When Will Phoenix Apartments Stabilize - and The Signs to Look For

Anthony Talarico: The market has fundamentally changed since 2020, 2021. ⁓ because of rising interest rates largely, but also because of the increase in home prices themselves. Now the average home versus the average rent price, the average rent is around eighteen hundred dollars in the Phoenix metro area for, like you said, a four or five star apartment. The average comparable mortgage payment is fourteen hundred dollars higher. It's about thirty two hundred. That's a big difference. That is a huge difference. Right. That's a good thing for the multifamily market because When people are looking at that calculation, they say, well, I can afford rent, but I I can't afford a mortgage right now. Sure. But it's good it's good for long-term renters. There, you know, more people are becoming long-term renters than ever before because of that. Welcome to Property Lot Scale. Whether you're a property owner, investor, developer, HOA, or professional property manager, this is where you'll find practical conversations to help you protect your business and grow with confidence. Let's get started with today's episode. Hello, and thank you everyone for joining us. My name is Chris Rogers. I am the managing attorney here at Scott Clark Law. And today I have Justin Lyons here. He's one of our senior attorneys. And we're gonna kind of talk about the overall outlook of the housing market and specifically the multifamily housing market in Arizona. Justin, thank you for joining me. My pleasure. ⁓ all right, so let's just jump right into it. So I know that we have seen it's kind of been a downtime in In the multi-housing market in Arizona. Yes. But it feels like we've begun to turn a corner. Yes. Why don't you just give us a little background and and kind of where we're at now and kind of where we're heading? So ⁓ as I'm sure everyone in the real estate business is familiar, it's a cycle. It goes through a bit of a roller coaster with building and developing new product on the market. There's always a cycle where everyone's so excited to strike gold in this market. Everybody thinks they're this is this is the time. So they get the financing, they get everything ready to go and they start building maybe a year or two after they start, you know, announcing a project. They start the building. And what happens is you have a a lot of people excited to build and put new multifamily product on the market at the same time. That all hits the market and it causes a huge glut of oversupply. And then the market has to go through a painful correction process. And that's where we're at. Right. So yeah, as we all know, there's been a a ton of new builds for the multifamily. Yes. ⁓ and for a number of quarters now, ⁓ we have been running at a deficit, you know, running at see how to put this. ⁓ there's far more demand than supply. We've been running at a surplus of vacancies. Yes. Right. ⁓ but now it seems like For the first time in a number of quarters, we're starting to catch up a little bit. Yes. ⁓ why don't you talk about how the demand is now versus what the supply is? Well, it's still strong, and there's still the fundamentals for the the Phoenix metro area are still very, very good for multifamily. and we're getting to that rate where we're absorbing, where we're getting these vacancies are slowly getting absorbed. So we've got a lot of new product on the market that's been there for the past you know, three, four years of of building and overbuilding and it's slowly getting absorbed, but we've still got another two plus years of excess vacancies that are on the market. So it's gonna take another couple of years for us to get to sort of more of a stasis market. Right. I mean I guess if you look at it, if we've been, you know, putting a surplus out there for six straight quarters. Yeah. And the absorption rate has finally outperformed the ⁓ the supply rate. Mm-hmm Probably not saying that correctly, but I think you guys understand what saying. ⁓ that it's it's a good spot to be in now, but it's still going to take a while to fully recover, correct? That's exactly right. So we're we're in that recuperating and and ⁓ we're in a stage where we're still I a lot of the leases that I'm seeing ha still have six and eight week rent concessions. ⁓ sure. So we still have to offer those because we just need to Offering those rent concessions is always better than having somebody not in the, you know, the apartment. Sure. And ⁓ because there's so much new product on the market, that's just what we have to do to get through this. But we'll see in the next few quarters, I think those rent concessions will bit be pared down a little bit, hopefully. Sure. So we won't have to give out as much free rent just to entice people to rent. Right. As as demand outperforms supply. Yes. We