JUNE 2004 Volume 16, Number 2
GREATER PHOENIX BLUE CHIP • JUNE 2004

........................................................................................... PAGE 1

Stability, moderate growth projected for real estate sectors
The boom is continuing for single-family
housing and vacancy rates are declining for
apartments, office and industrial according
to the latest Greater Phoenix Blue Chip
Consensus Real Estate Forecast.
After a record year in 2003, singlefamily permits are expected to decline
only very modestly in 2004 and 2005.
Thus, both years would still be very strong
years by any historic standard.
Multi-family permits are expected to
remain in the 4,000 to 5,000 range this
year and next. Absorption is expected to
modestly exceed permits in 2004 and 2005.
Vacancy rates still will be high, however,
remaining in the 9 percent range by the end
of the 2005.
The office market is enjoying a recov-

ery in vacancy rates. Absorption actually
exceeded new supply in 2003 and is projected to do the same in 2004 and 2005.
Vacancy rates are expected to drop to 17
percent by the end of 2005, mainly due to
two years of relatively modest construction in 2004 and 2005.
Industrial markets have also recovered
in terms of vacancy. Absorption exceeded
new construction in 2003, and again is
expected to do so in 2004 and 2005. While
construction remains in the 2 to 2.5 million
square foot range in both years, absorption
picks up from 3.4 to 4.1 million during that
period of time and vacancies drop to 8.7
percent — the lowest since 2000 — by
the end of 2005.
Retail tends to follow the housing cycle.

Although new construction has exceeded
absorption by a relatively small amount
over the last two years, construction and
absorption are expected to be in better
balance over the next two years. Vacancy
rates are expected to stay near the 9 percent level.
Overall, this is a positive outlook. The
commercial market has to go through
an extended period when absorption
will exceed new supply in order to get
vacancy rates down to levels that justifies
substantial new construction. While that
process has a way to run, it has clearly
started. This is positive news at this stage
of the cycle.
— Elliott D. Pollack

Panel sees brighter prospects ahead for region in 2005
The panel remains optimistic about the
prospects for the region during 2004 and
2005. It is clear that Greater Phoenix is
doing better than most other areas of the
country, but it will be 2005 before the area
begins to see the performance it has come
to expect from the economy.
The panel upped the forecast for retail
sales despite the recent run-up in gas
prices. Gasoline is not included in the
retail sales figures forecast by the panel,
and higher gas prices (all other things
being equal) will reduce the amount that
consumers can spend on other goods.
Gas prices will peak sometime during
the summer, simply because the demand
peaks during the summer and declines as
autumn approaches. OPEC is expected to
adjust production to keep crude oil prices
closer to the trading range it seems to
prefer — which implies lower gas prices
accompany the lower temperatures. Retail
sales will overcome the headwind of gas

prices with the twin engines of population growth and an improving economy.
Sales also will be helped by the relatively
strong personal income growth expected
by the panel.
Inflation is likely to rise, but not by
much. The expected rate for 2005 of 2.3
is not that high, even when compared to
the last several years. The bulk of the
price increases will be the result of the
improving economy, which is good news
— unless it gets out of hand. The improvement of the economy, more than the pace
of inflation, will force the Federal Reserve
to start raising rates incrementally. The
Fed has been keeping its foot on the gas
pedal to make sure the economy does not
stall out, but once the engine begins to
hitting on all cylinders it will have to let
up or risk losing its hard-won reputation
for responsible driving. The Fed must also
be careful to take in to account the stimulus that deficit spending has given to the

economy. Inflation over the long haul is
heavily influenced by expectations. People
have come to expect modest inflation, as
well as a Federal Reserve ready to make
sure it remains under control.
Employment continues to do well
overall, but manufacturing remains weak
and higher interest rates will flatten construction employment by 2005. Ironically,
the modestly higher prices that many
are seeing as a negative for the general
economy may help to improve the prospects for manufacturing. Firms have little
incentive to hire new workers when prices
are declining, as they have over the last
several years. Construction will not plummet as long as population growth continues, but there are more houses being built
currently than is justified by population
growth. This suggests that the industry
must throttle back some time soon.
— Tracy Clark

PAGE 2

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GREATER PHOENIX BLUE CHIP • JUNE 2004

GREATER PHOENIX ECONOMIC FORECAST FOR 2004
ANNUAL PERCENT CHANGE 2004 FROM 2003
PopuSOURCE
lation
Arizona Public Service
3.1
ASU – Bank One Economic Outlook Center 2.7
CH2M HILL
2.7
Department of Economic Security
2.5 L
ECON-LINC
2.7
Elliott D. Pollack and Co.
2.9
H.C. Reardon Economics
2.9
Joint Legislative Budget Committee
2.8
Lancaster Consulting
2.7
The Maguire Company
2.8
Protitlement
2.8
Salt River Project
3.0
U of A – Eller College
3.5 H
VisionEcon
2.8
Consensus
2.9

Personal
Income
7.4 H
6.6
6.5
6.1 L
6.2
6.5
7.1
6.5
6.5
6.3
6.8
6.8
7.1
6.7
6.7

Retail
Sales
6.7
6.0 L
6.0 L
6.6
6.0 L
7.5 H
6.5
6.0 L
6.2
6.1
6.5
6.0 L
7.5 H
6.1
6.4

