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Regional Spotlight

Kansas City, Missouri

2024 Could be a Great Year for the “City of Kansas” By Carole VanSickle Ellis As early in American history as 1803, Kansas City, Missouri (KCMO), was attracting new residents thanks to its location, which was, as explorers Lewis and Clark put it, “a good place to build a fort.” Not long after this report reached New York state, the city was formed by a group of settlers led by Latter Day Saints founder Joseph Smith. Although Smith and his followers spearheaded early development and built the first school within KCMO’s city limits, they soon left the area to trappers, traders, and ferrymen, who eventually expanded the municipal area to include multiple small ports and attracted other businesses and residents to the area. By 1853, when the “City of Kansas” was created in the state of Missouri, KCMO was well on its way to becoming the vital center of trade, logistics, technology, and manufacturing thatit is today. “Kansas City is now emerging as a growing market for real estate investments,” observed founder and CEO of Norada Real Estate Investments Marco Santarelli in November 2023. He cited the city’s recent downtown revitalization project and relative affordability as key attributes attracting both real estate investors and retail buyers to the area. “More than $6 million has been spent giving the downtown area a facelift and a new makeover, including apartments, offices, and condominiums,” Santarelli said. He continued, “These facelifts have also been done in both indoor and outdoor malls, restaurants, and places for concerts, plays, and other forms of entertainment…making Kansas City properties appealing to investors and homebuyers who are looking for gains or cash flow.” Kansas City, like many other areas of the country, is currently experiencing a housing crunch, which, in combination with its relative affordability compared to other regions, is creating a single-family rental market primed and ready for new residents from out of town. According to the Kansas City Regional Association of Realtors (KCRAR), residential homes are spending just over a month on market (up just over 15% in November 2023 year-over-year) and average sales prices are also still rising, up 9.6% year-over-year. However, more than 9% fewer sales are actually closing, and housing supply is on the rise, albeit still quite low at 2.1 months. This is more than 10% higher than the same time last year, however, and home prices are still rising. Job Growth, Remote Work & Great Expectations Thanks to burgeoning job numbers in the KCMO area, especially in the tech and IT space, many analysts say 2024 could be a strong year for Kansas City real estate and local employers. With fully 20% of Kansas City workers reporting they are full-time and working remotely, the area is full of households seeking residential options that provide enough space for a home office and a family. “The geographic decoupling of worker and workplace is here to stay,” wrote KC Tech Council president and CEO Kara Lowe in the group’s KC Tech Specs report published midway through 2023. She added, “[This is] evident in both the increased share of hybrid or