Is the Phoenix Apartment Market a Candidate for Overbuilding?

Phoenix’s apartment market has notched a strong two years, as occupancy has remained essentially full and rent growth levels have trended well above national norms. A key factor shaping this performance is that deliveries to date in this cycle haven’t been over the top. But this is a spot where the building pace can escalate rapidly, and there has been a run-up of activity of late.

A total of 13,356 units were under construction at the end of 2nd quarter 2017, the fourth straight quarter in which construction volumes topped the 13,000-unit mark. Those levels are in line with the ongoing construction highs seen in the previous cycle’s peak in 2007 and 2008.

While construction is rising to levels in line with the previous cycle’s peak, hiring in the metro is slowing to levels that are less than half of the previous peak. Annual job growth levels have steadily fallen over the past year, to roughly 42,000 jobs in the year-ending July 2017. By comparison, six-digit annual job gains were common throughout most of 2005 and 2006.

Do recent trends suggest a supply-demand imbalance is on the horizon for Phoenix? Not necessarily, given overall activity in the housing market. Limited single-family production by past standards probably means there is some opportunity to get somewhat more aggressive on apartment construction than has been the case in the past. Still, there’s not much room to push the total volume significantly higher without adding stress to the apartment market.

The good news is that supply is heading to the right spots – namely neighborhoods on the metro’s east side. Those areas – Tempe, Chandler and Gilbert, specifically – are where jobs are most common and demographics are the most favorable. They are also where construction has been concentrated throughout the current cycle.

In the Tempe area, a total of 2,702 units were under construction in mid-2017. That was among the largest construction volumes in Phoenix, representing 8.7% of the existing stock in Tempe.

Construction volumes reached 1,403 units and 1,240 units in Chandler and Gilbert, respectively, in mid-2017. Those levels represented 6.5% of the existing stock in Chandler and a whopping 11.8% in Gilbert.

Combined, those three areas accounted for 40% of the total construction volume in Phoenix in mid-2017.

Another sizable chunk of construction activity is occurring in the Central Phoenix and North Central Phoenix submarkets. Those two areas combined for 4,055 units underway in mid-2017, or 30% of the metro’s construction total. Once those units complete, the two submarkets would see combined inventory swell 14.0%.

Meanwhile, building activity is still sparse in the western suburbs, which are traditionally weaker-performing areas. But those areas should be watched for near-term starts. Permitting volumes remain elevated in the metro. And big blocks of product emerging on the west side historically have been a signal that the metro is overheating.