Rising Rents Put More Pressure on Phoenix Affordability

Phoenix is one of the fastest growing cities in the country. It has the fastest growing apartment rents in the US, one of the fastest growing populations and a diversifying economy. As a result, it has also been listed as a top buy market for many asset classes, and has seen an influx of buying activity. That’s the good news. The bad news: the market is starting to see housing affordability problems. While there is a large apartment construction pipeline, rental rates are expected to increase again this year, and that will only put more pressure on the growing problem.

“Affordability is tightening across the board,” Roland Murphy, director of research at ABI Multifamily, tells GlobeSt.com. “For example, on the single-family side, there was a lot of weeping and gnashing of teeth when we fell to number 17 on the HSH.com list of most affordable cities after being in the top 10 from 2014-17. Interestingly, even with that level of mortgage affordability, we still saw solid populations in the renter-by-choice category.”

There has been growing concern about increasing housing costs in Phoenix for several years, largely because the prices have grown alongside the local economy. For a market badly impacted by the Great Recession, this was welcome growth. “Last year, Maricopa County was the fastest growing in the nation, and we’ve been near the top for the several years before that,” says Murphy. “A lot of the migration has been due to successful efforts to draw attractive industries — such as tech, bioscience research, financial services, and distribution and fulfillment — that pay good-to-very-good wages but can still manage to pay less here than states like California. Still, wage growth here and across the country has been lower than anyone would have expected, though it has finally been ticking upward.”

According to a recent ABI Multifamily report, rents in Phoenix increased 6.3% in 2018 to an average of $1072. “The upside is we haven’t seen inflationary appreciation,” says Murphy. “The downside is we have certainly seen a contraction in affordability for residents, particularly in workforce affordability. Despite fears of oversupply, we’ve never produced enough units to actually meet demand projects, and the vast majority of what we have been producing is class-A.”

The population is growing faster than developers can bring new units to market. This will help to ensure rent growth in 2019. “That kind of in-migration is not being met by any appreciable gains in available supply,” explains Murphy. “We’re adding all the time, sure, but we’ve never once hit the NMHC/NAA estimated output of 11,500/year needed to meet projected demand. The single biggest year we’ve had since the turn of the millennium was 9,300 in 2009.”

Construction delays have exacerbated housing affordability as well. “You can’t even use units planned or under construction as a realistic gauge to predict delivery,” says Murphy. At the start of 2017, there were 12,500 units under construction and 20,000 units in the pipeline, but only 7,785 units delivered. At the start of 2018, the market had nearly 17,500 under construction and 12,000 planned, with estimates predicting 10,302 deliveries However, only 8,118 units delivered by yearend 2018.

This year, Murphy expects rents to continue to rise alongside more population and rent growth. He says that several sources, including On Q, predict 5% rent growth this year with 2% growth per year following. “Personally, I think that’s conservative enough to be considered precious, as none of the factors that contribute to rent growth are venting their pressures,” says Murphy. “We’re still adding people. We’re still adding attractive jobs. We’re the fifth largest city in the country and continuing to add 200 or so people a day in the MSA. We’re continuing to grow as a desirable place to live and adding infrastructure and lifestyle amenities at a rate faster than most cities that score higher, today, than our number 17 listing on the U.S. News 125 Best Places to Live ranking.”