SECOND QUARTER 2007 Volume 19, Number 2 GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2007 ............................................................................... PAGE 1 Single-family housing to fall in '07, but other sectors strong The dichotomy in the real estate market continues. The Greater Phoenix Blue Chip real estate panel forecasts that single-family permits will drop another 13 percent this year to just under 37,000 units, down from 43,400 units in 2006. A recovery is anticipated, however. The panel expects 40,000 single-family units to be permitted in 2008, an increase of nearly 10 percent. Just how uncertain the outlook is, however, can be seen by the wide spread in the forecasts. The low forecast for 2007 calls for 27,000 single-family units to be permitted while the high forecast calls for 48,000 units. The single-family residential market weakened considerably late in 2006 but recently picked up again. It remains to be seen if this is an aberration or if the worst is over. The multifamily market is anticipated to increase by more than 25 percent in 2007 to nearly 5,000 permits in 2007 and by another nearly 9.5 percent to 5,400 permits in 2008. This would be the first year of growth in multifamily permits in Greater Phoenix since 2004. Apartment absorption rates are also expected to be strong, though not quite as strong as permits issued. Thus, vacancy rates are expected to increase from 5.3 percent at year-end 2006 to 5.8 percent in 2007 and 6.2 percent in 2008. As for commercial markets, construction is expected to remain strong. Last year, 2.2 million square feet of office space was built. The Blue Chip Panel expects 3.8 million and 3.0 million to be built this year and next. Absorption is expected to be slightly less than new construction in both years. Vacancy rates should remain relatively stable at just under 13 percent. The retail market also remains healthy. Construction is expected to exceed 7.0 million square feet this year and reach almost 6.5 million next year. Absorption is also forecast to remain strong at about 6.4 million square feet this year and 6.0 million in 2008. Thus, vacancy rates will likely continue hovering around the 6 percent range. Industrial markets show the same pattern. After 7.0 million square feet in 2006, 7.8 million square feet are anticipated to be built this year and 7.2 million square feet next year. Industrial absorption is expected to run slightly less than the construction number, but vacancy rates are still expected to remain low – in the mid 7’s in 2006 and the high 7’s in 2007. The pattern seems clear, however. It is likely that 2007 will be the peak in commercial construction and absorption. Given the outlook for the economy, this pattern certainly seems reasonable. Fortunately, the slowdown in commercial construction starting in 2008 is expected to be relatively modest. — Elliott D. Pollack Greater Phoenix economic slowdown reflects national trend It is clear that the panel expects the economy to be being significantly slower in 2007 and 2008 compared to 2006. The local economy may be hit harder by the slowdown in the real estate sector than the national economy, but for the most part we will be slowing because of the slowing of the national economy and as a result of many of the same forces that are a drag nationally. It is important to understand that the real estate sector encompasses much more than the construction sector. It also includes real estate agents, mortgage brokers and lenders and a host of other related firms and workers. The slowdown so far has hit the non-construction portion of the industry far harder than the construction side. Also, the impacts have been on the residential side, although of course retail construction will suffer if the slump goes on long enough. The bright spot for the residential sector is that population growth is expected to remain healthy at least for the next two years. Indeed, the only thing likely to dramatically slow local population growth would be a protracted or deeper-than-expected slowdown in the national economy. It is true that the