kind of come back to the median and we don't have to entice people to to move in anymore. Yep. so Let's talk about where maybe the this concentrating the things metro area, where they kind of rank nationally in in total net absorption units. yeah. So why why don't we talk about where where we kind of rank in the top, you know, ten of the major markets? It's still a very, very strong multifamily market. So the fundamentals under the market are still very good. The net absorption rate ⁓ as an absolute is the third in the country as far as metro areas. Just behind Dallas Fort Worth and New York. Okay. That's a good place to be in terms of relative net absorption absorption. So the absorption relative to the whole market, we're still at five percent, which is fifth. Okay. The fifth ⁓ best major metro area. ⁓ behind a lot of those, and and a lot of those in the sun belt are the ones that are still doing really well as far as absorption rate. All right. So let's take a look at where we sit now versus where we sat pre pandemic. We all know the pandemic really changed the market and how how it worked. And so as we like I said, as we sit today, what is what are our vacancies look like compared to vacancies pre pandemic? Well, if you look at the overall vacancies in the Phoenix metro area, we still have about twenty eight thousand more vacancies now than we did in that twenty nineteen, you know, twenty eighteen, twenty nineteen market. Right. So we still have a lot of vacancies just due to that wave of supply that hit the market. Sure, and that's why we that's why earlier we said ⁓ that we may have turned a corner, but it's going to still take a while for it to really fix itself. Yes. So why don't you explain to us kind of what the absorption rate means and what it looks like moving forward? Well, the absorption rate means the number of units that are ⁓ being taken off of that that list of that vacancies that nobody wants to be on, ⁓ that are being absorbed by new people moving in, by natural growth in the population by people, you know, hopefully someday my kids will move out of my house and and get their own place. I mean statistically there's probably one that's gonna stay. Statistically I probably stuck with one for a while. But ⁓ hopefully that's the case and that does happen. Sure. You know, kids go do move on and grow up and grow out of their the the family household and they they form their own household. ⁓ so that's part of that natural growth plus the ⁓ the influx of in migration to Arizona, which has ⁓ slowed down, but it's still steady. It's still one of the steadier ⁓ migration destinations, you know, for people across the country. Sure. ⁓ all right. And so as we talked about the this was the first or the last quarter was one of the first quarters where we had an absorption rate that was higher than the the new unit rate put on the market, right? So once we have an absorption rate in excess of inventory, would you say that would kick off the next growth cycle? Yes. That's one of the signals that ⁓ people who develop multifamily look for. So we have to have that absorption rate trending in the right direction. Otherwise, you're just you're in the the unfortunate position of putting new units on the market that's already glutted with new units. Sure. You don't want to be there. You want to wait and wait until those units get absorbed into the market, like the market just absorbs them. And then in a year or two years. So now I think developers are looking at planning stages rather than, you know, so they're planning the next cycle. Where am I going to strike in the next cycle? What are my likely most likely targets? ⁓ which which submarkets do I like the best? So they're doing the planning stages ⁓ and thinking about getting financing, which is another thing that's tripped up a lot of developers, that spike in interest rates. Sure. Itself has really, really caused a lot of developers to think twice about how their projects are going to pencil out. Right. And I think we've all seen that cons you know, new construction has slowed down. Yes. And I think the numbers show it too. I I believe net deliveries of of new units have been down over the past quarter as well, which helped with the absorption rates. Yes. Yeah. And that's the trend that we like to see that that ⁓ will kick off the next round of development in the next cycle. Let's break this down a little farther. Right. So We know that the Greater Phoenix area incorporates a lot of different areas around the valley. We have a lot of suburbs, we have a lot of little pocket neighborhoods within the bigger neighborhoods, right? So ⁓ why don't you talk about vacancy rates specific to those types of areas? Like do we see maybe I'm not asking this correctly. Where do we see the biggest growth, like the biggest decline in vacancy rates around the