GREATER PHOENIX BLUE CHIP • JUNE 2003

VOLUME 15 • NUMBER 2 • JUNE 2003
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B
L U E • C H I P • E C O N O M I C • F O R E C A S T
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Single-family still looks good; commercial markets weak
The strong single-family housing market
in Greater Phoenix is expected to continue
through this year and into 2004, according
to the Greater Phoenix Blue Chip Real
Estate Consensus Forecast. Yet, commercial
markets are expected to remain weak.
After five years in the 32,000- to
34,000-unit range, the single-family consensus forecast calls for another 33,300
units this year, with a minor drop to about
32,000 units expected in 2004. This is a
surprisingly strong forecast, given the fact
that interest rates could increase over this
period of time.
Multifamily permits are expected to
decline this year to under 5,000 units,
down from 5,600 last year. Absorptions are
expected to continue to be weak and, thus,
no declines in vacancy rates are expected
this year for apartments. Vacancy rates are
anticipated to decline slightly in 2004.
High vacancy rates and low levels of
construction activity will continue in com-

mercial markets. The consensus forecast
for this year is only slightly over 0.5
million square feet, down from 2.9 million
square feet built in 2002. This is the lowest
level of construction since 1996. In 2004,
only slightly more than 0.6 million square
feet are anticipated. Absorption should be
slightly over 1.0 million square feet this
year and about 1.5 million in 2004. Thus,
vacancy rates, which averaged over 19
percent in 2002, should drop to between
17 and 18 percent by year end of 2004.
The major correction in the office market
still lies ahead.
Retail tends to follow the housing cycle.
Thus, the drop-off in construction has been
considerably more moderate than in the
office market. Construction is expected
to approximate 2.5 million square feet
this year and 3.0 million square feet in
2004, down relatively modestly from 2002.
Because absorption rates are remaining
strong, vacancy rates are expected to

increase, but only slightly to about 8.7
percent this year and next.
The industrial market seems to have
made the quickest adjustment, with construction declining from 5.6 million square
feet in 2002 to an estimated 2.0 million
this year and 2.5 million next year. Vacancy
rates are expected to peak at slightly over
10 percent this year and decline back into
the single digits next year as absorption
starts to pick up.
Overall, Greater Phoenix is in the correction stages of the cycle for apartments and
commercial real estate. This will continue
with a period of modest construction until
absorption picks up sufficiently to drive
vacancy rates down from present high
levels. This could take a few more years.
Single-family residential, on the other
hand, is expected to maintain high levels of
construction through the forecast period.
— Elliott Pollack

Gradual recovery seen for Greater Phoenix in 2003, 2004
The outlook for the local economy is
somewhat mixed, but certainly not all bad.
Greater Phoenix remains dependent on
the course of the national economy and
international events. The service sector
already is showing some strength, while
manufacturing remains weak.
The employment picture is better overall
according to the benchmark data revisions.
Employment for the state as a whole began
to improve in the third quarter of last year.
Prior to the revisions, there were no signs
of improvement until the end of 2002 –
beginning of 2003. All of the improvement
has been in the service sector; manufacturing continues to struggle, and prospects for
an immediate recovery are slim.
The recovery in services is related to the
area's continued population growth. It is

clear that growth is down from the peak,
but it has not fallen to the degree it has in
past recessions. Population growth creates
pressure for services job growth.
The worst news is that the war in Iraq
caused spending on semiconductors to drop.
Semiconductor billings had been on an
upward course for nine months, but fears
leading up to the Iraqi war caused a drop
for three straight months. March numbers
came in positive for all regions except the
Americas, which give some reason to hope
that the upward climb will resume.
It is difficult to ascertain just how much of
an impact the SARS virus will have on the
global electronics industry. Unfortunately,
the disease could negatively impact firms
and delay any employment recovery in
manufacturing. Before resuming hiring,

firms are likely to wait until the demand for
semiconductors clearly is on the way back
up, and the impact of SARS is clearer.
On the positive side, the war in Iraq has
impacted the tourism industry less severely
than expected. It seems that the buildup to
the war was gradual enough so that most
people were not alarmed by the war itself,
and the lack of terrorist activity helped
significantly.
In the absence of renewed terrorist activity or a significant expansion of SARS, it
seems likely that the local economy will
resume a gradual recovery mainly in the
service-producing side of the economy.
Before the goods-producing side picks up,
there are more obstacles to overcome.
— Tracy Clark

