Colliers’ Phoenix Q1 Multifamily Review

By Thomas Brophy for Colliers International  
While nearly every aspect of life has changed since March 1st of this year, it is necessary to take stock of where the market was prior to the COVID-19 shock knowing that all previous data sets relied upon have changed. As Elliott Pollack so eloquently stated in his ‘The Monday Morning Quarterback,’ 4/6/2020 post: 
“You shouldn’t be concerned with how bad things look right now. Current events are like nothing in modern history. The unprecedented slide in the economy has nothing to do with normal economic cycles. It is due to a reaction to COVID-19 that will be transitory. In addition, the CARES Act just passed by Congress is not a stimulus package. It is a disaster relief package. It is specifically designed to get income primarily to those whose income has been cut due to COVID-19 and its fallout (although every adult American with an income of less than $99,K will get some cash). Though not perfect, it is a well-designed program that should keep cash flowing to those who lost their income source.” 
With that said, the Phoenix MSA continued to lead the nation in rent growth rising 8.1 percent y/y to $1,235, nearly three times higher growth rate than the national average of 2.9 percent but still well below national average rent of $1,475. Occupancy rates continue to remain elevated at 95.1 percent despite decreasing 40bps over-the-year and marks the 33rd consecutive quarter occupancy has been above the 20-year average of 91.6 percent. 
Approximately 1,400 units came online over Q1 2020, which is below the 2,000 unit moving 3-year delivery average. Given the current construction rate, 2020 should prove to be the highest delivery amount since 2009’s 9,315-units. There are approximately 18,772 units currently under construction throughout Greater Phoenix, the highest amount since Q1 2018, and marked the 24th consecutive quarter where the number of units under construction was above 10,000. 
Investment sales volume decreased 37 percent over the year to $1.18B across 28 transactions with average Price Per Unit increasing nearly 28 percent to $189,185.  
Outlook 
At this point, COVID-19’s potential impact on both the real estate industry, and market overall, remains to be seen. While we may not have firm data as to the full extent of this disruption, make no mistake that its impact will be significant, as witnessed in the nearly 26M+ national unemployment claims, although not expected to be long term.  
The biggest impacts observed thus far, aside from unemployment claims, have been relegated to Capital Markets and Retail. Lenders have been widening spreads which has, in turn, impacted interest rates. The near-term interest rate spread increase can, and should, be attributed to the volatility of the virus’ spread and government steps to contain it. Nonetheless, the Federal Reserve has continued to provide liquidity, which bodes well for real estate. 
While the near-term employment picture is, in a word, terrible, it is helpful to note that the economic drivers that have kept Phoenix at the top of job and population growth are still in place. Not only did the Phoenix MSA lead the country in job growth going into the crisis, rising three percent plus in January/February, but has continued to diversify since 2010. 
One area of major growth, and particularly pertinent to our current situation, has been the explosion of the healthcare/biotech/bioscience industries. Since 2015, healthcare and related industries have been experiencing a five percent plus average per year employment growth rate, which continues to bring high paying jobs to the region. Additionally, a little over $1B in bioscience/medical related projects are currently underway throughout the Metro.  
Regarding multifamily, Phoenix was, and still is, undersupplied at both the Metro and City levels. While near-term rent delinquencies can be a cause for concern, particularly of Renter by Necessity properties, they have yet to fully materialize. Lenders have instituted forbearance options to not only provide varying degrees of mortgage relief but also halt evictions. This is in addition to various state/ county/municipal authorities who also have instituted moratoriums on evictions.  
Lastly, under the CARES Act, not only will many receive a onetime $1,200 stimulus check + $500 per child, contingent upon income, but those unemployed will see an additional $600 per week added to their unemployment checks through July 31st, 2020.  
Despite significant near-term volatility, there are a few bright spots beginning to emerge: One, preliminary results of various blood antibody tests have shown that a much larger population has been exposed to COVID-19 than previously thought and, as a result, suggests that mortality rates are many factors lower than first projected.  
Secondly, various states, in conjunction with the Federal Government, have started the process of providing guidance for re-emergence from the crisis. While it is much too soon to celebrate, we are, in the least, acquiring more accurate information which, in turn, leads to better decisions and those are the necessary prerequisites on the path toward recovery.