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VOLUME 11 • NUMBER 4 • OCTOBER 1999

GREATER PHOENIX BLUE CHIP • OCTOBER 1999

PHOENIX
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The Greater Phoenix real estate market continues to boom
Real estate construction activity continues
to boom in the Phoenix area. Despite a
slowdown in the rate of employment growth
and higher mortgage rates, single-family
activity has remained extremely high. The
forecast panel expects nearly 32,000 units
permitted by year-end, after a record 33,811
in 1998. While single-family permit activity
is expected to slow to around 28,800 units in
2000 and 26,500 units in 2001, that level of
activity suggests a relatively muted cycle.
Apartment activity also continues at a
strong pace, with 7,000 permits expected in
1999. Absorption, however, is expected to be
less than 4,700 units. This will result in vacancy rates increasing to approximately 6.5%
at year-end 1999 compared to just over 5%
at year-end 1998. Vacancy rates are expected
to increase modestly in 2000 and 2001 to
7.0% and 7.2%, respectively. While this is a

higher level of vacancy than what was prevalent in the market over the last five years, it
is still relatively low by historic standards.
As expected, office vacancy rates are
headed upward. This is a result of substantial construction activity estimated at more
than 3.5 million square feet in 1999 compared to absorption of approximately 1.8
million square feet. The result will be an
increase in vacancy rates — double-digits for
the first time since 1995. Year-end 1999
vacancy rates are expected to be around 12%.
Construction in excess of absorption also is
expected in 2000, when vacancy rates are expected to exceed 12%. Vacancy rates should
stabilize in 2001 when new construction and
absorption are more in balance. While a
higher level of vacancy is in store, it may not
indicate significant overbuilding, but a return
to more normal levels of vacancy.

Retail activity is expected to remain
relatively stable with supply and demand
remaining in balance. Vacancy rates are projected to increase only modestly between
1999 and 2001, indicating no signs of overbuilding on the horizon.
The industrial market has been strong for
an extended period and is expected to remain strong. More than 5.8 million square
feet of construction are anticipated in 1999,
with a similar level anticipated in 2000 and
2001. Absorption is expected to remain
around 7 million square feet, indicating a
modest decline in vacancy rates.
While vacancy rates have increased in office and apartments, the market as a whole
remains strong and stable. Most importantly,
a first glimpse into 2001 indicates a relatively
steady performance is expected rather than
a significant cycle.
—E.P.

Greater Phoenix economy outlook remains positive
The Greater Phoenix economic outlook
remains positive through 2001 according to
the panel’s consensus forecast. Growth will
slow over the period but will remain well
above recessionary levels. The panel expects
the majority of the slowing to occur between
1999 and 2000, and 2001 is expected to look
very similar to 2000.
The main driver of the local economy continues to be population growth, and the panel
sees only a modest slowing in the next two
years. Population growth has held up remarkably well over the course of this expansion,
perhaps because the peak was not as extreme
as it was in the previous expansion. The outlook for population growth over the next 10
years is for less growth than the last 10 due
to demographic factors. But, the area should
continue to attract its share of new residents.
Local economic prospects also will be
brightened if the panel is right about the fu-

ture course of inflation. Low inflation and
low interest rates have powered both construction and retail sales. Construction, the
main focus of the issue, is sensitive to interest rates. Retail sales also are sensitive to interest rates, particularly in light of the historically high levels of consumer debt held
at this point in the expansion. The sheer
length of the current expansion could play a
role in continued growth of retail sales because of the auto buying cycle. Consumers
who bought new autos during the earliest part
of the current expansion have already replaced, or are beginning to think about replacing, those cars and trucks.
Employment growth has been very good
in Phoenix. Phoenix was number one among
large MSAs (Metropolitan Statistical Area)
in four of the last five years. Employment
growth is slowing but the local area is still in
the top five among large areas. Population

growth should help maintain growth in all
but two of the sectors — manufacturing and
mining. Mining is in for several tough years
because of overcapacity. Manufacturing employment was hard hit by the crisis in Asia
but seems to be poised for a modest rebound
—T.C.
as those economies recover.
CONSENSUS FORECAST FOR 2001
Annual percent change from 2000
Population ..........................................
Personal Income ..............................
Retail Sales ........................................
Wage & Salary Employment ...........
Manufacturing Employment ...........
Construction Employment ...............
Service Employment ........................
National CPI ......................................
Unemployment Rate .........................