BANK ONE ECONOMIC OUTLOOK CENTER • ARIZONA STATE UNIVERSITY

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GREATER PHOENIX BLUE CHIP • JUNE 2003

GREATER PHOENIX ECONOMIC FORECAST FOR 2003
ANNUAL PERCENT CHANGE 2003 FROM 2002
PopuSOURCE
lation
Arizona Public Service
2.7
ASU – Bank One Economic Outlook Center 2.6
CH2M HILL
2.6
Department of Economic Security
2.4
ECON-LINC
2.6
Elliott D. Pollack and Co.
2.6
H.C. Reardon Economics
2.7
Joint Legislative Budget Committee
2.6
Lancaster Consulting
2.5
The Maguire Company
2.8
Protitlement
2.7
Salt River Project
2.8
U of A – Eller College
2.1 L
VisionEcon
3.0 H
Consensus
2.6

Personal
Income
5.5
5.6
5.3
5.6
5.5
5.5
5.8
5.5
5.6
5.7
6.2
5.0 L
5.7
6.5 H
5.6

Retail
Sales
4.6
4.1
4.3
5.4
5.0
6.0 H
5.0
4.5
5.0
5.5
5.4
3.0 L
4.7
6.0 H
4.9

Wage &
Salary
Empl.
2.3
2.2
2.5
1.6 L
2.2
2.7
2.9
2.5
2.6
2.6
2.8
2.0
2.6
3.2 H
2.5

Manufacturing
Empl.
0.1
0.8
(1.0)
(4.9) L
(0.5)
3.0
2.0
0.0
1.0
1.0
3.5 H
(2.0)
(1.4)
3.0
0.3

AVERAGE RATE FOR 2003

Construction
Empl.
0.8
(3.5)
(5.0) L
0.1
(1.0)
(5.0) L
0.0
(1.0)
0.0
0.0
(3.0)
2.0
0.7
2.7 H
(0.9)

Services
Empl.
3.3
4.9 H
2.6 L
2.6 L
3.8
4.0
4.7
3.0
3.4
3.0
4.2
3.0
4.6
4.5
3.7

National
CPI
2.4
2.1
2.3
2.4
2.3
2.5 H
2.2
2.5 H
2.5 H
2.4
2.4
2.3
2.3
2.0 L
2.3

Unemployment
Rate
4.7
4.5
4.9
4.9
4.2 L
4.5
4.8
5.0 H
4.5
4.5
4.6
4.8
5.0 H
4.7

GREATER PHOENIX ECONOMIC FORECAST FOR 2004
ANNUAL PERCENT CHANGE 2004 FROM 2003

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

Population

Personal
Income

Retail
Sales

Wage &
Salary
Empl.

Manufacturing
Empl.

2.7
2.7
2.7
2.3 L
2.7
2.7
2.7
2.6
2.7
2.8
2.8
3.1 H
2.9
2.8
2.7

6.3
6.2
6.1
6.1
6.2
6.7
6.8
6.0 L
6.2
6.3
6.8
6.8
7.5 H
6.2
6.4

5.5
6.0
5.5
6.0
6.0
6.5
5.9
5.0 L
5.7
6.1
6.5
6.0
7.6 H
6.1
6.0

3.3
3.8
3.1
2.1 L
3.5
4.0 H
3.6
3.0
3.1
3.2
3.8
3.5
3.9
3.6
3.4

1.1
2.7
2.5
(2.6) L
2.6
5.0 H
3.4
1.0
1.8
2.0
4.1
2.0
0.5
2.8
2.1

AVERAGE RATE FOR 2004

Construction
Empl.
1.4
(8.0) L
(5.0)
0.8
2.0
5.0 H
1.5
0.0
0.0
0.0
1.5
2.0
0.7
3.0
0.4

Services
Empl.

