GREATER PHOENIX BLUE CHIP • NOVEMBER 2002

VOLUME 14 • NUMBER 4 • NOVEMBER 2002
........................................................................................... PAGE 1

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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 outlook: a tale of two markets in 2002, 2003
The forecast for the Greater Phoenix real
estate market is splitting in two directions:
The single-family residential market is
expected to stay strong in both 2003 and
2004, while commercial construction is
likely to slow dramatically.
While there was no slowdown in singlefamily permit activity during the recession,
no boom is anticipated during the recovery.
The level of activity is expected to remain
at what is, by historic standards, very high
levels. The same is not true for multi-family
activity where permits, after peaking at
about 8,000 in 2000, should decline to
about 5,000 this year and slightly under
5,000 in 2003 before staging a modest
recovery in 2004. Multi-family vacancy
rates are expected to reach approximately
9 percent this year and decrease modestly
in 2003 and 2004.
Meanwhile, commercial construction is
expected to slow significantly, especially in
office. Construction of office space, which

reached 4.7 million square feet in 2001, is
expected to drop to 2 million square feet
this year and less than 1 million square feet
in 2003 and 2004. Despite this, vacancies
rates actually are expected to increase
this year to 18.5 percent and drop only
modestly next year to about 17 percent
because the level of absorption has dropped
dramatically. This is due to the recessionary conditions that have reduced demand
for office space. Even in 2004, vacancy
rates will be high, albeit declining to 15
percent. It should be noted that these
figures do not include sublease space that
actually make the market weaker than the
Blue Chip numbers appear.
Industrial construction is facing the same
major drop in activity, from almost 8.5
million square feet in 2001 to just over 4
million this year and just over 2 million in
2003 and 2004. This is due to higher vacancies and substantially reduced absorption,
once again due to weak economic activity.

Only a modest recovery in industrial
absorption is forecast for 2004.
Vacancy rates also have increased in the
retail sector, from 5.3 percent in 2000
to 6.6 percent in 2001, and are expected
to increase to the low 9 percent range
and remain at that level through 2004.
In addition, retail construction again has
dropped dramatically, primarily because
two new malls were completed in 2001.
Absorption has slowed because retailers
are struggling.
Overall, single-family remains remarkably stable, but construction of multifamily space, office, retail and industrial
space suggests a tougher time for the real
estate markets and construction employment. The good news is that vacancy rates
have not reached levels that will take years
to correct, with the possible exception of
office where the market may not stabilize
for quite some time.
— Elliott Pollack

Economic forecasters adopt policy of watchful waiting
The outlook for Greater Phoenix has
deteriorated from last quarter, which is
consistent with the generally weak projections for the national economy. The local
economy is reacting to the same forces that
have moderated the economic recovery
nationally, but Greater Phoenix is more
sensitive to the lack of business spending.
The biggest problem, both nationally
and locally, is uncertainty. The tensions
leading up to a possible war with Iraq
may be worse for the economy than the
direct impacts from an actual conflict. The
best-case scenario might be a two-month
duration for an actual conflict, but the
period leading up to hostilities could drag
on for much longer. The natural reaction
to uncertainty is to put projects on hold
and wait.

The push to invest is low due to excess
capacity. People who run businesses
are wary because of the stock market,
corporate scandals and the higher cost
of funds.
Consumers have benefited from low
interest rates through refinancing and, to
a lesser extent, lower credit card rates. In
the current climate of accounting scandals,
firms could well be hampered by higher
interest rates in the corporate bond market,
stiffer terms from bank lines of credit and
the fact that they can no longer look to the
stock market for new funds. Lenders are
well aware that the pricing power of most
firms is severely limited, which means the
only route to improved profits or reduced
losses is the reduction of expenses.
Cutting expenses usually means layoffs,

eliminating the least profitable lines of
business and investing only in technologies
with very high returns. Firms have been
investing in software to leverage all the
hardware they purchased over the last
few years; significant pressure to replace
hardware is unlikely before 2003 or 2004.
The worst-case scenario is that business spending would remain anemic long
enough to become a significant drag on
consumer spending. It is unclear whether
further rate cuts by the Federal Reserve
would effectively boost the economy at
this point. It is also unclear how much
fiscal stimulus is being provided once
increases in federal spending are netted
against reductions in spending at the state
and local levels.
— Tracy Clark