2.7
6.4
5.2
3.1
1.6
(2.9)
3.5
2.3
3.9

BANK ONE ECONOMIC OUTLOOK CENTER • ARIZONA STATE UNIVERSITY

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GREATER PHOENIX BLUE CHIP • OCTOBER 1999

GREATER PHOENIX ECONOMIC FORECAST FOR 1999
ANNUAL PERCENT CHANGE 1999 FROM 1998
PopuSOURCE
lation
Arizona Public Service
3.4
ASU – Bank One Economic Outlook Center
3.4
Communities Southwest
3.1
Department of Economic Security
2.8
ECON-LINC
3.0
Elliott D. Pollack and Co.
3.0
H. C. Reardon Economics
3.0
Joint Legislative Budget Committee
2.9
The Maguire Company
3.0
PricewaterhouseCoopers
3.0
Salt River Project
2.9
U of A – BPA College
3.6H
VisionEcon
2.7L
1998 Consensus
3.0

Personal
Income
8.1
7.5
6.8
6.6
7.2
6.7
7.4
7.1
7.1
6.8
6.8
9.5H
6.5L
7.2

Retail
Sales
8.0H
7.8
6.0
6.2
6.5
5.7L
6.0
6.1
6.2
6.0
6.4
7.8
6.8
6.5

Wage &
Salary
Empl.
4.4
4.1
4.4
4.1
4.0
3.5L
4.1
4.0
4.1
4.3
4.0
5.4H
3.5L
4.1

Manufacturing
Empl.
1.4
1.0
2.8
2.4
1.0
1.0
(1.0)L
1.9
2.4
2.5
1.0
3.2H
2.0
1.7

AVERAGE RATE FOR 1999

Construction
Empl.
7.7
5.5
3.5
5.5
5.5
6.0
6.0
0.5L
1.0
0.5L
5.0
11.5H
3.5
4.5

Services
Empl.
4.2
5.0
5.0
4.5
4.8
4.0
4.0
4.9
5.0
5.2
3.0L
5.6H
4.0
4.6

National
CPI
2.5H
2.3
2.1
1.7
2.3
2.0
2.2
1.9
2.1
2.2
2.2
1.6L
1.8
2.0

Unemployment
Rate
3.1L
3.1L
3.7H
—
3.1L
3.1L
3.3
3.5
3.1L
3.3
3.1L
—
3.5
3.3

GREATER PHOENIX ECONOMIC FORECAST FOR 2000
ANNUAL PERCENT CHANGE 2000 FROM 1999

SOURCE
Arizona Public Service
ASU – Economic Outlook Center
Communities Southwest
Department of Economic Security
ECON-LINC
Elliott D. Pollack and Co.
H. C. Reardon Economics
Joint Legislative Budget Committee
The Maguire Company
PricewaterhouseCoopers
Salt River Project
U of A – BPA College
VisionEcon
1999 Consensus

Population
3.1
2.7
2.9
2.7
2.6L
2.8
2.8
2.7
3.0
2.8
2.7
3.2H
2.7
2.8

Personal
Income
7.0
6.5
6.2
6.3
6.5
6.2
6.9
6.8
6.7
6.2
6.4
7.5H
5.0L
6.4

Retail
Sales
6.0
6.0
5.5
5.7
5.2
5.0L
5.5
5.6
5.8
5.5
6.0
7.7H
5.0L
5.7

Wage &
Salary
Empl.
3.6
3.7
3.7
3.8
3.0
3.0
3.7
3.7
4.0H
3.5
3.8
3.6
2.5L
3.5

Manufacturing
Empl.
1.1
2.0
2.5
3.5H
0.5
2.0
1.0
1.8
2.0
1.5
1.0
(2.8)L
1.8
1.4

AVERAGE RATE FOR 2000

Construction
Empl.
(3.2)
(2.0)
2.0
3.9
(5.0)
(7.0)L
(6.0)
(7.0)L
1.0
(3.0)
3.5
4.2H
(5.0)
(1.7)

