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They are discovering what companies and residents already knew: Jobs and affordability make this market an attractive place to do business.
Nellie Day
BUILDING FOR SUCCESS
Being one of the areas out West with room to grow, some multifamily developers are build- ing rather than buying. Scottsdale-based Talos Holdings, for one, currently has 1,408 units in its development pipeline. These projects span the East Valley, Northwest Valley and North Scottsdale.
This includes 350 units in a four-story configuration with surface parking that will be part of an 81-acre East Mesa site that was previously zoned for a Target-anchored retail power center. The site, now owned by Bela Flor Communities, will instead contain 900 new apartment homes by three multifamily developers, including Talos’ 350-unit project.
“In 2022, we intend to push beyond the market with world-class amenities, smart home technology, onsite life coaching and an unparalleled internet backbone on our properties,” says Jacques Bazinet, COO of Talos Holdings. “In addition, we are looking to partner with a non-institutional programmatic equity partner to help expand our pipeline in the years ahead.”
Another firm expanding its pipeline in Phoenix is TerraLane Communities. The luxury single-family rental developer has five communities under construction, with plans for several more projects.
“TerraLane is bullish on the Phoenix market because it was the first geography to embrace the product we build,” says Steve La Terra, co- founder and CEO of TerraLane Communities. “All of our neighborhoods are located in established suburban areas surrounded by jobs and transportation. This aligns with the requirements of our target renters, who tend to be employed in suburban nodes and seek convenience.”
As hot as the multifamily market is in Phoenix, many experts say the build-to-rent (BTR) category is even hotter.
“By far most of the calls and questions I field are related to the BTR segment of the market,” says Brophy. “The traditional single-story, duplex-style BTR development — the types built by NexMetro and Christopher Todd Communities (now Taylor Morrison) — accounts for approximately 23 percent of the under-construction pipeline, but only 2 percent of total available inventory.”
Stapp has witnessed a similar trend. Though he notes there is demand “in all classes” in Phoenix, the luxury multifamily category is starting to soften. At the same time, growth and demand are highest for single-family, built-to- rent communities.
The downside, however, is that these units take time to build and accommodate significantly fewer residents than a densely populated multifamily project. With the amount of residents pouring into Phoenix, this could be a problem, say industry professionals.
“We need more units than what exists, is planned or is under construction,” says Stapp. “Without more inventory, prices and rents will continue to increase. Although the area has had good wage growth, it’s much lower than the rate of rent growth. More of the population is becoming housing-burdened. A lack of regional housing policy, limited capital for affordable housing, political push- back on higher densities, scarcity and cost of land, labor shortages, supply chain constraints resulting in construction cost increases and longer delivery times mean this problem will persist.”
All these factors raise affordability questions going forward.
“Affordability is a relative thing,” says La Terra. “Today, Pheonix is expensive relative to itself, but very inexpensive relative to California. The Golden State escapees look to Arizona, Texas, Utah and Idaho for affordability, but in Phoenix we look to what we can afford locally.”
Bazinet agrees with this perspective, noting that, historically, multifamily dwellers in the Phoenix metro area devoted about 22 per- cent of their household income to rent.
“In New York, Washington, Illinois and California, over 50 percent of household income is consumed to pay rent,” according to Bazinet. “Although this percentage has increased to 26 percent — and trending to 27 percent — in the metro Phoenix area in 2021, it has not had the same effect on Class A multifamily due to dwellers’ increased income. In 2021, 63 percent of net inbound traffic showed household income over $100,000, keeping the percentage of household income devoted to rent at 22 percent in the Class A multifamily submarket, so we have lots of healthy room to grow.”
Growth at what cost might be the question La Terra would pose to developers just now entering the market. Like all good things, he believes there is an end in sight for this opportunistic investment environment.
“We are already feeling the effects of competition at our existing communities, and there are several additional projects proposed near our neighbourhoods in Phoenix, Goodyear and Surprise,” says La Terra.
“Rental rates will not continue to increase as they have, which means those who anticipated significant rental rate increases to make their deals pencil out may be disappointed. With the capital market’s thirst for yield, many deals are being underwritten that should not be built,” he cautions.
“Discipline is critical to creating a successful platform. Moving to the outskirts of a geographic region does not work for rental housing. The best opportunities exist within the geographies that offer convenience, proximate employment, services and local transportation,” emphasizes La Terra. “However, land prices in these areas are beginning to exceed sound underwriting standards, making the viability of some proposed communities questionable.”
