Phoenix multifamily capitalizing on local paradigm shift

JLL Southwest Multifamily Team PresentationQ2 2015

Phoenix multifamily capitalizing on local paradigm shift

The Phoenix apartment market continues to exceed market projections quarter after quarter. Vacancy has fallen to record low levels despite consistent deliveries and accelerating rent growth. Demand appears to be insatiable as projects fill up almost as fast as they are built. New millennial attitudes and mountains of foreclosures are not the only reasons for the strong performance of apartments. Diving deeper into the numbers provides a clear picture on how large scale demographic changes in Phoenix are shaping the future of apartments. The fact is that homeownership rates are falling around the country, and even faster in Phoenix. Homeownership has fallen by more than 10 percentage points in Phoenix, from its peak of 72.9 percent in Q1 2006 to 62.5 percent at the end of 2014. More residents are choosing to rent and their decisions are being influenced by several economic and demographic trends.

Multifamily is quickly accelerating ahead of everyone’s expectations

Phoenix was among the top fastest growing metros in the nation at the turn of the century. The Valley grew annually by 4 to 5 percent as more and more people moved for beautiful weather and expansive scenery, fueling explosive economic growth. Once the mortgage crisis took hold, Phoenix population growth dropped off to a measly 1 percent in 2009, 2010, and 2011. Now that the worst is far behind, much of Phoenix’s current growth has been fueled by domestic migration. In fact, the Phoenix Metro ranks 4th in the nation for net, domestic migration, bringing over 51,000 domestic migrants to the area. No longer locked down by underwater mortgages, the whole country is once again considering Phoenix as a prime location to live.

Fresh out of foreclosure, many individuals are once again moving to Phoenix

fastest growing metro4th


Three of four new Arizona jobs in the last year were created in Metropolitan Phoenix. There have been 61,400 new hires in the Maricopa and Pinal counties since early 2014, according to the Arizona Department of Administration, a 3.3 percent increase. Nine of the 11 sectors gained jobs over last year, the strongest performance since 2007. Professional business services, healthcare, and financial services continue to be the Valley’s driving forces. Looking back 25 years, an average of 10 new jobs were needed to substantiate one unit of apartment absorption. That ratio has fallen dramatically in more recent history. Looking back only five years, it now takes six new jobs to absorb one apartment unit. Strong employment gains will continue to fuel more apartment absorption, and is expected to drive the jobless rate as low as 3.9 percent by 2018.

Steady and diversified employment gains are fueling a strong Phoenix economy

25 Yr Avg 20 Yr Avg 15 Yr Avg 10 Yr Avg 5 Yr Avg

Total Job Growth 875,167 697,690 323,360 142,090 176,230

Total Apartment Unit Absorption 87,594 71,577 38,252 21,191 28,805

Ratio of Jobs Added Per Unit Absorbed 10.0 9.7 8.5 6.7 6.1

Stagnant income levels have kept homeownership out of reach for many Phoenicians over the last five years. Median household income across the metro finally started increasing, albeit very slowly, in 2011 after a significant drop during the recession. Despite incremental increases since 2011, median household income has yet to reach its pre-recessionary peak of $55,812 ending 2014 at $52,600. The labor market took longer to recover after the Great Recession, meaning there were more unemployed workers available for hire, so large firms did not have to poach workers from small firms. The abundance of supply outstripped any demand for labor, keeping wages in check. Overall personal income growth over the last decade has been half of what was seen from 1970 through 2005. Ultimately, working class residents are being pushed into the rental market.

New jobs do not necessarily translate to higher wages

gains will continue to fuel more apartment absorption, and is expected to drive the jobless rate as low as 3.9 percent by 2018.

25 Yr Avg 20 Yr Avg 15 Yr Avg 10 Yr Avg 5 Yr Avg

Total Job Growth 875,167 697,690 323,360 142,090 176,230

Total Apartment Unit Absorption 87,594 71,577 38,252 21,191 28,805

Ratio of Jobs Added Per Unit Absorbed 10.0 9.7 8.5 6.7 6.1

New jobs do not necessarily translate to higher wagesStagnant income levels have kept homeownership out of reach for many Phoenicians over the last five years. Median household income across the metro finally started increasing, albeit very slowly, in 2011 after a significant drop during the recession. Despite incremental increases since 2011, median household income has yet to reach its pre-recessionary peak of $55,812 ending 2014 at $52,600. The labor market took longer to recover after the Great Recession, meaning there were more unemployed workers available for hire, so large firms did not have to poach workers from small firms. The abundance of supply outstripped any demand for labor, keeping wages in check. Overall personal income growth over the last decade has been half of what was seen from 1970 through 2005. Ultimately, working class residents are being pushed into the rental market.

Volatile home prices have left many potential homebuyers dazed and confusedCoupled with the flat income levels, home prices across the Valley have rebounded significantly since the trough in 2011, further reducing home affordability for local residents. The recent history of median home prices for existing valley homes has been nothing short of dramatic. After reaching a peak of almost $275,000 in 2006, the market crashed more than 58 percent to a low of $112,000 by the end of 2011. Since

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1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2015 2019

Phoenix personal income growth

hitting bottom, home prices have bounced back by 77 percent to end 2014 just over $200,000. Residential developers remain cautious as only 12,500 new single family homes were completed in all of 2014, compared to Phoenix’s historical average of almost 30,000 since 1990, keeping new home supply low.Compared to regional and national neighbors, Phoenix remains one of the most affordable markets for a single family home, but the quick appreciation seen in the last three years has priced many potential home buyers out of the market.

Combination of economic and demographic trends set the stage for a strong multifamily marketLooking into 2015, multifamily vacancy is expected to maintain its record low level even as newconstruction is delivered to the market. While new supply is on the way, demand will be fueled by the shifting demographic landscape of Phoenix. Population growth and employment expansion coupled with stagnant income and rising home prices will continue to support healthy demand for apartments. Phoenix is making up for years of pent-up demand with the recent influx of new supply and 2015 is poised to exceed expectations once again.

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Phoenix existing median home priceRecession


Coupled with the flat income levels, home prices across the Valley have rebounded significantly since the trough in 2011, further reducing home affordability for local residents. The recent history of median home prices for existing Valley homes has been nothing short of dramatic. After reaching a peak of almost $275,000 in 2006, the market crashed more than 59 percent to a low of $112,000 by the end of 2011. Since hitting bottom, home prices have bounced back by 79 percent to end 2014 just over $200,000. Residential developers remain cautious as only 12,500 new single family homes were completed in all of 2014, compared to Phoenix’s historical average of almost 30,000 since 1990, keeping new home supply low. Compared to regional and national neighbors, Phoenix remains one of the most affordable markets for a single family home, but the quick appreciation seen in the last three years has priced many potential home buyers out of the market.

Volatile home prices have left many potential homebuyers dazed and confused

Looking into 2015, multifamily vacancy is expected to maintain its record low level even as new construction is delivered to the market. While new supply is on the way, demand will be fueled by the shifting demographic landscape of Phoenix. Population growth and employment expansion coupled with stagnant income and rising home prices will continue to support healthy demand for apartments. Phoenix is making up for years of pent-up demand with the recent influx of new supply and 2015 is poised to exceed expectations once again.

Combination of economic & demographic trends set stage for strong multifamily market

Charles SteeleVice President+1 602 282 [email protected]

John P. CunninghamExecutive Vice President+1 602 282 6314 [email protected]

Matt KolanoAnalyst+1 602 282 [email protected]

JLL Southwest Multifamily Team

Phoenix multifamily capitalizing on local paradigm shift

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