valley? Well, the the lowest vacancy rates in around the valley are places where they're sort of already built out, where we didn't have this huge number of new units of inventory coming to the market. Places like Gilbert, Chandler, Old Town Scottsdale, there's not a lot of places left to build in those. You know, there's a there's a random infill piece of land every now and then. Those are getting rarer and rarer. So we saw the most growth in places like Buckeye, Tollison, you know, the Southwest, Northwest Valley. ⁓ and a lot in downtown Phoenix actually came on the market in this last cycle. A lot of growth there. So those are the those are the markets that have the highest vacancy rates now because they have the most new competition in their neighborhoods. It doesn't affect it doesn't affect all we talk about how the Phoenix market is struggling a bit in multifamily, but it doesn't affect all markets the same. Sure. Sure. But I mean overall is what we're Yes, overall it's a lot. But as we know, there are, you know, different neighborhoods bring different, you know. Different things to the table. ⁓ we know there's a lot of you know, there's a lot of building out on the west, you know, the west side. ⁓ however, there are still a lot of people that are moving out there as well. ⁓ yeah. Well if you look at you just look at the the map of the East Valley, it's pretty much built out. Right. So the West Valley over the next twenty years is going to have unless you want to go all the way out to Santan, right? Well and some people do. Some people do. ⁓ but for developers, getting the that the water supply, the hundred year water supply. Sure. ⁓ certificate is beginning to be a challenge. Becoming increasingly more ⁓ especially in Pinell County. Yeah. Because they have the the CAP water rights to them are not as strong as other water rights are to other parts of the valley, especially like Buckeye. ⁓ that's an interesting thing to note. So you look at the West Valley, that's where I think growth is going to happen because there's still land out there. Right. And there's still water. So you have to have those two things to have growth. Hey, real quick If your property management company is growing, your legal processes need to be able to grow with it. Scot Clark Law helps property management teams build a faster, more consistent approach to legal issues across their entire portfolio. Visit ScotClark Law dot com to learn more. All right, let's get back to the show. We have talked about how over the last almost six, seven years since you know pre pandemic, that supply has been in excess of demand. ⁓ What does it look like? I like we said we turned a corner, but what are we really looking at in terms of returning stabilizing it back to pre-pandemic numbers? Well, we've still got about 17,000 units under construction. ⁓ wow. So you have to add those to that forecast. Right. So if you look at that, we still have to have about thirty thousand units just to get back to that ⁓ sort of overall market stabilized rate about six and a half percent vacancy, which we saw. in twenty eighteen, twenty nineteen. ⁓ and when you factor in the units under construction, it's about thirty-seven ⁓ point four thousand. So thirty-seven thousand four hundred ⁓ units that we still need to ⁓ to fill just to get back to that six and a half percent vacancy rate. Wow. So the market seems to look like it's had a turn, but we still got a ton of work to do. Yeah. We we still have about a three year average absorption rate at that absorption rate that we're seeing, which is good. We still have about three years to work that out to get back to those historically good vacancy numbers. We know that rents went up considerably after the pandemic, after we got out of the pandemic across the board were raised. But we've seen a trend now because of the excess supply that has kind of brought rents back down, or at least not continued to raise them. It th they have been brought down to the well Not brought down, but relatively the growth year to year has been negative this past year. Okay. So the growth in rents from twenty fifteen to twenty sixteen was about negative three percent over the Phoenix market. And the forecast for twenty sixteen and twenty seventeen is going to be less bad than that. Twenty twenty six and twenty twenty seven. So that's what about twenty six and twenty twenty seven. So sorry. You're fine. Next year is Forecast ⁓ rent growth is still going to be negative for the full Phoenix market as a whole, but it's going to be less worse than it was gonna get back in 20 in 2020. It's gonna look a little better. So how are rents ⁓ performing in 2026 so far versus 2025? They are performing better than they were last year. Okay. So like I said, the the the rent growth will probably still likely end up negative this year, but it'll be less