national economy slowed significantly in the first quarter of 2007 and there are significant challenges moving forward, but that does not seem to translate yet into enough of a slowdown to imperil our population growth. Everyone is aware of the drag on the economy exerted by higher energy and food costs, but at least so far the drag has not become intolerable. However, there are indications that long-term interest rates are poised to finally start rising, which could put a real damper on the economy if the rise in rates was large enough. Low long-term interest rates have fueled a major portion of the last two economic expansions. Higher long-term rates would exacerbate the problems we have already seen for mortgage lending and further dampen consumer spending, which has recently been fairly weak anyway. — Tracy Clark PAGE 2 ................................................................................ GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2007 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 Southwest Growth Partners U of A - Eller College VisionEcon Consensus AVERAGE RATE FOR 2006 Population 3.0 3.4 3.1 3.1 3.1 3.0 3.5 H 3.0 3.1 3.1 3.0 3.2 3.4 2.9 L Personal Income 6.9 7.5 8.0 H 7.3 7.5 7.2 7.5 7.0 7.2 7.6 7.7 6.8 7.5 6.7 L Retail Sales 6.1 9.0 H 5.8 6.7 7.0 7.0 5.0 L 6.5 6.5 7.4 7.0 6.4 5.5 6.3 Wage & Salary Empl. 3.5 4.1 H 2.7 L 4.1 H 4.0 3.7 4.0 3.6 3.5 4.0 3.1 3.4 3.5 3.1 Manufacturing Empl. 0.1 0.5 1.2 0.2 -0.5 L 1.2 0.0 0.5 1.0 2.5 H 1.0 0.8 1.0 1.6 Construction Empl. -10.0 L 6.0 H -7.0 3.1 1.0 0.0 -5.0 0.0 -5.0 0.0 -3.0 -5.5 -1.3 4.0 Services Empl. 4.1 4.5 5.8 H 4.1 3.0 L 5.0 4.5 4.6 4.5 5.0 4.2 4.8 5.1 4.5 National CPI 3.1 2.8 1.9 L 3.1 3.2 H 2.8 3.0 2.2 2.4 3.2 H 2.1 3.0 2.3 2.7 3.1 7.3 6.6 3.6 0.8 -1.6 4.6 2.7 Unemployment Rate 4.3 4.2 4.2 3.9 3.8 L 4.2 4.0 4.6 H 4.3 4.1 4.0 4.2 4.5 4.2 GREATER PHOENIX ECONOMIC FORECAST FOR 2007 ANNUAL PERCENT CHANGE 2007 FROM 2006 Population Personal Income Retail Sales Wage & Salary Empl. Manufacturing 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 Southwest Growth Partners U of A - Eller College VisionEcon 3.0 3.2 H 3.0 2.9 3.1 3.0 3.0 3.0 3.0 3.2 H 3.0 3.1 3.0 2.7 L 6.8 7.5 8.0 H 7.6 7.2 7.5 7.0 7.0 7.0 7.5 7.3 6.5 6.0 L 6.3 6.4 8.5 H 5.5 6.5 7.0 7.0 4.0 L 6.5 6.0 7.5 6.8 5.8 5.7 6.7 3.3 4.4 H 3.3 3.3 3.8 3.7 3.0 3.7 3.5 4.0 3.0 3.2 1.9 L 2.2 -0.5 L 0.0 1.0 0.7 1.0 1.1 0.0 0.5 1.0 2.0 H 1.0 0.5 -0.5 L 1.0 Consensus 3.0 7.1 6.4 3.3 0.6 SOURCE AVERAGE RATE FOR 2007 Construction Empl. Unemployment Rate Services Empl. National CPI -5.0 5.0 H -4.0 1.1 5.0 H 0.5 0.0 0.5 0.0 0.0 -1.0 -4.0 -5.6 L 0.0 4.0 5.0 6.3 H 3.7 4.8 4.6 3.0 L 4.9 4.0 5.0 4.2 4.2 3.7 4.0 2.9 2.4 2.4 3.0 2.6 2.8 3.0 2.0 2.4 3.3 H 2.1 2.8 1.2 L 2.7 4.4 3.7 L 4.5 4.2 4.0 4.3 4.4 4.6 H 4.2 4.2 4.0 4.4 -0.5 4.4 2.5 4.3 4.6 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) 3,764 3.5% 3,636 3.9% 3,499 3.2% Personal Income (millions) 130,857* 8.4% 120,717 9.5% 110,279 8.8% Retail Sales (millions) 43,686 7.9% 40,500 14.2% 35,466 9.6% Wage & Salary Empl. (thousands) 1,847.5 6.0% 1,743.0 6.2% 1,641.2 4.2% Manufacturing Empl. (thousands) 136.7 2.7% 133.1 3.2% 129.0 0.5% Construction Empl. (thousands) 184.0 12.7% 163.2 15.8% 140.9 9.3% Services Empl. (thousands) 756.7 7.4% 704.6 6.5% 661.6 5.6% National CPI 201.6 3.2% 195.3 3.4% 188.9 2.7% Unemployment Rate 3.5 4.0 4.4 GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2007 ............................................................................... PAGE 3 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST RESIDENTIAL 2007 Singlefamily Permits Multifamily Permits 36,000 33,400 36,000 40,000 33,000 48,000 38,500 38,700 27,000 36,733 5,000 5,000 6,500 4,000 4,700 6,400 5,000 4,400 3,600 4,956 Actuals from ASU and Phoenix Housing Market Letter: 2006 Actuals 42,423 3,922 2005 Actuals 63,570 3,250 2004 Actuals 60,872 4,997 Arizona Public Service ASU, Realty Studies CB Richard Ellis Commerce Realty Advisors Elliott D. Pollack & Co. Griffin Consulting Grubb & Ellis/BRE Commercial Southwest Growth Partners U of A, Eller College CONSENSUS 2008 Year-end Apt. Vacancy (%) Apt. Absorption