NOVEMBER 2005 Volume 17, Number 4
GREATER PHOENIX BLUE CHIP • NOVEMBER 2005

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

Record-busters may be over, but real estate remains strong
The single-family home market continues
to boom in Greater Phoenix, although the
“frenzy” appears to be over. According to
the Greater Phoenix Blue Chip Real Estate
Consensus, this year will probably be the
peak in permits for this cycle.
The panel predicts 2005 will surpass 2004
as a record year by 1.7 percent. However,
new single-family permits are expected to
decline by a modest 7.9 percent next year
and another 8.0 percent in 2007. This would
still make 2006 and 2007 excellent years by
historic perspective. Indeed, there may be
a lag effect in terms of the impact on new
housing. Overall, there is still a sanguine
view of the housing market.
Multi-family vacancy rates dropped
rapidly from 7.9 percent last year to an estimated fourth-quarter level of 6.6 percent.
Vacancy rates should stay stable over the
next couple of years, according to the panel.
While permits are expected to be in the 5,900
range for 2005 and 6,500 next year, the real
story is the conversion of apartment units to
condominiums.
Depending on whose data is used, a total

of 13,000 to 18,000 apartments have been or
are being converted to condominiums. This
will result in a reduction in inventory and
a significant drop in vacancy rates. Multifamily absorption rates are expected to be a
few hundred units below the level of permits
in 2006 and 2007, but the outlook remains
positive given the low level of vacancies.
Office vacancy rates also dropped dramatically, from more than 18 percent last year
to an estimated 14.8 percent. The outlook is
for a further decline of 13.8 percent in 2006
and 13.3 percent in 2007. This is due to a
mix of factors, including absorptions above
the level of new construction for all three
years, and again, the conversion of more
than 800,000 square feet from speculative
office to office condominiums.
The consensus outlook calls for office
construction activity to be 1.1 million
square feet in 2005, increasing to more than
2.0 million square feet in 2006 and 2007.
Absorption is expected to be 2.0 to 2.5 million square feet in those years, pushing the
year-end vacancy rate down. The outlook
for office remains positive.

Retail construction tends to follow the
housing market. The retail market remains
strong, with vacancy rates expected to
stay around 7.0 percent over the next few
years. Both construction and absorption are
expected to be in the 4.5 to 5.5 million square
foot range over the next couple of years.
The industrial market also remains strong
with rapid absorption relative to new construction in 2005, 2006, and 2007. In 2005
it is estimated that 7.5 million square feet
will be absorbed, while less than 3.5 million square feet will be built. Vacancy rates
dropped from 8.5 percent in 2004 to an
estimated 6.9 percent this year and should be
6.5 percent by 2007. The low-level vacancy
rates in industrial and declining level of
vacancy rates in office suggest that rents in
those markets should be escalating. Those
higher rents should ensure continued new
construction.
Overall, the outlook is excellent for commercial markets and apartments. Singlefamily housing, while peaking, should
continue to be relatively strong.
— Elliott D. Pollack

Economy continues to grow as single-family sector declines
The seems clear that the pace of growth
for the national economy will be slowing
in 2006, and the consensus suggests the
same for the local economy.
The Greater Phoenix economy is
expected to do well relative to the state
and the rest of the nation, but a more moderate national economy and an expected
cooling of single-family activity will
moderate local growth. As it grows, the
metro area becomes increasing subject to
the same pressures impacting the national
economy — and in many ways, behaves
more like the national economy.
If employment growth slows from 4.4
percent to 4.1 percent, the pace of growth

will be more moderate, but in no sense of
the word will it be bad.
The biggest drop in the rate of growth is
expected in the construction sector, where
most of the panel expect to see continuing
growth in 2006 but not nearly as much.
It may seem odd to project less singlefamily activity and still have job growth,
but this has been a very odd construction
cycle. Historically, when Phoenix was
on the rise, some other part of the West
was down — and visa versa — so that at
least some construction workers would
move from area to area with the cycles.
This cycle every part of the West (and
indeed, the nation as a whole) has been

up for most of the same period.
The local economy has never been able
to attract all the workers it needed in
construction, and as a result, completion
times have stretched considerably. Thus,
employment in the construction sector
could well continue to increase in the
face of somewhat slower permit activity.
In addition, less activity in single-family
does not imply less activity in other
sectors — as will be clear from our real
estate analysis in this issue. Employment growth in some sectors, including
services, is expected to continue picking
up steam in 2006.
— Tracy Clark

PAGE 2

...........................................................................................

