Phoenix, Arizona
The “Valley of the Sun” Is Not Too Hot to Handle Just Yet
By Carole VanSickle Ellis
When former Confederate soldier Jack Swilling moved west after the American Civil War in order to prospect for gold and, hopefully, start a new life, he certainly was not expecting that his excavation efforts would include making his fortune digging out the canals of an ancient, indigenous civilization that had abandoned the Arizona Territory more than 6,000 years prior.
Nor did Swilling and fellow settler Phillip “Lord” Darrell Duppa anticipate that Duppa’s optimistic title for the new city, Phoenix, would prove to be so apt.
Today, Phoenix, Arizona, or the “Valley of the Sun,” has likely surpassed even what the notoriously optimistic Duppa predicted would be “a city, greater and grander than that which had preceded it, born from the ruins of a former civilization.”
Interestingly, despite posting 33 percent year-over-year price-growth gains and leading the nation in home-price growth for 27 months (as of October 2021), many analysts believe the Phoenix market will hold steady or climb even higher before home values level out or experience a downturn.
“The entire Phoenix area is breaking records over records in sales prices, and I expect this to continue. The supply simply is not close to catching up to the current demand,” explained Alex Molleo, a local realtor based in the Phoenix metro area. He continued, “I anticipate this increase continuing through 2022 and beyond.”
Molleo conceded much of the upward pressure on home prices in the Phoenix area is due to low interest rates, high levels of fix-and-flip investor activity, and construction shortages.
Investors considering entering the market should do so with caution and a viable game plan for competing in a difficult market where it may be challenging to find materials and labor for renovations as well as properties with the right metrics for successful investment returns. However, with the right connections and a good game plan, the market still holds a great deal of promise.
“Phoenix is all set to remain a seller’s market in the next 12 months,” said Marco Santarelli, founder and CEO of Norada Real Estate Investments.
He noted that Phoenix home prices have appreciated more than 237 percent in the past 10 years, yet the city’s median home price is still more than $100,00 below median home prices in San Francisco, Los Angeles, Seattle, Portland, and Denver.
“From those perspectives, Phoenix’s housing prices remain relatively modest,” Santarelli noted.
Redfin recently reported about a quarter of all Phoenix out-of-state homebuyers hail from Los Angeles, while nearly one-fifth were current residents of Seattle. These buyers and others like them who are fleeing the West Coast markets are certainly playing a role in shoring up skyrocketing values in the area.
Intense Competition from Individuals, Investors & iBuyers
With so many different types of buyers focusing in on the Phoenix metro area, competition remains steep for available properties. According to Redfin, Phoenix homes are selling in an average of 26 days, down from 32 days-on-market in September 2020. However, slightly more homes are selling these days, with the number of closed transactions in the Phoenix area climbing by 69 deals in September 2021 compared to the year prior.
“On the one hand, homebuyers continued to face a competitive market in which home prices increased at a double-digit pace from one year ago,” said Danielle Hale, chief economist at Realtor.com, in commentary on Phoenix’s climbing home prices. “Going forward, the conditions buyers face are primarily dependent on two things: mortgage rates and housing supply.”
She noted that some buyers were already having more difficulty qualifying for home loans as interest rates have risen since August of this year.
National Association of Realtors (NAR) chief economist Lawrence Yun chimed in, saying, “Inventory is still tight, [but] the declines are not as severe.” In fact, Yun went so far as to predict Phoenix inventory might “turn the corner and increase” sometime in 2022, decelerating price increases although not bringing about a full stop.
Behemoth iBuyers in the Phoenix area have had and will continue to have an outsized influence on housing market activity in the region. Phoenix was among the first test markets for multiple tech-company real estate ventures, including Zillow, Redfin, Opendoor, and OfferPad. The city is “often referred to as the birthplace of the iBuyer trend,” observed GeekWire reporter Nat Levy, noting that in 2019, Phoenix had the second-highest share of home purchases by iBuyers.
Redfin chief economist Daryl Fairweather said the Phoenix market “worked well for iBuyers, which tend to purchase homes that are relatively affordable, were built within the last few decades, and are easy to price accurately because they are located in tract neighborhoods with largely homogeneous housing stock.”
