Re-cycling. Phoenix’s out-of-character economic debacle brought about a similarly out-of-character decline in the health of the local apartment market, a decline exacerbated by a drop off in population growth of proportions similarly unheard of. True to local history, the apartment market has staged a remarkable turnaround: with the confluence of several demand-supporting factors, the net absorption total for the two-year span 2010-2011 was the highest seen here since the 1999-2000 period—accompanied, moreover, by the near disappearance of construction. Vacancy has fallen to pre-recession rates and substantial growth is indicated for rents. Again true to form, a new construction cycle is now underway as some projects start, others are announced, and developments delayed by the downturn are revived. Investment has increased markedly as well.
With the market blindsided by the downturn that descended on Phoenix in the midst of an active development cycle, negative absorption catapulted the vacancy rate skyward. The 12.3% peak reached at the end of 2009 was the highest rate recorded by Reis for this market since 1988. The roughly 31,500 market-rate units reported vacant during the final quarters of 2009 and the first of 2010, however, were unprecedented within Reis’ 30-plus-year coverage of this market.
No less rapid, however, has been occupancy’s recovery. By the end of the second quarter of 2012, the dramatic shift in favor of demand over supply that began in 2010, along with an unprecedented near-halt of construction, had dropped the rate nearly by half, to 6.4%—a rate not seen here since the pre-recession period. Indeed, a year earlier Phoenix area vacancy was 190 basis points higher. By the end of the year, moreover, the rate should slip to under 6.0% for the first time in a dozen years. With rental demand seen across a broad economic spectrum, both the upper and lower tiers of the market have seen marked declines in their vacancy levels. The Class A sector closed the second quarter at 5.1%, down 30 basis points for the quarter, down 150 year-over-year. The Class B/C quarter-end rate was 7.6%, down 30 basis points for the period, down 220 year-over-year.
SUPPLY AND DEMAND
The unprecedented collapse of the local economy and the effects of the recession on lending for development resulted in a virtually unprecedented slowdown in apartment construction. The 453 market-rate units that arrived on line in 2011 stand as the smallest single-year completion total ever recorded by Reis for this market. The 2012 total will be smaller still. According to the firm’s late-August report on individual construction projects, just one market-rate property with only 224 units is scheduled to deliver all told this year, in November (see Submarkets).
The tide, however, is coming in. As strong nationwide trends in demand ignite a new apartment development cycle across the country, Phoenix will not be left out. According to the above-cited late-August report, 3,323 market-rate units in 12 projects (including the pending 2012 completion) were under construction metro wide. New projects, meanwhile, are being
announced with growing frequency. As described by the Phoenix Business Journal in July, the Loop 101 Corridor in the eastern metro area, from Desert Ridge in the north to the Intel Corporation area in Chandler in the southeast, has become the main focus of current development. However, the less-developed West Valley is expected to host approximately 70% of the metro area’s future housing development.
Just as construction is increasing, the profile of demand may be changing. A chief element in the recent surge in absorption was the appalling weakness in the local single-family market as high foreclosure rates with their displaced former owners and low confidence among would-be buyers in the future of home values augmented the growth in demand for apartments already underway (as a result of the improving local economy). But the early signs of recovery that have appeared in the single-family market (see The Economy) may have the potential to steal some of the apartment market’s recent thunder. “The low-interest-rate environment and accelerating rents have kept the spread between Class A asking rents and the monthly debt service on a typical mortgage of a median-priced home around $275 per month in favor of owning,” states Marcus & Millichap in its third quarter 2012 report on the local market.
Data and analysis provided by Reis, meanwhile, reveal a slowdown in net absorption. The market-rate total year-to-date in 2012 through the second quarter was 2,146 units, a hefty sum to be sure yet well below the pace of the previous two years, alongside the absence of new completions during the period. While it does not appear at present to be excessive, the rising volume of new construction accompanied by a slowdown in net absorption could alter the dynamics of the market. Although a new bout of overbuilding is not expected, the situation, with new projects entering the development stream as time passes, is sufficiently fluid to bear watching.
Rent growth, which turned positive during 2010, has shown moderate acceleration since. Growth for 2011 was about 2.0% for both the asking and effective average rates. At $774 and $708 per month, respective rates for second quarter 2012 were up 0.8% and 1.0% from the quarter before and were up 1.2% and 1.7% since year-end. Respective growth rates for the year currently are forecast at 2.7% and 3.9%. Growth, moreover, has been favorable across the board. At $926, the second quarter Class A asking average was up 0.8% for the quarter and up 1.1% since year-end following a 2.1% increase all told in 2011. The $640 second quarter Class B/C asking mean was up 0.6% and 1.3% over the same time spans following a gain of 1.4% last year.