worse than it was ⁓ Like the negative three percent, we're gonna see negative one point something percent for this year. Okay. So where does that rank versus then the you know yearly average usually? That's still well behind the historical trend that we saw between like twenty fifteen and twenty nineteen before the pandemic. If you extrapolate that rent growth trend, it was on about a five percent per year increase. So we like to see low vacancies and steady, stable growth in the rents. That's what our clients like. That keeps them happy and keeps them sleeping soundly at night. We want our clients to be happy too. Right. ⁓ so we'd like to see that return to that overall rent growth about 5% per year. It's going to take some time to get there, but it's trending in the right direction. Gotcha. So we touched on concessions a little bit. ⁓ we don't really have to get that far into them. But what does the concession usage look like right now compared to previous years? It is trending down, but it was at a major an all-time high really, ⁓ in in this last year, this last year and two. All time high over the all-time five years. Yes. Well, yes. for the data we have, the last five years, all time highs in rent, ⁓ concessions being offered, ⁓ at over seventy percent of all leases had some kind of rent concession, which is Kind of a crazy high number. No, I mean we read leases every day. We're in court every day on these. And I see these. I mean, we see these concessions. And some of them, like you said, are all the way out eight, like eight weeks, two months of concessions. That's been fairly common for what I've seen the last year. Like ⁓ at least to si like four four weeks is almost like, ⁓ wow, you only gave a four week concession. Right. Yeah. Six six weeks to eight weeks has become very, very common. Right. And in the Phoenix area. We're still about sixty-five percent of all leases now still have rent concessions in the I know. The overall average for the United States is only forty percent. ⁓ wow. So we're still way above the average. Yes, we are. ⁓ because we we rode that roller coaster. We had we had a ton of mar of product hit the market pretty much at the same three or four year span. That's all slowed down. So those rent concessions, that's a that's a function of that. Sure. We have to compete a little harder to get ⁓ tenants to sign up and we have to give away some free rent. Sure. Sure. But as the absorption rate outperforms the delivery rate of the supply rate, we we should see those concessions kind of taper off. We we should they should be heading in the right direction over the next two to three years. All right. Let's talk about just the population of Phoenix. I know we for years and years saw a huge population. Yeah. What does it look like now? It's still growing, but it's only about one percent per year. Okay. That's that's about it. It's not the same as it used to be. ⁓ we're still a good destination. People still like moving to the Phoenix Valley. ⁓ but we're we're at about that just above fifty thousand or so coming here per year. Okay. We're not even before, you know, the pandemic, it was eighty thousand, ninety thousand a year. Right. The It's it's definitely slowed down. People are looking at other destinations as being maybe a little more affordable. Phoenix was the Phoenix Metro Air, as it was always an affordable destination. Sure. It's not so much anymore. That's that's just not the same as it used to be. That being said, yes, we're still in the top five of growth markets. Yes. Yeah. I I should have, you know, maybe cash settle. We had historic record growth for twenty plus years here in the valley. Right. So we're used to that. So anything less than that is ⁓ it feels like we're we're losing. No, we're still in the the top four ⁓ metro areas for population growth. So we're still doing fine. Sure. ⁓ we're just not we're not adding, you know, ⁓ eighty to a hundred thousand people every year. It's more like fifty to sixty. Sure. ⁓ those fifty to sixty thousand people. Where in the valley are they settling? They're mostly settling in the far ⁓ the farther reaches of the valley. So the far west valley, ⁓ areas like Buckeye, ⁓ and Goodyear Tollison surprise, and the far southeast valley, places like Coolidge, ⁓ and Queen Creek and Maricopa and Casagram. I'm not sure I would consider Coolidge part of it's great if it's there. I I I think it is. I mean it's it's close. It's not a yeah. But that's where people are going because that's where ⁓ new homes are being built. And then like we talked about earlier, where there's, you know, less places to build like the East Valley. Like Tempe's pre-landlocked. You can't build there. Tempe's landlocked, Mesa is pretty much landlocked. You got Chandler, Scottsdale. I mean, even like Paradise Valley, you can't really I mean there's still places