Research & Forecast Report
Phoenix MSA Q1 2020 Multifamily Review Pre-Covid Wrap-up
While nearly every aspect of life has changed since March 1st of
With that said, the Phoenix MSA continued to lead the nation in
this year, it is necessary to take stock of where the market was
rent growth rising 8.1 percent y/y to $1,235, nearly three times
prior to the Covid-19 shock knowing that all previous data sets
higher growth rate than the National average of 2.9 percent but
relied upon have changed. As Elliott Pollack so eloquently stated
still well below National average rent of $1,475. Occupancy rates
in his ‘The Monday Morning Quarterback,’ 4/6/2020 post:
continue to remain elevated at 95.1 percent despite decreasing
You shouldn’t be concerned with how bad things look right now. Current events are like nothing in modern history. The
40bps over-the-year and marks the 33rd consecutive quarter occupancy has been above the 20-year average of 91.6 percent.
unprecedented slide in the economy has nothing to do with
Approximately 1,400 units came online over Q1 2020 which is
normal economic cycles. It is due to a reaction to COVID-19 that
below the 2,000 unit moving 3-year delivery average. Given the
will be transitory. In addition, the CARES Act just passed by
current construction rate, 2020 should prove to be the highest
congress is not a stimulus package. It is a disaster relief package.
delivery amount since 2009’s 9,315-units. There are approximately
It is specifically designed to get income primarily to those whose
18,772 units currently under construction throughout Greater
income has been cut due to COVID-19 and its fallout (although
Phoenix, the highest amount since Q1 2018’s 17,895, and marked
every adult American with an income of less than $99,000
the 24th consecutive quarter where the number of units under
will get some cash). Though not perfect, it is a well-designed
construction was above 10,000.
program that should keep cash flowing to those who lost their income source.
Investment sales volume decreased 37 percent over-the-year to $1.18B across 28 transactions with average PPU (Price Per Unit) increasing nearly 28 percent to $189,185.
Employment
PHOENIX MSA EMPLOYMENT Jobs Gained/Lost
Net Employment Change
80,000
The largest gains were seen the in Construction, +5.4 percent, Education and Health Services, +5.2 percent, Leisure and Hospitality, +3.6 percent, Financial Activities, +2.9 percent and Mining and Logging, +2.9 percent industry sectors.
Annual Change
4.0%
70,000
3.5%
60,000
3.0%
50,000
2.5%
40,000
2.0%
30,000
1.5%
20,000
1.0%
10,000
0.5%
0
Year-over-Year Change
Greater Phoenix continues to remain in the Top 5 metros for job creation in the country. According to the BLS, over-theyear nonfarm employment rose in 26 of the 51 metropolitan areas with a 2010 Census population of 1 million or more, while employment was essentially unchanged in 25 areas. The largest over-the-year percentage increases in employment in these large metropolitan areas occurred in Dallas-Fort WorthArlington, TX (+3.4 percent), Austin-Round Rock, TX (+3.3 percent) and Phoenix-Mesa-Scottsdale, AZ (+3.2 percent).
0.0% 2010
2011
2012
Population
2013
2014
2015
2016
2017
2018
2019
Q1 2020
NUMERIC POPULATION CHANGE BY COUNTY & MUNICIPIO: 2010 TO 2019
According to Census Bureau’s July 2019 population estimates, among the nation’s counties, the top 10 with the largest numeric gains since 2010 are all located in the South and the West. Maricopa County once again took the top spot for population growth, increasing 668,049. Among metropolitan areas, Phoenix-Mesa-Chandler, AZ, with a population of 4,948,203 in 2019, adding 755,074 new residents since 2010, replaced Boston-Cambridge-Newton, MA-NH as the 10th most populous metropolitan area in the country. *Source: Vintage 2019 Population Estimates
Rent/Occupancy Average rent for Greater Phoenix was up 8.1 percent y/y to $1,235. Occupancy for the region was 95.1 percent, 40bps lower y/y, but marks the 9th consecutive quarter occupancy has been above the 5-Year Moving Average of 94.7 percent and 33rd consecutive quarter above the 20-Year Moving Average of 91.6 percent. Greater Phoenix has continued to see sustained rent growth averaging 6 percent per year since 2014. Asking rents in Class A buildings increased 6 percent y/y with an average of $1,557 per month which is a little over $300 higher than the market average.