BANK ONE ECONOMIC OUTLOOK CENTER • ARIZONA STATE UNIVERSITY

PAGE 2

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GREATER PHOENIX BLUE CHIP • NOVEMBER 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
2.5
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
2.7
Protitlement
2.7
Salt River Project
3.0 H
U of A – Eller College
2.4 L
VisionEcon
3.0 H
Consensus
2.7

Personal
Income
4.4
5.0
3.8
4.9
3.8
4.0
4.2
4.0
5.2
5.0
4.6
4.0
3.4 L
5.6 H
4.4

Retail
Sales
2.3
2.4
4.0
4.6
3.2
2.0
3.1
2.5
4.2
4.0
3.8
1.0 L
1.4
5.7 H
3.2

Wage &
Salary
Empl.
(0.2)
(0.3)
1.4
(1.5) L
(0.8)
(1.0)
(0.5)
0.0
1.2
0.0
(0.5)
(1.0)
(0.6)
2.3 H
(0.1)

Manufacturing
Empl.
(5.8)
(5.0)
(2.0)
(5.8)
(6.5)
(8.0) L
(7.0)
(3.0)
0.0
(2.0)
(5.0)
(7.0)
(3.6)
1.4 H
(4.2)

AVERAGE RATE FOR 2002

Construction
Empl.
(4.0)
(7.5)
(5.0)
(5.0)
(5.0)
(6.0)
(6.0)
(5.0)
(10.0) L
(10.0) L
(6.0)
(3.5)
(3.6)
2.5 H
(5.3)

Services
Empl.
1.1
2.2
2.0
(1.3) L
0.0
1.5
0.0
1.0
2.8 H
1.0
2.5
0.0
(0.7)
2.0
1.0

National
CPI
2.0
1.9
2.0
3.6 H
2.0
2.0
1.6
1.9
2.0
2.0
2.2
1.6
1.7
1.4 L
2.0

Unemployment
Rate
5.3
5.4 H
5.1
5.0
5.1
5.2
4.7
5.0
4.6 L
5.0
4.9
5.2
5.2
5.1

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
2.5
2.6
2.8
2.5
2.5
2.8
2.7
2.9
2.3 L
3.2 H
2.7

Personal
Income
5.5
6.0
6.2
6.4
5.0 L
5.5
6.5
5.5
6.0
6.3
6.2
5.5
6.3
7.5 H
6.0

Retail
Sales

Wage &
Salary
Empl.

4.7 L
5.1
5.6
5.6
5.0
6.0
5.9
5.0
5.2
6.0
6.4
5.0
4.7 L
9.7 H
5.7

2.1 L
3.0
2.9
2.2
3.0
3.0
3.0
2.5
2.8
3.0
3.2
2.5
2.9
4.0 H
2.9

Manufacturing
Empl.

AVERAGE RATE FOR 2003

Construction
Empl.

0.6
1.0
1.5
1.4
2.0
4.0 H
2.8
0.0 L
1.8
2.0
3.5
1.0
1.7
2.5
1.8

0.5
(1.0)
1.0
(0.9)
0.0
(5.0)L
0.0
0.0
1.6
0.0
(4.0)
0.0
0.4
5.5 H
(0.1)

Services
Empl.
2.6
5.3 H
3.1
3.2
3.8
4.0
5.0
3.2
3.8
5.0
5.2
2.5 L
4.2
5.0
4.0

National
CPI

Unemployment
Rate

2.6
2.6
2.3
2.9 H
2.3
2.5
2.8
2.6
2.7
2.2
2.4
2.8
2.8
2.1 L
2.5

4.6
4.4
4.2
4.4
4.2
4.7 H
4.2
4.5
4.2
4.2
4.2
4.0 L
4.1
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

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

GREATER PHOENIX BLUE CHIP • NOVEMBER 2002

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

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
Meyers Group
Protitlement
U. of A, Eller College
Consensus
Actuals from ASU:
2001 Actuals
2000 Actuals