At present, more than 12 percent of all the property listings in the Phoenix area are held by Offerpad, Zillow (which has now famously closed its iBuying division), and Opendoor. In October 2021, that meant that of 6,500 total listings, 800 were listed under these three tech buyers. Analysts warn that this type of market domination tends to “warp” prices.
For example, in Maricopa County, where most of the Phoenix metro area is located, 13 percent of listed inventory belongs to iBuyers. Local agents say that this enables iBuyers to drive up home prices and then benefit from selling at inflated rates.
“They are playing the market as if it is a game [that] they intend on winning,” said Matthew Aguilar, a local renter who says he is finding it impossible to purchase a home due to iBuyer-inflated prices.
Real estate investors who identify ways to work with would-be buyers like Aguilar who want to buy and have the income to do so but not necessarily a traditional down payment may create a profitable, stable niche for themselves in what could become a volatile market if iBuyer inventory fails to move in a timely fashion.
Now that Zillow Offers has paused home buying at least through the end of 2021, the company’s ability to cut prices en masse in order to clear the books may create a temporary market softening that will, most likely, be largely negated for buyers due to rising interest rates.
“While a loss, the failure won’t hurt the company too badly,” explained RBC Capital Markets analyst Brad Erickson in a recent interview with Bloomberg. He noted that, at present, “[iBuyers like Zillow] probably don’t care so much. It’s not as important at this stage of the game to make money.”
Real estate investors must remain aware of the possibility that iBuyers currently reducing or eliminating activity in the Phoenix market can and likely will easily reenter it at a moment’s notice when they believe the time is strategically right for the company.
It’s Any Sector’s Game in 2022
In most parts of the country, single-family residential (SFR) real estate is the clear “winner” when it comes to asset classes that are most likely to generate returns for investors. In Phoenix, however, thanks to its relative affordability from a West Coast perspective, a thriving tech community, and plenty of room to continue to spread outward with new construction, other asset classes hold plenty of potential in the “Valley of the Sun.”
“[In] the office market, the first half [of 2021] started out slow, picked up substantially,” LevRose Commercial Real Estate co-founder Jon Rosenberg explained, noting that 65 percent more square feet of new leases were signed just during Q2 2021 than were signed in Q2 2020.
Rosenberg added, “We are seeing a lot of the California firms come here. The rents are much lower, much more affordable.” Average office rents in metro Phoenix are roughly 30 percent lower than the national average and about 250 percent lower than San Francisco rents.
The retail sector is also recovering, with JLL analysts recently telling the Phoenix Business Journal they expect retail assets to have a strong performance in the fourth quarter of 2021 and warning that demand may exceed supply by the end of the year.
“There is not enough quality, available retail product,” they said. “Retailers want more.”
Retail sales nationally grew by 15.8 percent from July 2020 to July 2021, and, despite the continued encroachment of online retail, the sector continues to recover and require modern spaces that meet new health-policy standards, are adaptable, and that remain attractive to consumers.
The city of Phoenix is actively seeking ways to “encourage revitalization of vacant storefronts in the city” at present, which could represent potential for funding and new types of investments for real estate investors.
Programs and strategies under consideration include converting outdated retail spaces to multifamily residential units, encouraging mixed-use developments, and redeveloping shopping centers and malls. The latter two assets were foundering, to a degree, prior to the pandemic, and have deteriorated in many cases even in markets where there is a strong demand for retail space because the spaces are not necessarily adaptable to current consumer requirements revolving around social distancing, air flow, or outdoor engagement.
The city is considering strategies like streamlining permits for businesses attempting to incorporate outdoor elements into traditionally indoor businesses to expedite revitalization and make existing retail real estate more attractive.
Still Going Strong into 2022
Usually when investors see a city start to top the lists for “biggest home price increases,” they begin to cool on the area’s investments. For Phoenix, however, being ranked third on the RE/MAX National Housing Report for largest percentages in home prices year-over-year has not dissuaded interested parties from investors to corporations to developers from their interest in the area.
