Mark Taylor’s The-Halsten; photo courtesy of Mark Taylor
“When the housing market is strong, typically economic growth is strong,” observes Randy Bury, who has more than 25 years’ experience in home building, land acquisition and development and is founder and owner of Moderne Communities®, an Arizona-based real estate investment and development company. “I believe approximately 65–70% of GDP is consumer spending, of which homebuilding and construction is the largest percentage of that spend — so the impact is significant.” Citing Automatic Data Processing, Inc.’s June report of approximately 497,000 new jobs and noting that 97,000 are in construction, he adds, “While other industries are experiencing layoffs or ‘right sizing,’ builders are hiring and they aren’t laying people off because it is tough to re-hire. It is also significant to note that housing starts are up year-over-year.”
From an economist’s point of view, it’s not the housing market that affects economic growth and the building of business, but, “It’s the inverse,” says Dennis Hoffman, Ph.D., professor in the economics department at Arizona State University’s W. P. Carey School of Business and director of its L. William Seidman Research Institute. It is economic growth and building of business that affect the housing market, and Dr. Hoffman points out that Phoenix and Arizona have been growth leaders for decades, magnets for people and new businesses. “With that ongoing influx, there is an unrelenting demand for housing,” he says, adding, “Historically, abundant land and affordable labor have kept costs low, so below-average housing prices did help promote the state as a great destination.”
While he believes housing costs have to impact at some level — such as people buying smaller homes and spending less on furniture and fixtures — Dr. Hoffman says growth appears to be strong in the state. “Significant business in-migration continues at a brisk pace.”
In the daily machinations of the market, however, housing does affect the economic picture.
For instance, John Carlson, president of Mark-Taylor Companies, the leading developer, owner, and investment manager of luxury multifamily communities in Arizona and Nevada, cites the Arizona Apartment Market Analysis that Elliot Pollack & Company produced in 2019: “It was estimated in 2018 that the apartment industry generated an annual impact of nearly 22,000 jobs, $695.9 million in wages and $3.8 billion in annual economic output each year.”
Observing that housing and the cost of housing has a huge impact on any local economy, Butch Leiber, president of the Phoenix REALTORS board of directors and an active broker, explains, “When there’s growth in the market, it creates jobs in construction, infrastructure and service jobs as well.” Noting that affordable and available housing can create opportunities for people to move to a city, he says, “Phoenix, and Maricopa County, continue to lead cities with population growth due to an abundance of housing and job opportunities.”
Tempe’s deputy economic development director, Maria Laughner, sees housing affordability encouraging economic growth because businesses have an easier time attracting a workforce. “If workers can live close to where they work, they can rely on various modes of transportation, which provides more workforce stability. If workers cannot live close to where they work because there is scarcity in affordability, they will most likely be dependent on automobiles, which can create transportation instability.”
Arial view of the city of Peoria; photo courtesy of City of Peoria
Laughner explains that an increase in housing units overall provides stability for businesses to locate or expand into a market because they know they can attract workforce nationwide who can relocate to the area. “Workforce is the first priority for businesses, so companies do not expand in cities that do not have growth,” she says. “They need to be assured that they can build their business in a city before they invest in capital and space. Housing availability is the primary indicator of workforce strength.”
Recent years have brought what Tim O’Neal, president and CEO of Thrive Services Group, characterizes as “unprecedented fluctuations in the housing market.” As head of a not-for-profit organization whose mission to eradicate poverty includes finding creative and effective solutions in housing, O’Neal says, “CEOs from various industries share the same concern, as our current housing market poses challenges in recruiting and retaining talent.” Believing that sustaining businesses and essential services at optimal staffing levels is essential for thriving communities, he says, “To achieve stable economic growth and attract businesses, we must consider the needs of the entire community, including low to mid-income earners who require employment, and affordable housing options.”
