In Q1 2024, 6,100 new units were completed and a record 5,600 were leased. In the pipeline, there are 131K new apartments either under construction or in the planning stage. Through 2026, it is estimated that an additional 6.4% of existing apartment stock will come to market. Vacancy is projected to rise from the current 8.7%, and rents are projected to continue to fall through 2024 and beyond. In seven Phoenix submarkets, new construction is over 20% of existing housing supply, which may be hard to lease up.

Other Concerns:

Evictions:
As mentioned above, rents in the $1,350 range appear to be relatively affordable for the average person. However, evictions in Maricopa county are leading the nation and are up 21% YOY. When compared to pre-pandemic levels, evictions are up 36%, which indicates affordability is a real issue for many tenants. The tried-and-true metric of keeping rent levels at 30% or lower of income may be outdated, with inflation eating into tenant’s purchasing power.

Water:
Phoenix has been experiencing a record 15-year drought and currently gets 60% of its water from the Colorado River (40M people rely on the river for water), which also is experiencing a similar drought. Today, the river’s flow is only 65% of normal levels. The city has done an excellent job of promoting water conservation and despite massive population growth, the water usage is less than what was consumed 2 decades ago. The city is working hard to find other ways to supply safe drinking water and admit that they can’t conserve their way out of the problem. Water is an existential threat that investors should consider before investing.

CRIME:
Phoenix has the highest crime rate in Arizona, and only 6% of cities in the US have a higher crime rate. It is a large city and, like any city, there will be higher crime areas, so it is important for investors to understand the crime in the area surrounding their investment.

In summary, Phoenix will continue to experience growth pains for real estate investors as excess supply will continue to outstrip demand for the foreseeable future. Investors should plan on muted rent growth and increasing vacancy for the next few years. Longer term, the potential for a lack of water supply could limit population growth. For these reasons, we are not currently looking for opportunities in Phoenix.