fully remote tech job postings and the increased migratory patterns of college degree holders moving from the largest coastal tech hubs toward mid-sized cities across the United States.” Lowe noted that in 2023, KCMO “hiring is up, tech workforce has grown, and Kansas City is importing more college graduate-level talent than any time in the last couple decades.” In the report, KC Tech Specs predicted the momentum KCMO generated during the COVID-19 pandemic and built in the aftermath would likely result in growth in the digital health, cybersecurity, tech infrastructure, and tech manufacturing industries in the area in the coming years. Evidently, the current presidential administration agreed, naming KCMO one of two Missouri “future technology hubs in the United States” in late October 2023. The designation comes with the opportunity to compete with 29 other tech hubs throughout the country for up to $75 million in “implementation grants” intended to help local businesses and municipal organizations further develop “innovative industries” including semiconductors, clean energy, critical minerals, biotechnology, precision medicine, artificial intelligence, and quantum computing. KCMO’s Kansas City Inclusive Biologics and Biomanufacturing Tech Hub, which is led by BioNexus KC and operates in both the Missouri and Kansas portions of the metro area, was specifically cited as “a global leader in biologics and biomanufacturing, increasing domestic production of life-saving vaccines and other preventative technologies.” With the support and ongoing growth of attractive, well-paying jobs in the area and a housing market that may be a little too tight even for high-earning professionals, KCMO will likely continue to be a strong performer for long-term rental owners in 2024. Missouri has long been considered a “landlord-friendly” state thanks to relatively lenient laws governing rent control and evictions, but KCMO does have stringent regulations in place for short-term rentals like Airbnb and VRBO properties. Short-term rental operators must apply for a license or face penalties, and non-resident short-term rentals cannot be located within 1,000 feet of each other or surpass 25% of the units in a building. Short-term rentals in residential neighborhoods are, in some areas, entirely banned. The regulations are intended to reduce Airbnb issues in neighborhoods and free up housing for long-term residents, both owners and tenants. “When the number of homes are being removed from the marketplace to be used as short-term rentals, it really eliminates housing opportunities for Kansas Citians,” explained local neighborhood association president Laura Burkhalter, who supported the restrictions. Local investors, however, say the restrictions can be difficult to navigate and dislike new taxes and fees imposed on short-term rental properties. With rents projected to rise for long-term residential rentals in KCMO in the coming months, short-term rental owners may elect to make a shift to longer leases rather than exit their investments in the area. As of Q3 2023, rents on single-family residential (SFR) homes had risen 4%, and, while that increase is relatively low compared to adjacent Kansas City, Kansas,

