NOVEMBER 2004 Volume 16, Number 4
GREATER PHOENIX BLUE CHIP • NOVEMBER 2004

........................................................................................... PAGE 1

Single-family setting records; commercial market improving
The single-family housing market will set new
records this year. The unanticipated strength seems
to be a function of a strong economy and low interest
rates. Indeed, the 2004 forecast is for about 52,000
permits, or more than a 25 percent increase over
2003. Only minor declines are anticipated in 2005
and 2006. While the forecast for 2005 calls for an
8.5 percent decline, followed by another relatively
small decline in 2006, those years would be strong
by any historic standard.
The apartment market seems to be improving.
The forecast for 2004, 2005 and 2006 shows more
absorption than new units permitted, and vacancy
rates dropping from 9.6 percent in 2004 to the mid-8
percent range by 2006. This would be a signiﬁcant recovery for a market that has been troubled.
As interest rates and median home prices move
up, affordability for single-family housing could
become more of an issue. Such a trend would help
return the multi-family market to normal.
The same absorption dynamics are true for the ofﬁce
market. Absorption in 2003 exceeded construction for
the ﬁrst time since 1997. Absorption should exceed
construction by nearly 500,000 square feet in 2004 and
2005, and by more than 600,000 in 2006. This would

help take downward pressure off rents as vacancy rates
decline from an anticipated 18 percent in 2004 to the
mid-15 percent range by the end of 2006. Construction,
which has been modest since 2003, is likely to remain
relatively modest over the next couple of years.
The consensus is that the retail market will be
relatively healthy, with construction and absorption
balancing out over the next three years. Vacancy
rates are likely to remain in the mid-8 percent
range and new construction in the 3.5-to-4 million
square-foot range.
According to the consensus, the industrial market
will be the ﬁrst to get back to normal levels of
vacancy. Vacancy rates have dropped from 10.3
percent at the end of 2002 to a projected 9 percent at
the end of 2004. Vacancies are expected to continue
to decline to under 8 percent by the end of 2006.
Once again, in that market, absorption would exceed
construction in 2004, 2005 and 2006.
Overall, the commercial markets are improving
as absorptions exceed new supply, thus allowing
vacancy rates to decline. Single-family housing is
expected to remain strong, albeit not as strong as
this year.
— Elliott D. Pollack

" While the
forecast for
2005 calls for
an 8.5 percent
decline [in
single-family
permits],
followed
by another
relatively small
decline in
2006, those
years would
still be strong
by any historical standard. "

National economic slowdown is drag on metro area's growth
In the face of uncertain economic performance at the national level, the local
economy continues to hold its own. However, those nationwide uncertainties mean
the Greater Phoenix area is not faring as
well as it normally would at this point in
the economic cycle.
The Phoenix Metropolitan Statistical
Area, which includes both Maricopa and
Pinal counties, had the third fastest job
growth among large MSAs in August, with
its growth rate of 2.5 percent. Typically it
would be reasonable to expect job growth
somewhere in the 3 percent range at this
point in the recovery.
Manufacturing job growth remains nega-

tive, primarily due primarily to continued
weakness in semiconductors. It seems likely
that the panel will have to further lower its
manufacturing employment projections.
The region also is experiencing weakness
in information employment because of the
continuing weakness in telecommunications. Manufacturing and information are
the only two negative sectors, but many
other sectors are growing more slowly than
expected. Construction is the only sector
growing faster than expected, and upward
revisions to construction employment forecasts were the biggest change to the fourth
quarter forecast.
The panel does not see inﬂation as a

major problem despite the recent surges
in energy prices. First, energy is a lower
percentage of overall spending than it was
during the energy crises of the ’70s and
’80s. Second the inﬂation-adjusted price
of gasoline would have to be close to $3 a
gallon to equal the constant dollar price for
gas in the early eighties. Thus, the potential for oil price hikes to impact the local
economy is lower than it used to be. The
Phoenix metro area is lucky too in that the
summer driving season is over and most
Valley residents don’t spend much to hear
their houses in winter — at least compared
to most U.S. homeowners.
— Tracy Clark

PAGE 2

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GREATER PHOENIX BLUE CHIP • NOVEMBER 2004

