to build both single- and multi-family housing units. Although the actual numbers are still low, as discussed at the beginning of this article, single-family building permits issued increased by 12.3 percent statewide during the first 10 months of 2018 compared to the same period a year earlier, while multi-family permits grew by 5.2 percent. 

The Development Picture

“We’re seeing activity all over the Valley,” Peru says. “What started early in the cycle as a big push for infill development has now spilled into the suburbs.” He notes that the demand for housing cannot be satisfied on infill alone because there just aren’t enough developable sites to accommodate the number of people moving and being employed here. “So, if there is a good employment story to be told nearby, the suburbs are seeing plenty of demand for housing.” 

Toll Brothers, for instance, has 129 homesites at The Crossings at Meridian, a new community being built in Queen Creek. The location attracted the builder’s attention because it sees Queen Creek as a vibrant growing community that offers recreation with nearby San Tan Mountains, Schnepf Farms, public as well as charter schools that are rated highly, and the convenience of shopping and dining close by. But the homebuilder known for building estate-sized homes for the high-end of the market is now targeting more of the entry-level market. Says Matthew Trinklein, sales manager at The Crossings at Meridian, “The Crossings at Meridian comes at a much lower price point with the same quality design and craftsmanship of a Toll Brothers home,” adding, “We’ve learned that there’s extraordinary demand.” In fact, Bob Flaherty, president of Toll Brothers Arizona, said it was an area Toll Brothers was missing out on, with more than half the single-family permits issued last year in metro Phoenix priced between $250,000 and $350,000. “We felt we could serve that market segment with a slightly higher-end product than what they’d been receiving.”

Brookfield Residential

Master-planned community in Avondale

Developer Brookfield Residential (Arizona) LLC broke ground on its next master-planned community in Avondale, Arizona, on Thursday, April 4, 2019. “Brookfield Residential looks for opportunities to build communities located in close proximity to good schools and strong employment centers, with convenient access to transportation corridors,” says Brad Chelton, senior vice president of Brookfield Residential’s Arizona market. “Eastmark currently enjoys all of these characteristics, which is why it has been so successful over the last five years. Alamar in Avondale is quickly moving in that same direction, and we expect that we will experience the same success as the south Avondale submarket grows into a destination community much the same way that east Mesa has.” 

Noting that the developer expects its builders at Alamar to offer homes priced from the low to mid $200s to the mid to high $300s in a variety of styles, sizes and floorplans, Chelton continues, “We believe offering premium housing choices along the entire spectrum of price ranges allows economic development within a city to remain balanced and strong. By design, master-planned communities create value by offering a wide range of amenities and lifestyle components which have always equated to a premium within the market in terms of home values, appreciation and pricing. Providing housing choices for executives, growing families as well as young adults provides a diverse base of employees and customers that are necessary for a healthy economy.”

In the northern reaches of the Valley, Camelot Homes, one of Arizona’s oldest family-owned homebuilders, is currently in the pre-sales phase at its latest community — The Villas At Seven Desert Mountain Camelot Homes’ 49 homesites will be part of the 190 luxury homes planned for the Seven Desert Mountain development in the golf community of Desert Mountain. And Union Park at Norterra is being developed in the backyard of the USAA complex near the I-17 and Union Hills, with four homebuilders offering models in the $300,000s to $500,000s — in a new master-planned community that will include a hotel; office space; and a retail corridor of specialty restaurants, shopping and outdoor gathering areas.

“Homebuilders are optimistic and seeing signs of a positive spring selling season,” says Peru. “There was a bit of a lull at the end of 2018, likely due to the increase in interest rates, but the builders we’ve spoken to viewed it as more of a bump in the road than a major cause for concern.” Observing that rates have come back down since then and sales have picked back up, he says, “The biggest challenge we hear about is the ability to build affordable/entry-level homes due to high construction costs. In many submarkets, traditional single-family for-sale entry-level housing demand is being filled by ‘single family for rent’ communities. 

“From a permitting perspective,” Peru continues, “we’re still showing strong growth year over year, but well within sustainable long-term parameters and in line with employment and population growth.”

There is also strong demand from apartment and “single family for rent” developers looking to build in the Phoenix Metro, Peru says. “When we look at a trailing 12-month number for multifamily building permits, it appears we peaked in April of 2017 and have receded back to a number more in line with our 20-year average. The market continues to absorb the newly constructed units, so vacancy and rental growth are still positives.”

Investment Interest

Investor interest is very strong in the single family rental market, and a recent study of 117 cities conducted by Smart Asset found three Phoenix area cities to be ranked in the top 10. There are Mesa, ranked second; Glendale, fifth; and Phoenix, seventh. 