GREATER PHOENIX BLUE CHIP • NOVEMBER 2005

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

SOURCE
Arizona Public Service
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
Salt River Project
U of A - Eller College
VisionEcon
Consensus

AVERAGE RATE FOR 2005

Population
3.5
2.8 L
2.9
3.1
3.2
3.0
3.3
3.2
3.2
3.4
3.6
3.8 H
3.4

Personal
Income
8.0
7.0 L
7.5
7.4
8.0
7.5
8.2
7.8
7.7
7.7
9.0 H
9.0 H
8.5

Retail
Sales
9.0
6.6 L
7.5
6.7
8.4
7.0
10.0
8.2
8.0
8.0
9.0
10.5 H
8.3

Wage &
Salary
Empl.
4.2
4.2
4.0 L
4.6
4.3
4.0 L
4.2
4.3
4.5
4.3
4.5
4.5
5.3 H

Manufacturing
Empl.
0.0
2.6
2.5
2.0
0.1
2.9
2.0
(0.2) L
2.5
2.4
1.0
1.3
1.8

Construction
Empl.
10.0
5.0
2.5
11.4
12.0 H
5.0
10.0
5.0
6.0
5.5
12.0 H
9.0
8.0

3.2

7.9

8.1

4.4

1.8

7.2

Services
Empl.
4.8
7.5 H
4.6
4.8
5.0
5.5
5.0
5.0
5.0
4.0 L
4.4
4.0 L
5.0

National
CPI
2.7
2.2 L
2.7
3.5 H
2.8
2.5
3.2
3.5 H
2.8
2.9
3.5 H
3.5 H
2.8

Unemployment
Rate
4.1
4.2
4.3 H
4.1
4.2
4.0
4.2
4.1
4.1
4.2
4.0
4.0

2.9

4.1

GREATER PHOENIX ECONOMIC FORECAST FOR 2006
ANNUAL PERCENT CHANGE 2006 FROM 2005

AVERAGE RATE FOR 2006

Population

Personal
Income

Retail
Sales

Wage &
Salary
Empl.

Manufacturing
Empl.

Arizona Public Service
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
Salt River Project
U of A - Eller College
VisionEcon

3.2
2.8 L
2.9
3.0
3.0
3.0
3.1
3.2
3.1
3.2
3.2
3.4 H
3.4 H

7.0
6.8 L
7.4
7.6
7.2
7.5
8.0
7.3
7.5
7.5
8.0
8.7 H
7.8

6.0
6.0
6.7
6.5
7.2
7.0
8.0
7.2
7.0
7.3
8.0
7.0
7.7

3.8 L
3.8 L
3.8 L
3.8 L
4.2
4.0
4.3
4.0
4.1
4.4
4.3
4.3
4.5 H

1.1
2.6
2.4
1.2
2.5
2.5
3.0 H
1.0
2.6
3.0 H
2.5
(0.1) L
1.6

4.0
3.0
(1.0)
9.6 H
(2.0) L
1.5
4.0
3.0
2.5
4.0
1.0
3.5
4.0

4.6 L
5.0
5.5
5.0
5.0
5.5
5.0
4.8
8.0 H

3.0
2.5
2.9
2.2
3.0
2.5
3.0
2.7
2.7
3.0
2.7
2.7
2.9

Consensus

3.1

7.6

7.0

4.1

2.0

2.9

5.4

2.8

SOURCE

L
L

H

H

Construction
Empl.

Services
Empl.
4.6 L
7.0
4.8

National
CPI

Unemployment
Rate

H

4.2 H
3.8
4.1
4.0
4.2 H
3.7
4.0
3.9
4.0
4.2 H
3.5 L

L
H
H

H

3.8
4.0

Data sources for Maricopa County (Greater Phoenix area): population, U.S. Census Bureau; 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
Population
SOURCE
(thousands)
2004
3,501
Percent Change
3.3%
2003
3,389
Percent Change
2.9%
2002
3,294
Percent Change
3.1%
* Estimate