Phoenix posted a median sales price of $411,000 in September 2021, up $71,000 over the year prior. Combined with an officially “recovered” jobs market (unemployment in the area has reached pre-pandemic levels and only about 30,000 Arizonans statewide continue to draw unemployment benefits), this relatively affordable home price is making the Phoenix area look better than ever to employers, employees, and small-business owners in 2022.
“Unique to Phoenix and the Sun Belt in general, we [Colliers International] have estimated that population growth due to pandemic displacement has resulted in 25 percent higher growth here,” said Colliers International research director Thomas Brophy during his observations on historic price gains in the Phoenix metro area.
He added that although nationally the United States posted negative household formation in 2020, Phoenix household formations are expected to double.
Existing and incoming employers are certainly doing their part to bring in those households. In 2021, DoorDash and LiveRamp (winner of Fortune “Best Workplaces in Technology”) both expanded their presence in the Phoenix area, bringing in hundreds of tech jobs and other positions associated with this type of employment.
According to a recent report from the Arizona Office of Economic Opportunity, Arizona is expected to gain more than 325,000 jobs statewide (excluding government). The government is doing its part as well. In February, Arizona governor Doug Ducey extended an executive order that renewed a moratorium on “new regulatory rulemaking by state agencies,” a move designed at a state level to limit government regulations inhibiting job growth.
The Arizona Office of Economic Opportunity estimates the implementation of this moratorium resulted in nearly $14.7 million in annual savings for the state economy in 2021 alone.
“Arizona is a pro-business state and we continue to welcome more job opportunities and new businesses,” explained Ducey as he signed the moratorium for the seventh year. With a background like that, it is no wonder that the Urban Land Institute and PricewaterhouseCooper (PwC) US named Phoenix one of the top metro areas for real estate prospects in 2022 and designated the city a “magnet market.”
These markets are also considered “preferred markets for investors and homebuilders,” PwC US analysts explained. “Their economic performance has been solid through thick and thin… Recovery has been much quicker and more complete.”
With an endorsement like that, 2022 is looking bright in the Valley of the Sun.
Regional Spotlight Sidebar 1
Super Sun Belt Markets
When the Urban Land Institute (ULI) and PricewaterhouseCooper (PwC) US teamed up to examine real estate trends in major metropolitan areas around the country, it did not take long for a clear trend to emerge.
“Though all markets lost jobs during the pandemic recession, recovery has been much quicker and much more complete in the Super Sun Belt markets,” analysts explained in the recently released report on top cities for real estate prospects in 2022. That list of Top 10 cities featured eight “Sun Belt” cities:
» Nashville, Tennessee
» Raleigh/Durham, North Carolina
» Phoenix, Arizona
» Austin, Texas
» Tampa/St. Petersburg, Florida
» Charlotte, North Carolina
» Dallas/Fort Worth, Texas
» Atlanta, Georgia
The remaining two cities, ranked ninth and tenth, were Seattle, Washington, and Boston, Massachusetts, respectively.
The Sun Belt region of the United States is generally considered to stretch from east to west, encompassing the southern halves of California and Nevada, parts of Utah and New Mexico, and cities in Texas, Arizona, Louisiana, Mississippi, Alabama, Georgia, Florida, South Carolina, and the southern portion of North Carolina.
Thanks to temperate climates leading to year-round outdoor recreation options and vast biodiversity (some of these states boast nearly 7,000 distinct species of animals outside of marine life), Sun Belt cities are attractive places to live in addition to being generally more affordable than their more northern counterparts, with one or two exceptions of course.
PwC US and ULI analysts dubbed certain cities on their Top 10 list “Super Sun Belt” markets, meaning they ranked particularly well for homebuilding prospects.
The Super Sun Belt markets included Phoenix, Atlanta, and Dallas.
Regional Spotlight Sidebar 2
Top 10 Employers in Phoenix Metro Area
Banner Health » 10,728 employees
American Express » 9,210 employees
Amazon » 6.457 employees
Honeywell » 6,171 employees
Wal-Mart » 5,419 employees
Fry’s Food Store » 5,229 employees
U-Haul » 5,133 employees
Bank of America » 5,012 employees
Phoenix Children’s Hospital » 4,826 employees
Dignity Health » 4,754 employees
