Need for rental housing explodes, but Valley cities resist: Now what?

Real Estate | 17 Sep |

A place to live in Greater Phoenix is becoming harder to attain. While homeowners have enjoyed a dramatic increase in the value of their investments, those in the rental market have seen a larger percentage of their paycheck eaten up by rising rental housing costs. A market report by online real estate company Zillow found that rents rose 17.7% year-over-year in the Phoenix area as of May 2021. Another Zillow study forecasts that by the fourth quarter of this year, typical renters in Greater Phoenix will become housing burdened, meaning that more than 30% of their income will go toward keeping a roof over their heads. As a result, the Phoenix metro will drop from the 29th to 38th most affordable metro in the U.S.

“It’s Economics 101: the law of supply and demand,” says Courtney LeVinus, president and CEO of the Arizona Multihousing Association. “When the supply of something is low but demand is high, the price goes up in response. Rent works the same way. When we have a robust supply of rental housing in the Valley, rental costs tend to remain steady, but when we have a shortage of rental units — and thousands of people moving to Greater Phoenix every month — then rent increases.”


READ ALSO: Mortgage payments for new homebuyers rising 67% faster than rents


A study commissioned by the National Multifamily Housing Council and the National Apartment Association estimates that the Phoenix metro needs 150,000 additional units of rental housing by 2030 to meet demand. To hit that target, the pace of current rental construction levels would need to hasten.

“In the 1980s, Greater Phoenix saw 105,905 multifamily units built. In the following three decades, the production plummeted, and we averaged 47,000 units per decade after the ’80s,” LeVinus notes. “We built up a great supply in the 1980s that made Arizona’s housing stock quite affordable, but now we are clearly not keeping up with demand.”

In The Zone

When a developer is looking to build a new apartment complex, the first step is to find land that is properly zoned for rental housing. Lots are given zoning designations based on a city’s general plan that is put before and approved by voters. The intent of a general plan is to guide long-term development inside the municipality, though changes can be made as needed. Other requirements and limitations may be attached to the property, such as compelling the builder to install a traffic light or capping the maximum height of the structure.

Tim Curtis, director  of current planning for the City of Scottsdale, says projects that fit within the present zoning parameters have little trouble acquiring building permits.

“If you already have the zoning for a multifamily project, and you’re happy as the developer with the building height and density that’s allowed, it’s really easy,” he explains. “The degree of difficulty would probably increase if the project doesn’t match what is already contemplated in the general plan and zoning.”

LeVinus admits that simply developing within spaces designated by a city’s general plan sounds logical, but she believes it’s unrealistic. “If you scan the available land in communities across the state, you find that comparatively little land has been zoned for multifamily developments. That means virtually every new apartment development in Arizona must go through the rezoning process,” she notes. “Rezoning is not easy. It’s expensive, there are enormous bureaucratic challenges, and it’s a long slog, timewise.”

A developer may want a lot to be rezoned for a variety of reasons. For example, an apartment building may need more units than is permitted in order for the investment thesis to be realized, otherwise the investor cannot turn a profit. Curtis adds that the city doesn’t control the sale price of the property, which affects the feasibility of the project.

“If your expectation is just to comply with the zoning, then you’re a happy camper and not necessarily complaining about how difficult it is to get permits,” he says. “But if your investors are expecting a certain rate of return that forces you to go to five stories, the city may be a bit apprehensive about that. The formula developers use to gauge their satisfaction, which is primarily capitalistic, is different than the formula that cities are using to build the community that they envisioned.”

LeVinus argues that the arbitrary zoning designations that make multifamily construction onerous have worsened the current housing crisis. “Rather than allowing the market to correct itself, local governments keep stepping in to artificially constrict the market by limiting growth in their communities,” she says. “If local government would get out of the way and allow the apartment community to respond to market forces, we could climb out of the hole relatively quickly.”

Public Opinion

Part of the rezoning process involves hearings in which residents can offer their thoughts on the proposed development in hopes of swaying city council members to either approve, deny or impose conditions on the project. Most participants at these hearings do not want apartments built because of a perceived threat to or degradation of their lifestyle. These attitudes are considered not-in-my-backyard sentiments, known as NIMBYism.

Nana Appiah, planning director at the City of Mesa, believes that the role of his department is to administer the city’s general plan and zoning ordinance, which strongly encourages residents to get involved in the process. He says a common contention he encounters at zoning hearings, and one that is argued throughout the country, is that multifamily housing will lower the property values in the surrounding area.

Quantifying a connection between apartment construction and decreased home prices is murky, according to Kevin Mayo, planning administrator for the City of Chandler. “We haven’t seen that in the current market. I don’t think anything’s affecting our property values except for raising them up,” he says.

In Chandler, residents’ top concern is traffic. “Thousands of multifamily units have been built and delivered to the market around the Chandler Municipal Airport in the last 36 months,” Mayo remarks. “Homeowners who live south of the airport had gotten used to what their normal commute was. Now there’s a 20% increase in traffic volume on the road. Even though the city has a traffic impact analysis that shows that the road is currently operating at 40% capacity, it still feels like an entirely different world for the citizens.”

Furthermore, social media has allowed NIMBY groups to organize online and attend zoning hearings for rental housing developments that aren’t in their neighborhood. LeVinus recalls cases where neighborhood residents have been neutral or in support of a nearby multifamily project, but outside NIMBY advocates have stirred up controversy. “The more noise that surrounds a project, the more risk averse local officials seem to become,” she says.

Appiah, who wrote his doctoral dissertation on citizen participation, thinks that people expressing their views is a positive thing, even if they don’t live nearby. “We encourage our residents in Mesa to participate and get involved in every activity that is going on as part of creating a complete community,” he says. “What is built in the city is important to everyone who lives outside the immediate vicinity of the project.”

The result of these hearings typically produces a series of requests from the city council. “Every project has an element of back and forth to get to the finish. What we’re frequently seeing now is a set of requests meant to make a development more palatable for neighbors — such as an art installation, a massive green belt, more sustainable elements, or more design nuance and treatments. These additions inevitably add considerable costs to a project — costs that ultimately are reflected in higher rent,” LeVinus remarks. “Its ironic that the same local officials who request such pricey additions are often the very leaders who complain about their community’s lack of affordable housing.”

With recent U.S. Census Bureau data identifying Greater Phoenix as the third fastest growing metro in the nation, trends point to a continuous stream of people making the Grand Canyon State their home. What remains to be seen is if transplants will keep coming if rising housing costs, rental or otherwise, persist.

“The City of Phoenix seems to understand the need for housing and is trying to keep up with growing demand. Others are restricting supply that is further exacerbating the affordable housing crisis,” LeVinus says. “What stings even more is that this resistance to new development is prevalent in areas where the demand for rental homes is high and rising with each passing day. This mentality to limit growth isn’t sustainable — not if we want the Arizona economy to continue to grow and we want to keep rent and the cost of living manageable for all residents, no matter what they earn and where they want to live.”

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