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Market Report

How Real Estate Will Surprise Us in 2024 By Carole VanSickle Ellis At the start of 2023, many real estate analysts expected the year to bring a “return to normal” for real estate the same way many Americans had hoped for a “return to normal” following the COVID-19 pandemic lockdowns in previous years. However, as the year progressed, real estate trends clearly showed “normal” might not look quite the way it used to, and many predictions fell short or completely awry of reality by the fourth quarter of the year. For example, in February 2023, the industry was rife with predictions that the number of homes for sale nationally would rise by nearly 23% by the end of this year due to longer times on market, but instead, home sales fell by just over 22% during the first half of the year; inventory remained incredibly tight in most markets, and properties listed continued to sell within about 20 days (national average). Only about a quarter of listed real estate remained on the market for more than a month. In 2023, the only truly predictable element about the market remained, as always, that real estate investors would figure out new and innovative ways to generate returns in the sector and that the post-pandemic world would be largely unpredictable. “Investors have to remember that the real estate market is a dynamic entity that is constantly evolving in response to economic, social, and environmental factors,” said Gary Harper, CEO of business coaching and consulting firm Sharper Business Solutions. “Adapting to change is crucial for success,” said Harper, who specializes in in systems and process management and has been investing in real estate since 2004. “People kept using the word ‘reset’ [in 2022], and it was a good word but it does not mean exactly what it used to,” said Bruce McNeilage, co-founder and CEO of Kinloch Partners and Kinloch Homes. “Things can turn extremely quickly, and investors have to always be on the lookout for the next market where their numbers make sense and where you can get the best margins.” At the start of 2023, McNeilage’s build-to-rent (BTR) development company was moving into tertiary markets where the competition was not quite as steep and land and labor remained relatively affordable. He expects to see most of his inventory sell to other investors in these markets within five years due to an ongoing lack of attractive housing inventory. “The market for renters and homeowners has changed,” he explained. “People want larger homes with five bedrooms so there is room for remote work and other things that they did not require in a home pre-pandemic. Today, we are almost exclusively building four- and five-bedroom properties in our neighborhoods because that is what people want to rent.” Rising Interest Rates & a Noncommittal Fed Make Traditional Homebuying Difficult In November 2023, many experts happily predicted that two interest-rate-hike pauses in a row from the Federal Reserve could mean that rising interest rates could finally be at an end. If this were the case, many homebuyers hope interest rates might start to fall again soon in order to render homes more affordable. In reality, however, a pause in rate hikes does not mean a return to affordability any time in the near future. As Keith Gumbinger, vice president at mortgage website HSH.com, told Forbes in November, “While not meaningless, another quarter-point hike at this point will not change the big picture much as a lot of the ‘damage’ from higher interest rates is either done or already in process.” He emphasized rate cuts are the key to substantial reversals in problematic trends in housing affordability for buyers. As usual, the Fed remains relatively tight-lipped about its plans for 2024, although many policy-trackers say they believe further tightening is probable in the coming year. Mary Daly, president of the San Francisco Fed, described the process of deciding what to announce or “telegraph” to the public about Fed plans and policies “the hardest phase of policymaking” because, as she described it, “When you do not know exactly what will be needed, it is not actually a terrific idea to telegraph one thing or the other…. I don’t want to be in a position where we have said definitively we are not going to do X, and then X is needed.” “We anticipate that rate decreases could encourage buyers who have been sitting on the sidelines to enter the market because they are attracted by the idea of lower interest rates,” Harper chimed in. However, he noted, more buyers will certainly create even tighter inventory environments in many markets. At present, the Fed does not appear likely to lower interest rates even if it continues to hold on raising them, and investors implementing creative financing strategies that enable them to make higher offers, close quickly, or offer accessible borrowing terms to would-be retail buyers will likely find themselves in high demand in 2024 regardless of how the interest-rate conundrum resolves. Dennis Cisterna, co-founder and CIO of Sentinel Net Lease, believes interest rates will remain firmly in place in 2024 despite other analysts’ predictions to the contrary. “It is going to make 2024 an incredibly slow year,” he said. “There is just too much demand and not enough product.” Christopher O’Neal, an investor, coach, and agent based in Virginia, warned that devaluation of the dollar in 2024 could also represent a curveball for every facet of the market. Since the end of World War II, the U.S. dollar has been the world’s principal reserve currency, but ongoing global conflicts in which the United States has played a role via sanctions, financial and military support, diplomacy, or some combination of these has led some countries to begin what the Council on Foreign Relations (CFR), a nonpartisan think tank and publishing house founded in 1921, described in a July 2023 report as “de-dollarization” in order to preemptively counteract sanctions and their indirect fallout. Although CFR analysts stated firmly they believe it