Planning in Support of Growth
“Currently, there is a misalignment of housing relative to what people are looking for,” says Chris Jacques, planning director for the City of Peoria. He emphasizes the importance of being able to offer housing to different lifestyle options and different income segments “because you want to be able to attract businesses that have places for the workforce to live in close proximity.”
Acknowledging the challenges brought on by exceptional growth — among which are water availability, schools and transportation — Julie Hancock, managing director and co-owner of Camelot Homes, believes good city planning can help mitigate those challenges. But she brings up an additional challenge: “Unfortunately, many people conflate ‘planned growth’ with ‘no-growth’ — and ‘no-growth’ environments have created unintended consequences that worsen our challenges.” Describing the consequences of city councils acquiescing to demands of no-growth groups and voting against infill re-zoning for higher-density projects even when they conform to their city’s general plan, she points out that growth is forced further to the outskirts of the city — which causes more traffic, air pollution and higher prices for homes in central locations. “People need and want to live in areas close to their jobs, but land and home prices and higher interest rates are compounding the problem. This, ultimately, increases urban sprawl and decreases quality of life for all,” Hancock says.
Photo courtesy of Camelot Homes
To that point, Jacques says Peoria’s general plan tries to forecast the areas where the city planners believe there will be a lot of intensity of employment and business, and tries to provide areas for different types of housing in proximity to that hub. “We try to do that in certain strategic areas around the city,” he says. “Mainly, it’s about trying to plan for those appropriate areas for different housing types.”
According to Jennifer Stein, director of Peoria’s economic development services department, the city is experiencing strong activity from both its target markets and generated leads. She reports a lot of interest on the industrial, advanced manufacturing side of the house, thanks to Taiwan Semiconductor Manufacturing Company and the supply chain that’s interested in being in close proximity.
“Peoria prides itself on being a full-service city with amenities and opportunities, and that includes diverse housing, ensuring that we have housing products for all — single family, multifamily, executive house, whatever suits your needs,” Stein says, explaining that Peoria, for a long time, has been “planning strategically in conjunction with master-plan developers to provide incredible neighborhoods.”
Emphasizing the importance that housing product be distributed fairly uniformly throughout the city, Jacques describes three major projects. Peoria Place, a vacant area close to Peoria’s downtown core, was rezoned a couple of years ago — in line for what the general plan had allowed for it — to allow a mix of housing types to help support the rejuvenation of downtown that includes multifamily, build-to-rent and more urban-style mixed-use development. The Park West area, long envisioned for mixed-use, is seeing new restaurants and entertainment options add to the retail and entertainment already in place, and Jacques says, “There was some existing multifamily, but over the last couple of years, we’ve encouraged additional multifamily. We’re trying to create the critical mass where you have housing in close proximity to jobs and services.” And for Vistancia, long envisioned as a major hub for employment users, high-tech, business park, retail, hospitality and residential, the developer is asking for a zoning amendment to allow an additional increment of housing specifically focused in that area. “Again, trying to create that mixed-use, that urban core,” Jacques says. “We have opportunity for different housing types and an environment where people can walk to work, walk to shops.”
Eclipse Scottsdale; photo courtesy of MODUS Companies
Laughner describes Tempe as taking “an all-in approach,” saying, “We are pursuing multifamily construction throughout the city and proactively working with builders to encourage construction.” To that end, Tempe is issuing RFPs for redevelopment of city-owned land into mixed-use multifamily projects. “We are actively working with the housing authority on funding to acquire and build affordable multifamily wherever we can. And we are actively upzoning sites to streamline the process for private landowners to build multifamily.” This includes affordable housing, which Laughner says is mostly north of U.S. Route 60, due to transportation and development options, “though we highly encourage it along our TOD on Apache Blvd due to transportation options.”
Another factor comes out of the recent pandemic. Leiber, observing that many people learned during COVID that they could just as effectively work from home, so there’s now an abundance of office space available, says, “There is a movement trying to find developers to convert some commercial office and retail space to affordable housing.” Changes like that will require partnerships with local governments, developers and investors, which Leiber sees currently happening. “This is another potential shift the National Association of Realtors is behind and actively supports through lobbying,” he says.