What’s driving the market is investor demand, according to JLL’s Cunningham. “There is a tremendous amount of capital available to buyers, and they want to deploy it in the Phoenix multifamily sector.” This can be attributed, he says, in large part to the Valley’s economic health, which ranks high on every metric. “From a jobs perspective, in particular, we are in solid growth mode, with Phoenix adding 81,000 jobs last year. To my knowledge, that is a record high. This fuels the demand for apartments and keeps Phoenix on the top of everyone’s list. There is no reason not to invest in Phoenix right now.”

In fact, Cunningham says, “Phoenix is so attractive from an economic, demographic and quality-of-life perspective that every multifamily asset class here is desirable for investors. 

“If I had to pick one asset class over the other,” Cunningham continues, “it would probably be value-add because it allows investors to purchase a property, improve it with renovations and increase cash flow and value. We don’t expect investor appetite for this, or any other, multifamily product type to slow for some time.”

“Investors are seeing improved opportunities with well-positioned buildings that can be repositioned or upgraded — older, vintage apartments that now warrant higher occupancy. Investors can get a rent premium on those spaces,” says Marcus & Millichap’s Sarbinoff.

Housing with a Side of …

“There has been a strong push for infill development/re-development in both residential and retail,” Peru says. Much of the residential development has been razing underutilized parcels of land or functionally obsolete buildings and redeveloping them as housing communities. On the retail side, there has been a large number of adaptive re-use projects that make creative use of older buildings. “‘Walkability’ is not just for infill, though; there are now several suburban downtowns with dense clusters of restaurants and entertainment venues that allow residents to capture that experience.”

Nor is all development aimed at the lower end of the economic spectrum. The Palmeraie, straddling the border at Scottsdale and Paradise Valley, is in a prime central location. The residential and resort component of the community, which features The Ritz-Carlton, Paradise Valley, is well underway with construction and is expected to open in the spring of next year. At the heart of the community is a 215-room Ritz-Carlton hotel that will be surrounded by 81 single-level Ritz-Carlton Residences Villas, priced from the mid-$1 million and ranging in size from 1,700 to 4,800 square feet, and 39 single-family Ritz-Carlton Residences Estate Homes, priced from the low $5 millions and ranging in size from 5,500 to 12,000 square feet. Along with this, and expected to open by the end of next year, is a 30-acre destination being touted as one of the most desired, experiential shopping and dining destinations in North America that will bring together the world’s global leaders in fashion and culinary. 

Also attracting a lot of attention is RED Development’s Block 23 in Downtown Phoenix, with a 330-apartment tower from StreetLights Residential adjacent to a 230,000-square-foot office building with ground-floor restaurants and retail. 

“Housing as part of mixed-use development can be viewed two different ways, horizontal and vertical mixed-use,” says Peru. “Horizontal mixed-use, where residential is built adjacent to complementary uses as part of an overall master plan, has always been desirable and will continue to be. Vertical mixed-use, where there is a complementary use within the same building (like ground floor retail in an apartment building), only works in certain locations, typically with a high walkability score. 

“In somewhat of a reverse mixed-use scenario, we are seeing interest from asset owners and residential developers in re-developing portions of vacant shopping centers as higher density housing,” Peru says, noting, “It’s a great way to boost traffic for the remaining retailers in some of these centers that are larger than what the current retail market can support.”

Hot Spots

The correlation between the economy, employment and home ownership doesn’t pencil out the way it used to, and multifamily apartments is still dominating the housing market.

In multifamily, the East Valley has been the area delivering the majority of the units, according to Morrow, with 2019 to represent 55 percent of all new multifamily inventory. 

Steele points to downtown Phoenix as an area experiencing an unprecedented amount of multifamily growth, noting there are more multifamily units under construction now than in the history of the city. “This is especially true for Class A high-rise projects, which is not new to downtown but is new at this high level of construction,” he says. “Much of this activity is being driven by the rising number of students attending Arizona State University’s downtown campus and wanting to live downtown for convenience and as a lifestyle opportunity. As a result, we’re also seeing more demand for restaurants and bars and will soon have downtown’s first full-service grocery store — a Fry’s Food Store being built as part of the Block 23 office building in CityScape.”

Significant new multifamily construction activity is now peppering Phoenix’s central corridor, Morrow points out. This year, nearly a quarter of all new units (24 percent) will be in this area. The location-location-location factors for this popularity are the light rail, ASU’s downtown campus and many new non-residential projects — and, as discussed previously, the millennials’ preference for an urban lifestyle. 

“North Tempe is another market experiencing significant growth, again a direct correlation to jobs and student demand from Arizona State University. Here, though, new construction activity is much broader — everything from conventional multihousing to student and senior housing,” Steele says.

Observing that cost and demographic trends are pushing more renters into the multifamily market than ever before, Steele says, “We expect this to continue as the price of single family homes keeps rising.” He notes again the proven shift among millennials to rent versus own, “particularly in projects that are near points of transit. They want to be able to access their places of employment easily and like areas that score high on a walkability scale to nearby dining, shopping and entertainment. 

“That Phoenix can provide this demonstrates our continued commitment to become a first-class city,” Steele says.

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