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The 2023 Real Estate Retrospective

Once Again, Real Estate Investors Prove Absolutely Anything is Possible By Carole VanSickle Ellis In January of this year, things were, in some ways, very different than they are today. Interest rates on a 30-year, fixed-rate mortgage were hovering just under 6.5%; the national median sales price for a single-family home had fallen slightly to $385,000, and Moody Analytics was predicting rental rates would rise by 2.5% over the next 12 months. Today, 30-year, fixed-rate mortgage interest rates are just under 8%; the national median sales price is up $30,000, and Moody’s is warning it would be “premature to celebrate the end of the housing correction.” Real estate investors, however, are hard at work at business-as-usual and, as usual, that means very different things for different investors in different markets. “Adaptability is always the key to success in the evolving real estate market,” noted Gary Harper, CEO of Sharper Business Solutions and longtime real estate investor and educator based in the Midwest. Harper said he is seeing investor focus in his area shifting toward new builds as existing-home inventory remains tight. “This is the only way to keep up with demand,” he said. Bruce McNeilage, CEO of southeastern build-to-rent (BTR) development company Kinloch Partners, agreed. “We just follow growth where it leads us,” McNeilage said. His company has focused on the BTR space for years, but has recently expanded outward from its former focus on urban-core areas by about 30 minutes. The developer also has begun focusing almost exclusively on five-bedroom SFR properties. He explained, “This gives us access to the largest pool of qualified residents from which to draw and enables us to provide them with the innovation and technology they want in their homes. By going 30 minutes from the urban core, our lots and materials cost the same as they would nearer to the city center but we (and they) get much more square footage.” Build-to-Rent is Bigger Than Ever McNeilage is just one BTR investor taking advantage of the desirability of larger SFR assets. Richard Ross, CEO at Quinn Residences, joined the company at its inception in early 2020. The privately held real estate operating company focuses exclusively on acquiring, developing, and operating newly built, SFR communities primarily in the southeastern United States and has grown its portfolio to nearly 5,000 homes in just under three years. To Ross, the Quinn Residences strategy of partnering with local builders and developers to create purpose-built, dedicated rental communities and then retain control of maintenance, upkeep, and management is the way forward in the industry because it creates a product that helps “dismantle the negative perceptions of the build-to-rent industry,” he said. “We provide more supply to an industry in need through newly built, reasonably priced homes,” Ross concluded. Although some experts predicted that 2023 would show a decline in BTR activity due to a projected housing downturn, any slowdown in the sector was largely “momentary,” Fixr.com analyst Adam Graham wrote in July of this year. In fact, most construction professionals and developers interviewed for the home-improvement resource platform reported receiving “more requests” for BTR projects, “further highlighting the ongoing increase in popularity of this real estate arena,” Graham wrote. As with most real estate-related assets, BTR performance is highly regional in nature and, in many cases, increased BTR activity is closely associated with overvalued housing markets or increasing unaffordability. Phoenix, Arizona, for example, posted a 280% increase in BTR completions in the last five years, followed by Dallas, Texas (+102%), and Detroit, Michigan (+96%). Interestingly, although these percentages translated to the highest increases in volume of BTR properties being built in these areas, they did not directly correspond to the cities with the most BTR growth. Charlotte, North Carolina, led that charge with a 621% increase in BTR completions over the last five years, followed by Atlanta, Georgia (+380%) and Jacksonville, Florida (+353%). “Atlanta is on fire because of job growth, and it is expanding outward as far as Savannah [Georgia],” observed Robert Lee during a recent National Rental Home Council (NRHC) chapter meeting in Atlanta, Georgia. Lee, who serves as president of Sylvan Road Capital and recently installed solar panels in an entire neighborhood developed and managed by his company, said that BTR investors will be well-served to look at secondary and tertiary markets for better opportunities in the coming year. “We make acquisitions based on job growth and new industry growth when the market conditions are right,” Lee said. “We are very bullish about the whole southeast.” Any investors who own or are considering owning rental properties at this point in time should remember, however, that the increased demand for single-family homes, in particular, opens up residents and property owners to fraud and scams. Jay Byce, president of private BTR neighborhood developer ResiBuilt Homes, said that although rent growth has been positive and the BTR space is booming, providers are noticing a substantial uptick in fraudulent activity taking advantage of residents and owners in the space. “This fraud is consistent and recurring in nature,” Byce said. He described scenarios in which scammers “scrape” listings and present them on social media marketplace platforms as their own, conning would-be tenants into shelling out money for security deposits and background checks, and situations where a tenant will actually gain access to a home and begin paying rent only to discover that they have been paying rent to someone who changed the locks on the property and has no ownership of it at all. “It’s expensive and difficult for everyone involved when this happens,” Byce said. He added that for ResiBuilt, the key to catching issues like this early and keeping residents satisfied lies in having “real people” in customer service who understand the real estate industry and are able and motivated to help promptly when called to do so. “That is absolutely the key to having happy tenants,” Byce said. In the “Right” Markets, Flipping Still is Going Strong Despite increasingly intense competition for every single-family property to

