FOURTH QUARTER 2006 Volume 18, Number 4 GREATER PHOENIX BLUE CHIP • FOURTH QUARTER 2006 ............................................................................... PAGE 1 What a difference six months makes in housing forecasts Just how significant the change in perceptions regarding the single-family market has been can be seen by comparing the Greater Phoenix Blue Chip forecast from June 2006 with the forecast in this issue. In June, the panel members forecast 53,371 units to be permitted in 2006. The latest forecast now expects only 45,943 units in 2006, a 14 percent decline. The forecast is even more telling for 2007. In June, the forecast for 2007 was 49,766 units, compared to the current forecast of 41,767 units, a 16 percent decline. Thus, there has clearly been a significant deterioration in expectations about the housing market since the summer. The current forecast is for a decline of 27 percent in single-family permits from 2005 to 2006 and another 9 percent in 2007. The panelists believe that the worst will be over after 2007, and expect a 9 percent increase in permits in 2008, to approximately 45,500 units. The severity of the downturn appears to have been greater than virtually anyone anticipated. The lowest forecast in June was for 48,000 in 2006; that forecast is now toward the high end of the range. Multifamily permits are expected to increase significantly in 2006 and remain at about the same level in 2007 and 2008. Vacancy rates should stay relatively low after a fourth quarter rate of 5 percent in 2005. The rate is forecast to be 5.4 percent in the fourth quarter of 2006, 5.7 percent in 2007, and 6.0 percent in 2008. While there were some minor revisions for multifamily since the June forecast, they were not nearly as large as in the single-family market. The multifamily absorption numbers for 2006 appear to be optimistic. The consensus forecast is 4,800 units for 2006 and 4,900 for 2007. However, estimated absorption rates for the first three quarters of 2006 are negative. If these forecasts are too high, then vacancy rates will be greater in 2007 and 2008 than the consensus suggests. The office market is anticipated to remain strong, with construction increasing from 1.5 million square feet in 2005 to 2.3 million completed this year and 3.1 million next year, before falling back to roughly 2.4 million in 2008. Absorption is expected to be high as well, with 3.4 million square feet absorbed this year, 3.1 million next year, and 2.9 million in 2008. The only significant revisions from the last forecast were that absorptions are expected to be stronger in 2006 and 2007, and construction to be stronger in 2007. With absorp- tions about the same as new construction, vacancy rates should remain flat, in the low 12 percent range. The retail forecast is similar to the June forecast. Retail, which tends to follow the housing cycle, is also anticipated to remain in relative balance. Vacancy rates in 2006, 2007 and 2008 are projected to remain under 7 percent and construction is expected to be strong in 2007 and 2008, with more than 6 million square feet built each year. The outlook for industrial construction is positive also (although the definition of industrial varies from company to company). In relative terms, construction should be close to 7 million square feet in 2006 and 2007 before falling to roughly 5.4 million in 2008. Vacancy rates are expected to increase modestly over this period, as absorption stays strong in 2006 and 2007. The bottom line is that 2006 should be a good year for commercial construction, and 2007 even better, with only a modest slowdown in 2008. Vacancy rates are expected to remain relatively low and absorption strong. This is good news for the local economy, suggesting that there are at least some offsets to the declining housing market. — Elliott D. Pollack Greater Phoenix economy's slowdown reflects national trends The Greater Phoenix economy remains in good shape, both in absolute terms and relative to other metro areas. It is clear that the economy peaked in 2005; 2006 will end up being a slower year and 2007 