How Is Metro Phoenix Responding to Growth?
May 31, 2019
Fred E. Taylor Professor of Real Estate
2010 was our low point. That year, only 7,100 new single-family housing permits were issued. 2011 wasn’t much better with only 7,200 – a far cry from the 60,900 issued in 2005. Since that low point, there has been a steady increase in new single-family home construction which reflects our annual population growth rate of 1.8%. Metro Phoenix is 4th in population growth percentage and actual population and 2nd in net migration; driven by the fact it is number 2 in job growth nationally. This growth rate translates to the population growth of about 86,000 people and demand for new housing between 28,000 – 29,000 single and multi- family units annually. A major issue meeting this demand is affordability, especially for those earning at or below the median household income in metro Phoenix of approximately $62,200. Several factors impact cost to construct a new housing unit. Construction materials cost increases and labor shortages (which make available labor more expensive – basic supply and demand), coupled with rising land prices that result from demand, have pushed overall costs to a point where constructing a unit, affordable to those earning at or below the median household income, is very difficult. Although there has been wage growth, lack of supply and demand has increased housing costs at almost 35% over the past five years while wages have only risen about 3.5%.
So, how is the housing market reacting to demand? Some of the response is simple – seek cheaper land. This is the dominant strategy of builders. To find cheaper land, builders must look to the edges of the metro area, just as they did in the early 2000s. According to Belfiore Consulting, 83% of all demand growth in the past three years has been in the “exurbs” (Florence, Apache Junction, Coolidge, and Buckeye west of the White Tanks) which are affordable submarkets. At the same time, sales in suburban and urban areas have leveled off, even declined slightly in some areas. Supply in significant amounts can only be accommodated affordably by building on less expensive land and that land is, and always will be, on the edges – basic urban economics.
The other strategy employed by builders is changing the value proposition. In some cases building smaller units to deliver lower overall sales price. Builders are developing new build, single-family detached, rental communities. A logical extension of the institutional money backed, an existing single detached rental strategy that started in metro Phoenix and grew here. Institutional investment capital saw the opportunity to buy foreclosed homes in significant numbers, below replacement costs, and rent them in an organized, professional manner. Now companies like Nexmetro and BB Living have evolved this strategy into a successful business model of building new single-family subdivisions specifically for rental – a disaggregated apartment with a high level of amenities. This approach is taking advantage of both the “de-stigmatization” of renting and appealing to a segment of the market that likes the freedom of renting but want the space of a single-family home and those who can not afford to buy a home.
Another strategy is prefabricated construction. This comes in numerous forms. The example often cited is Katerra, a Menlo Park-based, technology-driven, offsite, construction company founded in 2015 to rethink and innovate how buildings focused on lowering costs and increasing quality. Katerra has two fabricating facilities in metro Phoenix. The other end of the spectrum is Clayton Homes, builder of prefab homes (I will not use “mobile homes” because they have evolved beyond what typically defines the term). Clayton Homes has become one of the largest home builders in the US. There are many other examples of prefabrication of parts of units or entire buildings, that help lower costs.
Seeking less expensive land, changing the value proposition, finding new business models, construction methods or products, and ensuring affordability are critical for us to maintain economic competitiveness. But, I always offer these words of caution – affordability alone will not keep Metro Phoenix competitive, developing a culturally rich and diverse community will. At the same time affordability is considered, there must be an investment in arts, education, culture and social support systems, We must develop as a community and not commodity, competing as the low-cost provider, if we want to be sought after. If we can do that, values rise for the entire community.