As Phoenix’s Population Rises, Developers Race To Keep Up

Article originally posted on CoStar on January 12, 2022

This story was reported and written by Randyl Drummer, with photography by Brandon Arant unless otherwise noted, and design by Jelena Schulz and Rohit Shenvi Diwadkar.

Three years ago, West Fillmore Street in downtown Phoenix was a desolate patchwork of empty lots, crumbling one-story buildings and dilapidated houses.

Today, the area just a few blocks from City Hall pulses with the sound of skip loaders, forklifts and cement mixers. Lennar, Toll Brothers, Trammell Crow and other developers are building thousands of apartments for renters who want to live in artsy Roosevelt Row and other up-and-coming downtown and midtown districts.

At one point a few months ago, some builders had to delay projects because there weren’t enough construction cranes, said Eric Toll, spokesman for Phoenix’s Community and Economic Development Department.

“The difference between 2018 and now is mind-blowing,” Toll said during a tour of the city’s high-growth neighborhoods. “Downtown Phoenix is adding houses and apartments at four and a half times faster than anywhere else in the valley.

The explosion of construction is a reaction to Phoenix’s rise as the fastest-growing big city in America over the past decade, according to the most recent census. That count found its population, now approaching 5 million, grew 15.6% between 2010 and 2020.

Spurred in part by the arrival of tech companies lured by Arizona’s lower business costs, the growth has attracted middle-class families from California and other more expensive parts of the country. They are joining retirees drawn by a more affordable quality of life, lack of earthquakes, hurricanes and other natural disasters, and 300 days of sunny weather a year on average.

Builders are rushing to fill in or redevelop Phoenix’s downtown and midtown districts even as growth pushes residential and commercial development to distant suburbs such as Goodyear and Buckeye, which have ranked among the fastest-growing smaller U.S. cities for more than a decade. And greater Phoenix, known as the Valley of the Sun, has room to spread: It’s the largest metropolitan area in the Southwestern United States by geography, at 14,500 square miles.

Surging Rental Demand

The 28,000 rental units that are under construction will expand Phoenix’s supply by 7.5%, according to CoStar data. But that’s not enough to keep up in a region that added 653,000 people between 2010 and 2020.

The growth spurt has driven up housing prices and rents and eroded affordability, one of the region’s main draws for people and companies pouring into the Grand Canyon State from more expensive places such as California.

“We are about to hit the skids on affordability,” Scottsdale, Arizona-based economist Elliott Pollack said at the Greater Phoenix Chamber’s 2022 Economic Outlook presentation. “There is a shortage of all types of housing, and that will take time to cure. Affordability is not a terminal issue now, but it could become one very soon.”

Arizona is projected to add jobs at four times the national rate over the next decade, according to a new report from the Arizona Office of Economic Opportunity, which studies the state’s economy and labor market trends.

Multifamily developments built in the past three years such as the Roosevelt Row apartments have attracted artists and professionals to live in downtown Phoenix. (Brandon Arant/CoStar)

Hundreds of companies have moved to or expanded into the region, including tech giants such as Google, Facebook and Amazon, bringing thousands of jobs to broaden Phoenix’s business base.

“For decades, Phoenix relied on homebuilding and construction,” said Sharon Harper, CEO of Phoenix-based commercial development firm The Plaza Cos. “We have diversified in a dramatic fashion and added new industries and high-wage jobs. It’s not a one-dimensional boom-and-bust economy anymore.”

Large corporations built hundreds of thousands of single-family homes in the region through a half-dozen boom-and-bust cycles dating back to the 1970s, including the housing bubble and catastrophic crash in 2008 that caused median prices to plunge more than 55% in Phoenix.

It took three more years for home prices to hit bottom amid record foreclosures as thousands of jobs in Phoenix’s construction and tourism sectors disappeared. Many neighborhoods didn’t see prices return to 2006 levels for nearly a decade after the crash, long after most big cities had fully recovered, according to CoStar data.

Diversification Push

Phoenix started to change in that protracted recovery, said Steve Betts, a developer and land-use attorney since the early 1980s.

“Watching other cities recover more quickly as we sat in the deepest hole for four or five years after the crisis was really cathartic,” he said. “We realized as local and state business and community leaders that we needed to reinvent and diversify our economy.”

City, state and regional leaders ramped up efforts to encourage growth industries such as technology and bioscience, investing billions into expansions of Arizona State University and the famed Mayo Clinic, Betts said

“Nobody bought it when we started to use the phrase ‘Silicon Desert’ seven or eight years ago for our tech sector,” he said. “We started to invest in the school of engineering at ASU because what advanced tech companies need is really qualified employees. And 10 years ago, we had virtually no manufacturing here. Now we do.”

