GREATER PHOENIX BLUE CHIP • APRIL 2002

VOLUME 14 • NUMBER 2 • APRIL 2002
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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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Real estate market expected to cool down in 2002, 2003
The slowdown in the economy has
caught up to the real estate market.
Although 2001 was close to a record year
for single-family permits, the Greater
Phoenix Blue Chip panel believes that
permits in the Greater Phoenix area will
decline by just under 10 percent this
year before increasing modestly in 2003.
This would be a very mild housing
cycle should the forecast turn out to
be accurate.
Multi-family vacancy rates are expected
to continue to increase this year to about
8.5 percent by year end, before modestly
declining to 8.2 percent in 2003. Forecast
activity, however, is expected to decline
from 7,200 units in 2001 to about 5,800
units in 2002 and 5,300 units in 2003.
A slowdown in construction activity
is due to increases in vacancy rates in
virtually all commercial sectors. Office
vacancy rates, which increased to 16.6

percent last year, are expected to increase
to over 18 percent this year before declining to about 16 percent in 2003. The big
story, however, is that new construction in
the office market, which approached 4.7
million square feet last year, is expected
to be only 2.1 million square feet in
2002 and less than 1.0 million square
feet in 2003.
The same is true in retail where
vacancy rates are expected to increase
this year before declining modestly next
year. Construction activity in retail,
however, is expected to significantly
decline, mainly because two new malls
were completed in 2001. Construction
should be approximately 2.25 million
square feet this year and again in 2003.
Absorption is expected to be only 1.7
million square feet this year and roughly
2.1 million in 2003.
Industrial construction activity has also

slowed from 8.5 million square feet last
year to an estimated 3.5 million square
feet this year and about the same in
2003. Absorption is expected to remain
relatively weak in the industrial market
as well.
Overall, while this is not even close to
a repeat of the disastrous 1988 through
1992 cycle, vacancy rates have increased
and are expected to peak this year before
declining modestly in 2003. The amount
of construction, however, is expected to
decline modestly for single-family but
significantly for commercial sectors this
year. Only the office sector is expected
to decline in 2003, as well. Overall, the
real estate market will be weak in 2002
relative to the past several years — and
it is not expected to perform much better
in 2003.
— Elliott Pollack

Watchword is patience for local economic recovery
The good news for the Greater Phoenix
economy is that the recovery is under way,
interest rates are likely to remain favorable,
and the Asian economies that are major
trading partners for the area are on the
rebound, too. There is also evidence that air
travel is going to pick up. The bad news is
that it will take some time before all these
improvements will be felt locally.
The Business Conditions Survey (formerly the Purchasing Managers Survey)
finally has rebounded over the 50-point
level, which indicates that the economy is
expanding again. The improvement is more
pronounced in manufacturing than in nonmanufacturing — but then, manufacturing
was hit first in the downturn. Employment
growth should begin to improve by the
end of the year as employers become

convinced that the recovery is for real.
Nationally, GDP surged during the first
quarter as inventories were replenished, and
the pace is expected to be more moderate
during the rest of the year. The same is
likely true of the Greater Phoenix area.
The recent pronouncements by the
Federal Reserve suggest that interest
rates will not begin to creep upward until
the second half of the year. This will
moderate the decline in single-family
construction and encourage businesses to
resume spending sooner. A pickup in non
residential construction will have to wait
until businesses are more comfortable
with the staying power of the recovery.
The generally positive outlook for the
Asian economies will help increase
demand for local products. Even Japan is

expected to see some growth by 2003.
A recent survey by the National Travel
Monitor suggested that leisure air travel
will increase 6 percent in 2002 and business air travel could rise by 8 percent.
Arizona remains a top travel destination,
and the only downside is that our peak
tourism and travel season does not begin
until the hot weather ends.
The April 2002 Western Blue Chip contained a report on the impact of reduced
air travel on the Western states. There is a
high degree of correlation between aircraft
landing activity and job growth in Arizona
and Maricopa County. Airport activity is
important for tourism as well as the movement of goods into and out of the state.
— Tracy Clark

BANK ONE ECONOMIC OUTLOOK CENTER • ARIZONA STATE UNIVERSITY

PAGE 2

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GREATER PHOENIX BLUE CHIP • APRIL 2002

GREATER PHOENIX ECONOMIC FORECAST FOR 2002
ANNUAL PERCENT CHANGE 2002 FROM 2001
PopuSOURCE
lation
Arizona Public Service
2.7
ASU – Bank One Economic Outlook Center 2.8
CH2M HILL
2.6
Department of Economic Security
2.6
ECON-LINC
2.6
Elliott D. Pollack and Co.
2.7
H.C. Reardon Economics
2.8
Joint Legislative Budget Committee
2.6
Lancaster Consulting
2.6
The Maguire Company
2.8
Protitlement
2.7
Salt River Project
2.9
U of A – Eller College
2.5 L
VisionEcon
3.0 H
Consensus
2.7

