By Roland Murphy for AZBEX
A report last month from Northmarq gives new detail to a trend market watchers were already tracking: Build-to-Rent housing is experiencing the same uncertainty as the rest of the housing market while maintaining an exceptional degree of popularity as the new kid on the multifamily block.
As the birth site for BTR, Phoenix maintains its position as both a bellwether for the segment and a harbinger of things to come.
Summarizing the overall state of the market, the report says, “After a few years of rapid growth, the single-family build-to-rent market is facing its first period of uncertainty. At this stage in the cycle, renter demand for units has remained strong, gaining momentum at the national level and across most major BTR markets. The rise in absorption has been outpaced by an accelerating rate of new construction, with more units set to deliver in the coming quarters with the development pipeline at an all-time high.”
The transitional factors for BTR are the same ones impacting the rest of the housing market, especially multifamily:
- A high volume of BTR units under construction/recently delivered,
- Capital/construction costs throttling back new development and
- The overall economy restricting new sales of traditional single-family homes.
Northmarq says, “While the number of projects in the supply pipeline has attracted the most attention, 2023 has been a strong year for renter demand. Nationally, net absorption in 2023 was up 35% year-over-year.
“Absorption is being fueled by an economy that is far stronger than originally forecast and mortgage rates that are making it more costly to transition from renting to owning. Renters find themselves in a position where unemployment is low, jobs are being added at an above-average pace, and wages are rising. In prior cycles, these conditions would prompt home sales, but with mortgage rates twice as high as two years ago and for-sale inventories limited, many current renters are choosing to upgrade their rental housing rather than purchase a first home.”
Even though rental demand is rising, new deliveries are coming online somewhat faster than renters can occupy, creating a rise in vacancies and slowing rent growth. While problematic for developers and owners, that is providing some much-needed breathing room for renters in markets that had seen double-digit increases for multiple years.
After first emerging as a regional trend, with metro Phoenix as one of the first markets to dabble, BTR has become an established part of the overall housing market. As with any trendy new offering, BTR projects swelled to meet anticipated demand. Nationwide, the report says, “The sector recorded steep accelerations of construction starts from 2020 through 2022. Increases in starts averaged 22% per year in the past few years, spiking by nearly 30% in 2022 to 76,000 units.”
Like every other segment, BTR starts have slowed in the face of an uncertain economy and dramatic increases in interest rates and construction costs. Through the first three quarters of 2023, BTR starts were down roughly 11% year-over-year.
Metro Phoenix Numbers
Because of its positioning as a national leader for in-migration and rental unit demand, coupled with its early foray into the space, Phoenix has consistently been a leader in BTR development, which has made it the market to watch for national trends.
The metro retained its top position for units under construction in 2023, staying slightly ahead of Dallas-Fort Worth, which was the only other market with a comparable count. Both markets had more than 8,000 units under construction during the study period. Houston was a distant third with around 4,500.
Still, even with Phoenix carrying the heavy load, the entire West region only accounted for 16% of new construction starts. The South, fueled largely by Texas, had 61% and had around half of the total national unit delivery count at nearly 35,000.
All that construction has, naturally, had an impact on operational performance. Northmarq reports Phoenix BTR vacancy was up 160 basis points year-over-year and ended Q3 2023 at 7.7%, approximately 70 basis points higher than the market’s vacancy rate for apartments.
The average Phoenix area BTR rent is slightly less than $2,000/month and $1.50/SF, which still comes in well below the next least expensive of the Top 10 markets—Charlotte at slightly more than $2,125/month and around $1.65/SF.
The metro Phoenix disparity is most clear in terms of the units delivered versus units absorbed. Phoenix delivered slightly more than 6,000 units in the first three quarters of 2023, compared to Dallas-Fort Worth at approximately 3,750. Conversely, Phoenix’s absorption was only around 3,500, while DFW’s was closer to 3,125.
Phoenix & State BTR Construction Snapshot
Combining the Northmarq report with details from the DATABEX project database provides an interesting snapshot of the overall state of BTR in metro Phoenix and across the state.
For the sake of clarity, Northmarq does not define what municipalities constitute “Phoenix” in its report, and many research houses have slightly different boundaries for the metro area. Looking at DATABEX, we decided to include all of Maricopa County in our overview but leave out the Pinal County areas that are sometimes lumped in. It’s not apples and oranges, but the cumulative effect of their choices and ours may be a comparison of Granny Smith and Fuji.
To further define our research a little better, we have cut any master plans from the list, since our data also includes sufficiently advanced individual projects. We also need to stipulate that, while we have estimated construction valuations for the vast majority of projects on the list, that information is not universal.
Statewide, DATABEX lists 203 individual BTR developments. Valuations are available for 199 of those for a total of $7.617B and an average project value of $38.3M.
Not much changes when we look at just Maricopa County. DATABEX shows 153 projects in Greater Phoenix, with valuations on 152 of them totaling $5.695B for an average project value of $37.5M.
Things really get interesting when we look at BTR project statuses both around the state and in Maricopa County. The slowdown in BTR development becomes strikingly clear.
Since DATABEX launched in 2016, 48 BTR projects have been completed around Arizona, with 43 of those sited in Maricopa County. There are 80 communities under construction around the state, 60 of which are in Metro Phoenix.
Seven projects have been canceled statewide, with five of those located in Maricopa County. Eight Arizona BTR projects are on hold, with six of those lying in Metro Phoenix.
There are 12 Arizona projects listed in pre-construction, nine of which are located in the Phoenix area.
That leaves a total of just 48 projects statewide in other statuses, including design, planning, and pending procurement/in negotiations. Of those 48, 30 projects are included in all other statuses in Metro Phoenix.
A pipeline of 48 projects sitting “pre” pre-construction out of 203 for the state. A pipeline of 30 out of 153 in Maricopa County.
It’s fair to say Northmarq is not overstating things or risking any controversy in saying BTR has slowed. When slightly fewer than 20% of the Phoenix pipeline projects input over the past eight years are poised to move from the conceptual and into the actual building stages, “slowed” could even be considered a modest term.
The upside, however (and there is always an upside), is that BTR has gone from a novel outlier in the world of multifamily development to an established product type. Metro Phoenix still has a pent-up demand of several tens of thousands of units across housing types. The area is still a top market for in-migration and employment opportunities, and even though it can no longer make any claim as to affordability, it is still not as over-inflated as many of the markets with which it competes.
Assuming financing and construction costs mellow in the next 18-24 months, land availability doesn’t get worse, and owners/developers can learn to accept rent growth continuing to normalize away from the double-digit firehose they got to drink from for a couple of years (and that some deluded themselves into believing would be a “new normal”), Phoenix is better situated than most markets.
There’s no way BTR is not going to bounce back. The product type has proven itself too popular for too long to merely fade away as an afterthought. There’s also no way, when the rebound happens, that Phoenix won’t be poised to be among the first markets to benefit.