AVERAGE RENT | OCCUPANCY (2000 - YTD) Average Rent
Average Occupancy
5-Year Avg Occupancy
$1,400
96.0%
$1,200
95.5%
$1,000
95.0%
$800
94.5%
$600
94.0%
$400
93.5%
$200
93.0%
$0
92.5% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 2017 2017 2018 2018 2018 2018 2019 2019 2019 2019 2020
2
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Construction
Pre-Lease Absorption
Planned Development decreased over-the-quarter (6 percent) but increased y/y by 5.4 percent to 22,192 units. Actual projects under construction reversed trend and increased significantly in both overthe-quarter and year readings to its current 18,772-unit amount.
As expected, pre-lease absorption rates decreased in Q1 to 11 units which is below the 3-Year average of 15 units per property/ month. Based on the average number of units under construction per property, which is 272, and assuming 90 percent occupancy for stabilization; current delivery-to-stabilization period is currently hovering around 22 months. While this remains within the 18-to-24month stabilization rubric used by developers, it is above the 16 months stabilization rate witnessed at the end of last year. Nonetheless, more normal absorption rates are anticipated once shelter-in-place orders are removed in the months ahead.
Given the on-going pandemic, in addition to the trade war and now oil war, will continue to act as a market headwind, particularly in the near-term. Despite elevated construction deliveries, occupancy remains significantly elevated at 95.1 percent which is 350 bps above the 20-Year Average. Assuming all 9,500 units that are projected to be completed by end of 2020 were delivered vacant, occupancy would still be 92.2 percent, which is also 60 bps above our 20-year average.
AVG. PRE-LEASE ABSORPTION RATE/PROPERTY (Q1 2018 TO Q1 2020)
MULTIFAMILY CONSTRUCTION (50+) Planned
Under Construction
Completions
25 Q1 2020
22,192
Q4 2019
23,603
Q3 2019
21,975
Q2 2019
20,992
14,192
Q1 2019
21,051
14,372
Q4 2018
17,607
Q3 2018
18,251
Q2 2018
16,761
Q1 2018
13,829
18,772
1,399
21 16,237
1,933
15,351
20
1,895
15
2,365
16
16
17
16
15
15
13
2,521
10 14,715
15,737
2,758
16,766
17,895
11
1,350
5
2,380
0
1,630
13180
Q1 2018
2010+
2000-2009
Q2 2018
Q3 2018
1990-1999
Q4 2018
1980-1989
Q1 2019
Q2 2019
Pre-1980
Q3 2019
Q4 2019
Q1 2020
Overall Avg PPU
$300,000
$200,000 $180,000
Investment Sales (100+)
$250,000
$160,000 $140,000
$200,000
$120,000 $150,000
$100,000 $80,000
(100+) AVG. PRICE PER UNIT (PPU) BY VINTAGE
$100,000
$60,000 $40,000
$50,000
$20,000 $0
$0 2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Q1 2020
As of 3/31/20 the 10-year treasury sat at 0.67 percent compared to 2.49 percent as of 3/31/19 (currently 0.62 percent). Q1 2020 Summary of Multifamily Sales (100+ units) Transactions: 28 Sales (down 45 percent y/y) Total Sales Volume: $1,185,754,111 (down 37 percent y/y) Average Price/Unit: $189,185 (up 28 percent y/y)
Top 5 Transactions 1. West Sixth (Student): $123,000,000 | $328,000 per unit | Closed 2/28/20 | Yr Blt 2011 2. Arista at Ocotillo: $65,000,000 | $308,057 per unit | Closed 2/28/20 | Yr Blt 2019 3. Broadstone Osborn: $60,000,000 | $300,000 per unit | Closed 3/30/20 | Yr Blt 2019 4. Circa Central: $57,500,000 | $253,304 per unit | Closed 1/16/20 | Yr Blt 2019 5. Tides on Thunderbird: $55,400,000 | $147,340 per unit | Closed 2/18/20 | Yr Blt 1981
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3
Permits MF & SFR
PERMITS & EMPLOYMENT-TO-PERMIT (EP) RATIO BY MONTH
Current, as of February, permits for both single family
Single Family Permits
respectively. Despite generally increasing permit levels,
4,000
total permits for 2019 were 34,576 or 49 percent below
3,500
our previous market peak of 68,402 units in 2005.
