By Roland Murphy for AZBEX
For the first time in many residents’ lifetimes, metro Phoenix is poised to deliver nearly enough multifamily units to meet annual demand.
Having spent several years where units delivered equaled around half the number needed to meet demand in any given 12-month calendar cycle, the massive spike in demand during and after the pandemic, coupled with still exceptionally low-interest rates, finally fueled developers to start churning dirt and building in significant volumes.
Earlier this month, RealPage Analytics reported that 2023 multifamily deliveries would come in at nearly 440,000 across the U.S. After sitting between 8,000 and 10,000 units per year, Phoenix saw 2023 deliveries slightly exceed 17,000 units.
The projections for 2024 make 2023 look like a warmup lap. A second RealPage report predicts 2024 deliveries will reach 670,000 nationally. It should be noted that RealPage is widely viewed as optimistic in its supply data, since it includes all phases, even if they are not yet under construction.
Phoenix could nearly double its delivered unit count with an estimated 33,817 expected this year.
Analysts taking a more narrow view are projecting 2024 deliveries of around 20,000 units. Still there’s little room to quibble with the volumes the market is reporting.
This is, of course, raising worries in the ownership and investment communities because more volume equals slower absorption and moderating rent growth. Renters have more choices, and properties now have to do more than just open their doors to draw them in.
Combine that with a dramatic spike in interest rates and other development costs, and Phoenix’s deliveries meeting demand market balance shows every sign of being a one-off.
Slowing is Not Failing
Even though renters are no longer starving, there is still exceptional hunger for housing in greater Phoenix that no couple of high-volume years is going to slake.
Even with more than 33,000 units coming online in 2024, assuming that projection plays out, the Phoenix area demand is nearly 36,000. The market has tilted away from owners, but it is nowhere near landing solidly in the renters’ camp.
As Thomas Brophy, Colliers’ head of multifamily research, said in a recent column about the uptick in deliveries, “For tenants, this will be welcomed news considering they’ve experienced ~13 years of consistent rent increases. While we will see a large supply over the next approx. 5-to-6-quarters, if current trends hold, particularly in capital markets where construction lending has contracted significantly, this large influx will be short-lived.”
At least as far back as 2017, industry watchers, particularly housing advocates, have said Phoenix needed to deliver a minimum of 12,500 units per year through 2030 to address existing demand. 2022 and 2023 were the first years the market came anywhere near that goal. While the last two years exceeded those estimates, they still don’t address current realities.
Keep in mind, those 2018 numbers could not foresee the pandemic demand explosion, nor could they have charted the other factors that have kept Phoenix as a leader in in-migration even as the relocation has slowed nationwide.
While Phoenix’s occupancy rates have slipped as “enough” new units come online for the first time in decades, that pent-up demand can and will be a goldmine for developers who bother to look beyond 18-month data sets.
Phoenix rents may have gone down 5% in 2023, but they’re still up 30% from 2020, and no amount of physically possible development is going to push declines anywhere near those numbers again. In the last 90 days, rents in several submarkets have posted modest gains again.
The spike in rent rates during the boom and run-up was a major contributor to inflation across the economy, which is why the Federal Reserve dramatically raised interest rates.
Inflation has cooled, but many cautious economic analysts are afraid the Fed will repeat its mistakes of the 1970s, declare victory too soon, lower rates too early and lock in a protracted period of inflation and economic stagnation. Given the political pressures currently on the markets, the Fed’s actions after Q1 are anyone’s guess.
A Long View Will Pay Off
While short-term analysts are panicking, those who take a long view can’t help but be somewhat pleased with many current developments. While double digit rent increases look great on paper and pump up quarterly results, they are devastating on the street and destructive to long range performance.
There are universal rules in economics, and no market segment is immune to them. A fundamental law is: If you price your item out of your target market’s ability to pay for it, they won’t.
Economics and politics are inexorably intertwined, and neither are inherently laughing matters. For those who find humor in irony and paradox, however, there are plenty of chuckles of disbelief at the moment. Inflation has, indeed, slowed, and that’s an undeniable positive. Many political pundits, however, are perplexed that the average poll respondent still reports dissatisfaction with the economy.
The answer is simple if you tear your eyes away from the charts and look out the window. The cost of living isn’t getting worse at the same rate it was, but prices aren’t receding either. When your cost of living has gone up more than 50% and your income has gone up 4%, it’s hard to get excited that the rate of inflation has fallen below 3.5%.
Consumers aren’t macroeconomists. They’re people, and people get excited when their rent stops going up hundreds of dollars a year while their paychecks, maybe, go up by tens.
What does this mean for developers? For those with the right long-term outlook, it could mean a world of opportunity.
For all the weeping and gnashing of teeth about interest rates, there’s a world of private capital out there, even if liquidity is harder to engage. Deals will remain more challenging to structure, and more players will have to be involved because almost no one is willing to take on funding a project in its entirety anymore.
Because more units are coming online, they will take a little longer to absorb. Because the market is still short more than 100,000 units, however, they will absorb. Perhaps there will even arise an opportunity to build units outside the top tiers and focus on more affordable units that still generate a return on investment.
What the development community has to look at is this: The rent increases of the past few years were anomalies. It may not have been a bubble, but it was certainly a boom. Booms can’t last.
It’s exciting to ride the wave and surf the crest, but mature, skilled surfers want to get out of the curl and still be on their boards.
There comes a point when you have to trade in your toga for a set of chinos and embrace stability, both for your own sanity and the sanity of your markets and clients.
Short-sighted developers and investors are going to put on the brakes and slow down the rate of multifamily construction through 2026.
Smart ones are just going to ease up a bit on the gas. That way, they will still be cruising along when the next uptick happens and not have to race to catch up.