Personal
Income
5.3
5.8
4.7
4.9
4.6
6.0
5.2
5.0
5.4
6.0
6.2 H
5.0
2.2 L
5.6
5.1

Retail
Sales
3.1
3.5
3.0
4.6
3.8
4.5
4.5
3.0
4.7
5.0
6.0 H
3.0
0.2 L
5.7
3.9

Wage &
Salary
Empl.
0.6
1.2
0.8
(1.5) L
0.2
1.0
2.5
0.5
2.5
2.0
2.7 H
2.0
(0.1)
2.3
1.2

Manufacturing
Empl.
(2.1)
0.7
(4.0)
(5.8) L
(4.0)
(3.0)
0.5
0.0
0.8
1.0
0.1
1.0
(3.4)
1.4 H
(1.2)

AVERAGE RATE FOR 2002

Construction
Empl.
(3.3)
(5.0)
(5.0)
(5.0)
(3.0)
(10.0) L
0.0
(2.0)
(10.0) L
0.0
(6.0)
0.0
(3.0)
2.5 H
(3.6)

Services
Empl.
1.2
3.9
1.6
(1.3) L
3.2
3.0
4.5 H
1.0
3.6
4.0
4.5 H
2.0
1.0
2.0
2.4

National
CPI
2.0
1.9
2.1
3.6 H
2.6
2.5
1.9
1.9
2.0
2.2
2.6
1.4 L
1.9
1.4 L
2.1

Unemployment
Rate
4.9
4.2
5.1
4.5
5.0
4.7
5.0
4.5
4.2
4.0
4.5
3.8 L
5.2 H
4.6

GREATER PHOENIX ECONOMIC FORECAST FOR 2003
ANNUAL PERCENT CHANGE 2003 FROM 2002
Population

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

2.7
2.6
2.6
2.6
2.7
2.6
2.8
2.5
2.5
2.8
2.8
2.8
2.4 L
3.2 H
2.7

Personal
Income
6.3
6.4
6.2
5.9
5.2 L
7.2
7.2
6.0
6.0
6.5
7.5 H
5.5
6.2
7.5 H
6.4

Retail
Sales

Wage &
Salary
Empl.

Manufacturing
Empl.

4.6
5.1
5.6
5.4
5.0
5.5
6.6
5.0
5.2
6.0
7.2
4.0 L
6.7
9.7 H
5.8

2.8
2.8
2.7
2.2 L
2.2 L
3.8
3.5
2.5
3.0
3.0
3.6
3.0
2.6
4.0 H
3.0

0.3
1.7
1.0
1.4
1.5
3.0 H
2.2
0.5
2.2
2.0
2.5
2.0
(1.7)L
2.5
1.5

AVERAGE RATE FOR 2003

Construction
Empl.
1.2
1.0
(1.0)
(0.9)
0.0
3.0
0.0
1.0
2.5
0.0
(4.0)L
1.0
1.0
5.5 H
0.7

Services
Empl.
3.3
4.5
2.9 L
3.2
3.8
5.0
5.0
3.2
4.0
5.0
5.2 H
3.5
3.9
5.0
4.1

National
CPI

Unemployment
Rate

2.8
2.7
2.8
3.4 H
2.9
2.8
2.7
2.7
2.8
2.4
2.8
2.4
2.6
2.1 L
2.7

4.2
3.7
4.5 H
3.9
4.2
4.2
4.2
4.0
3.8
4.0
3.6
3.3 L
4.1
4.0

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

SOURCE
2001
Percent Change
2000
Percent Change
1999
Percent Change

Population
(thousands)
3,196
3.2
3,097
3.4
2,995
3.6

Personal
Income
(millions)
91,535
5.9
86,435
7.1
80,705
7.3

Retail
Sales
(millions)
30,605
1.5
30,167
8.4
27,825
10.4

Wage &
Salary
Empl.
(thousands)
1,557.2
0.8
1,544.6
3.9
1,487.0
4.8

Manufacturing
Empl.
(thousands)
155.8
(3.9)
162.2
0.4
161.6
(3.1)

Construction
Empl.
(thousands)
119.7
1.5
117.9
4.8
112.5
7.8

Services
Empl.
(thousands)
507.9
(0.8)
512.0
5.5
485.3
8.8

National
CPI
177.1
2.8
172.2
3.4
166.6
2.2

Unemployment
Rate
3.8
2.6
3.0

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

GREATER PHOENIX BLUE CHIP • APRIL 2002

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
2002

Arizona Public Service
ASU Real Estate Center
CB Richard Ellis
Elliott D. Pollack & Co.
Griffin Consulting
Grubb & Ellis
Marcus & Millichap
Meyers Group
Protitlement
U of A, Eller College
Consensus
Actuals from ASU:
2001 Actuals
2000 Actuals
1999 Actuals