O’Neal points out that, while we often focus on macro-level aspects like land and real estate development, it is ultimately the people within our communities who drive the economic engine. “To ensure successful economic development,” he says, “it is crucial to address the pressing questions surrounding housing.” Without affordable housing solutions, communities struggle to attract diverse businesses and employment opportunities. “Accordingly, housing stability and employment stability are intricately linked.”
Housing Products & Availability
The economic growth that creates jobs and attracts people to move into our market puts pressure on home prices, says Ed Modus, founder of Phoenix-based MODUS Companies, which is known as one of the country’s leading developers of Net Zero communities — and this is compounded by high interest rates, which make it difficult for many to buy homes or move to a new one. Noting that the interest rates have, moreover, caused many builders to pull back on multifamily housing, he says, “These two things will combine to worsen the housing shortage that we are already experiencing.”
The roots of today’s housing shortages lie in the market response to the Great Recession of 2008–2010, explains Dr. Hoffman. Housing was significantly overbuilt, fueled by investors and speculators. And the housing bust that followed shortly thereafter changed attitudes in the housing development industry — leading to underinvestment for the past decade or more. “And now, there is a distinct shortage of units of all types, single and multifamily,” he says, adding, “Uncertainties over the cost and availability of labor and the possible impact of higher interest rates on demand have not helped ease the situation.”
San Artes Apartment Homes; photo courtesy of Mark-Taylor Companies
Citing the cost of land as one reason single-family home construction is down, Leiber notes new home neighborhoods are being built on the outskirts of the Valley. He also finds that builders are seeing challenges in hiring skilled workers and there are still issues with material shortages keeping construction down.
And then there’s the impact of the rise in interest rates over the last year. Says Leiber, “Many first-time buyers are being priced out of the market due to rising home prices and rising interest rates.”
Pointing out that affordability in the Valley is also a factor, Leiber reports that, in 2017, 91% of all homes sold in Maricopa County sold under $500,000, while in 2022, the number dropped to 57% of the market. “Incomes in the Valley have not kept up with home prices, making the cost of entry to home ownership prohibitive for many young people.”
Leiber believes the downturn of the housing market will begin to affect our local economy for any business impacted by home sales, which include title, lending, real estate agents, movers, painters, carpet cleaners and more. The longer the housing market stays in the doldrums, the more impact it is likely to have on the local economy. Yet, he points out, if interest rates were to drop significantly, we’d most likely see a flood of buyers to the market before we see an increase in inventory — potentially causing a new spike in prices until the sellers join the party and begin listing more homes.
Hancock reports Camelot continues to diversify its operation to adapt to market needs and challenges. “For example,” she says, “we are now developing single-family homes for rent to fulfill the need of consumers who can’t afford substantial down payments or higher interest rate loans but desire a single-family home lifestyle. We are also heavily involved in remodeling homes for our clients who do not want to leave their existing home because they love their current location and/or low interest rate mortgage but are seeking updated features and designs.”
And Laughner reports that, in Tempe, “we have also been seeing numerous lot conversions, especially in older neighborhoods where single-family homes are adding ADUs or converting to duplexes or townhomes.”
Another interesting trend Leiber shares is, while single-family resale home sales are down from the last few years, mobile home resales are up significantly over pre-pandemic numbers. “There’s clearly a market for affordable homes and buyers who prefer owning to renting,” he observes.
Buckeye Village Centre; photo courtesy of MODUS Companies
One other factor impacting the low number of single-family listings is investor-owned properties. “After the downturn in 2008, many investors bought up distressed properties, or properties sold as short sales or bank-owned (foreclosed) properties,” Leiber says. Observing that those investors have seen their properties’ values double or triple while at the same time they most likely have great cash flow from higher rental prices, which have doubled since 2008, he notes that, if these investors sell their properties, they will have a massive capital gains tax hit on their profits. “The National Association of REALTORS is currently working with federal lawmakers to help find some capital gains relief for homeowners and investors to perhaps create some growth to the low inventory,” he says.
