JUNE 2006 Volume 18, Number 2 GREATER PHOENIX BLUE CHIP • JUNE 2006 ........................................................................................... PAGE 1 Single-family sector in decline, but still at historic high level Residential data from this issue of the Greater Phoenix Blue Chip Real Estate Consensus undoubtedly will be subject to individual interpretation. While the forecast shows that singlefamily permits are expected to decline by 15 percent in 2006 and another 7 percent in 2007, these years, by any historic perspective, would be considered excellent. Indeed, 2006 will be the third-strongest year in our history and 2007 would be the fourth-strongest year. Thus, while there clearly is a decline in single-family permits under way, it is from such a high level that it is hard to say the housing boom is over or that these results should be particularly unexpected. Multifamily permits are forecasted to increase significantly this year and stay high next year as low vacancy rates start to push up rents and make new construction more economically feasible. The decline in vacancy rates between 2004 and 2005 was due in large part to the conversion of apartment units to condominiums. That phenomenon is likely to be significantly less prevalent this year and next. Even with that, vacancy rates are expected to remain low. Commercial sectors all are doing exceptionally well in response to a booming economy. Vacancy rates in office buildings dropped from 18 percent to less 13 percent between 2004 and 2005, and are expected to continue to decline, albeit modestly this year. The consensus estimates that absorption will be lower this year than last year but the construction will be significantly higher. The result is a strong market for office this year and next, with vacancy rates remaining around the 12 percent level. Retail also is expected to stay strong, with only slight declines in absorption relative to last year and continued strong construction. Vacancy rates around the 6 percent level are anticipated. The industrial market is seeing some of the lowest vacancy rates in history, and last year enjoyed the highest level of absorption on record. Low vacancy rates are expected to continue in industrial buildings. This is true despite the Blue Chip panel's forecast of absorption slowing dramatically this year and construction expected to double from last year’s level. However, overall that market should remain strong. Indeed, it is difficult to see how industrial will record significantly lower absorptions in 2006 than in 2005, especially given the very strong growth in employment in Greater Phoenix. Overall, the news is good. The singlefamily residential market, while slowing, continues to show very strong levels of activity. Commercial markets continue to see explosive growth in construction and relatively low vacancy rates. — Elliott D. Pollack Greater Phoenix economy slowdown reflects national trends The panel’s forecasts suggest that 2005 was the peak for the current cycle, which may be disappointing but comes as no surprise. The metro area is very tightly integrated into both national and international markets, and so will reflect slowing economic prospects for the national economy. The forecasts for 2006 and 2007 would be considered very good years except in comparison to 2005. It may seem strange that the construction employment forecast remains positive for 2006, given the doom and gloom in the news and a general expectation that housing construction will decline from the peak in 2005. Construction boomed for so long nationally that Arizona construction companies never were able to hire enough skilled people. Further hiring in construction may well occur here, but at much slower growth rates. The extended expansion in the construction and real estate sectors contributed to rapid growth in other parts of the economy as well. Income increases during these boom times encouraged more spending by those employed in the sectors. Meanwhile, refinancing