Wage &
Salary
Empl.
3.9
3.3
3.3
2.5 L
3.7
3.5
3.6
3.5
3.2
3.3
3.8
3.5
4.5 H
4.0
3.5

Manufacturing
Empl.
2.0
1.5
3.1
(2.0) L
3.0
4.0 H
1.5
2.1
2.0
2.3
3.5
2.0
1.9
2.8
2.1

AVERAGE RATE FOR 2004

Construction
Empl.
5.5 H
(3.5) L
0.0
3.5
2.0
3.0
3.0
1.0
0.0
0.0
1.5
2.0
4.2
3.0
1.8

Services
Empl.
4.7
5.8
4.3
3.7
3.3 L
5.0
5.0
4.0
4.2
4.2
5.5
4.5
6.0 H
6.0 H
4.7

National
CPI
2.1
1.8
2.4
2.2
2.4
2.5
2.2
1.7
2.5
2.4
2.5
1.7
1.3 L
3.6 H
2.2

Unemployment
Rate
4.7
4.8 H
4.4
4.8 H
4.0 L
4.4
4.4
4.4
4.0 L
4.2
4.2
4.0 L
4.8 H
4.4

GREATER PHOENIX ECONOMIC FORECAST FOR 2005
ANNUAL PERCENT CHANGE 2005 FROM 2004

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.

3.1
2.8
2.8
2.5 L
2.7
3.1
3.0
2.8
2.8

8.0 H
7.0
6.7
7.1
6.5 L
7.7
7.4
6.7
7.0

7.5
6.6
6.3
6.5
6.0 L
7.0
6.7
6.5
6.6

4.4
4.2
3.7
3.2 L
3.8
4.5
4.2
4.0
4.0

3.2
2.6
3.3
1.1 L
3.2
5.0 H
3.2
2.5
2.4

2.8
2.9
3.5 H

7.2
8.0 H
7.7

6.8
8.0 H
7.3

4.5
4.5
4.9 H

2.9

7.3

6.8

4.2

AVERAGE RATE FOR 2005

Construction
Empl.

Unemployment
Rate

Services
Empl.

National
CPI

2.5
(9.0) L
2.0
3.4
2.0
(5.0)
3.0
1.5
2.5

5.0
7.5 H
4.3 L
4.5
4.5
5.5
5.0
4.5
4.6

2.3
2.2
2.5
2.5
2.3
3.0 H
2.3
2.0
2.6

4.4
4.5 H
4.5 H
4.5 H
4.0
4.0
4.0
4.3
3.8 L

4.1
4.0
4.7

1.8
1.0
4.3 H

5.8
5.0
5.5

2.5
1.3 L
1.6

3.9
3.8 L

3.3

0.8

5.1

2.3

4.2

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
2003
2002
2001

Population
(thousands)
3,382.0
2.8%
3,289.0
3.0%
3,194.0
3.1%

Personal
Income
(millions)
103,762.0
5.3%
98,540.0
4.4%
93,317.0
4.7%

Retail
Sales
(millions)
32,132.0
4.7%
30,690.0
0.3%
30,605.0
1.5%

Wage &
Salary
Empl.
(thousands)
1,576.6
1.3%
1,556.9
-0.2%
1,559.5
1.2%

Manufacturing
Empl.
(thousands)
126.9
-6.0%
135.0
-10.2%
150.3
7.5%

Construction
Empl.
(thousands)
128.6
3.3%
124.5
-1.7%
126.7
8.3%

Services
Empl.
(thousands)
627.4
2.7%
610.8
1.0%
604.5
19.2%

National
CPI
184.0
2.3%
179.9
1.6%
177.1
2.8%

Unemployment
Rate
4.9
5.6
3.9

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

GREATER PHOENIX BLUE CHIP • JUNE 2004

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
2004

Arizona Public Service
ASU Real Estate Center
CB Richard Ellis
Elliott D. Pollack & Co.
Griffin Consulting
Grubb & Ellis/BRE Commercial
Marcus & Millichap
Meyers Group
Protitlement
U of A, Eller College
CONSENSUS
Actuals from ASU:
2003 Actuals
2002 Actuals
2001 Actuals

Singlefamily
Permits

Multifamily
Permits

40,000
33,400
42,000
40,000
36,200
N/A
N/A
38,000
38,600
42,773
38,872

5,000
7,250
3,900
6,000
4,800
2,000
4,936
4,400
4,800
3,731
4,682

39,652
34,312
32,867

4,836
5,607
7,201

2005
Year-end
Apt.
Vacancy (%)

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

10.2
10.0
9.6
10.0
9.5
9.0
9.3
N/A
10.6
N/A
9.8

4,000
8,000
4,800
4,000
6,000
5,500
3,477
N/A
5,100
N/A
5,110

38,000
32,000
40,000
37,000
34,000
N/A
N/A
37,500
36,700
44,700
37,488

4,850
7,500
3,700
7,000
5,400
2,000
N/A
4,500
6,300
3,094
4,927

9.6
9.4
8.2

3,702
3,355
1,525

Year-end
Apt.
Vacancy (%)