National
CPI

4.3
6.0
3.3
3.0 L
3.2
5.0
5.4
4.0
4.2
4.0
5.5
4.0
6.1 H
6.0
4.6

2.5
2.4
2.5
2.0
2.4
2.7
2.4
2.6
2.5
2.6
2.8 H
1.6 L
2.4
2.7
2.4

Unemployment
Rate
4.3
3.8 L
4.4
4.5
4.4
4.0
4.4
4.5
4.2
4.3
4.2
4.3
4.8 H
4.3

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,

GREATER PHOENIX HISTORICAL DATA
PopuPersonal
Retail
lation
Income
Sales
SOURCE
(thousands) (millions)
(millions)
2002
3,289
96,934
30,690
Percent Change
3.0
4.4
0.3
2001
3,194
92,849
30,605
Percent Change
3.1
5.9
1.5
2000
3,097
86,676
30,167
Percent Change
3.4
9.4
8.4
NA – Information currently unavailable due to conversion to NAICS

Wage &
Salary
Empl.
(thousands)
1,552.4
-0.5
1,559.5
1.2
1,541.0
3.6

Manufacturing
Empl.
(thousands)
135.8
-9.6
150.3
NA
NA
NA

Construction
Empl.
(thousands)
123.8
-2.3
126.7
NA
NA
NA

Services
Empl.
(thousands)
609.4
0.8
604.5
NA
NA
NA

National
CPI
179.9
1.6
177.1
2.8
172.2
3.4

Unemployment
Rate
5.6
3.9
2.7

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GREATER PHOENIX BLUE CHIP • JUNE 2003

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
2003
Singlefamily
Permits

Multifamily
Permits

Arizona Public Service
ASU Real Estate Center
CB Richard Ellis
Elliott D. Pollack & Co.
Griffin Consulting
Grubb & Ellis
Meyers Group
Protitlement
U of A – Eller College
Consensus

32,000
30,900
33,000
31,000
31,000
N/A
39,900
31,500
37,400
33,338

5,100
7,250
4,200
5,000
5,100
2,500
6,800
3,600
4,100
4,850

Actuals from ASU:
2002 Actuals
2001 Actuals
2000 Actuals

34,312
32,867
32,494

5,607
7,201
8,009

2004
Year-end
Apt.
Vacancy (%)

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy (%)

Apt.
Absorption

9.2
10.0
9.3
10.0
8.3
9.0
N/A
10.8
N/A
9.5

5,000
3,475
4,000
3,500
5,250
4,500
N/A
3,200
N/A
4,132

32,500
31,200
31,000
30,000
31,500
N/A
39,000
30,000
30,800
32,000

5,500
7,500
3,900
4,000
5,750
4,000
6,500
3,800
4,800
5,083

8.5
9.0
8.8
10.0
8.0
8.5
N/A
9.6
N/A
8.9

7,000
9,985
5,500
4,000
6,200
5,500
N/A
4,500
N/A
6,098

9.4
8.2
6.8

3,355
1,525
6,225

2002 year-end inventory: 863,726 (single-family)
321,459 (multi-family)

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
OFFICE (Millions of Square Feet)
2003

2004

Construction

Vacancy
(1st Qtr. %)

Arizona Public Service
CB Richard Ellis
Cushman and Wakefield
Elliott D. Pollack & Co.
Grubb & Ellis
Lee & Associates
PricewaterhouseCoopers LLP
Protitlement
Consensus