Services
Empl.
3.8
4.5
4.6H
4.2
4.2
4.0
4.5
4.0
4.5
4.6H
2.8L
4.6H
3.5
4.2

National
CPI
2.4
2.5
2.4
1.8
2.5
2.6H
2.5
2.1
2.2
2.3
2.3
2.2
1.5L
2.2

Unemployment
Rate
3.4L
3.7
3.9
—
3.7
3.5
3.6
3.8
3.5
3.5
3.5
—
4.3H
3.7

Data sources for Maricopa County (Greater Phoenix area): population, Arizona Department of Economic Security; personal income, Bureau of Economic
Analysis; retail sales, Arizona Department of Revenue; wage and salary employment, manufacturing employment, construction employment, service
employment and unemployment rate, Arizona Department of Economic Security; metropolitan Phoenix consumer price index, ASU Center for Business
Research.

GREATER PHOENIX HISTORICAL DATA

SOURCE
1998
Percent Change
1997
Percent Change
1996
Percent Change
*Estimated

Population
(thousands)
2,793
3.2
2,706
3.2
2,621
3.7

Personal
Income
(millions)
72,309*
7.7*
67,140*
7.9*
62,224
9.1

Retail
Sales
(millions)
25,207
7.9
23,360
7.8
21,664
8.2

Wage &
Salary
Empl.
(thousands)
1,420.9
5.7
1,344.2
5.6
1,272.5
7.0

Manufacturing
Empl.
(thousands)
167.4
5.6
158.5
4.5
151.7
4.7

Construction
Empl.
(thousands)
104.3
11.7
93.4
5.5
88.5
6.0

Services
Empl.
(thousands)
443.9
4.7
424.0
7.3
395.2
9.7

National
CPI
163.0
1.6
160.5
2.3
156.9
2.9

Unemployment
Rate
2.7
3.0
3.6

GREATER PHOENIX BLUE CHIP • OCTOBER 1999

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PAGE 3

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
1999

2000

2001

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Apt.
AbsorpVacancy
tion

Arizona Public Service
ASU Real Estate Center
CB Richard Ellis
Communities Southwest
Griffin Consulting
Elliott D. Pollack & Co.
The Meyers Group

32,150
29,600
—
34,000
30,750
31,500
33,000

7,450
5,500
8,000
7,000
6,500
6,000
8,500

6.0%
7.0
6.0
6.5
6.8
6.5
7.3

4,100
4,250
6,500
4,000
5,500
4,500
3,800

28,750
27,500
—
30,000
27,500
27,000
32,000

6,100
6,000
8,000
5,000
6,000
6,000
7,000

6.3%
7.0
6.5
7.0
7.1
7.0
8.2

4,800
5,000
6,000
3,500
5,300
4,500
4,500

26,500
25,000
—
27,000
26,500
25,000
29,500

5,700
6,000
8,000
4,500
6,000
5,500
6,000

6.5%
8.0
7.0
6.5
7.2
7.0
8.4

4,700
4,500
6,000
3,000
5,200
5,000
4,700

Consensus
1998
1997
1996

31,833
33,811
29,124
28,157

6,993
7,877
7,799
8,533

6.6
5.1
4.8
4.5

4,664
3,674
8,001
7,820

28,792

6,300

7.0

4,800

26,583

5,957

7.2

4,729

1998 year-end inventory: 731,918 (single-family)
289,044 (multi-family)

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
OFFICE (Millions of Square Feet)

Arizona Public Service
CB Richard Ellis
Communities Southwest
Cushman & Wakefield
Elliott D. Pollack & Co.
Grubb & Ellis
Lee & Associates
Consensus
1998
1997
1996

1999

2000

2001

Construction
3.6
3.8
2.9
3.9
3.8
3.3
4.0

Leaseable
Year-end
Vacancy
12.5%
11.6
10.5
12.4
11.5
12.9
11.0

Absorption
1.0
2.4
2.2
2.0
1.5
2.0
1.8

Construction
0.8
1.9
2.4
2.0
3.0
2.7
3.5

Leaseable
Year-end
Vacancy
11.4%
11.0
11.0
12.8
13.5
13.6
13.1

Absorption
1.3
2.0
1.8
1.7
1.5
1.9
1.6

Construction
1.5
1.9
2.0
1.5
1.5
1.9
1.6

Leaseable
Year-end
Vacancy
11.7%
10.4
11.5
12.6
13.5
13.1
12.2

Absorption
1.2
2.0
1.5
1.7
1.4
1.9
1.5

3.6
1.6
0.7
0.0

11.8
8.5
7.5
9.1

1.8
1.1
1.4
0.3

2.3

12.3

1.7

1.7

12.2

1.6

1998 year-end inventory: 40.5 million square feet

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RETAIL (Millions of Square Feet)
1999