2003

2004

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Year-end
Apt.
Vacancy

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

33,500
34,400
32,000
32,000
29,500
N/A
34,000
29,900
28,300
31,700

5,000
6,500
4,500
5,000
5,750
4,500
5,000
4,800
4,400
5,050

8.0%
9.0
9.3
8.2
8.3
9.8
N/A
9.2
N/A
8.8

6,000
4,850
4,000
5,000
4,750
500
N/A
3,200
N/A
4,043

32,000
30,900
31,000
30,000
30,000
N/A
35,000
30,900
34,400
31,775

7,000
7,250
2,500
4,500
6,000
2,000
5,000
4,400
4,900
4,839

7.7%
8.5
8.7
8.3
8.0
9.7
N/A
9.4
N/A
8.6

7,000
5,700
5,000
5,000
5,500
2,000
N/A
4,200
N/A
4,914

32,500
29,000
30,000
30,000
31,500
N/A
35,500
31,800
N/A
31,471

9,000
7,500
3,000
6,500
6,500
4,000
4,500
4,500
N/A
5,688

32,867
32,494

7,201
8,009

8.2
6.8

1,525
6,225

Year-end
Apt.
Apt.
AbsorpVacancy
tion

7.2%
8.0
7.8
8.5
8.0
8.5
N/A
9.0
N/A
8.1

10,000
6,500
6,000
6,000
6,000
5,500
N/A
4,800
N/A
6,400

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

Leaseable
Year-end
Vacancy

2003
Absorption

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

2.80
2.00
2.30
1.70
2.29
1.90
1.80
2.11

19.0%
18.3
18.5
21.1
18.3
19.0
15.5
18.5

0.75
0.60
1.30
0.25
1.85
1.00
1.25
1.00

Actuals from Lee & Associates:
2001 Actuals
2000 Actuals

4.71
3.10

16.6
10.8

1.15
3.06

Construction
0.40
0.50
1.30
0.25
0.83
1.00
0.80
0.73

Leaseable
Year-end
Vacancy
17.8%
17.5
19.0
20.5
16.2
17.8
13.0
17.4

2004
Absorption
1.00
1.00
1.00
0.50
1.83
1.00
1.60
1.13

Construction
0.40
0.15
0.80
0.50
0.43
1.30
1.00
0.65

Leaseable
Year-end
Vacancy
13.8%
15.7
16.5
19.5
13.6
16.0
12.0
15.3

Absorption
2.50
1.30
2.00
0.75
1.80
1.10
1.75
1.60

2001 year-end inventory: 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 & Ellis
PricewaterhouseCoopers LLP
Protitlement
Consensus
Actuals from CB Richard Ellis:
2001 Actuals
2000 Actuals

Leaseable
Year-end
Vacancy

2003
Absorption

1.50
5.00
3.00
2.20
2.00
2.74

9.6%
9.1
8.5
9.8
9.2
9.2

1.00
2.00
1.50
1.00
1.70
1.44

7.46
2.68

6.6
5.3

5.72
2.78

Construction
3.00
3.00
3.00
1.00
1.80
2.36

Leaseable
Year-end
Vacancy
9.9%
10.2
8.8
9.2
8.7
9.4

2004
Absorption
2.50
1.50
3.00
1.00
1.80
1.96

Construction
2.50
2.00
5.00
0.80
2.00
2.46

Leaseable
Year-end
Vacancy
8.7%
10.9
9.0
9.0
8.5
9.2

2001 year-end inventory: 101.1 million square feet

Absorption
3.50
1.00
4.00
1.00
2.10
2.32

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GREATER PHOENIX BLUE CHIP • NOVEMBER 2002

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

CB Richard Ellis**
Grubb & Ellis**
Lee & Associates *

Construction
5.30
4.50
2.46

Leaseable
Year-end
Vacancy
11.0%
10.8
10.8

2003
Absorption
3.50
1.50
1.80

Consensus – Total Space

4.09

10.9

2.27

Actuals from CB Richard Ellis:
2001 Actuals –Total Space
2000 Actuals – Total Space
1999 Actuals – Total Space

8.47
6.51
9.45

9.8
7.4
8.1

2.77
10.71
7.03

Construction
1.40
3.00
2.30

Leaseable
Year-end
Vacancy
10.9%
10.9
10.5

2.23

2004
Absorption
1.50
2.50
2.10

10.8

2.03

Construction
2.20
3.10
1.90
2.40

Leaseable
Year-end
Vacancy
10.8%
10.4
9.9
10.4

Absorption
2.50
3.10
2.60
2.73

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)**

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

Griffin Consulting
Brian J. Smargiassi

PricewaterhouseCoopers LLP
Tom Kabat

Grubb & Ellis
George Gramm

University of Arizona, Eller College
Marshall Vest

The Meyers Group
Tim Maddock

Lee & Associates Arizona
Bill Gosnell

ECONOMIC FORECAST PANEL
Arizona Department of Economic Security
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

GREATER PHOENIX BLUE CHIP (ISSN 1042-6825) is published four
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the L. William Seidman Research Institute in the College of Business
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the Bank One Economic Outlook Center at (480) 965–5543.

Bank One Economic
Outlook Center
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