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Hot Springs, Arkansas

Hot Waters & a Hot Market for “America’s First Resort” By Carole VanSickle Ellis In Hot Springs, Arkansas, 47 natural thermal springs send about 1 million gallons of water measuring 143°F flowing through the area before emptying into Lake Hamilton. The city, which is sometimes referred to as “The Valley of the Vapors” and has dubbed itself “America’s First Resort,” has been primarily supported by the hospitality industry since long before that term existed. Hot Springs is also considered to be the “birthplace” of Spring-training baseball thanks to hosting the Chicago White Stockings (now the Chicago Cubs) in 1886. In subsequent years, many other teams followed suit. The area boasted casinos and other gambling venues until the late 1960s (today, they are once again in operation) and has long been home to spa and bath houses, health centers, and medical facilities. In keeping with its unusual and diverse attractions, the Hot Springs housing market tends to go against the grain and stand apart from state and national trends both in terms of avoiding extreme or protracted lows and in terms of remaining relatively calm even in the face of national volatility. Of course, that relative lack of volatility does not mean that the market has not seen growth over the past few years. In fact, Hot Springs is currently on a bit of a “hot streak” that is probably not over yet, experts say. “The Hot Springs housing market has seen a 6.2% appreciation rate over the last five years, [and] over the past 10 years, the city experienced a cumulative 29.99% appreciation rate,” observed Movoto analyst Alan Woods. He also noted the Hot Springs appreciation rate is “about 50% higher than other Arkansas cities,” possibly in part because the city boasts “the only legal casino for hundreds of miles.” Hot Springs real estate benefits from the unusual nature of the local hospitality industry, which is more focused on health and wellness than many such markets. As a result, the area does not always experience the sharp economic swings to which similar markets are subject. Even during the Great Recession, when national home prices plummeted, Hot Springs median home values fell relatively small amounts and recovered quickly, falling briefly between 2013 and 2016 only by about $6,000 at the nadir and exceeding 2013 prices by the start of 2017. The trend of gentle price acceleration continued until 2020, which posted a minor dip of just about $3,000. By 2021, home values were climbing once more. Woods credited the city’s focus on historic preservation and renovation as a significant contributor to local housing market health. According to a 2020 study published by PlaceEconomics, “Hot Springs is the star” when it comes to preserving historic buildings and landmarks in ways that benefit the local economy. The group also called the city “a national success story” for its leverage of tax-credit programs encouraging historic preservation toward creating new jobs and businesses in the area. Between 2009 and 2020, 16 major initiatives led to nearly half a million dollars in annual earnings, jobs, and local tax revenue, creating momentum that shored up downtown Hot Springs during the COVID pandemic and associated lockdowns. However, Hot Springs did not emerge during the pandemic as a “zoom town,” a location to which people moved in order to avoid more urban areas, but rather simply posted steadily rising real estate values that have not yet ebbed or leveled off. This is a positive sign for the market because many zoom towns are expected to soften as more companies backpedal on their “permanent-remote-work plans” and require employees to return to the office. A Healthy Market for the Buyers Seeking Affordability Despite its unique natural attractions and recession-resistant housing market, Hot Springs real estate has remained consistently affordable relative to the rest of the country. In fact, it is consistently listed as one of the most affordable areas in the country in which to own real estate. According to Payscale.com, area housing expenses are 17% lower than the national average and transportation expenses (bus fare, gas prices, etc.) are about 11% lower than the national average. Food and grocery costs tend to hover around 3% below the national average, while healthcare is a full 20% lower. Interestingly, the relatively low cost of living in the area (Hot Springs median home prices were about $150,000 lower than the national median home price in July of this year) could be having some unexpected fallout for housing-choice voucher programs in the area. According to reporting by the Arkansas Democrat Gazette in August 2023, the number of Hot Springs landlords willing to accept housing choice vouchers is on the decline. In fact, 13% of the vouchers assigned by HUD this year were not in use at the end of May. “There has been a shift in the market primarily due to economic conditions but also short-term rentals,” said economic planning consultancy RKG president Russell Archambault during a July Board of Directors work session in Hot Springs. He said short-term rentals have created “a different economic incentive for moving away from those subsidies: less management, higher profits.” Archambault warned the city could lose its rental vouchers if the issue is not “cured.” Hot Springs recently increased vouchers to 120% of fair market rent in hopes of making them more attractive to property owners and real estate investors. Short-term rental owners may soon encounter another incentive to look closer at housing vouchers; the Hot Springs area has begun targeting vacation rentals in an attempt to rein in what locals describe as “unneighborly behavior” in the properties. One lakefront neighborhood recently forced a local vacation-rental owner to apply for a special-use permit for their investment property and, subsequently, the Hot Springs Board of Directors denied the owner that permit. The board cited high densities of short-term rentals in the area as the reason for the denial.One director asked, “At what point do you have the density of short-term rentals before you say this is really becoming