is expected to continue the slowing trend. However, if we were looking at the economy by itself rather than in comparison to a peak, both 2006 and 2007 would be considered good years. The primary cause of the slowing trend is the national economy and not anything unique to the local area. As it has grown in size and complexity, our local economy has become more like the national economy in terms of composition and the external forces that influence its path. Thus, as the national economy slows we will slow locally, due to the direct influence of the national economy and because we are responding to the same forces that are a drag on the rest of the nation. The trick, of course, will be to slow enough that inflation remains under control but not so much that the economy slips into recession. The consensus forecast is consistent with the first scenario. If the national economy slows more than expected in 2007 or beyond, the local forecast would have to be revised downward. The biggest risk to the local economy would be a moderate to deep national recession that choked off population growth, because it is that population growth that is blunting the impact of the housing slowdown. — Tracy Clark PAGE 2 ................................................................................ GREATER PHOENIX BLUE CHIP • FOURTH QUARTER 2006 GREATER PHOENIX ECONOMIC FORECAST FOR 2006 ANNUAL PERCENT CHANGE 2006 FROM 2005 SOURCE Arizona Department of Commerce Arizona Public Service ASU - 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 3.1 3.2 3.1 3.1 3.2 3.0 L 3.1 3.2 3.1 3.2 3.0 L 3.7 H 3.6 Personal Income 8.0 8.5 7.8 L 8.4 7.8 L 8.0 8.0 8.3 8.0 8.1 9.0 10.4 H 8.5 Retail Sales 8.5 10.0 H 7.5 7.4 8.5 7.2 L 9.0 7.6 9.0 7.5 8.0 8.4 8.6 Wage & Salary Empl. 5.0 4.2 L 4.5 5.1 5.4 4.3 5.5 H 4.8 4.5 4.3 5.1 4.6 4.5 Manufacturing Empl. 1.5 1.5 1.2 1.5 0.0 L 2.5 0.5 0.0 L 2.0 3.0 H 0.0 L 2.3 1.6 Construction Empl. 0.1 L 10.0 3.0 12.0 H 8.0 5.0 10.0 10.0 5.0 4.0 10.0 5.4 6.0 3.2 8.4 8.2 4.8 1.4 6.8 Services Empl. 5.5 5.0 7.0 H 4.9 5.0 6.5 5.3 5.0 5.5 5.5 4.8 L 6.0 5.5 National CPI 3.4 3.5 H 2.8 L 3.4 2.8 L 2.8 L 3.5 H 3.4 3.4 3.0 3.1 3.3 3.2 Unemployment Rate 4.3 3.9 4.0 3.6 L 4.1 3.9 3.8 3.9 4.0 4.1 3.6 L 4.5 H 3.2 4.0 GREATER PHOENIX ECONOMIC FORECAST FOR 2007 ANNUAL PERCENT CHANGE 2007 FROM 2006 AVERAGE RATE FOR 2007 Population Personal Income Retail Sales Wage & Salary Empl. Manufacturing Empl. Construction Empl. Arizona Department of Commerce Arizona Public Service ASU - 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 H 3.0 3.0 3.0 3.0 3.1 H 2.9 L 3.0 3.1 H 3.0 3.1 H 2.9 L 7.2 8.0 H 7.0 7.3 7.8 7.2 7.5 7.5 7.5 7.6 8.0 H 6.8 6.3 L 6.5 8.0 H 7.0 7.0 7.6 7.2 7.0 6.4 7.0 7.4 7.5 5.0 L 6.9 3.5 3.8 4.2 4.1 5.0 H 3.8 4.0 3.4 3.8 4.0 3.5 2.6 L 3.1 0.5 1.5 1.1 1.3 0.0 2.0 1.0 0.0 2.0 3.0 0.0 0.3 1.6 -10.0 L 0.0 -5.0 7.1 H 2.0 1.5 -10.0 L 0.0 2.0 4.0 0.0 -9.0 4.0 Consensus 3.0 7.4 7.0 3.8 1.1 SOURCE L L H L -1.0 Unemployment Rate Services Empl. National CPI 4.0 4.5 6.0 H 5.2 5.0 4.5 4.0 4.5 5.0 3.5 L 4.0 4.0 3.3 3.8 3.1 3.2 3.2 2.7 3.2 4.0 H 2.8 3.1 2.5 2.3 L 3.7 4.4 4.3 4.2 4.1 4.2 4.2 4.2 4.2 4.1 4.2 3.8 L 4.5 3.1 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 GREATER PHOENIX BLUE CHIP • FOURTH QUARTER 2006 ............................................................................... PAGE 3 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST RESIDENTIAL 2006 Arizona Public Service ASU Real Estate Center CB Richard Ellis Commerce Realty Advisors Elliott D. Pollack & Co. Griffin Consulting Grubb & Ellis/BRE Comm. U of A, Eller College CONSENSUS Singlefamily Permits Multifamily Permits 48,246 40,100 43,000 43,500 44,000 48,500 53,000 47,200 45,943 2,859 4,500 4,800 9,500 4,700 6,000 5,000 8,525 5,736 2007 Year-end Apt. Vacancy Apt. Absorption 5.0% 10,241 5.0 3,000 4.2 2,000 6.5 7,500 5.0 1,000 6.0 5,900 6.3 4,000 NA NA 5.4% 4,806 Actuals from Phoenix Housing Market Letter and ASU: 2005 Actuals 63,000 3,250 5.0% 2004 Actuals 60,000 4,997 7.9% 2008 Singlefamily Permits Multifamily Permits Year-end Apt. Vacancy Apt. Absorption Singlefamily Permits Multifamily Permits 50,184 