Regarding the apartment market, Carlson says the current state suggests an ongoing oversupply, which is expected to persist in the near future. In fact, Leiber says he’s seen a huge increase in permits for multifamily housing in the Valley and observes, “It seems there are new apartments and condos popping up everywhere.”
And Laughner shares that in Tempe, “We are also seeing interest in reducing surface parking to accommodate more density, such as at the Emerald Center.”
Long-term, however, may be a different story. As Hancock described earlier in discussing why developments are pushed to the city outskirts, Carlson says factors impacting future supply include “the persistent and well-coordinated opposition from NIMBY activists, who resist virtually all new housing developments in their neighborhoods, and the growing phenomenon of ‘apartment fatigue’ in certain cities [that] manifests in significant delays or consistent rejections of high-quality apartment projects.” Additionally, the escalating costs associated with constructing and operating apartments — which include rising wages, increased material expenses and soaring insurance premiums —pose a significant challenge.
Filling the space between renting and owning are single-family rentals and the trending build-to-rent communities. This is a highly visible development sector in metropolitan Phoenix. In fact, Jacques says, “I had heard that the Valley is ground zero for the country for build-to-rent.”
“An alternative to traditional multifamily housing, this asset class is a desirable option for renters who do not wish to live in traditional multifamily housing, without the commitment or responsibility of home buying,” Carlson says, noting that build-to-rent accounts for nearly 40% of all new products anticipated in metropolitan Phoenix this year.
It’s also more affordable than buying a traditional home. “We are seeing many people who are priced out of the for-sale market electing to live in BTR communities,” Modus says, pointing out that these communities offer many of the benefits of a single-family home at a much lower price. Also, many of these communities provide a robust amenity package that makes these communities a very desirable option. He expects build-to-rent will continue to flourish close to job centers as more people move to our state. And, pointing to Buckeye and Casa Grande as generating a large number of new jobs as two of the fastest-growing cities in the United States, he says, “Cities like these need new housing at multiple price points, and the challenge will be keeping up with the demand in a high-interest-rate environment.”
Northmarq’s Single-Family Build-to-Rent Special Report, released this past June, highlights the sector’s mixed conditions after significant momentum during the past few years. Among the report’s key takeaways is the prediction that deliveries should outpace absorption, resulting in higher vacancy rates, although tighter capital markets will restrict transactions and make undertaking new developments more challenging. Overall, despite these obstacles, renter demand in the sector is expected to be supported by a labor market that is outperforming expectations and a for-sale housing market that continues to price out potential first-time home buyers. It also ranks Phoenix No. 1 for new single-family build-to-rent development.
Another special class is affordable housing.
“The escalating costs of land and construction, coupled with the increasing number of residents, have intensified the competition for housing, leading to unaffordability,” says O’Neal, who describes as “critical” the need to address the challenges of workplace housing and affordable housing. Bringing up a related issue, he believes, it is imperative to find effective solutions to the growing factors and risks associated with homelessness — which has an economic impact as well as the obvious human one.
O’Neal points out that real estate development is impacted by increased construction expenses due to the rising costs of materials, and by higher interest rates, which impact not only homebuyers but also the developers financing housing projects. “Recent surveys conducted by the National Association of Home Builders indicate that banking issues are impacting developers’ deals,” he says, noting that some housing developers have even slowed down their development plans, exacerbating the issue,” he says.
Opportunity Zone Scottsdale; photo courtesy of MODUS Companies
Renters are also feeling the effect, as these rate hikes have slowed down the transition from renting to homeownership, thereby adding more pressure to an already strained rental market. Describing the economic repercussions, O’Neal explains that persistent shortages in housing availability and affordability will, in turn, continue to affect the recruitment and retention of essential jobs — and labor shortages or shifts hinder business operations and overall economic growth potential.