9.2
9.5
9.2
10.2
8.8
8.5
N/
N/
9.5
N/A
9.3

Apt.
Absorption

7,700
8,350
5,500
6,500
6,550
6,000
N/A
N/A
6,800
N/A
6,771

2003 year-end inventory: 899,077 (single-family)
326,311 (multi-family)

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
OFFICE (Millions of Square Feet)
2004
Construction

Arizona Public Service
CB Richard Ellis
Cushman & Wakefield
Elliott D. Pollack & Co.
Grubb & Ellis/BRE Commercial
Lee & Associates
Marcus & Millichap
PricewaterhouseCoopers LLP
Protitlement
CONSENSUS
Actuals from Lee & Associates:
2003 Actuals
2002 Actuals
2001 Actuals

2005

Vacancy
(Year End %)

Absorption

0.9
1.0
0.6
0.8
0.7
1.5
0.8
0.5
0.7
0.8

21.0
17.5
16.4
18.0
19.3
16.4
19.1
21.0
18.0
18.5

1.2
2.0
1.9
1.5
1.3
1.8
1.5
1.0
1.6
1.5

1.1
2.9
4.7

18.7
19.3
16.6

1.3
1.2
1.2

Construction

1.1
1.4
0.7
1.0
1.0
0.8
N/A
1.5
1.0
1.1

Vacancy
(Year End %)

19.5
16.0
15.3
17.5
17.6
14.5
N/A
19.0
16.8
17.0

2003 year-end inventory:

Absorption

1.7
2.3
2.3
1.6
1.8
1.8
N/A
1.8
2.2
1.9

54.8 million square feet

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
RETAIL (Millions of Square Feet)
2004
Construction

Arizona Public Service
CB Richard Ellis
Grubb & Ellis/BRE Commercial
Marcus & Millichap
PricewaterhouseCoopers LLP
Protitlement
CONSENSUS
Actuals from CB Richard Ellis:
2003 Actuals
2002 Actuals
2001 Actuals

2005

Vacancy
(Year End %)

Absorption

Construction

4.2
4.0
5.5
N/A
2.5
4.3
4.1

3.1
4.5
5.0
1.6
2.8
3.5
3.4

10.9
8.2
8.9
8.5
8.0
9.2
9.0

2.5
3.5
5.0
2.3
3.0
3.1
3.2

5.0
3.9
7.5

7.4
7.3
6.6

4.1
3.0
5.7

Vacancy
(Year End %)

2003 year-end inventory:

11.6
8.1
8.5
N/A
8.2
9.6
9.2

Absorption

3.0
4.0
6.0
N/A
2.0
3.8
3.8

110.0 million square feet

PAGE 4

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GREATER PHOENIX BLUE CHIP • JUNE 2004

METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST
INDUSTRIAL (Millions of Square Feet)
2004

2005

Construction

Vacancy
(Year End %)

Absorption

Construction

CB Richard Ellis**
Cushman & Wakefield**
Grubb & Ellis/BRE Commercial**
Lee & Associates *

3.5
0.4
3.5
1.4

9.6
8.0
10.5
9.0

4.5
3.2
3.7
2.1

4.0
1.0
3.5
1.5

9.1
7.2
9.8
8.5

5.0
4.0
4.9
2.5

CONSENSUS — Total Space

2.2

9.3

3.4

2.5

8.7

4.1

Actuals from CB Richard Ellis:
2003 Actuals – Total Space
2002 Actuals – Total Space
2001 Actuals – Total Space

3.4
5.7
8.5

9.7
10.3
9.8

4.4
3.4
2.8

*All space over 5,000 sq. ft.

Vacancy
(Year End %)

Absorption

2003 year-end inventory:
215.2 million sq. ft. (CB Richard Ellis) *
234.3 million sq.ft. (Cushman and Wakefield) **
222.8 million sq. ft. (Lee & Associates)*
233.0 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

Marcus & Millichap
Jason Wong

Griffin Consulting
Brian J. Smargiassi

The Meyers Group
Stu Burton

Grubb & Ellis/BRE Commercial
George Gramm

PricewaterhouseCoopers LLP
Tom Kabat

Lee & Associates Arizona
Curt Czarsty and
Matt Fredrick

Protitlement
Steve Pritulsky
University of Arizona, Eller College
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

H. C. Reardon Economics
Hank Reardon

Protitlement
Steve Pritulsky

Joint Legislative Budget Committee
Staff

Salt River Project
Arlyn Herrera, Rebecca Holmes and Karen Wolfe

Lancaster Consulting
Dwight Duncan

University of Arizona, Eller College
Marshall Vest

The Maguire Co.
Alan Maguire

Vision Econ
Debra J. Roubik

Arizona State University
Bank One Economic Outlook Center
Tracy Clark
CH2M Hill
Kent Ennis

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

GREATER PHOENIX BLUE CHIP (ISSN 1042-6825) is published four
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the L. William Seidman Research Institute in the W. P. Carey School
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For information, call the Bank One Economic Outlook Center at
(480) 965–5543.
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