13 minute read
Arizona Multihousing Association
NOT IN MY BACKYARD
The need for rental housing is burgeoning, but some Valley cities are resistant to multifamily development
By KYLE BACKER
Aplace to live in Greater Phoenix is becoming harder to attain. While homeowners have enjoyed a dramatic increase in the value of their investments, those in the rental market have seen a larger percentage of their paycheck eaten up by rising housing costs. A market report by online real estate company Zillow found that rents rose 17.7% year-overyear in the Phoenix area as of May 2021. Another Zillow study forecasts that by the fourth quarter of this year, typical renters in Greater Phoenix will become housing burdened, meaning that more than 30% of their income will go toward keeping a roof over their heads. As a result, the Phoenix metro will drop from the 29th to 38th most affordable metro in the U.S.
“It’s Economics 101: the law of supply and demand,” says Courtney LeVinus, president and CEO of the Arizona Multihousing Association. “When the supply of something is low but demand is high, the price goes up in response. Rent works the same way. When we have a robust supply of rental housing in the Valley, rental costs tend to remain steady, but when we have a shortage of rental units — and thousands of people moving to Greater Phoenix every month — then rent increases.”
A study commissioned by the National Multifamily Housing Council and the National Apartment Association estimates that the Phoenix metro needs 150,000 additional rental units by 2030 to meet demand. To hit that target, the pace of current rental construction levels would need to hasten.
“In the 1980s, Greater Phoenix saw 105,905 multifamily units built. In the following three decades, the production plummeted, and we averaged 47,000 units per decade after the ’80s,” LeVinus notes. “We built up a great supply in the 1980s that made Arizona’s housing stock quite affordable, but now we are clearly not keeping up with demand.”
IN THE ZONE
When a developer is looking to build a new apartment complex, the first step is to find land that is properly zoned for multifamily housing. Lots
Nana Appiah Tim Curtis Courtney LeVinus Kevin Mayo
are given zoning designations based on a city’s general plan that is put before and approved by voters. The intent of a general plan is to guide long-term development inside the municipality, though changes can be made as needed. Other requirements and limitations may be attached to the property, such as compelling the builder to install a traffic light or capping the maximum height of the structure.
Tim Curtis, director of current planning for the City of Scottsdale, says projects that fit within the present zoning parameters have little trouble acquiring building permits.
“If you already have the zoning for a multifamily project, and you’re happy as the developer with the building height and density that’s allowed, it’s really easy,” he explains. “The degree of difficulty would probably increase if the project doesn’t match what is already contemplated in the general plan and zoning.”
LeVinus admits that simply developing within spaces designated by a city’s general plan sounds logical, but she believes it’s unrealistic. “If you scan the available land in communities across the state, you find that comparatively little land has been zoned for multifamily developments. That means virtually every new apartment development in Arizona must go through the rezoning process,” she notes. “Rezoning is not easy. It’s expensive, there are enormous bureaucratic challenges, and it’s a long slog, timewise.”
A developer may want a lot to be rezoned for a variety of reasons. For example, an apartment building may need more units than is permitted in order for the investment thesis to be realized, otherwise the investor cannot turn a profit. Curtis adds that the city doesn’t control the sale price of the property, which affects the feasibility of the project.
“If your expectation is just to comply with the zoning, then you’re a happy camper and not necessarily complaining about how difficult it is to get permits,” he says. “But if your investors are expecting a certain rate of return that forces you to go to five stories, the city may be a bit apprehensive about that. The formula developers use to gauge their satisfaction, which is primarily capitalistic, is different than the formula that cities are using to build the community that they envisioned.”
LeVinus argues that the arbitrary zoning designations that make multifamily construction onerous have worsened the current housing crisis. “Rather than allowing the market to correct itself, local governments keep stepping in to artificially constrict the market by limiting growth in their communities,” she says. “If local government would get out of the way and allow the apartment community to respond to market forces, we could climb out of the hole relatively quickly.”
PUBLIC OPINION
Part of the rezoning process involves hearings in which residents can offer
their thoughts on the proposed development in hopes of swaying city council members to either approve, deny or impose conditions on the project. Most participants at these hearings do not want apartments built because of a perceived threat to or degradation of their lifestyle. These attitudes are considered not-inmy-backyard sentiments, known as NIMBYism.