Arizona Public Service
CB Richard Ellis
Communities Southwest
Grubb & Ellis
Consensus
1998
1997
1996

Construction
2.2
3.1
1.8
2.0
2.3
1.0
3.6
3.8

Leaseable
Year-end
Vacancy
9.5%
5.7
9.5
6.5
7.8
9.4
9.5
9.4

2000
Absorption
1.6
3.3
1.6
1.8

Construction
1.1
3.3
1.6
1.8

2.1
1.3
3.4
3.8

1.9

Leaseable
Year-end
Vacancy
9.3%
5.9
9.8
6.8
8.0

2001
Absorption
1.2
2.9
1.4
1.6

Construction
2.1
3.3
1.5
1.5

1.8

2.1

Leaseable
Year-end
Vacancy
10.1%
6.1
10.0
7.0
8.3

1998 year-end inventory: 84.1 million square feet

Absorption
1.2
2.8
1.4
1.3
1.7

PAGE 4

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GREATER PHOENIX BLUE CHIP • OCTOBER 1999

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
INDUSTRIAL (Millions of Square Feet)
1999

CB Richard Ellis*
Cushman & Wakefield*
Lee & Associates*
Consensus–Total Space

Construction
5.5
8.2
3.9
5.9

Grubb & Ellis**
Consensus–Spec Space

2.7
2.7

1998 (Total space)
1997 (Total space)
1996 (Total space)
*All space over 5,000 sq. ft.

Leaseable
Year-end
Vacancy
8.3%
6.0
7.0
7.1
13.2
13.2

2000
Absorption
7.0
8.0
7.0
7.3

Construction
5.0
8.0
4.5
5.8

3.5
3.5

2.0
2.0

Leaseable
Year-end
Vacancy
8.5%
6.5
7.5
7.5

2001
Absorption
7.5
7.0
6.5
7.0

Construction
6.0
8.0
3.5
5.8

3.0
3.0

2.0
2.0

13.5
13.5

Leaseable
Year-end
Vacancy
8.0%
7.0
8.5
7.8

Absorption
8.0
7.0
5.6
6.9

14.0
14.0

2.5
2.5

7.0
7.1
7.9
1998 year-end inventory: 190.6 million sq. ft. total (Lee & Associates)
8.1
7.0
9.5
84.5 million sq. ft. spec (Grubb & Ellis)
4.8
5.7
8.7
**Spec space over 10,000 sq. ft., including multiple building developments that total 10,000 sq. ft.

REAL ESTATE FORECAST PANEL
Arizona Real Estate Center
Arizona State University
Jay Q. Butler
Arizona Public Service
Brian Cary and Pete Ewan
CB Richard Ellis
Kelli Brooks

Communities Southwest
Steven Pritulsky

Griffin Consulting
Brian J. Smargiassi

Cushman & Wakefield
Katherine Gibbs

Grubb & Ellis
George Graham

Elliott D. Pollack and Company
Elliott Pollack

Lee & Associates Arizona
T. J. Swearengin
The Meyers Group
David A. Thikoll

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
Dan Anderson and Donald Wehbey

ECON-LINC
John Lucking

Arizona Public Service Company
Pete Ewen

H. C. Reardon Economics
Hank Reardon

Arizona State University,
Bank One Economic Outlook Center
Tracy Clark

Joint Legislative Budget Committee
Kent Ennis

Communities Southwest
Steve Pritulsky

The Maguire Company
Alan Maguire

Elliott D. Pollack and Company
Elliott Pollack
Salt River Project
Christopher Combe, Melissa Hardison
and Karen Wolfe
University of Arizona, College of Business
and Public Administration
Marshall Vest

GREATER PHOENIX BLUE CHIP (ISSN 1042-6825) is published quarterly by the Economic Outlook Center, an
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