Where is Phoenix Apartment Market's Urban Core?
Several Areas Could Fit Definition
By Louis Rosenthal | Friday, February 10, 2017
After suffering a severe housing price collapse during the doldrums of the Great Recession, Phoenix is roaring back to life, particularly its apartment market. Phoenix rents grew by an average of 6.3% in 2016, the fifth highest growth rate among the top 50 metro areas in the country.
However, unlike other major metro areas, Phoenix lacks a clearly-defined residential “urban core.” Phoenix features a “polycentric” form of development, with multiple employment and residential centers, as opposed to the sort of concentric (common/single center) development that characterizes older cities like Chicago. Polycentric development patterns often result in sprawl, and Phoenix is, according to some measures, the 12th most sprawling metro among the top 50 metros in the US (less spread out than Dallas, but more so than Atlanta and Houston).
As suburban development exploded in post-World War II Phoenix, the central business district downtown began to hemorrhage residents and retail in the 1960s, leading to the appearance of a hollowed-out urban core. Apartment development in Phoenix illustrates the declining fortunes of downtown Phoenix. The vast majority of apartments in Phoenix were built during the 1980s (some 80,000 units were built from 1981-1990), but only 3,519 of those units were built in the true downtown area of Phoenix —only 4% of total multifamily development.
Apartment development in downtown Phoenix accelerated in the early 2000s and through the present day: Some 9% of all new units delivered in Phoenix from 2001-2010 were concentrated in the downtown area, and 6% were delivered downtown from 2011-2017. Part of this may represent the preference of Phoenix residents for suburban lifestyles over urban ones. On the other hand, given the sprawling nature of the Phoenix metro area, it’s possible that urban-minded residents are indeed living in urban areas — but not downtown. Polycentrism means more than one center, and Phoenix very likely has multiple urban cores.
Because the most expensive apartments with the highest rental rates are built in dense, urban areas (primarily due to the lifestyle preferences of the renters), it follows that the highest-priced properties in a given metro are, by and large, urban properties. Likewise, because we assign asset class grades based on rent levels, the top-of-the-line product (Class A+) also tends to represent urban core properties.
Based on this logic, the South Scottsdale submarket of Phoenix is most clearly an urban core submarket in that the average rent per square foot in South Scottsdale apartments is 13 cents more expensive than the next most expensive submarket, North Tempe. Yet, considering the difference in rental rates at the top of the market, there is also good reason to include North Tempe, Central Phoenix South (the true central business district/downtown), Northeast Phoenix and North Scottsdale/Fountain Hills. This is a very broad definition of urban core to be sure; but it follows from Phoenix’s historic pattern of development, as well as the type of clustering of high-end products that we see in urban cores across the country.
When we track the effective rent growth of the different conceptions of Phoenix’s urban core(s), we find some interesting results.
First, we look at the true central business district/urban core of Phoenix (Central Phoenix South submarket). Of note is the remarkable similarity in performance between the presently-considered urban core and the weighted average of the suburban submarkets. In 2016, for example, the average gap between rent growth in Central Phoenix and the suburban submarkets was 2.1%, compared to the national average urban/suburban gap of 2.3%. In general, suburban submarkets are outperforming urban core submarkets across the country.
If we instead use South Scottsdale (the priciest submarket in Phoenix) as the urban core, the average gap between suburban performance and urban core performance in 2016 widens to 3.9%, which is more in line with national trends. In fact, after testing different urban core definitions in Phoenix, South Scottsdale represents the most urban-core-like submarket in Phoenix.
However, there remains a demographic challenge that may impede a full urban core renaissance (however urban core is defined), particularly insofar as the apartment market is concerned. About 36% of the entire US population ages 25-34 (prime renter years) has a bachelor’s degree or higher. In Phoenix, on the other hand, only 28% of all 25-34-year-olds have a bachelor’s degree or higher.
The relatively low higher-educational attainment levels in Phoenix suggests a population of renters that is less likely to be able to afford the top-tier urban core rents. And, perhaps more importantly, this likely means a pool of renters that are simply not as interested in urban core lifestyles as the renter pools in other major metro areas.
In general, urban core submarkets across the United States are underperforming suburban submarkets. In December 2016, urban core rents grew, on average, by only 0.1% while suburban submarkets grew, on average, by 2.7%. This is typical for where we are in the current cycle.
Unlike many other major metros, Phoenix is unique in that it doesn’t have a clearly identifiable urban core, but also in that the places that most approximate an urban core in Phoenix feature relatively strong rent growth (though still below the suburban average). Supporting relatively strong urban core rent growth in Phoenix is the metro area’s late recovery from the housing crash, which means that Phoenix is rising just as other, early recovery metros are falling. Additionally, ASU’s tremendous enrollment growth in recent years along with improved transportation options has increased demand for a more urban-minded lifestyle.
On the other hand, Phoenix’s divergence from the national trend of underperforming urban core areas might imply that what we’ve tentatively identified as the urban core(s) has more in common with suburban submarkets than it does with urban core submarkets around the country.
Irrespective of urban or suburban properties, Phoenix is expected to continue posting strong rent growth figures over the next several years—well above the metro area’s long-term average. A truly strong urban core could be in the cards in the not-too-distant future.