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Hawaii

In the Aloha State, Real Estate Gets More Complicated By Carole VanSickle Ellis Hawaii is a state that stands alone, literally. Of all the states in the United States, Hawaii is the only one located outside of North America, the only archipelago, and the only state in the tropics. It is comprised of 127 volcanic islands, eight of which are considered the “main islands”: Niʻihau, Kauaʻi, Oʻahu, Molokaʻi, Lānaʻi, Kahoʻolawe, Maui, and Hawaiʻi (“Big Island”). The state is known for its incredible beauty and, when it comes to real estate, for the incredibly high costs of living and home values that come as a result of extremely limited and beautiful livable acreage. Even prior to the horrific Maui County wildfires (see sidebar) that decimated more than 2,500 acres on Maui island (this accounts for much of the residential area on the island since more than half of the island is a conservation district and about 35% is agricultural land), the housing situation on all the islands was growing increasingly alarming. “Let me break it down for you. We don’t have enough houses for our people. If it’s not a crisis, if it’s not an emergency, I don’t know what is,” Hawaii governor Josh Green said in July of this year when he signed an emergency declaration on housing suspending six state and county laws governing land use, historic preservation, and environmental review. Supporters hoped the declaration would result in the construction of 50,000 new homes in the next three years, while critics warned overriding historic preservation provisions, land-use regulations, and environmental review could have dramatic and negative impact on all of the inhabited islands. For developers, the declaration represented a limited window of opportunity opened by a governor desperate to stop outbound migration to the mainland of residents who simply can no longer afford to live in the state. Fewer than one-third of households currently living in Hawaii can afford to buy a single-family home, and less than half can afford to buy a condo, according to the University of Hawaii Economic Research Organization Fund. Median rental prices are also unaffordable to at least one-third of Hawaiian households. Green’s declaration altered Oahu’s zoning laws to permit the conversion of downtown office space to rentals and created a fast track for the development of affordable housing by removing land-use restrictions. It also itemized 34,000 units in the Honolulu city and county areas alone and spotlighted the “Top 10 Projects in the Pipeline” on the Big Island that could create approximately 4,000 housing units over the next decade. On Hawaiʻi, only two of those projects are currently under construction, but all project “100% affordable units” upon completion. Countering a Confusing Trend of Expensive “Stagnation” Although Hawaii tends to top the list when it comes to the most expensive places to live in the United States, the state’s housing market has been in a state of prolonged stagnation according to many analysts. So much of the local population has been priced out of the market that investment properties — even rentals — tend to perform better when they cater to out-of-town residents. Accessory dwelling units (ADUs) have been increasing in popularity recently because it enables current property owners to increase their passive income without acquiring more land. “This strategy is likely my favorite,” observed Koa Cassady, realtor associate for Dwell Hawaii/Ho’opili Living, “and it is arguably the most efficient option…because you already own the land, which we all know is the most expensive part of Hawaii real estate.” In fact, Cassady said, the land upon which a structure sits accounts for between 70 and 80% of a home’s total value in most cases in Hawaii. He noted, however, that ADUs in Hawaii do “come with their own set of unique challenges and regulations.” Naturally, the axiom “location, location, location” is truest when dealing with a chain of islands. This can also complicate matters for investors who do not live in the area who wish to purchase investment property. When looking at the median state numbers is not enough, breaking down median income by island or even neighborhood can help investors get a better picture. For example, Waikīkī, a neighborhood on the south shore of Honolulu, lost value over the course of 2022. However, median household incomes in that area are rising (by just over 4.5%) year-over-year, and neighboring Honolulu proper posted a 6.2% increase in median household income over the course of the same time period. This could indicate that Waikīkī is poised for additional growth as urban residents leverage their earnings to move outward. Investors should also remember that trends tend to be outsized in Hawaii due to the extremely limited nature of real estate in the Aloha State. While sales volumes are declining throughout the country as interest rates rise and homeowners decide to stick with their pandemic-era low rates rather than move, in Hawaii, the numbers are particularly stark. According to the Honolulu Board of Realtors, sales on Oʻahu declined 12% month-over-month in April 2023 and year-over-year by 43%. During the same time period, the Big Island of Hawaii posted a 34% decline in home sales year-over-year, and Kaui’s closed sales fell by more than 63%. Of course, the Maui wildfires have dramatically affected the real estate climate on that island and throughout the entire state; it remains to be seen how the local government will deal with the disaster and how that will affect the island of Maui and state as a whole. SIDEBAR Maui & the “Vulture Investor” Conundrum As horrifying wildfires tore through the island of Maui last month leaving death and devastation in their wake, the world was confronted with uniquely confounding images of tourists snorkeling on their Hawaiian vacations in the same waters where locals had recently swum for their lives from the maelstrom. Now that the fires have been largely contained and extinguished, hundreds of people are still missing from Maui and many are feared dead. As the residents of the island struggle