Personal
Income
(millions)
109,155*
6.8%
102,205
4.7%
97,597
4.3%

Retail
Sales
(millions)
35,466
9.6%
32,371
5.5%
30,690
0.3%

Wage &
Salary
Empl.
(thousands)
1,632.9
3.6%
1,575.8
1.2%
1,556.9
-0.2%

Manufacturing
Empl.
(thousands)
127.7
-0.5%
128.3
-5.0%
135.0
-10.2%

Construction
Empl.
(thousands)
139.4
8.1%
128.9
2.5%
125.7
-1.6%

Services
Empl.
(thousands)
656.8
4.9%
626.4
2.6%
610.8
1.0%

National
CPI
188.9
2.7%
184.0
2.3%
179.9
1.6%

Unemployment
Rate
4.4
5.2
5.6

GREATER PHOENIX BLUE CHIP • NOVEMBER 2005

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

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
2005

2006

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

54,000
59,840
55,000
63,500
62,000
51,000
62,000
54,000
59,400
57,860

3,919
3,850
4,000
9,500
4,500
4,850
4,500
10,300
7,600
5,891

Actuals from ASU and U of A:
2004 ACTUALS
56,896
2003 ACTUALS
47,285

4,682
4,836

Arizona Public Service
ASU Real Estate Center
CB Richard Ellis
Commerce Realty Advisors
Elliott D. Pollack & Co.
Griffin Consulting
Grubb & Ellis/BRE Comm.
Marcus & Millichap
U of A, Eller College
CONSENSUS

2007

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

7.6%
6.0
5.0
6.8
5.5
8.8
6.5
7.3
ND
6.7%

6,719
7,000
5,200
7,500
8,000
5,000
4,500
9,600
ND
6,690

51,000
53,300
53,000
62,000
55,000
48,500
55,800
49,000
52,200
53,311

4,826
5,500
5,000
9,000
6,500
5,200
5,000
11,500
6,400
6,547

7.0%
6.0
4.3
7.0
5.0
9.0
6.3
6.5
ND
6.4%

7.9
9.6

9,230
3,702

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

6,486
6,000
1,000
8,000
8,000
5,100
5,000
7,100
ND
5,836

50,000
45,640
53,000
60,000
50,000
45,000
53,000
41,000
43,800
49,049

5,586
6,000
6,000
8,500
7,000
5,250
6,000
10,300
6,100
6,748

Year-end
Apt.
Apt.
AbsorpVacancy
tion

6.8%
7.0
4.1
8.0
4.5
8.6
7.0
6.1
ND
6.5%

5,882
6,000
1,000
9,000
8,000
6,250
5,000
4,800
ND
5,741

2004 year-end inventory: 943,512 (single-family)
330,291 (multi-family)

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

Construction

2005

2006

2007

Leaseable
Year-end
Vacancy

Leaseable
Year-end
Vacancy

Leaseable
Year-end
Vacancy

Absorption

Construction
0.8
2.5
1.8
2.0
2.4
2.0
3.2
2.2
2.1

Arizona Public Service
CB Richard Ellis
Cushman and Wakefield
Elliott D. Pollack & Co.
Grubb & Ellis/BRE Comm.
Lee & Associates
Marcus & Millichap
PricewaterhouseCoopers LLP
CONSENSUS

0.7
0.8
0.8
1.0
1.3
1.1
1.5
1.8
1.1

18.3%
14.5
13.2
14.0
14.0
13.6
16.0
14.5
14.8%

2.9
3.0
2.5
3.0
3.2
4.0
3.3
2.5
3.0

Actuals from Lee & Associates:
2004 Actuals
2003 Actuals

1.7
1.1

18.2
18.7

2.1
1.3

17.5%
13.9
11.7
12.5
13.5
12.7
14.5
14.0
13.8%

Absorption

Construction

1.1
2.5
2.5
3.5
2.8
2.0
3.7
2.3
2.6

1.0
2.0
1.6
2.5
2.8
1.8
2.3
2.2
2.0

16.5%
13.6
10.0
11.0
14.4
12.3
14.2
14.0
13.3%

Absorption
1.4
2.5
2.5
3.0
2.5
1.7
2.2
2.2
2.3

2004 year-end inventory: 55.6 million square feet

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RETAIL (Millions of Square Feet)
2005
Construction

Leaseable
Year-end
Vacancy

2006
Absorption

Construction
5.0
6.0
4.8
4.2
5.0
5.0

Arizona Public Service
CB Richard Ellis
Grubb & Ellis/ BRE Comm.
Marcus & Millichap
PricewaterhouseCoopers LLP
CONSENSUS

6.0
7.0
4.5
4.9
4.8
5.4

9.3%
5.6%
5.8%
8.2%
7.5%
7.3%

6.5
7.0
4.0
5.3
4.5
5.5

Actuals from CB Richard Ellis:
2004 Actuals
2003 Actuals

5.6
5.0

6.1
7.4

6.6
4.1

Leaseable
Year-end
Vacancy
9.8%
5.7%
6.0%
7.8%
7.0%
7.3%

2007
Absorption

Construction

4.0
5.5
4.3
4.4
4.9
4.6

4.0
7.0
5.0
3.7
4.6
4.9

Leaseable
Year-end
Vacancy
9.7%
6.1%
5.9%
7.5%
7.0%
7.2%

2004 year-end inventory: 115.5 million square feet

Absorption
3.7
6.0
4.4
3.9
4.8
4.6

PAGE 4

...........................................................................................