The new Phoenix can be seen in the sprawling Taiwan Semiconductor Manufacturing Co. plant going up on a 1,128-acre site just north of downtown. The $12 billion factory that is expected to open in 2024 represents the largest direct investment by a foreign company in Arizona history, said Christine MacKay, Phoenix’s director of community and economic development.

“TSMC will bring in 1,900 direct jobs including hundreds of engineers in the first phase alone, and thousands more supply-chain jobs,” MacKay said. “It’s one of the biggest economic development and construction projects in the United States.”

The deal signed after years of talks with the Taiwan-based manufacturer is an economic development victory for Phoenix leaders that have long promoted Arizona’s business-friendly tax and regulatory policies, lower costs and desert climate to companies outside the state. Developers, including Lennar Corp., one of the nation’s largest homebuilders, are buying land near the TSMC plant to build hundreds of homes for future workers.

Tech and manufacturing companies such as Lucid Motors and Intel have joined Taiwan Semiconductor, the world’s largest microchip maker, in announcing projects to invest billions of dollars in the city and add thousands of new jobs, creating a need for more apartments and single-family homes.

“Phoenix’s growth did not happen by accident,” Mayor Kate Gallego said in an interview. “We’ve been very intentional about how and where we grow.”

Warehouse Leasing Boom

The valley’s industrial market has also boomed, with tenants leasing a record 6.6 million square feet of warehouse space in the third quarter, well above the average quarterly volume of 4.7 million square feet from 2017 to 2019, according to CoStar.

Developers are building 32 million square feet of warehouses in Phoenix. More projects are in the works, including plans to develop what would be one of the largest industrial parks in Arizona history in Phoenix’s El Mirage suburb. Nevada-based Dermody Properties proposes to build an eye-popping 10 million square feet of industrial space on 1,000 acres at the long-planned Copperwing Logistics Center over the next decade.

Office developers are also betting on Phoenix’s growth, despite a move toward remote work during the pandemic that has caused some businesses to give up unused space. CoStar data shows that almost 2 million square feet is under construction, equal to roughly one-third of the office stock added each year on average during Phoenix’s office boom between 2000 and 2008.

Much of the office development is in Tempe, immediately east of Phoenix, including an 18-story tower under construction by developer Hines and Atlanta-based real estate investment trust Cousins Properties at 100 S. Mill Ave., where such high-profile tenants as Amazon and accounting firm Deloitte have signed leases.

“Over the past decade, the city has matured,” CoStar market analyst Jessica Morin said. “Phoenix has attracted high-caliber companies and added amenities and infrastructure that has made it a top destination that appeals to families, retirees, students and young professionals.”

Phoenix’s ascension hasn’t come without pitfalls for renters, homebuyers and commuters. Just ask David Mooney, a high school teacher who moved to the area from Colorado 20 years ago.

“I used to say this is an international city with everything you want in it, and very affordable,” Mooney said recently as he looked north at Downtown from Dobbins Lookout, one of the highest points near Phoenix at an elevation of 2,330 feet. “But that’s the No. 1 thing that’s changed, that’s gone wrong.”

Mooney benefited from the housing boom when he sold his home in suburban Mesa last year at a tidy profit.

“I can’t complain, but I also can’t afford to buy another house,” said Mooney, 48, who grew up in Virginia. “What’s frustrating is that I know people that work for Intel or Intel subsidiaries. The number of corporate people buying up normal real estate is a disturbing trend.”

Looking down at the neighborhoods off of Central Avenue that are the next areas targeted by the city for redevelopment, he said, “I wish I had bought something in South Phoenix when it was unloved and dirt-cheap 10 or 15 years ago.”

New Housing Boom

Would-be homebuyers are facing an alchemy of double-digit price increases, scant inventory and construction backlogs.

The region ranks among the top markets in the country for single-family home price appreciation and apartment rent growth. The arrival of new companies and workers has driven up demand for rentals, fueling record year-over-year rent growth of about 23% through Sept. 30, according to CoStar.

Apartment investors, many of them from California, have responded by buying roughly $14 billion in Phoenix multifamily assets this year, easily surpassing the $8 billion record set in 2019, according to CoStar research

“An investor that bought a building a year ago and thought they paid an aggressive price, well, today that price looks like a very attractive buy,” said Chapin Bell, CEO of P.B. Bell, a multifamily development and management firm that was founded in 1976 by his father Philip. “Phoenix is still a more affordable city than a lot of others, but that’s going to change if we continue to have this kind of rent and housing price growth.”

