On The Rise: Phoenix's Population Boom Boosts Local CRE
With a growing population bringing thousands of working-age people to an increasingly diversifying economy and a resiliency tested by the depths of the Great Recession, Phoenix is pushing its way to prominence on the national stage, drawing investment and attention as it goes.
For 20 years, the Phoenix real estate market has displayed remarkably phoenix-like tendencies: rise, crash, rise again, with a vigor not seen in many other places, and with another recession looming, local CRE experts hope the maturation the city has seen in the last two decades will insulate it from the worst of the fallout.
"The Valley [of the Sun] is prepared to navigate an economic downturn should it happen," Transwestern Senior Research Analyst Jennifer Barili said, but the powerful macroeconomic factors at play can’t be completely denied."The biggest risk to growth is in the form of a pause while the Fed tries to quell inflation.”
The cost of borrowing has been so inexpensive, for so long, that investors and developers are waiting to see how far the Fed will go and how the economy will react to it, she said.
"But do I think growth will stop in Phoenix anytime soon? I do not," Barili said, referring especially to the local industrial market, which has been a bellwether in recent years, including during the initial phase of the pandemic.
Real estate can be a touchy business, with success or failure dependent on a host of factors, but one constant is that to succeed, real estate of any kind needs people, and Phoenix increasingly has them.
Phoenix has been the top metro area in the nation for net in-migration for four years in a row. In 2020, a famously low-movement year, Phoenix’s population grew by more than 106,000 people, above the market’s 10-year average of 85,562 people.
And although metro Phoenix attracts its share of retirees, the area isn't evolving into another Florida, marked by a quickly aging demographic. As of 2021, just 15.8% of the residents of Maricopa County were aged 65 or older, and the median age was 37.6, according to the Census Bureau.
Phoenix is thus a magnet for people — many of them working age — and the businesses that hire them.
To call Phoenix a "secondary" market, as it has long been known, is something of a misnomer. In terms of population, the metro area has 4.9 million residents, making it the 10th-largest in the United States.
Not only that, it is No. 10 with a bullet: In the 2010s, both Maricopa and Pinal counties saw significant jumps in population, up about 15.8% and 13.1%, respectively, over the decade, according to the Census Bureau.
For comparison, the U.S. population grew 7.3% during that period.
Phoenix also has a history of bouncing back robustly from economic distress, at least in this century. The Global Financial Crisis of 2008, for instance, hit the region hard, leaving the metro economy as one of the weakest in the country.
But by 2012, a report by the Brookings Institute put Phoenix as the fifth-strongest economy in the nation, supported by a recovering housing market. During the 2010s, the area's gross metro product rose by 26.2%, according to a later report by Brookings, and the number of jobs increased by 26.5%.
The area is not without its drawbacks. Water scarcity, for one, plagues the American West at large, and in the desert climate of Phoenix, finding the water rights to support new development is a challenge. And like other smaller cities that have experienced rapid growth in the last decade, Phoenix needs to maintain and expand infrastructure to support its swelling ranks.
Phoenix is also not immune to the rising housing costs that have come to basically the entire country, making affordable housing a growing concern. The median list price for a home in Maricopa County was $525K in August 2022, up from $498K in August 2021.
And compared to the median price of $350K just five years ago in 2017, this year’s figure represents a 50% increase.
Like many places, the pandemic caused a short, sharp downturn locally, but soon after, Phoenix returned to growth mode. So much so, in fact, that the Phoenix Chamber Foundation reported in early 2022 that the local economy faced a challenge in filling the jobs on offer.
"Metro Phoenix fared better than much of the country during the pandemic," NAI Horizon CEO Terry Martin-Denning said, adding that the trend has continued through 2022's economic turbulence.
For one thing, the region has benefited from strong migration of people leaving high-cost coastal cities for lower-cost cities, Martin-Denning said. In-migration, especially of well-educated workers, feeds a positive dynamic as employers look for talent.
"The Valley is a serious contender for some top companies in various sectors," Martin-Denning said.
Moreover, he said, macroeconomic woes might even help attract investors from other places, looking for safe havens in the form of relatively strong local economies. That too has the potential to drive growth, or at least mitigate the harm of a recession locally.
ViaWest Group founding partner Steven Schwarz points to the diversification of the Phoenix economy as a strength going forward, including advanced manufacturing, semiconductor manufacturing, data centers, biotech, and EV manufacturing and testing.
"We develop mostly industrial buildings these days which cater to all these types of businesses," said Schwarz, whose company is active in greater Phoenix. "Due to the lack of land and limited supply in California, we have become a primary market for distribution and warehousing as well."
Phoenix's industrial market faces a potential recession from a position of strength. Average rents increased about 20% year-over-year across all submarkets to $11.84 per SF in Q2 2022, according to Transwestern, with net absorption of 22.8M SF.
The market has an additional 56M SF of industrial space under construction, with 108M SF proposed. Overall vacancy remains tight at 4.6%, down year-over-year from 5.2%.
Despite its recent strength, demand for industrial could certainly change at any time, perhaps impacted by fluctuating e-commerce sales, Transwestern's Barili said.
"Anything can change at any time with a black swan-type event, and we are still recovering from that, blindly. We learned that lesson during Covid," Barili said. "As far as e-commerce stalling, we need to be careful of putting it that way, when more accurately it is just normalizing."
Multifamily has also been historically strong in Phoenix, once it has recovered from the recent recessions.
"Jobs are a leading indicator of apartment demand, and Phoenix remains one of the fastest-growing job markets in the country," said Banyan Residential partner Max Friedman, with job growth not limited to a specific sector.
"While apartment supply has increased over typical annual averages for the Phoenix market, sustained and consistent absorption of those deliveries confirms our confidence in continuing apartment demand," Friedman said. "Phoenix is our highest-concentration market, with over 2,500 multifamily units and 250K SF of office development under ownership," Friedman said.
Other property types face a less certain future in Phoenix, though still stronger than a lot of places. In the nationally beleaguered office sector, office fundamentals strengthened in Phoenix during the last year, largely due to increasing demand for Class B and C floor plans, according to Marcus & Millichap.
While a net of 300K SF of Class-A space was returned to the market during the 12 months ending in June 2022, a net of 1.6M feet of lower- and mid-tier space was absorbed during the same period. Apparently office tenants still see the need for space, but not for expensive space, the opposite of the flight-to-quality dynamic taking place in most metro areas across the country.
Niche products have also had a good run in Phoenix lately. Phoenix’s growth as a data center market trails only Northern Virginia. The area enjoyed 142 megawatts of absorption in 2021, second only to Northern Virginia's 338 MW, according to JLL.
Greater Phoenix is now North America’s fifth-largest data center market.
“This market was a baby 10 years ago … we were nobody, now we’re No. 2 behind the flagship NoVa,” said Michael Ortiz, CEO of hyperscale provider Layer 9 Data Centers, speaking at Bisnow’s DICE Southwest event in May.