1.00
0.41
0.37
0.40
0.25
0.72
0.80
0.65
0.57

21.5
17.4
19.8
19.0
20.5
16.3
22.0
14.6
18.9

1.00
1.20
1.04
0.80
0.50
1.80
0.80
1.40
1.07

Actuals from Lee & Associates:
2002 Actuals
2001 Actuals
2000 Actuals

2.90
4.71
3.10

19.3
16.6
10.8

1.19
1.15
3.06

Absorption

Construction

0.40
0.75
0.43
0.50
0.50
1.48
0.50
0.50
0.63

Vacancy
(1st Qtr. %)

18.3
15.9
18.4
18.0
19.5
15.3
21.0
13.2
17.5

2002 year-end inventory:

Absorption

2.00
1.50
1.73
1.50
0.75
1.80
1.00
1.60
1.49

54.3 million square feet

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RETAIL (Millions of Square Feet)
2003
Construction

2004

Vacancy
(1st Qtr. %)

Absorption

Arizona Public Service
CB Richard Ellis
Grubb & Ellis
PricewaterhouseCoopers LLP
Protitlement
Consensus

1.50
4.00
3.00
1.60
2.45
2.51

9.8
6.1
8.8
9.0
9.6
8.7

2.00
5.00
3.00
1.00
1.98
2.60

Actuals from CB Richard Ellis:
2002 Actuals
2001 Actuals
2000 Actuals

3.89
7.46
2.68

7.3
6.6
5.3

3.04
5.72
2.78

Construction

Vacancy
(1st Qtr. %)

1.75
4.50
5.00
1.50
2.60
3.07
2002 year-end inventory:

8.9
6.1
9.0
10.0
9.4
8.7

Absorption

2.50
4.20
4.00
1.00
2.25
2.79

105.0 million square feet

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GREATER PHOENIX BLUE CHIP • JUNE 2003

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
INDUSTRIAL (Millions of Square Feet)
2003
Construction

Vacancy
(1st Qtr. %)

2.20
1.29
3.00
1.50
2.00

9.6
9.6
10.9
10.8
10.2

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

Actuals from CB Richard Ellis:
2002 Actuals Total Space
2001 Actuals Total Space
2000 Actuals Total Space
*All space over 5,000 sq. ft.

2004

5.65
8.47
6.51

Absorption

Construction

3.50
1.90
2.50
2.10
2.50

10.3
9.8
7.4

3.36
2.77
10.71

3.20
1.36
3.10
2.60
2.57

Vacancy
(1st Qtr. %)

Absorption

8.9
8.9
10.4
9.8
9.5

4.30
2.80
3.10
3.50
3.43

2002 year-end inventory:
210.4 million sq. ft. (CB Richard Ellis) *
229.3 million sq.ft. (Cushman and Wakefield) **
218.9 million sq. ft. (Lee & Associates)*
229.0 million sq. ft. (Grubb & Ellis) **

**Total Market (Space over 10,000 sq.ft)

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

Elliott D. Pollack and Co.
Elliott Pollack

The Meyers Group
Tim Maddock

Griffin Consulting
Brian J. Smargiassi

PricewaterhouseCoopers LLP
Tom Kabat

Grubb & Ellis
George Gramm

Protitlement
Steve Pritulsky

Lee & Associates Arizona
Chaz Turner

University of Arizona, Eller College
Marshall Vest

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
Donald Wehbey

Protitlement
Steve Pritulsky

Elliott D. Pollack and Co.
Elliott Pollack

Arizona Public Service Co.
Brian Cary

ECON-LINC
John Lucking

Salt River Project
Arlyn Herrera, Rebecca Holmes and Karen Wolfe

Arizona State University
Bank One Economic Outlook Center
Tracy Clark

H. C. Reardon Economics
Hank Reardon

University of Arizona, Eller College
Marshall Vest

Joint Legislative Budget Committee
Staff

Lancaster Consulting
Dwight Duncan

The Maguire Co.
Alan Maguire

Vision Econ
Debra J. Roubik

CH2M Hill
Kent Ennis

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

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.
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