As housing costs have increased, developers continue to buy land for master-planned developments in Goodyear and other outer suburbs. Job growth hasn’t kept up with housing expansion in the distant West Valley suburbs, forcing many workers to make lengthy commutes on increasingly choked roads and freeways to jobs in central Phoenix and surrounding cities.

Phoenix is spending billions on its freeways, airports and other infrastructure to stay ahead of the curve, said Mayor Gallego, who has held economic development positions for more than 15 years dating back to Phoenix’s housing boom before the Great Recession.

The Sheraton Downtown Phoenix, the city’s largest hotel with more than 1,000 rooms, reopened last year after a $40 million renovation. Billions in infrastructure improvements and redevelopment projects are bringing an increasing number of renters, tourists and new businesses downtown for the first time in decades. (Brandon Arant/CoStar))

The Phoenix City Council approved a plan in 2020 to address the city’s burgeoning housing shortage by creating or preserving 50,000 affordable units by 2030, the mayor added.

“It’s clear that the demand for housing is exceeding supply and we’ve seen significant increases in pricing,” Gallego said. “We’re trying to be very intentional about making sure we have a good supply of housing that’s available and accessible to all of our residents.”

Water Supply Concerns

Environmentalists and growth control advocates have a different worry: that providing water to a population of 5 million people in the desert is unsustainable as epic droughts dry up rivers and reservoirs.

It is a concern exacerbated by millions of square yards of concrete and asphalt that scientists say can create urban “heat islands” in a city where the temperature regularly exceeds 110 degrees during the summer.

The heat takes a higher toll on lower-income areas that lack reliable air conditioning. The Phoenix City Council in September appointed David Hondula, an associate professor of environmental science, as one of the nation’s first municipal “heat czars” in charge of the city’s new Office of Heat Response and Mitigation.

Phoenix’s heat and sprawl are regular fodder for digs from late-night talk-show hosts and others, including The Onion, a satirical website that reported a fake study by Syracuse University forecasting that the majority of Earth’s landmass, “or roughly 137 million square miles across six continents,” will be Phoenix suburbs by 2050.

Betts, managing director for Tucson, Arizona-based real estate investment firm Holualoa Cos., considers it progress that Phoenix’s residential growth is now strategically planned based on buyer demand rather than the speculative development that he describes as “the old Phoenix model of growing for the sake of growth.”

“For most of my career, the slogan here was ‘Build it and they will come.’ We were the poster child for sprawl,” Betts said. “Now it’s ‘They’re coming, so we better build it now.’ We’re playing catch-up because the region just can’t build single-family homes fast enough, and multifamily housing is filling the void.”

Filling a 40-Acre Hole

One project that illustrates Phoenix’s shift from outward growth to reviving its aging downtown and midtown districts is the redevelopment of Park Central, Phoenix’s first shopping mall.

About a decade ago, downtown started to see signs of new residential development for the first time since the 1950s and ’60s when city officials approached Betts about his vision for “what we could do with this 40-acre hole in the middle of Phoenix,” he said.

“The urban core of downtown and midtown Phoenix was not growing, so a mall in the center city really had no viability,” Betts said. “This outdated suburban-style mall stood in disrepair for two decades.”

Betts and Holualoa CEO Stan Shafer, along with Harper’s Plaza Cos., developed a plan to convert the mall built in the mid-1950s into a mixed-use urban technology park with creative offices and restaurants across the front.

“We’re converting what was a heat sink of dark asphalt parking lots into buildings with lots of trees to remove the heat island effect,” Betts said of the 40-acre old mall site.

The mall lost most of its tenants by the 1980s and struggled for decades as downtown and midtown residents moved to Phoenix’s sprawling ring of suburbs. The mall’s owners defaulted on their loan 10 years ago, and the shopping center ended up with two ownership entities that couldn’t agree on a plan to revive the property

After years of often contentious talks, the group began acquiring the property in 2017 and built a 2,000-space parking garage that provided room for Creighton University to build a $100 million health sciences campus.

West Coast Ultrasound Institute’s School of Imaging and Nursing opened in 2020. Future phases include plans for a residential tower and two hotels on what’s now a cracked, heat-radiating asphalt parking lot at the former mall site.

“This would not have happened 10 years ago under the old economic model of greater Phoenix,” Betts said.