2021- State of our state and the industry

2021- State of our state and the industry

By Peter Madrid

When economic prognosticators gazed into their crystal balls a year ago at this time, little did they know that a health crisis would devastate the globe.

Arizona’s apartment industry was booming. The economy in general was booming. There was positive job growth. Hundreds of new residents were moving into Arizona daily. There was pent up demand for rental housing.

As 2021 looms on the horizon, those same economic experts are using words such as “uncertainty … long-term recovery … recession.”

The COVID-19 pandemic has affected every economy on the globe. In Arizona’s apartment industry, it has set off a domino effect that is being felt by owners and residents alike.

At last year’s AMA Perspectives & Projections industry outlook conference, the 2020 outlook appeared rosy.

“You are in one of the best markets in the multifamily industry,” proclaimed opening speaker Tim Sullivan with Meyers Research. He and other experts predicted a “banner year.”

Looking ahead to 2021, AMA brought its members together at APTUnite, a two-day virtual gathering that included the annual economic outlook. Jessica Morin with CoStar presented the local market update and state of the Arizona apartment market.

“We’ve been fortunate that Arizona is growing at a tremendous rate and that one of our major economic drivers continues to be jobs,” Morin said. “Since the first U.S. COVID case in January and the school closures in late March and April, our non-farm employment has bounced back.

“We have replaced 46 percent of the February to April job losses, but still have a significant way to go since the height of the pandemic. A full recovery will depend on improving our current health situation,” Morin said.

Phoenix economy and apartment industry

Phoenix economy and apartment industry employment growth in Arizona pre-COVID was strong thanks to a diversity of industries, Morin said. Ten years ago, she added, Phoenix relied on population growth through housing, home building and commercial real estate. Then the Great Recession hit and we were by hurt our dependency on housing.

Today Phoenix is home to more technology, financial technology and insurance jobs.

“This has insulated us from another economic shock,” Morin said.

While the Valley has seen some employers put the brakes on hiring, it has seen others expand:

Scottsdale-based Axon is building a new headquarters and adding 650 high-paying jobs; Robin Hood, a fin-tech company, is expanding its Valley footprint; Amazon is hiring more than 1,300 people by the end of the year; and TSMC, a Korean semiconductor firm, is bringing 1,600 jobs to Arizona.

There should be good news for the Phoenix apartment market in 2021, Morin said. Nationally, the level of apartment demand has bounced back. New residents have postponed an initial slow down.

The pandemic has created a lot of hardships, both for owners and residents. Rents have stabilized and in April the CARES Act helped residents with “$600 they really relied on,” Morin said.

A trend seen in the Valley – residents adding space for a home office or studying area for their school-aged children.

“Renters are moving out to suburbs where it’s more affordable,” Morin said. “Lower-wage earners don’t see the benefit of living in downtown Phoenix and are moving to the Southeast Valley. The same is happening in San Francisco and Los Angeles, urban vs. suburban. Renters are saving more than $1,000 a month moving into the outlying suburbs.”

Rents in Phoenix are still holding up much stronger, Morin said. And while rents are going up, so are the use of concessions. Phoenix will remain a market for rent growth.

On the construction side, 9,700 units are expected to deliver this year, which is near record levels for the Valley. In downtown Phoenix alone, 4,600 units are under construction. In Gilbert, 1,800 units are under construction.

Aiding in the Southeast Valley’s economic growth are the rise of mixed-use developments in Gilbert, Chandler and Tempe. But when it come to downtown density, Phoenix’s urban core remains the champ. There are seven multifamily projects underway – each a half mile from the other.

Another trend Morin highlighted – single family rental communities. These single-story, detached residences are popping up the West Valley and offer a small yard and are being gobbled up by those Morin refers to as “renters by choice who want flexibility.”

For owners and investors, the market will continue to gain momentum by 2022 with California buyers the most active. In terms of sales by volume, a lower share of 4-- and

5-star product will be traded.

Don’t expect a robust recovering until 2022,Morin said. Supply, demand and vacancy

will decide how the apartment industry inArizona fares.

Tucson Apartment Demand

Tucson Economy

Tucson has been pretty resilient throughout the pandemic, Morin said. It has performed better in initial losses in employment. However, she added that lower wage employment has not kept up with mid- and high-wage jobs. “Before the pandemic, the Tucson economy was actually picking up after a long and sluggish recovery,” Morin said. “Tucson was finally getting its footing.”

Employment declines were seen in employee and health services, transportation, and manufacturing. Employment growth was experienced by companies such as Caterpillar, Comcast, ADP and Raytheon. Apartment demand will continue to remain strong, Morin said.

How does Arizona rate vs. other parts of the country?

“Overall, I’m very optimistic aboutthe Valley, particularly Phoenix andTucson, compared to other areasaround the country,” Morin said. “Werely on the leisure industry, whichshould bounce back. In dense areas,workers can now work remotely. I’mextremely optimistic that employerswill continue to look to Phoenix asbeing more affordable and offering abetter quality of life.”

Demand Starts to Rise After Weak Start to 2020

Flagstaff economy

Flagstaff experienced a 20 percent job loss from February to April. Retail, leisure and hospitality all took the hardest hit. According to a study conducted by Northern Arizona University, while 84 percent of the businesses remained open, 37 percent laid off or furloughed employees.

With NAU comes 30,000 students. It’s still unclear what kind of impact COVID-19 has had on the school. New apartment construction is moderate, and new product could outpace demand, Morin said.

The market will depend on the return of leisure and student activity.

At his annual economic outlook, this year titled “A Tale of Two Economies: The Employed Versus The Unemployed During COVID-19,” Elliott D. Pollack of Elliott D. Pollack & Company, predicted:

“The lack of a meaningful timeline for a vaccine, therapeutics, or inexpensive, quick, and reliable testing makes forecasts more uncertain than usual.”

NATIONAL APARTMENT, SINGLE-FAMILY HOUSING OVERVIEW/LOOK AHEAD

Kimberly Byrum with Meyers Research presented the national apartment and housing overview and look ahead at APTUnite. Byrum’s takeaways:

• Contributing to an income cliff timeline: the eviction moratorium, PPP deadline, airline job cuts and federal student loan forbearance.

• Housing is following a V recovery with Millennials the No. 1 buyer right now.

• Working from home is impacting everyone. Don’t expect that to change. In the multifamily sector, residents are looking to modify a 750 SF apartment to add a personal work space.

• Good for home builders: lack of resale supply, low mortgage rates, expanded buyer pool from work from home and study from home phenomenon.

• Bad for home builders: Lack of new home inventory, high land costs, supply issues, lumber pricing and inability to keep prices low and margins high.

• The economy is recovering but still damaged.

• GDP expected to return to 2019 levels by 2020, jobs are expected to rebound in 3 years, inflation will rise moderately above 2 percent for some time.

• Multifamily new construction: very few starts through end of the year.