Singlefamily
Permits

Multifamily
Permits

30,000
27,000
31,000
28,000
29,000
N/A
31,445
33,700
30,500
28,300
29,883

6,000
7,500
4,500
5,000
5,750
5,000
7,583
7,900
4,800
4,400
5,843

32,867
33,494
33,252

7,201
8,009
7,759

2003
Year-end
Apt.
Vacancy (%)

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

8.4
8.0
9.2
8.2
8.2
8.8
8.7
N/A
8.3
N/A
8.5

5,000
6,250
4,500
5,000
5,000
2,000
3,160
N/A
3,800
N/A
4,339

33,000
28,800
30,000
28,000
30,000
N/A
32,977
32,000
29,000
34,400
30,909

7,000
7,250
2,500
5,000
6,000
6,000
2,893
7,200
5,100
4,900
5,384

8.2
6.8
5.9

1,525
6,225
5,017

Year-end
Apt.
Vacancy (%)

8.2
7.5
8.6
8.0
8.0
8.5
7.9
N/A
8.5
N/A
8.2

Apt.
Absorption

7,000
6,575
5,000
6,500
6.050
4,000
5,243
N/A
4,200
N/A
5,509

2001 year-end inventory: 830,946 (single-family)
312,761 (multi-family)

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
OFFICE (Millions of Square Feet)
2002
Construction

Arizona Public Service
CB Richard Ellis
Cushman and Wakefield
Elliott D. Pollack & Co.
Grubb & Ellis
Lee & Associates
Marcus & Millichap
PricewaterhouseCoopers LLP
Protitlement
Consensus
Actuals from Lee & Associates:
2001 Actuals
2000 Actuals
1999 Actuals

2003

Year-end
Vacancy (%)

Absorption

2.80
2.00
1.10
1.80
1.20
2.86
3.28
1.80
1.80
2.10

20.7
17.3
16.7
18.0
18.7
14.7
20.5
19.5
13.1
18.3

0.80
1.00
1.40
1.00
1.00
1.50
0.90
1.10
1.50
1.09

4.71
3.10
4.03

16.6
10.8
11.4

1.15
3.06
2.78

Construction

0.40
0.50
1.60
0.50
0.50
0.66
1.65
0.50
1.60
0.79

Year-end
Vacancy (%)

18.8
16.0
14.6
15.5
16.5
12.4
18.0
17.8
12.6
16.2

2001 year-end inventory:

Absorption

1.40
1.20
2.60
1.60
1.70
2.00
2.73
1.20
1.30
1.80

52.6 million square feet

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RETAIL (Millions of Square Feet)
2002
Construction

Arizona Public Service
CB Richard Ellis
Grubb and Ellis
Marcus & Millichap
PricewaterhouseCoopers LLP
Protitlement
Consensus
Actuals from CB Richard Ellis:
2001 Actuals
2000 Actuals
1999 Actuals

2003

Year-end
Vacancy (%)

Absorption

1.50
2.80
3.00
2.38
2.30
2.00
2.33

9.2
7.3
7.5
11.6
9.8
9.2
9.1

1.80
1.80
2.80
0.79
1.00
1.70
1.65

7.46
2.68
4.00

6.6
5.3
5.5

5.72
2.78
4.44

Construction

Year-end
Vacancy (%)

3.00
2.30
3.00
2.37
1.00
1.80
2.24
2001 year-end inventory:

9.7
6.9
7.5
9.5
9.2
9.0
8.6

Absorption

2.30
2.40
3.00
2.37
1.00
1.80
2.14

101.1 million square feet

PAGE 4

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GREATER PHOENIX BLUE CHIP • APRIL 2002

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
INDUSTRIAL (Millions of Square Feet)
2002
Construction

Year-end
Vacancy (%)

6.00
1.89
4.10
3.0
2.49
3.50

10.2
9.1
9.7
9.0
10.6
9.7

CB Richard Ellis *
Cushman and Wakefield **
Grubb & Ellis **
Lee & Associates *
Marcus & Millichap *
Consensus: Total Space
Actuals from CB Richard Ellis:
2001 Actuals Total Space
2000 Actuals Total Space
1999 Actuals Total Space
*All space over 5,000 sq. ft.

2003

8.47
6.51
9.45

Absorption

4.50
3.20
3.50
4.00
1.23
3.29

9.8
7.4
8.1

2.77
10.71
7.03

Construction

4.50
2.70
4.40
4.00
1.26
3.37

Year-end
Vacancy (%)

Absorption

9.0
8.0
9.0
8.5
8.7
8.6

5.50
4.60
5.50
6.00
3.03
4.93

2001 year-end inventory:
204.8 million sq. ft. (CB Richard Ellis) *
213.2 million sq. ft. (Lee & Associates)*
224.9 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
Protitlement
Steven Pritulsky

Cushman and Wakefield
Stewart Park
Elliott D. Pollack and Co.
Elliott Pollack

Marcus & Millichap
Tim Rios or Dave Wetta
The Meyers Group
John Liston
PricewaterhouseCoopers LLP
Tom Kabat
University of Arizona, Eller College
Marshall Vest

Griffin Consulting
Brian J. Smargiassi
Grubb & Ellis
George Gramm
Lee & Associates Arizona
Ken Crouse

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
Dan Anderson and Donald Wehbey

Protitlement
Steve Pritulsky

Elliott D. Pollack and Co.
Elliott Pollack

Arizona Public Service Co.
Pete Ewen and 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

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