Phoenix is Rising, But Can it Continue?
The Greater Phoenix market remains one of the top in the nation in terms of population and job growth, but growth in residential building permits during the first half of 2015 may not serve as an indicator for what is to come. Our Senior Vice President Ryan Arp has been busy helping builders plan for their next position in the market, but is noticing a few trends that local industry professionals face as they make their next strategic move. Consider the following:
Rays of Light
There are a number of factors and trends that are occurring in Phoenix that indicate market strength, such as:
- 30% year-to-date growth in single family building permits, the strongest in years and on pace with ASU’s Blue Chip Forecast of over 14,000 permits for the year
- 101 new home projects opened for sale in Maricopa County alone in 2015
- Multiple new master plans open for sale, such as Mulberry by Blandford Homes in Mesa (four product lines priced from the $200s) and Meridian by William Lyon Homes in Queen Creek (three product lines priced from the $100s)
- Strong selling infill attached projects, such as Aerium by Landmark USA (priced from the $400s) and ENVY by Deco (priced from the $300s), both in Scottsdale
- An Employment to Permit (E/P) Ratio of 3.9, which is strong considering that a ratio of about 1.2 is considered balanced – see the following table for a comparison of how Phoenix stacks up relative to other growing metropolitan areas:
Clouds on the Horizon
The points above are certainly positive, but builders are also dealing with rising materials costs, inflated land prices and labor shortages. The majority of builders have worked through their impaired land assets and are currently building through the assets they purchased in 2012-2013. Often many of these parcels were underwritten assuming some level of market appreciation, but if appreciation rates for that given submarket did not materialize as expected, then margins on communities could see additional compression. In addition, some builders are experiencing expanded cycle times, and have employed a strategy of putting more spec homes on the ground to reach year-end numbers. The result of these compressed margins and longer build times could be a slowdown in permits as we enter the final quarter of 2015. Further, with the weaker Canadian dollar, we are seeing a slowdown in the presence of Canadian buyers.
While challenges and growing pains will continue to be a reality for the local market, our research and experience (and the relative value that Phoenix offers compared to higher priced areas in nearby California) suggests that the proverbial sun will shine brightly on the Valley for some time to come.
Ryan Arp, Senior Vice President of Advisory Phoenix
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