3,000
Given the Covid outbreak, 2020 permits are expected
2,500
to remain at or below 2019’s peak. Current E/P Ratio is
Permits
4,500
E/P Ratio
E/P Equilibrium 2.50
2.00
1.50
2,000
1.82 or 60bps above equilibrium. The Employment-to-
1,500
Permit Ratio (E/P) looks at how well supply is keeping
1,000
up with demand. Equilibrium = 1.2, meaning for every
500
1.2 jobs added, there is 1 permit issued.
MF Permits (5+)
1.00
E/P Ratio
and multifamily increased 24 percent and 6 percent,
0.50
0
0.00 J-19
F-19
M-19
A-19
M-19
J-19
J-19
A-19
S-19
O-19
N-19
D-19
J-20
F-20
Outlook At this point, Covid-19’s potential impact on both the real estate industry, and market overall, remains to be seen. While we may not have firm data as to the full extent of this disruption, make no mistake that its impact will be significant, as witnessed in the nearly 26M+ national unemployment claims, although not expected to be long term. The biggest impacts observed thus far, aside from unemployment claims, have been relegated to Capital Markets and Retail. With regards to Capital Markets lenders have been widening spreads which has, in turn, impacted interest rates. The near-term interest rate spread increase can, and should, be attributed to the volatility of the virus’ spread and government steps to contain it. Nonetheless, the Federal Reserve has continued to provide the market necessary liquidity which bodes well for real estate. While the near-term employment picture is, in a word, terrible it is helpful to note that the economic drivers that have kept Phoenix at the top of job and population growth are still in place. Not only did the Phoenix MSA lead the country in job growth going into the crisis, rising 3%+ in January/February, but has continued to diversify since 2010. One area of major growth, and particularly pertinent to our current situation, has been the explosion of the healthcare/biotech/bioscience industries. Since 2015, healthcare and related industries have been experiencing a 5%+ average per year employment growth rate which continues to bring high paying jobs to the region. Additionally, a little over $1B in bioscience/medical related projects are currently underway throughout the Metro and include: expansion of ASU/UA @ Phoenix Biomedical Campus (Downtown Phoenix), Creighton Medical School (at
THOMAS BROPHY Research Director | Arizona +1 602 222 5066 Thomas.Brophy@colliers.com
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Park Central) and North Phoenix Mayo Campus expansion, as well as, medical/pharmacy related expansions in Chandler/Gilbert. Regarding multifamily, Phoenix was, and still is, undersupplied at both the Metro and City levels. While near-term rent delinquencies can be a cause for concern, particularly of Renter by Necessity properties, they have yet to fully materialize. Lenders such as Fannie and Freddie have instituted forbearance options to not only provide varying degrees of mortgage relief but also halt evictions. This is in addition to various state/ county/municipal authorities who also have instituted moratoriums on evictions. Lastly, under the CARES Act, not only will many receive a onetime $1,200 stimulus check + $500 per child, contingent upon income, but for those unemployed will see an additional $600 per week added to their unemployment checks through July 31, 2020. For Arizona, the maximum benefit amount is $240 per week + $600 per week (CARES Act funding) = $3,360 per month. Despite significant near-term volatility, there are a few bright spots beginning to emerge: one, preliminary results of various blood antibody tests have shown that a much larger population has been exposed to Covid than previously thought and, as a result, suggests that mortality rates are many factors lower than first projected. Secondly, various states, in conjunction with the Federal Government, have started the process of providing guidance for re-emergence from the crisis. While it is much too soon to celebrate, we are, in the least, acquiring more accurate information which, in turn, leads to better decisions and those are the necessary prerequisites on the path towards recovery.
Copyright © 2020 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
Copyright © 2019 Colliers International. colliers.com/arizona The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has
been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.