Nana Appiah, planning director at the City of Mesa, believes that the role of his department is to administer the city’s general plan and zoning ordinance, which strongly encourages residents to get involved in the process. He says a common contention he encounters at zoning hearings, and one that is argued throughout the country, is that multifamily housing will lower the property values in the surrounding area.
Quantifying a connection between apartment construction and decreased home prices is murky, according to Kevin Mayo, planning administrator for the City of Chandler. “We haven’t seen that in the current market. I don’t think anything’s affecting our property values except for raising them up,” he says.
In Chandler, residents’ top concern is traffic. “Thousands of multifamily units have been built and delivered to the market around the Chandler Municipal Airport in the last 36 months,” Mayo remarks. “Homeowners who live south of the airport had gotten used to what their normal commute was. Now there’s a 20% increase in traffic volume on the road. Even though the city has a traffic impact analysis that shows that the road is currently operating at 40% capacity, it still feels like an entirely different world for the citizens.”
Furthermore, social media has allowed NIMBY groups to organize online and attend zoning hearings for developments that aren’t in their neighborhood. LeVinus recalls cases where neighborhood residents have been neutral or in support of a nearby multifamily project, but outside NIMBY advocates have stirred up controversy. “The more noise that surrounds a project, the more risk averse local officials seem to become,” she says.
Appiah, who wrote his doctoral dissertation on citizen participation, thinks that people expressing their views is a positive thing, even if they don’t live nearby. “We encourage our residents in Mesa to participate and get involved in every activity that is going on as part of creating a complete community,” he says. “What is built in the city is important to everyone who lives outside the immediate vicinity of the project.”
The result of these hearings typically produces a series of requests from the city council. “Every project has an element of back and forth to get to the finish. What we’re frequently seeing now is a set of requests meant to make a development more palatable for neighbors — such as an art installation, a massive green belt, more sustainable elements, or more design nuance and treatments. These additions inevitably add considerable costs to a project — costs that ultimately are reflected in higher rent,” LeVinus remarks. “Its ironic that the same local officials who request such pricey additions are often the very leaders who complain about their community’s lack of affordable housing.”
With recent U.S. Census Bureau data identifying Greater Phoenix as the third fastest growing metro in the nation, trends point to a continuous stream of people making the Grand Canyon State their home. What remains to be seen is if transplants will keep coming if rising housing costs, rental or otherwise, persist.
“The City of Phoenix seems to understand the need for housing and is trying to keep up with growing demand. Others are restricting supply that is further exacerbating the affordable housing crisis,” LeVinus says. “What stings even more is that this resistance to new development is prevalent in areas where the demand for rental homes is high and rising with each passing day. This mentality to limit growth isn’t sustainable — not if we want the Arizona economy to continue to grow and we want to keep rent and the cost of living manageable for all residents, no matter what they earn and where they want to live.”
Eye on the Future
Q&A with AMA Board Chair Reid Butler
Reid Butler, the 2021 board chair of the Arizona Multihousing Association (AMA), has been in the apartment business since the mid1980s, first with Evans Wythecombe Residential before moving to Legacy Partners. He started his own firm, Butler Housing Company, in 2001.
In addition to working as a developer and property owner, Butler has been a longtime member of the AMA, starting out in government affairs and working his way up through the leadership. AZRE Magazine caught up with Butler to learn more about the benefits of AMA membership and his vision for the organization.
AZRE: What value does the AMA offer its members?
REID BUTLER: The strength of the AMA is its ability to bring together people at local, regional and national companies that are making a difference in Arizona, as well as leaders in local and state government. The AMA connects us and helps us really understand each other. A great example of this happened during the pandemic. We have a large board, almost 50 members, and every two weeks, we would get together to talk about best practices and share what we were doing to protect our staff and our residents. I was impressed to see so many competitors dispensing trade secrets. AZRE: Multifamily development is exploding in the Greater Phoenix region. Can the Valley maintain this level of growth?
RB: When I moved to Arizona in 1960, the population in Metro Phoenix was 558,000 people. In 2020, that number was 4.5 million. In the last 10 years, the city has added about 100,000 residents annually — about 40,000 new households per year. Historically, about 35% of the population live in rentals. That’s 14,000 new apartments. Now, we have a much larger pipeline maybe 20,000 to 25,000 units, but the pipeline takes two or three years to get all the way from early ideas to to construction and leasing. So the issue isn’t demand but supply constraints. I think the growth will continue as long as we keep an eye on the challenges.