“Given the remarkable economic growth in our regions and the inadequate supply of affordable housing across all income levels, we are deeply moved by the stories of individuals experiencing these impacts,” O’Neal shares. “Just imagine the significant rent increases of $300, $500, or even $800 per month and the profound effect they have on the monthly finances of middle-income families. We witness households with two working adults who are compelled to live far from their workplaces, often resulting in job loss. Single mothers with multiple jobs face eviction when they can no longer afford the rent hikes, leaving them with no choice but to live out of their cars. While homelessness is often attributed to behavioral health issues, we are witnessing people being displaced due to the lack of affordable and transitional housing.”
Greenlight Communities, the trailblazing Scottsdale-based real-estate development company committed to constructing affordable and attainable workforce housing, aims to address the housing needs of the local workforce and contribute to alleviating the housing crisis. A current project is Streamliner 87th, Greenlight’s first development in Peoria, which is set to begin construction by year’s end and start leasing in May 2025.
Since breaking ground on its first rental community in 2017, Greenlight has made attainable housing a reality for thousands of Arizona residents. The company has more than $1 billion in projects in various stages of development, with 20 communities in the Valley in various stages of development or completed. By streamlining its design and building processes, and eliminating the waste, the company has significantly reduced its building and construction costs; Greenlight owns and operates its own general contracting and civil engineering divisions, which allows the company to deliver a superior product to its residents faster and more affordably.
“We are thrilled to introduce plans for our Streamliner 87th project, which is at the forefront of the major redevelopment currently taking place in the City of Peoria,” says Pat Watts, co-founder and co-principal of Greenlight Communities. “Streamliner 87th will transform a vacant lot into a vibrant rental housing community and be an essential part of the revitalization of the downtown area. Projects like ours will inevitably attract new businesses and residents. We are confident that Streamliner 87th will be a success and a welcome addition to Peoria’s dynamic city.”
Tempe recently saw the groundbreaking of a 200-unit apartment building from Wexford Developments and Wexford Real Estate Investors that will include 20 affordable housing units. First & Farmer, in downtown Tempe, is scheduled to be completed by the fall of 2024.
Investors, Interest Rates & Development
“It is hard to know exactly where the investor community is today on housing,” says Dr. Hoffman. He notes that over the last few years, demands from investors have crowded out potential buyers. While today, there are signs that the short-term rental market is saturated, he says other real estate investors may be switching from commercial to residential investments — but whether or not this eases pressures in the market will depend on the nature of the investment.
Tower Capital is an investor active in the Valley, specifically in build-to-rent.
“The BTR market continues to experience strong growth and demand from the lending community as single-family residential home sales volume declines because of rising mortgage rates and limited inventory,” says Kyle McDonough, principal and co-founder. “Last year was the strongest year on record for construction of BTR’s, and we expect more of the same in 2023. Our pipeline of BTR financings certainly reflects that trend, as we have closed nearly $210 million in BTR financing this past month and have roughly $300 million more in the works to close this summer.”
Noting that institutional investors continue to be attracted to single-family BTR communities because they recognize the undersupply of housing, and these single-family communities operate similar to multifamily assets, McDonough adds, “The appeal for investors is the exceptional renewal rates and BTR’s appeal to a wide range of renters. Consumers also favor these communities because they tend to be higher end properties that live like a single-family residence.”
Tower Capital’s recent build-to-rent activity in the Phoenix market includes $120.5 million in financing for 332-unit Village at Pioneer Park and 167-unit Village at Skyline Ranch, and $88.5 million for 354-unit Village at Bronco Trail.
Moderne at Rocking K; photo courtesy of Moderne Communities
The Bronco Trail development is located in the rapidly growing North Phoenix submarket, less than two miles from the $40-billion chip manufacturing plant under development for Taiwan Semiconductor Manufacturing Company, the world’s largest manufacturer of semiconductor chips — which, as a very large employer, is driving a lot of multifamily development.
