Phoenix Real Estate - Fairly Priced? Or Over Priced?

[Nick Gerli]

Phoenix real estate values have increased by a 114% - more than doubling - over the last 10 years according to data from Zillow. That's the third highest-growth rate of any metro in the US, propelling the average price in the metro area up to $315k.

But we've seen this story in Phoenix before, with values climbing only to fall precipitously. Values declined by 60% during the GFC from 2007-12.

Fortunately, I think the fundamentals in Phoenix look to be in better shape this time around. Most notably, the permitting and construction of new homes/apartments is much lower today than it was in 2005. At the same time, population in the metro has grown by 1 million in that span.

What are your thoughts on the Phoenix market? Do you think it's fairly valued right now? Or do you think the market is too hot?

[Serge S.]

Well ... there is Phoenix, there is Tucson and then there is everyone else. PHX and TUC have so far been the big winners of the Covid era. The pandemic has pushed forward California migration 5-10 years by some estimates. Maricopa Co in the last 6 months has had 25% more inflow from CA than the 2019 monthly average. Arizona never implemented the draconian measures that have failed CA and has generally remained open for business meaning one of the lowest unemployment rates in the nation. Maricopa county is one of the few counties in the nation that has continued to experience construction growth. This has made us the current epicenter of the global pandemic BUT what its done for RE, both SFR and MFR has been nothing sort of shocking.

I closed on an empty class B, 168 unit multifamily conversion in Phoenix on Nov 30. I estimated that it would take me the entire year 2021 to lease up and get to stabilized occupancy. By year end 2020, I was 50% occupied and currently at 70%. I would estimate 60% of my tenants are transplants. 

The issue buying in PHX is valuation. We have new out of state interest that was not here at these levels pre pandemic. Listen to any podcast and you will be told that PHX and TUC are top markets. The secret is out:) But there are issues. Rent growth has outgrown wage growth and the gap is back to pre-recession levels. There is very little value add inventory in Maricopa Co and sellers are very reluctant to sell. Buyers are literally all chasing the exact same asset.  Bad debt is a real issue although it is largely ignored in current valuations (in my opinion).  As such, all of the optimism is already priced into the market. 

SFRs and small multifamily are now completely disconnected from cash flow. Expect revenue to equal. .5% of purchase price. I guess somewhere along the line the 2% rule became the .5% rule:) I would classify Metro PHX as a buyer beware.