Rising rents and declining supply are causing major shifts in Phoenix’s multi-family

Renting an apartment in the greater Phoenix area has become an increasingly expensive endeavor since the start of the pandemic. Zillow reports that as of July, the typical monthly rent in Phoenix was $1,949, up from $1,408 in March 2020 — an increase of nearly 39%. At the same time, the University of Arizona’s Center for Economic and Business Research notes that building permits issued for all types of housing in the Valley are down nearly 30% year over year as mortgage rates increase and inflation remains persistent but slowing.


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The mismatch between supply and demand has created a tiered effect in Phoenix’s multi-family sector, with those who buy a home renting Class A apartments, driving people already in that product category into Class B apartments.

“I’ve been in this business for 40 years, and I’ve never seen rent pressures like we’ve seen in the past three years,” says Red Butler, owner of Butler Housing. “To buy a home these days you better have good credit and you probably need a 20% down payment. Interest rates are still above 7% when two years ago they were only about 4% for a mortgage. Is the unattractiveness of the housing market Is this the reason behind the high demand for apartments?I agree with that.

At the same time, there is a narrative being spun from national economists, says Zack Haptonstall, CEO and co-founder of Rise48, that Phoenix is ​​in fact overvalued because organic rent growth is trending downward. However, many new units are being built in the far southwest and southeast valley, where single-family rental housing is a new product that attracts those who do not have or do not want access to home ownership. .

Rise48, which focuses on multi-family housing in metro Phoenix that was built mostly in the 1980s, doesn’t invest in those outlying areas because there aren’t many apartments that match the company’s target renter demographic.

“Our residents will likely never buy a home, nor can they afford first-class luxury apartments,” says Haptonstall. “Because the cost of construction was so high, you have to build Class A luxury and get premium rents to make these deals economically less expensive. And all these people can’t afford that.”

He goes on to say that even if the market is likely to be overbuilt today, many projects have been put on hold due to interest rate increases, so the pipeline of new units will not keep up with demand.

Ryan Abbott, Clayco’s executive vice president, adds that stricter lending practices, along with higher labor and material costs, are affecting development even though rental rates have stabilized.

“Where all of these (economic factors) converge is the deal complexity – read ‘delay’ – in closing a recent deal,” he says. “The biggest impact on development and construction is how to predict an unspecified moving point in the future. This complexity requires participants who are smart, agile, hardworking and brave.

Height at Highland Meadows Leasing Office. (Courtesy of Rise48 Equity)

Affordability for Multi-Families in Phoenix

The United States government administers the federal Low Income Housing Tax Credit (LIHTC) program, which incentivizes the construction or rehabilitation of housing units for those earning less than 60% of the area median income. For developers and investors to qualify for the tax credits, a project must adhere to specific guidelines and rent restrictions set by the federal government.

An Arizona-based developer that specializes in affordable housing and the workforce, as well as public housing redevelopment and urban renewal projects, is Gorman & Company. It has about 2,000 units in Arizona, with about 1,000 units under construction and about 1,000 additional units in the pipeline.

Although Gorman & Company is very active in the market, current conditions are stressful, says Brian Swanton, President and CEO of Gorman & Company. High interest rates, supply chain issues, and construction cost issues are particularly difficult because of the criteria that must be met to access LIHTC and other funds.

“We have government-restricted rents, so it’s not like we can just increase rents on people to make up for the losses,” Swanton continues. “We are locked into an affordable lease structure for typically 30 years or more. This means we have to return to other sources of financing and get creative in reducing project costs to keep deals moving. I know a lot of developers have lost their projects due to changing market conditions.

On the other hand, demand for affordable housing is so high, Swanton says, that the company doesn’t worry about filling apartment buildings — there are about 17,000 people on waiting lists for properties owned by Gorman & Company. There is also a growing awareness from lawmakers regarding the need for affordable housing.

“[Gorman & Company uses]fairly complex capital structures, tax breaks and other government-funded tools to get projects done,” Swanton explains. “When stimulus money and other state, local, and federal resources run low, they often target our businesses. The Inflation Relief Act, the Arizona tax credit, the $150 million investment in the state’s Housing Trust Fund, and the American Rescue Plan have all… To transfer money to affordable housing.

Thanks to these measures, Gorman & Company has not had to delay closing or construction on its projects.

“We left a lot of profits on the table,” Swanton notes, “and we had to fund gaps at the corporate level and write checks that we never thought we would have to in order to survive.” But for the most part, federal, state, and local governments rallied behind the industry to keep the industry afloat. Everyone’s pipelines are as active as possible due to the nature of the crisis.

The missing middle

There is no program similar to LIHTC to encourage developers to build units that meet the needs of renters who earn too much money to live in an apartment built with LIHTC money but cannot afford a luxury apartment. This sector is often referred to as attainable housing or workforce housing and is the hardest part of the market to serve, according to Butler.

“You have a market where there is a fair amount of supply at the upper end, unlimited but significant supply at the lower end that is constrained by financing, and then there is virtually no new supply for the middle market. (This demographic) ends up living in older housing, which is not It’s always acceptable, and the location may not be ideal. The middle part of the market is also the hardest part to finance, which is why you don’t see it. “If you’re building new housing for the middle end of the market, it’s about the same cost to build for the top end of the market. ”

Abbott points out that when the costs of land, labor and materials are essentially equal between the workforce and luxury apartments, it is easier for developers to pump more capital into a project and charge higher rents. He says this ultimately de-risks the investment by maximizing the rental rate. This may be a wise business decision, but it contributes to raising the issue of the “missing middle.”

Butler says he often hears people talking about the new apartment buildings that have sprung up vertically around the valley as evidence that the problem is being addressed, but the supply is simply still not enough. There are projects in the pipeline, but they take longer to deliver — up to two years instead of one — and are concentrated in a few submarkets like downtown Phoenix and the Central Corridor because some subareas in the Valley don’t want higher housing density.

“It’s hard to understand, but when you add 100,000 people to metro Phoenix, that’s the size of metro Flagstaff, and it happens every year,” he points out.

As for solutions to the supply problem, Butler says the Arizona Multihome Association has worked over the past few years to create more supply and density.

“Increased density would make a big difference in my opinion,” he continues. “I’ll find ways to add density and then address other real issues, whether it’s parking, traffic, privacy, or (preserving) historic buildings. And even give additional density to infill in urban areas, because it takes advantage of existing infrastructure.”

The greater Phoenix area has a history of building horizontally rather than vertically, which makes trying to build in instead of out more difficult, he continues, but the added density helps address the overall supply issue.

“Increasing supply removes pressure on rents,” Butler concludes. “That’s what we need – more supply, more choice and finding a way to build in that missing middle, perhaps with some new product designs where apartments can be a little smaller and higher density. Does every two-bedroom apartment need two bathrooms? We have to find ways To create these additional solutions to make housing a little less expensive, and therefore a little less expensive.

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