Laughner believes the primary concern about the population influx is not related to interest rates for homebuyers but the housing scarcity overall and the impact higher interest rates have on multifamily builders. Observing that the Valley has seen a rise in for-rent multi-family product, which will help alleviate the scarcity issue while also providing options for residents to wait out the high interest rate markets, she shares, “We are seeing an influx in new home construction which has taken over the home resale market as there are still plenty of people interested in buying a home despite the higher interest rates.”
In fact, Bury sees new builds as the best bet for people looking to purchase homes. “There is more availability and the builders can offer some incentives, buying down the rates [and] lowering the monthly payment in the short term while allowing the buyer the flexibility to refinance when rates decline.”
He believes the housing shortage will be exacerbated if builders are not able to get financing for multifamily product, which could have a significant impact on economic growth. “To date, we haven’t seen this on a wide scale, although affordable housing alternatives have had some challenges as a result.”
While Laughner reports an influx of new home construction, it’s a different story across town. Speaking for the City of Peoria, Jacques says there’s been a reduction in the number of single-family permits that the city has issued since interest rates have risen. “It’s been a pretty precipitous drop,” he says. But he reports a lot of interest has come forward for multifamily. “They’re looking for infill sites, sites that are near a transportation corridor or along the freeway. They’re also looking for sites that are near emerging job centers. So, we continue to see pretty robust requests for multifamily.”
With interest rates and housing shortages putting significant pressure on home prices and rents in the long term, homebuilders will produce fewer homes — and this, Modus explains, will force more people to become renters. “If not kept in check, this will temper the number of people that move here. However, in the near term, Arizona will continue to attract workers from California, as our home prices and income tax structure are still much more attractive.”
Population & Housing
“Maricopa County, and Arizona as a whole, continues to experience strong economic growth, with new business moving to the area in multiple industry sectors — in particular, chip manufacturing and electrical car manufacturing plants along with support services — and they are bringing higher paying jobs,” Bury says. While he sees the housing shortages as a challenge, he notes that a significant amount of multifamily rental housing is under construction and public homebuilders are poised to fill the gap with new construction. Phoenix is also the base camp for the next generation of build-to-rent communities that are now expanding across the country.
Dr. Hoffman points to numerous factors we need to address to improve the economic picture regarding housing. These include immigration reform, including pathways for bolstering the construction labor force via workforce training or perhaps offering term visas, and clarity on water supply to meet the 100-year supply regulations.
And affordable housing. “It would start with developing programs that get space permitted to accommodate basic workers, police, fire, nurses, service professionals, etc.,” says Dr. Hoffman, noting this would require basic housing space, whether multifamily or other, and that increasing supply at the mid level would likely free up existing housing inventory to meet the needs of everyone. Explaining that the affordable housing challenge is difficult because no matter what is available, it will simply cost significantly more than it did 10 years ago, he says this means incomes have to rise commensurately — and that will only happen when education and skills are expanded. “We have to get to a situation where fewer people are ‘on the edge,’ only one missed paycheck from being on the street. And, of course, there are many socio-economic factors at play here.”
The U.S. Census puts Arizona as the fastest-growing state from 2010 to 2020 and continues to be in the top five, and Bury notes Maricopa County has been the largest beneficiary of this growth. And now, he observes, we are also seeing employers calling people back into the office. “This means ‘Zoom cities’ in states such as Idaho, Utah and Nevada are seeing people moving out and back to growing cities such as Phoenix — although he points out that, while Phoenix is experiencing strong population growth with people and businesses making Arizona their new home, net in-migration showed a significant decrease in 2023.
Observing that one of the biggest concerns is the cities keeping up with the infrastructure needed, Bury says, “Fortunately, Maricopa and Pinal counties as well as the State of Arizona have and continue to do a great job planning and installing the needed public infrastructure to support this continued growth.”
See this month’s Feedback for more about what’s happening in other local cities.
