By Sebastian Moya, Associate at Kay Properties & Investments
In the last five years, there are two markets that have had unprecedented growth in comparison to the rest of the country. Both have surpassed several cities on the rankings of “Largest U.S. City Population” held by the US Census Bureau and they now rank at the fourth and fifth largest city, respectively. Houston in on track to surpass Chicago as the third largest city in the country, and Phoenix is following right behind it. As the fifth largest city in the country as of 2016(1), Phoenix boasts many reasons it has grown at such an exceptional rate and why some experts believe it will continue to grow.
Phoenix continues to attract a new work force, which is demonstrated by having the second largest net migration in the United States. People are moving in droves to the Phoenix- Mesa-Scottsdale MSA not only for the warm weather but the job growth. Total employment grew by 3.4% from January 2019 to September of this year (2a), and the MSA boasts an unemployment rate of 3.8% as of September this year (2). From September 2018 to 2019, there were more than 53,000 jobs added to the Phoenix-Mesa-Scottsdale MSA (2b). In that job push, approximately 22% of the jobs came from construction (2c). Growth in construction jobs is a sign of a city’s growth, but it can be concerning when there is not growth in other industries that provide more stability.
In a down market, construction jobs decrease dramatically. However, the job growth found in Phoenix was spread out between many different industries. A large portion of growth came from the professional services industry, making up 13.5% of job growth within the September 2018-2019 year (2d). Professional services are a strong indicator of the robustness of an economy. Workers with these jobs are more likely to be paid higher wages and often have a desire to settle down wherever they move, and therefore may be less likely to leave. In a recent study by CompTIA, the world’s largest tech association, 78% of IT professionals surveyed said the largest factor they would consider leaving their current city is for affordability (4). The dramatic increase in costs throughout other large MSAs has potentially driven job growth in Phoenix.
For being the fifth largest city in the United States, Phoenix is still one of the most affordable for a large MSA. Amongst the 100 most populous cities in the United States, Phoenix ranks 52 nd according to an affordability study conducted by RealtyHop in May of this year (5). The study measured the average wage of a worker in that city versus the amount of income it would take to own the average home there. In Los Angeles, it would take 89% of the average worker’s income to buy a home. California cities that rank in the top ten as least affordable include Los Angeles at number one, San Francisco, Oakland, Long Beach, and Irvine – half of the top ten list. Cities known to draw workers from the professional services industry like San Francisco, Los Angeles, and Seattle have increased their cost of living by ridiculous margins.
As such, their net migration has dropped dramatically with workers more reluctant to pay for homes in pricey markets. Los Angeles has had a net migration of -381,000 between the years 2012 and 2017 (3). In that same period Phoenix experienced a growth of 221,000. Workers focused on home ownership and cost of living are running away from cost burden and high taxes of California to places like Phoenix. Arizona is a relatively business friendly state, with a state income tax ranging between 2.59% and 4.54% as of 2018 (6). This makes the state rank in the top five lowest state income tax rates for states that have them. On average homeowners in Phoenix spend 30.3% of their income on owning a home compared to other comparable cities like Denver, Houston, and Seattle that all land in the 38% range (5). Tax benefits paired with affordability and job opportunities have made Phoenix a market that will seem to grow much more in the future.
*Phoenix economic performance may not reflect the performance of a specific property.
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