A certain restauranteur friend who has successfully used the right ingredients for a great menu and thriving business recently shared some great advice as to how he’s pursuing smart growth. Interested, because the market dynamics that drive great restaurant demand are similar to the demand for real estate development, PEG leaned in to listen. Our friend explained that one of the most compelling factors that promoted his company’s growth practice was the ability to open a minimum of 10 stores per city.
Our friend’s “10-store standard” became a new market requirement after the restaurant measured the amount of time and logistics that went into opening a new store in a new city. The human resources that went into establishing new relationships with architects, contractors, designers and the ever-important supply chain to open up one new store was staggering. Ramping up on new employment standards and market nuances consumed significant legal resources and efforts from the corporate office that marginalized the rewards from creating a new store in a new market.
A disciplined new market strategy was put into place that first required numerous boxes to be checked of why the restaurant should and could expand in a certain market, with the primary focus being on finding a new market that would support the 10-store minimum. It gave them buying power, economies of scale and the ability to transfer lessons learned to the next stores, creating a dynamic for improved growth and best practices that could be implemented, trained, and communicated between restaurants.
It has been thrilling to watch a friend take an idea for a good restaurant and apply strategic principles for growth and success to the culinary recipes to define a recipe for success for optimal growth and profitability for the business.
As PEG Companies considers strategic markets to grow our development and operations platform, we have found analogs in how successful companies, including our friend’s restaurant chain, have carefully planned to achieve optimal growth and success and not just growth for growth’s sake.
Great projects are functions of great people, and real estate development requires a significant network of architects, engineers, attorneys, brokers, contractors, and sub-contractors along with asset and property managers. By applying a similar project minimum threshold to market analyses akin to the restaurant’s requirements for new stores, we will reap significant rewards in efficiency of up-front diligence work and cost, and translate lessons learned across local projects while improving upon our operational efficiencies that drive the bottom line return to our investors.
As we at PEG reflect on how, where, and why we should grow our development platform, we too have concluded that the best markets will be those that check all of the right boxes in addition to providing the opportunity to execute multiple projects within the marketplace to promote the optimal growth and performance that we seek. After analyzing several markets extensively through this lens, our investment team has come to find one market, in particular, to be particularly promising: the Phoenix MSA market contains all of the right ingredients to create PEG’s recipe for optimal growth and dynamic asset operations.
The aforementioned discusses the philosophical approach to our optimal growth – as Phoenix is one of our top markets in the country, it seems appropriate to briefly discuss the “why.”
A Strong Multifamily Outlook
Robust economic fundamentals? Check.
Ongoing influx of new residents? Check.
Escalating demand for rental housing? Check.
The Greater Phoenix market checks all of the boxes that indicate a healthy environment for multifamily owners, operators and developers. The ingredients for strong growth are in place and Phoenix one of the top markets for multifamily investors for the next few years.
“These strong fundamentals, coupled with meager levels of overall housing supply (single-family and multifamily), are pushing vacancy rates to historically low levels which should keep Phoenix among the top rent growth markets nationally in 2020,” said Matt Pesch, Executive Vice President with CBRE Phoenix Multifamily Institutional Properties division. “Phoenix is still one of the most affordable major markets in the Western United States.”
Despite the significant amount of supply that has been delivered to the market, significant in-migration and changing demographics has created a situation where supply is not meeting demand. According to Tom Brophy, the Director of Research at Colliers International in Arizona, there is a 20,000- to 30,000-unit deficit in multifamily based on the population growth Maricopa County is experiencing.
“We are living through a tectonic shift pushing us further and further into a more renter-centric society which started in earnest in 2011 and 2012,” according to Cindy Cooke, Senior Executive Vice President at Colliers International in Arizona. “Renter household levels have increased nearly 7 percent since 2000. More locally, Maricopa County has witnessed a stunning 20-plus percent increase.”
“By our estimation, metro Phoenix is building 10,000 to 15,000 too few housing units annually,” said Asher Gunter, Executive Vice President with CBRE Phoenix Multifamily Institutional Properties division. “Because of the current labor shortage, it’s not likely that developers will be able to build fast enough to keep up.”
Data points are readily available that justify why PEG will be able to achieve smart market growth within the MSA. With exciting projects in Tempe, Papago, Old Town Scottsdale, downtown Phoenix, and now Tucson, we feel that 2020 has us off to a great start. Like our friend following smart growth with his restaurant business, PEG plans to pursue the 10-project standard over the next couple of years. We are thrilled to have a few strategic flags planted in the fertile desert and look forward to establishing our ever-important network in in the Valley of the Sun as we work toward the recipe of success.