GREATER PHOENIX ECONOMIC FORECAST FOR 2004
ANNUAL PERCENT CHANGE 2004 FROM 2003
PopuSOURCE
lation
Arizona Public Service
3.1 H
ASU – Bank One Economic Outlook Center 2.7 L
CH2M HILL
2.8
Department of Economic Security
2.7 L
ECON-LINC
2.9
EconLit LLC
2.7 L
Elliott D. Pollack and Co.
3.0
H.C. Reardon Economics
2.9
Joint Legislative Budget Committee
2.9
The Maguire Company
2.9
Protitlement
2.9
Salt River Project
3.0
U of A – Eller College
3.1 H
VisionEcon
2.8
Consensus
2.9

Personal
Income
7.4
6.6
6.6
6.3
6.2 L
6.5
6.5
7.1
6.5
6.6
6.8
6.8
7.1
6.7
6.8

Retail
Sales
6.7
6.0 L
6.2
6.4
6.5
6.2
8.5
6.5
6.5
6.8
6.5
9.0 H
8.5
6.1
6.9

Wage &
Salary
Empl.
3.9
3.3
3.3
2.5 L
2.6
3.2
3.0
2.8
3.5
3.3
3.8
3.0
3.9
4.0
3.4

Manufacturing
Empl.
2.0
1.5
2.4
(2.0) L
0.0
2.0
0.0
0.0
1.5
2.6
3.1
0.0
2.2
2.8
1.4

AVERAGE RATE FOR 2004

Construction
Empl.
5.5
(3.5) L
1.5
3.5
10.0 H
0.0
10.0 H
9.0
3.0
3.0
2.8
8.0
6.4
3.0
4.3

Services
Empl.
4.7
5.8
4.4
3.7
3.3
4.2
4.0
5.0
4.5
4.8
5.5
3.0 L
5.1
6.0 H
4.6

National
CPI
2.1
1.8 L
2.4
2.4
2.4
2.5
2.5
2.6
2.5
2.4
2.5
2.7
2.7
3.6 H
2.5

Unemployment
Rate
4.7
4.8 H
4.6
4.6
3.8 L
4.0
4.4
4.0
4.4
4.6
4.4
4.2
4.8 H
4.4

GREATER PHOENIX ECONOMIC FORECAST FOR 2005
ANNUAL PERCENT CHANGE 2005 FROM 2004

SOURCE
ASU – Bank One Economic Outlook Center
CH2M HILL
Department of Economic Security
ECON-LINC
EconLit LLC
Elliott D. Pollack and Co.
H.C. Reardon Economics
Joint Legislative Budget Committee
The Maguire Company
Protitlement
Salt River Project
U of A – Eller College
VisionEcon
Consensus

Population

Personal
Income

Retail
Sales

Wage &
Salary
Empl.

Manufacturing
Empl.

2.8
2.8
2.6 L
2.9
2.8
3.1
3.0
2.8
2.9
3.0
2.9
3.4 H

7.0
6.7
7.1
6.5 L
7.0
7.7
7.4
7.0
6.9
7.2
7.5
8.2 H

6.6
6.5
6.5
6.6
6.6
7.0
6.7
6.8
7.0
6.8
8.0 H
5.6 L

4.2
3.7
3.2 L
3.8
4.0
4.5
4.2
4.0
4.2
4.5
4.5
4.8 H

2.6
3.1
1.1 L
3.0
2.4
3.5
3.0
3.0
3.7
3.7
4.0
4.8 H

2.9

7.2

6.7

4.1

3.2

AVERAGE RATE FOR 2005

Construction
Empl.

Unemployment
Rate

Services
Empl.

National
CPI

(9.0) L
1.8
3.4
(2.0)
2.5
2.5
0.0
2.0
2.0
(1.0)
1.0
6.3 H

7.5 H
4.4
4.5
4.3 L
4.6
5.5
5.0
5.0
4.9
5.8
5.0
5.2

2.2
2.5
2.5
2.5
2.6
2.7 H
2.3
2.2
2.4
2.5
1.8 L
1.8 L

4.5 H
4.5 H
4.4
3.8 L
3.8 L
4.0
3.8 L
4.1
4.2
3.9
3.8 L

0.8

5.1

2.3

4.1

Data sources for Maricopa County (Greater Phoenix area): population, Arizona Department of Economic Security (DES); 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, DES.