to build, but they're not building multifamily housing in Paradise Valley. So that that being said, are these the regions where we see like more of a negative? population like ⁓ do we see a downturn? Maybe I'm not asking this correctly. But ⁓ what's the population growth look like in the i in the East Valley? ⁓ it is pretty stagnant actually. Yeah. T Tempe, Mesa, Chandler, not much growth at all. Right. They're just there there are new neighborhoods there anymore. Right. So that's kind of the function of what we talked about. Yeah. All right. Well we all know that the real estate market and multifamily housing market is Driven by employment growth. Yes. More jobs, more people move there, more people need more places to live. What is the employment outlook in Arizona? It is stable and steady, but not in a huge hiring spree ⁓ anymore. So it's what they call a low hire and low fire ⁓ labor market. So the good news is if you got a job, you're probably pretty stable. The bad news is Places like Taiwan Semiconductor, those are huge stories because that's a huge growth. That that that that brings thousands of jobs. Sure. There are a whole lot of stories like that happening in the valley right now. There are some, but ⁓ just not the way that used to be. Sure. So we talked about employment and unemployment rates are a tick up, but like you said, it's pretty steady. What what is wage and income look like? Well, one of the good metrics is that the wage ⁓ The wage growth has exceeded the apartment asking rents. Okay. So that's that's good. That's good for the stability of the the multifamily multi-housing market itself. it's a sign that people can afford the rent. You know, if it's the other way around, if the rents are s going it going growing faster than the wage growth, that's a that's a bad sign. We don't like that. Sure. We saw home prices skyrocket. Yes. Right. Interest rates have kind of stabilized the market a little bit. But what are mortgage rates right now? Not rates, but mortgage payments look like now compared to where rents are for four and five star apartments. Because we know we hear people talk about it, like when you're renting, you're paying someone else's mortgage. Yeah. Right. And why don't you just go buy a house? But I think we've seen a different trend. Yes. The market has fundamentally changed since twenty twenty, twenty twenty one. ⁓ because of rising interest rates largely, but also because of the just the the increase in home prices themselves, we've seen there used to be a lot of parity between ⁓ what you pay in rent versus what you pay in the mortgage. Now the average home versus the average rent price, the average rent is around eighteen hundred dollars in the Phoenix metro area for, like you said, a four or five star apartment. The average comparable mortgage payment is fourteen hundred dollars higher. It's about thirty two hundred. That's a big difference. That is a huge difference. So it's not the same calculation that goes in people's heads. That's a good thing for multifamily. Right. That's a good thing for the multifamily market because when people are looking at that calculation, they say, Well, I can afford rent, but I I can't afford a mortgage right now. Sure. I'm gonna have to put off buying my first home until I'm in my thirties or, you know, instead of in my twenties. Right. And that's typically what we've seen happening. But it's good f it's good for long term renters. They're sure. You know, more people are becoming long-term renters than ever before because of that. All right. Well, like again, we've hit on a lot of topics. Let's quickly ⁓ talk about w we talked about the ⁓ amount of new builds that weren't on the market, but I think we've seen a bit of a a a downturn in the amount of c new construction and multifamily. Yes. About a sixty percent downturn. So that's due to a variety of factors, ⁓ mostly because people don't want to be The last person in a cycle. Right, right. You don't want to be the last person to put a brand new ⁓ four-story ⁓ apartment building in downtown Phoenix when there's you've got a dozen others that are just right behind you, you're the last one to the party. Sure. Nobody wants to do that. So units under construction, down 30, ⁓ 59% over the last two years. ⁓ new ⁓ multifamily permit issuance. So people pulling the permits to build new. ⁓ is down thirty eight percent. All right. Well, we've given out a lot of information today. Yes, we have. Thank you for joining me, Justin. I I do appreciate it. ⁓ I thank you for everyone out there for joining us ⁓ for this overview of the Phoenix market and kind of where we're headed in the future. Thank you. All right, you guys have a great day. Thanks for joining us on Property Law at Scale. For more resources and to connect with our team, visit ScottClarklaw.com. We'll see you on the next episode.