and low mortgage rates spurred spending by homeowners, which helps to explain the dramatic growth of retail sales in 2004 and 2005 as well as the sustained growth during much of the ’90s. Low interest rates and the booming growth in home prices and sales activity appear to be behind us, which is a good reason to expect the rate of growth for retail sales to decline. Population growth is expected to con- tinue, which will keep construction at respectable levels. People moving into the area also contribute significantly to overall personal income and retail sales growth , blunting the impact of higher interest rates and the decline in refinancing. The wild card in the economic forecast remains the impact of energy prices. The sales figures for SUVs and hybrid cars suggest that energy prices are having some impact, but not to the extent that consumer complaints would indicate. Energy prices have been reacting to increases in demand, limited supply and fears of political instability in producing countries — none of which seems likely to change in the next two years. — Tracy Clark PAGE 2 ........................................................................................... GREATER PHOENIX BLUE CHIP • JUNE 2006 GREATER PHOENIX ECONOMIC FORECAST FOR 2006 ANNUAL PERCENT CHANGE 2006 FROM 2005 SOURCE Arizona Department of Commerce Arizona Public Service ASU - Bank One Economic Outlook Center 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 2006 Population 3.0 L 3.2 3.1 3.1 3.2 3.0 L 3.1 3.2 3.1 3.2 3.4 3.5 3.6 H Personal Income 7.6 8.5 7.8 7.6 7.8 7.5 L 8.0 8.6 7.8 8.1 9.0 9.3 H 8.5 Retail Sales 7.1 10.0 H 7.5 6.7 L 7.6 7.0 10.0 H 8.0 8.0 7.5 8.0 8.0 8.6 Wage & Salary Empl. 4.0 3.5 L 4.5 3.8 4.2 4.0 5.5 6.0 H 4.2 4.3 5.1 5.1 4.5 Manufacturing Empl. 2.0 0.0 L 1.2 1.2 2.5 2.5 3.0 H 2.1 2.2 3.0 H 2.0 2.1 1.6 Construction Empl. 5.5 8.0 3.0 9.6 H 2.0 1.5 L 5.0 4.0 3.0 4.0 5.0 4.0 6.0 3.2 8.2 8.0 4.5 2.0 4.7 Services Empl. 4.3 4.0 L 7.0 H 5.5 5.0 5.5 5.5 5.0 5.5 6.0 6.5 6.0 National CPI 3.1 3.5 H 2.8 2.8 3.0 2.5 L 3.5 H 3.2 2.9 3.0 3.0 2.6 3.2 5.5 3.0 Unemployment Rate 4.1 4.1 4.0 4.0 4.2 3.7 L 4.0 3.9 4.0 4.1 3.8 4.5 H 4.0 GREATER PHOENIX ECONOMIC FORECAST FOR 2007 ANNUAL PERCENT CHANGE 2007 FROM 2006 Population Personal Income Retail Sales Wage & Salary Empl. Manufacturing Empl. Arizona Department of Commerce Arizona Public Service ASU - Bank One Economic Outlook Center 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 3.0 3.1 3.0 3.0 3.2 H 3.0 3.1 2.9 L 3.0 3.1 3.2 H 3.0 2.9 L 7.2 8.7 H 7.0 7.7 7.8 7.4 7.5 7.7 7.5 7.6 8.0 7.8 6.3 L 6.5 8.0 H 7.0 7.0 7.2 6.8 7.5 7.0 7.0 7.4 7.5 5.7 L 6.9 3.2 3.0 L 4.2 H 4.0 4.2 H 3.8 4.0 3.9 3.8 4.0 3.2 3.2 3.1 1.0 (1.0) 1.1 1.3 2.0 2.4 3.5 H 1.5 2.0 3.0 0.0 (2.4) L 1.6 Consensus 3.0 7.6 7.0 3.7 1.2 SOURCE AVERAGE RATE FOR 2007 Construction Empl. (10.0) L 4.0 H (5.0) 4.0 H 2.0 2.7 3.0 0.0 2.0 4.0 H 0.0 (0.8) 4.0 H 0.8 Unemployment Rate Services Empl. National CPI 3.6 3.5 L 6.0 H 5.2 5.4 5.0 4.0 4.8 5.0 3.5 L 4.3 4.0 3.1 3.8 H 3.1 2.2 3.2 2.7 3.2 3.2 2.5 3.1 2.5 1.8 L 3.7 4.5 4.2 4.2 4.2 4.2 3.9 4.2 4.2 4.1 4.2 3.8 L 4.5 2.9 4.2 4.8 H 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 SOURCE 2005 2004 2003 * Estimate Population (thousands) 3,630 3.7% 3,501 3.3% 3,389 2.9% Personal Income (millions) 121,521 9.4% 111,104 8.6% 102,278 5.4% Retail Sales (millions) 40,500 14.2% 35,466 9.6% 32,371 5.5% Wage & Salary Empl. (thousands) 1,743.1 6.2% 1,641.2 4.2% 1,575.8 1.2% Manufacturing Empl. (thousands) 132.2 2.5% 129.0 0.5% 128.3 -5.0% Construction Empl. (thousands) 163.1 15.8% 140.9 9.3% 128.9 2.5% Services Empl. (thousands) 706.0 6.7% 661.6 5.6% 626.4 2.6% National CPI 195.3 3.4% 188.9 2.7% 184.0 2.3% Unemployment Rate 4.1 4.4 5.2 ........................................................................................... PAGE 3 GREATER PHOENIX BLUE CHIP • JUNE 2006 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST RESIDENTIAL 2006 Singlefamily Permits Multifamily Permits ASU Real Estate Center CB Richard Ellis