GREATER PHOENIX BLUE CHIP • NOVEMBER 2005

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

Arizona Public Service
CB Richard Ellis
Grubb & Ellis/BRE Comm.
Marcus & Millichap
PricewaterhouseCoopers LLP
CONSENSUS - Total Space

Construction
6.0
7.0
4.5
4.9
4.8
5.4

Actuals from CB Richard Ellis:
2004 Actuals Total Space
2003 Actuals Total Space
2002 Actuals Total Space

4.6
3.4
5.7

*All space over 5,000 sq. ft.

2005

2006

2007

Leaseable
Year-end
Vacancy
9.3%
5.6
5.8
8.2
7.5
7.3%

Leaseable
Year-end
Vacancy
9.8%
5.7
6.0
7.8
7.0
7.3%

Leaseable
Year-end
Vacancy
9.7%
6.1
5.9
7.5
7.0
7.2%

Absorption
6.5
7.0
4.0
5.3
4.5
5.5

8.5
9.7
10.3

6.2
4.4
3.4

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

Construction
5.0
6.0
4.8
4.2
5.0
5.0

Absorption
4.0
5.5
4.3
4.4
4.9
4.6

Construction
4.0
7.0
5.0
3.7
4.6
4.9

Absorption
3.7
6.0
4.4
3.9
4.8
4.6

2004 year-end inventory: 222.6 million sq. ft. (CB Richard Ellis)*
234.3 million sq. ft. (Cushman and Wakefield)**
225.9 million sq. ft. (Lee & Associates)*
240.0 million sq. ft. (Grubb & Ellis)**

REAL ESTATE FORECAST PANEL
Arizona Public Service
Pete Ewen

Cushman and Wakefield
Mark Urbanowicz

Lee & Associates Arizona
Curt Czarsty and Josh Kohlhase

Arizona Real Estate Center, ASU
Jay Q. Butler

Elliott D. Pollack and Co.
Elliott Pollack

Marcus & Millichap
Bryan O'Keefe

CB Richard Ellis
Jeff Cooledge

Griffin Consulting
Brian J. Smargiassi

PricewaterhouseCoopers LLP
Tom Kabat

CRA Ltd.
Todd Vesledahl

Grubb & Ellis / BRE Commercial
Mike Coover

Eller College, University of Arizona
Marshall Vest

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
Donald Wehbey

ECON-LINC
John Lucking

Arizona Public Service Co.
Pete Ewen

EconLit LLC
Dwight Duncan

Bank One Economic Outlook Center, ASU
Tracy Clark
CH2M Hill
Kent Ennis

Bank One Economic
Outlook Center
Tracy L. Clark, Economics Editor
Elliott Pollack, Topics Editor
Nancy A. Maneely, Editorial Coordinator

H. C. Reardon Economics
Hank Reardon
Joint Legislative Budget Committee
Staff

Elliott D. Pollack and Co.
Elliott Pollack
Salt River Project
Arlyn Herrera, Rebecca Holmes and Karen Wolfe
University of Arizona, Eller College
Marshall Vest

The Maguire Co.
Alan Maguire

GREATER PHOENIX BLUE CHIP (ISSN 1042-6825) is published four
times a year by the Bank One Economic Outlook Center, an affiliate of
the L. William Seidman Research Institute in the W. P. Carey School of
Business at Arizona State University. Rates: Print copy – one year (4
issues), $45.00; PDF (e-mail delivery) – one year, $39.00. For information, call the Bank One Economic Outlook Center at (480) 965–5543.
©2005 Arizona Board of Regents for Arizona State University. Reprint
permission required from the Bank One Economic Outlook Center.
Arizona State University vigorously pursues affirmative action and equal
opportunity in its employment, activities and programs.
• Not Printed or Mailed at State Expense •

Vision Econ
Debra J. Roubik