38,500 36,000 41,000 35,000 44,000 49,000 40,450 41,767 2,789 5,000 7,500 9,000 5,000 6,150 5,000 7,700 6,017 4.0% 6.0 4.8 7.0 6.0 6.2 6.0 NA 5.7% 2,990 5,000 3,000 8,000 5,000 6,000 4,500 NA 4,927 52,150 43,600 45,000 42,500 40,000 46,000 50,000 44,900 45,519 2,701 6,000 8,000 8,500 6,000 6,250 5,000 10,200 6,581 Year-end Apt. Apt. AbsorpVacancy tion 4.0% 6.0 5.0 7.5 7.0 6.2 6.0 NA 6.0% 2,593 6,000 5,000 9,000 5,000 6,100 4,500 NA 5,456 4,756 9,230 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST OFFICE (Millions of Square Feet) Construction 2006 2007 2008 Leaseable Year-end Vacancy Leaseable Year-end Vacancy Leaseable Year-end Vacancy Absorption Construction 1.5 3.4 4.0 3.7 4.2 2.2 3.6 2.2 3.1 Arizona Public Service CB Richard Ellis Cushman and Wakefield Elliott D. Pollack & Co. Grubb & Ellis/BRE Comm. Colliers International Lee & Associates PricewaterhouseCoopers LLP CONSENSUS 1.1 2.4 2.8 2.5 2.9 2.9 2.1 2.2 2.4 16.9% 10.8 12.2 10.5 12.0 12.0 11.2 12.0 12.2% 2.1 3.4 3.5 3.2 3.5 6.1 2.9 2.3 3.4 Actuals from Lee & Associates: 2005 Actuals 2004 Actuals 1.5 1.7 12.9% 18.2% 4.2 2.1 15.6% 10.4 12.5 11.0 13.0 11.8 13.3 11.5 12.4% Absorption Construction 2.0 3.6 3.0 3.0 3.0 5.9 1.9 2.2 3.1 1.5 2.8 3.0 3.0 4.3 2.0 1.4 1.5 2.4 14.8% 10.6 12.5 11.0 14.0 11.5 12.1 11.5 12.3% Absorption 1.8 2.6 3.0 3.0 3.8 5.6 1.9 1.7 2.9 2005 year-end inventory: 56.7 million square feet METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST RETAIL (Millions of Square Feet) Construction 2006 2007 2008 Leaseable Year-end Vacancy Leaseable Year-end Vacancy Leaseable Year-end Vacancy Absorption Construction 4.0 7.6 7.0 5.5 6.0 Arizona Public Service CB Richard Ellis Grubb & Ellis/ BRE Comm. PricewaterhouseCoopers LLP CONSENSUS 2.5 4.7 6.5 6.0 4.9 6.9% 4.6 5.5 6.5 5.9% 4.5 5.3 6.2 5.4 5.4 Actuals from CB Richard Ellis: 2005 Actuals 2004 Actuals 6.5 5.6 5.3% 6.1% 6.7 6.7 8.0% 5.1 6.5 6.8 6.6% Absorption Construction 2.4 6.5 6.3 4.8 5.0 4.0 6.5 6.8 5.3 5.7 8.0% 5.3 6.3 7.2 6.7% 2005 year-end inventory: 121.7 million square feet Absorption 3.7 5.9 6.8 4.5 5.2 PAGE 4 ................................................................................ GREATER PHOENIX BLUE CHIP • FOURTH QUARTER 2006 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST INDUSTRIAL (Millions of Square Feet) 2006 2007 2008 CB Richard Ellis* Cushman and Wakefield** Colliers International** Grubb & Ellis/BRE Comm.** Lee & Associates* CONSENSUS - Total Space Construction 7.5 6.3 6.9 6.0 7.5 6.8 Leaseable Year-end Vacancy 6.9% 5.5 8.0 6.0 7.5 6.8% Absorption 4.0 5.6 9.8 7.5 4.0 6.2 Leaseable Year-end Vacancy 7.6% 5.3 7.6 6.5 9.0 7.2% Leaseable Year-end Vacancy 7.2% 5.2 7.2 7.0 10.5 7.4% Actuals from CB Richard Ellis: 2005 Actuals Total Space 2004 Actuals Total Space 6.3 4.6 5.6% 8.5% 12.3 6.3 *All space over 5,000 sq. ft. **Total market (space over 10,000 sq. ft.) Construction 8.9 5.0 5.8 6.4 4.0 6.0 Absorption 6.5 5.0 8.4 6.0 3.0 5.8 Construction 7.0 5.0 5.5 5.8 3.5 5.4 Absorption 7.5 5.0 7.9 5.0 3.0 5.7 2005 year-end inventory: 237.2 million sq. ft. (CB Richard Ellis)* 246.3 million sq. ft. (Cushman and Wakefield)** 230.7 million sq. ft. (Colliers International) 242.0 million sq. ft. (Grubb & Ellis)** REAL ESTATE FORECAST PANEL Arizona Public Service Pete Ewen CRA Ltd. Todd Vesledahl Grubb & Ellis / BRE Commercial Mike Coover Arizona Real Estate Center, ASU Jay Q. Butler Cushman and Wakefield Mark Urbanowicz Lee & Associates Arizona Curt Czarsty and Brad Vigil CB Richard Ellis Jeff Cooledge Elliott D. Pollack and Co. Elliott Pollack PricewaterhouseCoopers LLP Tom Kabat Colliers International Stewart Park Griffin Consulting Brian J. Smargiassi 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 JPMorgan Chase Economic Outlook Center Tracy Clark Arizona Department of Commerce Kent Ennis JPMorgan Chase Economic Outlook Center Tracy L. Clark, Economics Editor Elliott Pollack, Topics Editor Jim Dodson, 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 JPMorgan Chase 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 JPMorgan Chase Economic Outlook Center. 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