GREATER PHOENIX HISTORICAL DATA

SOURCE
2003
2002
2001

Population
(thousands)
3,382.0
2.8%
3,289.0
3.0%
3,194.0
3.1%

Personal
Income
(millions)
$103,762.0
5.3%
$98,540.0
4.4%
$93,317.0
4.7%

Retail
Sales
(millions)
$32,132.0
4.7%
$30,690.0
0.3%
$30,605.0
1.5%

Wage &
Salary
Empl.
(thousands)
1,576.6
1.3%
1,556.9
(0.2)%
1,559.5
1.2%

Manufacturing
Empl.
(thousands)
126.9
(6.0)%
135.0
(10.2)%
150.3
7.5%

Construction
Empl.
(thousands)
128.6
3.3%
124.5
(1.7)%
126.7
8.3%

Services
Empl.
(thousands)
627.4
2.7%
610.8
1.0%
604.5
19.2%

National
CPI
184.0
2.3%
179.9
1.6%
177.1
2.8%

Unemployment
Rate
4.9%
5.6%
3.9%

GREATER PHOENIX BLUE CHIP • NOVEMBER 2004

........................................................................................... PAGE 3

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
2004

Arizona Public Service
ASU Real Estate Center
CB Richard Ellis
Elliott D. Pollack & Co.
Grifﬁn Consulting
Grubb & Ellis/BRE Comm.
Marcus & Millichap
Meyers Group
Protitlement
U of A, Eller College
Consensus
Actuals from ASU:
2003 ACTUALS
2002 ACTUALS

2005

2006

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

49,500
45,000
55,000
57,000
47,400
52,000
N/A
55,750
56,000
53,500
52,350

4,300
4,200
5,500
4,300
4,800
2,000
N/A
5,500
4,200
6,122
4,547

9.0%
9.0
9.4
9.0
9.5
9.5
9.2
N/A
12.5
N/A
9.6

5,900
4,000
4,900
6,500
5,250
3,500
4,537
N/A
4,800
N/A
4,923

42,500
38,500
59,000
49,000
44,000
50,000
N/A
50,175
49,000
49,190
47,929

4,800
4,500
5,500
4,500
5,300
2,000
N/A
4,800
5,000
5,669
4,674

8.9%
9.0
8.6
8.5
9.0
9.0
9.0
N/A
11.8
N/A
9.2

4,700
4,000
6,200
6,500
6,550
3,800
4,990
N/A
5,400
N/A
5,268

43,400
35,000
58,000
48,500
41,000
45,000
N/A
47,750
46,000
49,113
45,974

4,900
6,000
6,000
5,500
5,600
2,500
N/A
4,500
6,000
5,816
5,202

39,652
34,312

4,836
5,607

9.6
9.4

3,702
3,355

Year-end
Apt.
Apt.
AbsorpVacancy
tion

8.5%
8.5
8.2
8.1
8.8
8.5
N/A
N/A
11.2
N/A
8.8

5,900
6,000
6,500
6,500
7,250
4,500
N/A
N/A
6,500
N/A
6,164

2002 year-end inventory: 899,077 (single-family)
325,311 (multi-family)

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

Construction
Arizona Public Service
CB Richard Ellis
Cushman and Wakeﬁeld
Elliott D. Pollack & Co.
Grubb & Ellis/BRE Commercial
Lee & Associates
Marcus & Millichap
PricewaterhouseCoopers LLP
Protitlement
Consensus
Actuals from Lee & Associates:
2003 Actuals
2002 Actuals

2004

2005

2006

Leaseable
Year-end
Vacancy

Leaseable
Year-end
Vacancy

Leaseable
Year-end
Vacancy

Absorption

0.90
0.80
0.66
1.00
0.95
1.11
0.92
1.00
0.80
0.91

21.0%
16.2
17.0
17.0
19.0
17.1
18.3
17.0
19.5
18.0

1.20
1.80
1.50
1.70
1.00
1.10
1.64
1.20
1.40
1.39

1.08
2.89

18.7
19.3

1.32
1.19

Construction
1.10
1.30
1.59
1.50
0.80
1.01
1.08
1.50
1.00
1.21

19.5%
15.8
16.3
16.0
18.5
15.5
17.8
15.2
17.6
16.9

Absorption
1.70
2.20
2.00
2.00
1.40
1.75
1.21
1.70
1.80
1.75

Construction
2.20
2.30
1.81
1.50
1.20
0.93
N/A
1.20
1.40
1.57

19.2%
14.1
14.5
15.2
17.2
13.8
N/A
15.2
16.5
15.7

Absorption
2.00
3.00
2.80
2.00
2.00
1.75
N/A
1.20
2.20
2.12

2003 year-end inventory: 54.8 million square feet

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

Construction
Arizona Public Service
CB Richard Ellis
Grubb & Ellis/BRE Commmercial
Marcus & Millichap
PricewaterhouseCoopers LLP
Protitlement
Consensus
Actuals from CB Richard Ellis:
2003 Actuals
2002 Actuals