Commerce Realty Advisors Elliott D. Pollack & Co. Griffin Consulting Grubb & Ellis/BRE Commercial U of A, Eller College 48,000 53,000 59,800 52,000 50,000 55,800 55,000 5,500 5,000 8,000 6,000 6,000 5,000 9,100 CONSENSUS 53,371 2007 Year-end Apt. Vacancy (%) Apt. Absorption Singlefamily Permits Multifamily Permits Year-end Apt. Vacancy (%) Apt. Absorption 6.0% 4.3% 7.0% 5.5% 7.0% 5.5% NA 6,000 1,000 6,000 5,000 5,400 5,000 NA 43,560 53,000 58,600 48,500 45,000 53,000 46,700 6,000 6,000 7,500 5,000 6,050 6,000 10,400 7.0% 4.1% 8.0% 6.0% 7.2% 6.0% NA 6,000 1,000 8,500 6,000 5,300 6,000 NA 6,371 5.9% 4,733 49,766 6,707 6.4% 5,467 Actuals from ASU and Phoenix Housing Market Letter: 2005 Actuals 63,000 3,250 2004 Actuals 60,000 4,997 5.0% 7.9% 4,756 9,230 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST OFFICE (Millions of Square Feet) 2006 2007 Construction Vacancy (Year End %) CB Richard Ellis Cushman and Wakefield Elliott D. Pollack & Co. Grubb & Ellis/BRE Commercial Lee & Associates PricewaterhouseCoopers LLP 2.50 2.30 2.50 2.00 1.59 2.20 11.5% 11.9% 12.0% 14.0% 11.9% 13.0% 3.00 3.00 3.50 2.80 1.84 2.30 2.00 2.00 3.00 1.80 1.91 2.20 13.6% 10.0% 12.5% 14.4% 11.6% 12.5% 2.50 3.00 2.50 2.50 1.84 2.20 CONSENSUS 2.18 12.4% 2.74 2.15 12.4% 2.42 Actuals from Lee & Associates: 2005 ACTUALS 2004 ACTUALS 1.46 1.67 12.9% 18.2% 4.20 2.07 Absorption Construction Vacancy (Year End %) 2005 year-end inventory: Absorption 56.7 million square feet METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST RETAIL (Millions of Square Feet) 2006 Construction 2007 Vacancy (Year End %) Absorption Construction Vacancy (Year End %) Absorption CB Richard Ellis Grubb & Ellis/BRE Commercial PricewaterhouseCoopers 6.00 6.50 5.00 5.7% 5.5% 7.0% 5.50 6.20 4.60 7.00 7.00 4.60 6.1% 5.8% 6.8% 6.00 6.50 4.60 CONSENSUS 5.83 6.1% 5.43 6.20 6.2% 5.70 Actuals from CB Richard Ellis: 2005 ACTUALS 2004 ACTUALS 6.50 5.60 5.3% 6.1% 6.70 6.66 2005 year-end inventory: 121.7 million square feet PAGE 4 ........................................................................................... GREATER PHOENIX BLUE CHIP • JUNE 2006 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST INDUSTRIAL (Millions of Square Feet) 2006 Construction 2007 Vacancy (Year End %) Absorption Vacancy (Year End %) Construction Absorption CB Richard Ellis* Cushman and Wakefield** Grubb & Ellis/BRE Commercial** Lee & Associates * 6.50 7.00 4.80 3.87 6.1% 5.1% 8.0% 6.8% 7.50 6.00 6.00 5.42 7.00 5.50 5.00 4.09 6.0% 4.8% 8.2% 6.7% 5.50 6.00 5.50 3.77 CONSENSUS — TOTAL SPACE 5.54 6.5% 6.23 5.40 6.4% 5.19 Actuals from CB Richard Ellis: 2005 ACTUALS Total Space 2004 ACTUALS Total Space *All space over 5,000 sq. ft. 2.69 4.56 5.6% 8.5% 12.30 6.27 2003 year-end inventory: 229.6 million sq. ft. (CB Richard Ellis) * 241.4 million sq.ft. (Cushman and Wakefield) ** 225.8 million sq. ft. (Lee & Associates)* 242.0 million sq. ft. (Grubb & Ellis) ** **Total Market (Space over 10,000 sq.ft) REAL ESTATE FORECAST PANEL Arizona Public Service Pete Ewen Cushman and Wakefield Mark Urbanowicz Arizona Real Estate Center, ASU Jay Q. Butler Elliott D. Pollack and Co. Elliott Pollack CB Richard Ellis Jeff Cooledge Griffin Consulting Brian J. Smargiassi CRA Ltd. Todd Vesledahl Grubb & Ellis / BRE Commercial Mike Coover Lee & Associates Arizona Curt Czarsty PricewaterhouseCoopers LLP Tom Kabat Eller College, University of Arizona Marshall Vest 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 Salt River Project Arlyn Herrera, Rebecca Holmes and Karen Wolfe Arizona State University Bank One Economic Outlook Center Tracy Clark Arizona Department of Commerce 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 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. E-mail subscriptions (PDF) are available for $39 for one year (4 issues). For information, call the Economic Outlook Center at (480) 965–5543. ©2006 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 • University of Arizona Eller College Marshall Vest Vision Econ Debra J. Roubik