Singlefamily Permits Multifamily Permits 5.0% 6.0% 5.8% 5.0% 5.5% 6.8% 6.0% 6.0% NA 5.8% 3,000 5,000 2,000 2,500 2,000 5,900 4,500 4,800 NA 3,713 38,000 43,600 38,000 43,000 35,000 45,000 45,000 43,300 32,000 40,322 6,000 6,000 7,500 4,200 5,000 6,250 5,000 4,800 4,100 5,428 5.3% 5.0% 7.9% (4,653) 4,756 9,230 Year-end Apt. Vacancy (%) Apt. Absorption 5.0% 6.0% 6.0% 5.5% 7.5% 7.0% 6.0% 6.5% NA 6.2% 5,700 6,000 4,000 2,800 5,000 5,850 4,500 5,200 NA 4,881 2006 year-end inventory: Single-family: 1,027,634 million square feet Multifamily: 321,294 million square feet METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST OFFICE (Millions of Square Feet) 2007 2008 Construction Vacancy (Year End %) CB Richard Ellis Colliers International Cushman and Wakefield Elliott D. Pollack & Co. Grubb & Ellis/BRE Commercial Lee & Associates Southwest Growth Partners CONSENSUS 3.20 4.90 4.80 3.70 3.50 3.10 3.20 3.77 11.9% 12.9% 14.5% 12.0% 15.0% 12.3% 11.2% 12.8% 2.40 5.90 2.00 2.00 3.00 2.50 3.20 3.00 Actuals from Lee & Associates: 2006 Actuals 2005 Actuals 2004 Actuals 2.20 1.46 1.67 12.0% 12.9% 18.2% 2.24 4.20 2.07 Absorption Construction 2.80 4.50 1.50 2.70 3.80 3.00 2.60 2.99 Vacancy (Year End %) 12.7% 11.9% 14.2% 13.0% 14.8% 13.2% 10.8% 12.9% 2006 year-end inventory: Absorption 1.90 5.60 1.50 2.00 4.00 2.10 3.00 2.9 57.7 million square feet METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST RETAIL (Millions of Square Feet) 2007 Construction 2008 Vacancy (Year End %) Absorption CB Richard Ellis Grubb & Ellis/BRE Commercial Southwest Growth Partners CONSENSUS 8.00 7.20 6.20 7.13 5.4% 6.5% 6.3% 6.1% 7.40 6.00 5.90 6.43 Actuals from CB Richard Ellis: 2006 Actuals 2005 Actuals 2004 Actuals 4.51 6.50 5.60 5.1% 5.3% 6.1% 5.20 6.70 6.66 Construction Vacancy (Year End %) 6.50 6.80 6.00 6.43 2006 year-end inventory: 5.4% 6.0% 6.5% 6.0% Absorption 6.00 6.50 5.50 6.00 126.3 million square feet PAGE 4 ................................................................................ GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2007 METROPOLITAN PHOENIX REAL ESTATE CONSENSUS FORECAST INDUSTRIAL (Millions of Square Feet) 2007 Construction CB Richard Ellis * Cushman and Wakefield ** Colliers International ** Grubb & Ellis/BRE Commercial ** Lee & Associates * CONSENSUS — TOTAL SPACE 8.00 9.30 7.20 5.50 9.10 7.82 2008 Vacancy (Year End %) Absorption 8.1% 4.8% 7.9% 7.2% 10.2% 7.6% 4.00 10.00 8.10 6.50 6.50 7.02 Actuals from CB Richard Ellis: 2006 Actuals - Total Space 2005 Actuals - Total Space 2004 Actuals - Total Space *All space over 5,000 sq. ft. 6.99 6.33 4.56 6.7% 5.6% 8.5% 6.03 12.33 6.27 Vacancy (Year End %) Construction 7.00 9.00 6.50 4.80 8.90 7.24 Absorption 8.5% 4.5% 7.2% 6.8% 12.1% 7.8% 4.50 9.00 7.40 6.30 6.20 6.68 2006 year-end inventory: 237.5 million sq. ft. (CB Richard Ellis) * 248.2 million sq.ft. (Cushman and Wakefield) ** 236.0 million sq. ft. (Colliers International) 240.0 million sq. ft. (Lee & Associates)* 249.0 million sq. ft. (Grubb & Ellis) ** **Total Market (Space over 10,000 sq.ft) REAL ESTATE FORECAST PANEL Arizona Public Service Pete Ewen CRA Ltd. Todd Vesledahl Lee & Associates Arizona Kyle Mecker and Brad Vigil Arizona State University Realty Studies Jay Q. Butler Cushman and Wakefield Mark Urbanowicz PricewaterhouseCoopers LLP Tom Kabat CB Richard Ellis Jeff Cooledge Colliers International Stewart Park Elliott D. Pollack and Co. Elliott Pollack Griffin Consulting Brian J. Smargiassi Southwest Growth Partners LLC Steve Pritulsky University of Arizona Eller College Marshall Vest Grubb & Ellis / BRE Commercial Mike Coover 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. © 2007, Arizona Board of Regents for Arizona State University. Reprinting information contained in this publication should cite the W. P. Carey School of Business at Arizona State University. Authors are solely responsible for the accuracy and content of their articles. Arizona State University vigorously pursues affirmative action and equal opportunity in its employment, activities and programs. University of Arizona Eller College Marshall Vest Vision Econ Debra J. Roubik