AZRE: What are some issues facing the multifamily industry in Arizona?
RB: One of the big challenges is the current anti-apartment mindset in certain communities. They feel as though they’re getting enough density and growth and maybe it’s time to slow some of that down. As an industry, how do we make the case that the kind of urban projects we’re building fit within the broad range of housing needs for every community? AZRE: What are your goals for your term as chairman?
RB: The main goal is managing the effects of COVID-19. The pandemic has caused so many adjustments in which the government, under its public health responsibilities, has intervened with housing relationships between property owners and tenants. Now, more than ever, we need to work with the government and find a balanced way to allow the industry to function properly while continuing to take care of our residents.
I’ll also be working on the future of housing. Do we need to become a little more green? Do we need more solar? It’s a big discussion. Arizona has become a lot more urban, and we’re seeing a lot more infill growth, which to me is smart. But the AMA always wants to look toward the future and see what trends we should lead the way on.
HOUSING CRISIS
What the eviction moratorium means for the future of Arizona’s rental industry
By REBECCA L. RHOADES
On Aug. 3, the Centers for Disease Control and Prevention (CDC) issued a new moratorium to temporarily halt eviction in counties where COVID-19 is spreading rapidly, which includes Maricopa. This new stay, which the U.S. Supreme Court vacated on Aug. 26, came only two days after the expiration on July 31 of a federal moratorium that began, in various forms, on March 27, 2020.
According to the Arizona Multihousing Association (AMA), while some have viewed the moratoriums as necessary policy interventions, many housing experts warn that continued deferment will not only halt future investment but may permanently push small investors out of the market entirely.
“The federal eviction moratorium has meant that many rental property owners have gone nearly 18 months without collecting rent. In some cases, renters have accrued more than $20,000 in rental debt,” says Courtney LeVinus, president and CEO of the AMA. “Yet all of these owners are still required to pay their mortgages, property taxes, insurance and costly repair bills, regardless of whether or not the renter is in default.”
A survey conducted by the National Rental Home Council in early 2021 found that, as a result of these moratoriums, 30% of single-family rental home property owners say they will be forced to tighten standards when evaluating future rental applications, 11% have been forced to sell at least one of their properties, and 12% have been forced to sell all their properties.
Even if a fraction of these estimates proves true, the effects on the rental industry will be long-lasting.
“Historically, the market has been 50-50 smaller landlords vs. institutional ones,” explains Mark Zinman, attorney and partner at Zona Law Group, which focuses on residential property management issues. “If a large management company has even one tenant out of 10 who doesn’t pay indefinitely due to a moratorium, it’s going to increase rents to account for that loss of income. The mom-and-pops will be forced to sell off their assets or transfer them to the institutional investors and permanently decrease the amount of stock on the market. Either way, you’re going to end up with the same result of increased rents.”
A MORATORIUM MUDDLE
While many experts predicted a surge in eviction filings immediately following the cessation in July of the initial federal moratorium, Zinman’s office did not see an outpouring of pleadings. “Property owners realize that they’re better off keeping someone in a home who is paying them maybe 70% of the rent and following a payment plan as opposed to evicting them and not getting another tenant or, worse, finding one who ends up filing for bankruptcy. Eviction is a last option,” he says.
Federal emergency rental assistance is available, but unlike other pandemicrelated programs, money has been slow to reach those affected. According to the AMA, Arizona received about $1 billion in federal funding, but only about 17% has been allotted so far.
In order to qualify for rental assistance, both the tenant and landlord must sign and submit a declaration form, and even then, the process is complicated and applicants face extreme scrutiny by the government. The antipoverty nonprofit Wildfire, which was contracted to distribute $22.5 million in aid, noted that 36% of landlords were denied funds.
While it could take years for all of the issues and lawsuits surrounding the moratoriums to be resolved, one thing is certain: The current crisis, combined with threats of future moratoriums has caused many investors to pull out of an already tight market.
“We’re in the position of potentially losing 10% of our stock because owners are exiting the market,” says LeVinus. “That should scare everybody.”
