Phoenix’s cost of living has risen due to the city’s growing population. And that trend shows no signs of slowing, with a new report indicating that as the population grows, the Phoenix metro area may attract more interest from out-of-state companies looking to set up shop in the Valley as well.
According to a study conducted by the New York-based Moody’s Analytics, an inbound trend of people moving to Phoenix and across the state is expected to continue. The report’s author, Moody’s analyst Thomas LaSalvia, stated that the Valley’s affordability has historically been a big draw. However, LaSalvia discovered that Phoenix’s rent-to-income ratio has increased by 7% since the beginning of the Covid-19 pandemic, to nearly 27% as of Q1 2022.
“That corresponds to the 30-plus percent rent increases that we’ve seen in Phoenix in aggregate over the last couple of years,” LaSalvia said. “One of the concerns is not only a slowing of housing prices, but also a slight correction in the 5-10% range.” That is very likely if demand dries up sufficiently.”
According to LaSalvia, the influx of people to the Valley will provide new skills to the local workforce, attracting the attention of out-of-state companies looking to expand into Phoenix. More businesses and jobs in the area would result in more construction, a larger supply of homes, and higher incomes.
Moody’s research examines real estate trends.
“If you get a really good influx of skill and diversity into a metropolitan area, and if businesses see that Phoenix is also an area where they can build from, gain productivity, and find a good labor force,” he explained. “And this type of self-reinforcing mechanism would occur, prompting additional growth in the Phoenix area.”
“To me, the most intriguing aspect of Phoenix right now is which direction it will take at this fork in the road.”
According to the Moody’s report, Arizona’s population increased by nearly 100,000 people between June 2020 and June 2021. While nearly one-third of those who moved to the state did so for retirement, others did so for work, lifestyle, or family reasons. 54.1% of the state’s moving population was inbound, while 45.9% was outbound.
That expanding workforce will have an impact on commercial property rents as well. Moody’s expects Phoenix’s retail market to remain stable, relying on tourists and retirees to drive the market by shopping at local establishments. Moody’s forecasts 2% and 4.6% rent growth in the office and industrial markets, respectively, through 2025.
Businesses that make office leasing decisions
Despite the fact that many businesses have chosen a hybrid work model in response to the Covid-19 pandemic, LaSalvia claims that physical office occupancy in Phoenix is higher than in denser urban areas such as San Francisco and New York.
“That’s showing management, those making leasing decisions, that ‘we’ve got to hold onto our space a little longer,'” he explained. “You’re seeing a greater willingness to go to work in some of these areas where it hasn’t traditionally taken an hour and a half to get there.”
According to LaSalvia, the logistics and industrial markets could continue to drive long-term investment in Phoenix if quality infrastructure is in place to support the growth.
“There’s a risk of overexuberance or too much speculative supply out there,” he says, “but [logistics] is going to be one of Phoenix’s greatest industries in the long run.”
BKM Capital Partners of Newport Beach, California, purchased the Mesa Ridge Business Park because it saw value in the park’s current below-market rents. IndiCap, another out-of-state firm, plans to invest around $2 billion in the Valley. To date, three business parks have been planned, with the majority of the space dedicated to new industrial buildings, including a 292-acre site in Gilbert.