Arizona Real Estate Market – Back to the Top of the Heap

Mark Stapp
Professor of Real Estate, Arizona State University


In March 2006, this market was one of the best, the darling of the new homebuilding segment. But that month I remember well because the public builders started rapidly pulling back – that began the wild ride down. Well, 13 years later the Phoenix metro market is once again one of the top real estate markets in the US. Pick a segment and this market is near the top. Tier 1 Gateway cities are waining and capital is looking to Tier 2 and 3 markets for opportunity and yield. We are a leader in net migration which drives housing, pushing demand to approximately 30,000 new housing units annually – single and multi-family. The reason for this net migration is very strong job growth and those jobs are in diverse industries, those that are sustainable like med and bio-med and technology. Our quality of life has increased substantially as we evolve as a place. Compared to many other markets we look like a good deal which is why the trend of moving from California to Arizona has increased.

Phoenix is 7th in homebuilding but still 31st in overall real estate prospects. Phoenix is rated as a moderately strong market for investor demand and development/redevelopment opportunities according to the Emerging Trends in Real Estate survey conducted by ULI. We are expected to grow our economy at a rate of 1.5% annually over the next five years and more important have annual per-capita income growth of 1.7%, yet our housing prices are only 95% of the peak. All good news.

The industrial segment – fulfillment, warehousing and manufacturing – is very strong which reflects the strong primary job growth. The office has performed extremely well due to expansion of the financial services sector. Multi-family remains very strong due to population growth and constraints on single-family development. Urbanization continues and should remain an important part of our overall growth continuing to shape this place. Opening of the Fry’s in CityScape will provide support for more housing downtown. The development of significant mixed-use and residential development in downtown will make it a true city center.

But development must continue to expand outward. Most new single-family housing is in the exurbs because this is where land is priced to allow new, moderate- priced homes to be built. No, we are not the sprawling capital but we are expected to add 2 million people in the next 20 years – that is equivalent of adding the city of Denver. It can’t all be located in the center of metro Phoenix. We need expansion on the periphery to maintain affordability. This is driving “urbanization of our suburbs” – creating places that offer social interaction, entertainment, local food and beverage options in walkable places in our suburban communities. Urban living appeals to the burgeoning millennial family segment of the market.

This is all good news but it’s not all rosy so don’t start partying like it’s 1999 (homage to Prince however, not the year we want to replicate because we were facing a tech bubble – maybe this has more in common with now than we’d like to think). Investors are becoming slightly more conservative, lenders more concerned which is making new financing a little tougher – lots of capital in the market but tougher to find yield. This might be a governor on rapid development. I think uncertainty in the global and national economy, coupled with political unrest, will wear on lenders and investors during 2020.

The issue I’m most concerned about is affordability. Although we are a strong market, we are 3rd least affordable which surprises people. Rents and housing prices continue to rise at rates much greater than incomes. The median home price has climbed almost 45 percent since 2013, while median household income has only increased by 12 percent. That is not sustainable. Inventories are small, occupancies are high and coupled with increasing demand, rents and prices will continue. Will we find the elastic limits of the renter and buyer? I think we will! This will affect investor returns which will also moderate rapid expansion. Moderating new development in the face of increasing demand from our growth will make affordability worse – a double edge sword. If we want to continue as a strong desirable place to live we need to find ways to moderate rents and home prices. Equally important is expanding cultural opportunities, support for the arts and increase in funding for public education. As a market, we do a poor job supporting these critical community elements. We have a promising future, next year will be shaky due to global and national issues. We have matured which will help us weather an inevitable recession much better than any previous downturns, but as good as it is, it is not a panacea and requires some tough leadership to keep us highly desirable.