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Phoenix, Arizona

Investors, Homeowners Continue to Bank on The Valley of the Sun By Carole VanSickle Ellis Imagine describing the boundaries of your hometown city in this way: “The area is bounded by the shores of Lake Pleasant and the Superstition Mountains.” It sounds like a fairy tale, but the truth is that this description closely matches the boundaries of the Phoenix, Arizona, metropolitan area. In Phoenix, home values are the stuff of dreams as well, with owners who purchased in 2017 banking 94% appreciation over the last six years. While values probably will not continue to skyrocket in that manner, local analysts predict the Phoenix market will continue to hold strong until the end of 2023 and then, astoundingly, level off rather than “correct” simply because local home values already reflect the taut balance between supply and demand in the area. “There is not enough housing for the population, [and] people need a place to live,” local broker and Phoenix Board of Realtors president Butch Lieber told the Arizona Digital Free Press in late June. Lieber said he expects home prices will rise throughout the remainder of 2023 in large part because population growth in Phoenix has continued to climb. “We have gone up about 10% in prices so far this year,” he said. However, while homebuyers are still flocking to the Phoenix area, many investors are backing away — at least from single-family property purchases. During Q1 2023, Redfin reported a 64% drop in investor purchases in Phoenix compared to Q1 2022. Nassau County, New York; Atlanta, Georgia; and Charlotte, North Carolina, were the only cities in the country to post larger declines. With annual sales prices on investment properties also down 9% in Phoenix, investors are likely easing off purchase rates because it is becoming increasingly hard to recoup expenses and make a profit. Earlier this year, investors reported buying homes for a median price of $400,000, but selling for only about $10,000 more than this. Furthermore, not many owners are choosing to list their homes in the first place. According to the St. Louis Fed, there were just under 8,600 homes for sale in the entire Phoenix metropolitan area in June 2023. This lack of housing paired with a steadily growing population has resulted in a housing market that is stable despite its recent, meteoric rise. The majority of acquisition activity in the Phoenix area is focused on the sub-$450,000 “sweet spot.” Steven Hensley, senior manager with new-home consulting firm Zonda Advisory, explained, “Ultimately, given the lack of existing resale homes…new homes with favorable specs and financing are selling at a healthy pace, and builders can pull some levers which don’t exist in the resale market.” He noted, however, that consumers “don’t want to wait.” Beating Pandemic Flight, Hands Down Although the global COVID-19 pandemic slowed and even reversed urban population growth in 2020 and 2021, Phoenix’s urban growth never stopped. In fact, the area added 66,850 people in 2021 and 72,850 in 2022. These were some of the largest gains for a major city anywhere in the country, and the Phoenix metro area now has more than 5 million residents and could top 7.6 million by 2055. In other similarly attractive metro locations, would-be homebuyers might find themselves compelled to accept renting simply because the few homes listed on the market are too expensive to buy. In Phoenix, however, many renters are actually losing their rentals as landlords elect to take advantage of rising home prices and sell off rental properties. According to a report in Time magazine, the number of residential rental units in Phoenix has grown but only about 11% over the past decade. By comparison, the local population grew by about 20%. With fewer single-family listings on the market than ever and most new construction focused in the multifamily sector, the competition for single-family homes in Phoenix is likely to grow only more intense. Solving for the Water Factor Perhaps one of the only things that could potentially stop the population influx in Phoenix is the statewide groundwater shortage throughout Arizona and the complicated politics and policies surrounding the issue of who gets water and who has water rights. For investors, the issue is even more complicated. It is vitally important to understand how water rights are regulated and where (or if) there is likely to be “queue” for them in the future. The key to solving the “water factor” in Arizona relies on understanding how state and local water policies interact. More than 50 years ago, 10 Arizona municipalities in Maricopa County, where the majority of the Phoenix metro is located, joined together to secure water resources for their respective areas of the state. The Arizona Municipal Water Users Association (AMWUA), led by executive director Warren Tenney, represents 3.7 million residents, more than half the state’s population, as well as businesses and industries critical to both the state and local economies. “AMWUA members understand…we live in a desert. We have to manage our water well,” Tenney said. AMWUA members must complete regular reassessments every 10 to 15 years in order to maintain a certified, demonstrable plan for 100 years’ of assured water supply. Currently, all cities have either recently completed this recertification or are in the process of doing so in order to receive their designation for 2025. “This gives everyone a chance to revisit demand and supply,” Tenney explained. Investors interested in development in the Phoenix area should investigate how their deal fits into the geographic AMWUA certifications. “It really is the platinum standard in water management,” Tenney said. “All 10 AMWUA cities are well positioned to be able to continue to develop and thrive because they are not solely dependent on groundwater and are able to meet demands of community and local projects over the next 100 years.” The Grass is Still Greener in the Valley of the Sun Phoenix is certainly a market filled with contradictions, but one trend seems beyond dispute. The Valley of the Sun housing market

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