2004

2005

2006

Leaseable
Year-end
Vacancy

Leaseable
Year-end
Vacancy

Leaseable
Year-end
Vacancy

Absorption

Construction
4.20
6.50
3.60
2.24
3.80
4.30
4.11

3.10
5.00
3.60
1.94
3.80
3.50
3.49

10.9%
6.5
6.0
8.8
10.2
9.2
8.6

2.50
5.70
3.40
1.80
3.80
3.10
3.38

5.00
3.89

7.4
7.3

4.12
3.04

11.6%
7.0
5.5
8.5
9.8
9.6
8.7

Absorption

Construction

3.00
5.50
3.50
2.09
4.00
3.80
3.65

3.60
5.00
3.70
N/A
3.60
4.00
3.98

11.7%
6.1
5.0
N/A
10.6
9.2
8.5

2003 year-end inventory: 110.0 million square feet

Absorption
3.10
5.80
3.60
N/A
3.40
4.40
4.06

PAGE 4

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GREATER PHOENIX BLUE CHIP • NOVEMBER 2004

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
INDUSTRIAL (Millions of Square Feet)
2004
Construction
CB Richard Ellis*
4.5
Cushman and Wakeﬁeld**
1.3
Grubb & Ellis/BRE Commercial**
3.2
Lee & Associates*
4.9
Consensus — Total Space
3.5
Actuals from CB Richard Ellis:
2003 Actuals Total Space
2002 Actuals Total Space
2001 Actuals Total Space
2000 Actuals Total Space
*All space over 5,000 sq. ft.

3.44
5.65
8.47
6.51

Leaseable
Year-end
Vacancy
0.1
0.1
0.1
0.1
0.1

9.7
10.3
9.8
7.4

2005
Absorption
6.7
3.4
6.0
2.6
4.7

4.40
3.36
2.77
10.71

Construction
6.0
2.1
4.5
4.7
4.3

Leaseable
Year-end
Vacancy
0.1
0.1
0.1
0.1
0.1

2006
Absorption
7.0
4.6
7.1
3.9
5.6

Construction
7.0
3.2
5.6
4.0
5.0

Leaseable
Year-end
Vacancy
0.1
0.1
0.1
0.1
0.1

Absorption
6.0
5.6
7.8
3.5
5.7

2003 year-end inventory: 215.2 million sq. ft. (CB Richard Ellis)*
234.3 million sq. ft. (Cushman and Wakeﬁeld)**
222.8 million sq. ft. (Lee & Associates)*
233.0 million sq. ft. (Grubb & Ellis)**

**Total market (space over 10,000 sq. ft.)

REAL ESTATE FORECAST PANEL
Arizona Public Service
Pete Ewen
Arizona Real Estate Center
Arizona State University
Jay Q. Butler
CB Richard Ellis
Jeff Cooledge
Cushman and Wakeﬁeld
Stewart Park

Elliott D. Pollack and Co.
Elliott Pollack

The Meyers Group
Stu Burton

Grifﬁn Consulting
Brian J. Smargiassi

PricewaterhouseCoopers LLP
Tom Kabat

Grubb & Ellis / BRE Commercial
Jaime Weideman

Protitlement
Steven Pritulsky

Lee & Associates Arizona
Curt Czarsty and Josh Kohlhase

University of Arizona, Eller College
Marshall Vest

Marcus & Millichap
Jason Wong

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
Donald Wehbey

ECON-LINC
John Lucking

Elliott D. Pollack and Co.
Elliott Pollack

Arizona Public Service Co.
Pete Ewen

EconLit LLC
Dwight Duncan

Protitlement
Steve Pritulsky

H. C. Reardon Economics
Hank Reardon

Salt River Project
Arlyn Herrera, Rebecca Holmes and Karen Wolfe

Joint Legislative Budget Committee
Staff

University of Arizona, Eller College
Marshall Vest

The Maguire Co.
Alan Maguire

Vision Econ
Debra J. Roubik

Arizona State University
Bank One Economic Outlook Center
Tracy Clark
CH2M Hill
Kent Ennis

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