Will A Liberal Arizona Continue to Attract Investors?

Phoenix has blossomed in the last several years. Inward migration from California has fueled growth across asset classes. While residents have moved to the market for better affordability, investors are running from the stringent regulation in California. However, as Californians move into Phoenix, the political environment is changing.

Late last year the change was evident. Arizona passed a wealth tax to fund education in the state, and the state swung blue in the presidential race. “I wonder if because Arizona is now a blue state and has passed a wealth tax, will the state start trending toward rent control and other regulations? That would slow down a lot of the momentum of investors living in Phoenix,” Tom Jonsson, multifamily director at James Capital Advisors, tells GlobeSt.com. “The appeal of Phoenix from Southern California investors is that you are 250 miles away and you have fundamentals that are so similar to L.A. with population influx, shortage of housing, low vacancy rates and strong rent growth. If the state increases regulations, investors might as well stay in California. That will create a slowdown.”

At the moment, there are many compelling reasons for investors to increase exposure to the Phoenix market. “There are investors that are selling out of California across the spectrum,” says Jonsson. “You can buy a 20 to 30 unit building in a $5 million deal. Investors can sell a $3 million 10-unit building in Los Angeles and can go and buy a 30-unit building in Phoenix. So, the long-term cash flow in the market is substantially greater. The bonus is that they no longer have to deal with the regulatory issues in Los Angeles, like rent control.”

While a more attractive regulatory environment might deter some investment, there are still plenty of reasons to invest in the market, including more attractive yields and strong population and job growth. “I don’t think the increase in regulations in Arizona, I don’t think that offsets other fundamentals that make Phoenix attractive. That includes housing affordability,” says Jonsson. “People are moving out to Phoenix because California is an unaffordable state. Phoenix is more affordable and the weather is great 9 months out of the year. From that standpoint, you’ll have strong occupancy rates and rent growth.”

At the moment, Jonsson is advising clients to buy attractive opportunities in both market. “From a long-term perspective, this is still a great time to buy because there are low interest rates, historical trends of strong occupancy levels and rent growth,” he says. “That is true in both Los Angeles and Phoenix right now.”