By Rob Jafek| Boomerang Capital Partners
If you haven’t heard – Phoenix is awesome and seems to have everything going for it! Just consider the following:
- Phoenix’s combination of favorable weather, most of the time.
- Outdoor recreation — so close and so varied, all over the state.
- Cultural attractions & events – our sports teams like the Phoenix Suns, the Diamondbacks, the Coyotes, etc. along with our golf and car events.
- Economic opportunities & growth (and more every day).
All these factors combine to make it a great place to live, work, and visit.
Fortunately, and unfortunately, lots of people have noticed. And by ‘lots,’ I mean lots and lots! The city of Phoenix has become one of the fastest-growing cities in the nation according to the Maricopa Association of Governments and there are no signs of that changing any time soon.
So where are we going to put all the new people? With demand for homes up and the supply limited, real estate prices have gone up, but not as much as you might think. It is worthwhile to note that Phoenix’s appreciation is not very different from what has been experienced in other desirable metros. This is largely due to the availability of land (haters refer to this as ‘sprawl’), but the net result is that prices are still less than other comparable areas. Phoenix is still a relative bargain with an average house at $424.9K, compared to Denver, CO at $588.5K, Nashville, TN at $518.4K, Miami, FL at $540K, and don’t even think about anything in CA with Los Angeles at $979.6K, San Francisco $1.3M, and San Diego $850.3K.
However, the mix of difficult and inter-related issues of affordability challenges, infrastructure demands, traffic, and congestion, and even homelessness, all contribute to a complex and pressing issue for the city’s residents and policymakers. Where to put all the people? One answer is pretty obvious: jam more people into the same space. In development terms, this is called increasing density. Within this solution there are two relevant ideas: use more of the land or build up.
ADUs
ADUs (Accessory Dwelling Units) are the solution to using more of the land. Often referred to as guest houses, casitas, or granny flats, these are separate, self-continued living areas that are either fully detached structures or attached to an existing home, but with its own external entrance. In September of 2023, Phoenix significantly expanded the rules to allow ADUs in all single-family residential properties for which the yard size and other parcel characteristics make them permissible. Since this is intended to be a long-term solution for people wanting to live here, the ADU cannot be used as a legally separate short-term rental and there are other restrictions so it’s worth reading up on. And with the all-in cost to build in the neighborhood of $200 PSF, and built houses selling for around $280 PSF, it’s a pretty safe bet that we will soon see more of these.
Apartments
If the ADU solution is for more infill, the apartment solution is to go up. There are quite a few large housing developments under construction downtown, bringing about 2,400 apartments online in the next 12 months or so. The Maricopa County government has been saying that they wanted more apartments and workforce housing in the mix since 2019. Given it takes a while, apartments are finally coming online with 10,151 coming online in 2022, which is the most since 2000, and that accelerated development pace is expected to continue. Phoenix is expected to have more apartments completed than any other metropolitan statistical area in the US with as many as 20,541 having been completed in 2023.
What does this all mean for investors? Having options for buyers is a good thing. ADUs are another way for purchasers to find (or keep) a house that fits their needs and accommodates more people. Apartments allow people to get started, and many will eventually move ‘up’ to homes. Not all will – more than a quarter of the apartments being built will be class A so we may see movement out of homes into some of these. More choice leads to more satisfaction and that is good for everyone.