GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2008 ...............................................................................

PAGE 1

SECOND QUARTER 2008 Volume 20, Number 2

Construction outlook: Panel expects big declines for all sectors
The reality of the extent of the downturn
in the residential housing market has clearly
set in with the Greater Phoenix Blue Chip
Real Estate panel. The panel now expects
a decline in single-family permits of more
than 43 percent, to a level of about 17,600
permits in 2008. This is a decline of about
72 percent from the peak in 2005, making
it one of the most severe housing cycles on
record. To give some perspective to the 72
percent decline from the peak to the current
expected level, the peak to trough decline
in the 2001 recession was a very modest
4 percent. From the peak in 1986 to the
trough in 1990, the decline was about 54
percent for single-family housing and from
the peak in 1978 to the trough in 1981, the
decline was about 63 percent. The 1960s
downturn saw a decline of 74 percent.
The Blue Chip panel does expect a recovery next year, however, to approximately
22,300 housing units, a 26 percent increase.
Even if that increase occurs, it would still
make 2009 the second-weakest year since
1992 (after 2008).
Apartment permits are also expected to
fall to just under 5,000 units, a decline of

25 percent from the 6,600 units of last year.
Multifamily units are forecast to decline
another 13 percent in 2009 because absorption for apartments is expected to approximate zero this year, with only 2,800 next
year. Vacancy rates are likely to increase
to more than 9 percent in both years. This
situation can only occur if population flows
have slowed dramatically, which appears
to be the case.
As expected, given current economic
conditions, the outlook for commercial
construction is less than sanguine. Office
construction is expected to be approximately 3.6 million square feet this year,
but only 710,000 square feet are expected
to be absorbed. This could push year-end
vacancy rates to close to 17 percent. In
2009, only about 1.7 million square feet of
space is expected to be added to the market
while 1.2 million square feet should be
absorbed. This would push vacancy rates to
the 18 percent level, the highest on record
since 2003.
Retail construction is also expected to
slow dramatically from 11 million square
feet last year to a little over 7 million square

feet this year and 4.3 million square feet in
2009. Absorption is also expected to slow
dramatically from 9.4 million square feet
last year to 5.0 million square feet this year
and less than 4.0 million square feet next
year. As a result, vacancy rates are expected
to jump to 9.2 percent in retail by the end
of 2009.
Construction of industrial space is also
forecast to slow dramatically, and vacancy
rates will hit double-digit levels. Construction, which was more than 13 million
square feet in 2007, is estimated to drop to
about 7.3 million square feet this year and
5.7 million square feet next, while absorption slows from more than 8 million square
feet last year to less than 2 million square
feet this year and about 3 million square
feet in 2009. Vacancy rates should end the
year at more than 11 percent. Given present
trends in the economy, these projections
could easily prove to be optimistic.
Overall, the construction outlook is ugly.
Only a small improvement is expected
in single-family activity and commercial
activity is expected to slow.
— Elliott D. Pollack

Weakness in Phoenix economy projected to continue through 2008
The economy of the Greater Phoenix
metropolitan area has been stagnant for the
first half of the year. Compared to last year,
Greater Phoenix has added practically no
new jobs. Gains in the more resilient sectors have been offset by sharp job losses in
other parts of the economy.
Construction employment is hardest
hit. Since peaking at 185,600 jobs in
the summer of 2006, construction in the
Valley has shed 37,000 workers. For the
first half of the year, it appears construction employment will be down by about
25,000 jobs from the first half of last year.
The Blue Chip panel projects that construction employment will continue to lose jobs
through 2008 and 2009 (see page 2).
As construction has slumped and residen-

tial activity has stalled, finance employment
is down by more than 5,000 jobs.
With the construction downturn accounting for 30,000 lost jobs, where is the offsetting growth coming from? Government and
health care each have created nearly 1,000
jobs per month for the past year.
And, surprisingly, employment in food
and drinking establishments continues to
rise. Analysts had expected that high gas
prices would cause consumers to defer
food purchases outside the home, but that
has not happened. Yet.
Analysts don’t expect government to
remain as a strong source of job growth
going forward as revenue shortfalls begin
to take hold. Similarly, while first half
growth in retail trade employment has

been positive (although modest), consumer
confidence at depths not seen for decades
will soon affect employment in malls and
shopping centers.
Although the national unemployment
rate has jumped to 5.5 percent, the Phoenix
unemployment rate was a startling 3.4 percent in April. The Blue Chip panel expects
unemployment to begin to move up in the
second half, and average 4.3 percent for
the year (page 2).
Slower population flows and weak personal income growth will bring two more
years of subpar retail sales. Overall job
creation will be below average for Phoenix
until the housing sector begins to show
signs of recovery.
— Lee McPheters

PAGE 2

................................................................................ GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2008

GREATER PHOENIX ECONOMIC FORECAST FOR 2008
ANNUAL PERCENT CHANGE 2008 FROM 2007

SOURCE
Arizona Department of Commerce
Arizona Public Service
ASU - Economic Outlook Center
ECON-LINC
EconLit LLC
Elliott D. Pollack and Co.
H.C. Reardon Economics
Joint Legislative Budget Committee
The Maguire Company
Salt River Project
U of A - Eller College
VisionEcon/Governing Star Group
Consensus

AVERAGE RATE FOR 2008

Population
2.6
1.0 L
2.8
2.6
3.0 H
2.0
2.8
2.7
2.9
2.8
2.2
2.7

Personal
Income
4.6
3.5
6.5
5.8
6.8
4.0
5.0
6.0
5.8
5.5
2.9 L
3.6

Retail
Sales
1.4
2.0
1.0
3.4
5.5
-1.0 L
2.0
2.0
4.6
2.5
1.0
2.5

Wage &
Salary
Empl.
-0.5
-0.5
0.0
0.1
2.8
-2.0 L
1.5
1.5
2.8
0.6
-1.2
0.6

Manufacturing
Empl.
-2.2 L
0.0
-2.0
-1.0
0.5
-2.0
-1.0
0.0
0.0
-0.7
-2.1
0.0

Construction
Empl.
-10.6
-20.0
-5.0
-15.0
-5.0
-15.0
-12.0
-5.0
-8.0
-17.5
-23.1 L
0.0 H

Services
Empl.
2.1
1.5
3.0
1.0 L
3.8
1.5
4.0
3.0
3.8
2.8
1.2
2.0

National
CPI
3.5 H
3.0
2.4
2.8
2.7
3.0
2.2
3.3
3.2
2.0 L
3.5 H
3.0

2.5

5.0

2.2

0.5

-0.9

-11.4

2.5

2.9

Unemployment
Rate
4.6 H
4.2
4.6 H
3.6 L
4.3
4.0
4.6 H
4.5
4.6 H
4.4
4.0
4.3

GREATER PHOENIX ECONOMIC FORECAST FOR 2009
ANNUAL PERCENT CHANGE 2009 FROM 2008
Population

Personal
Income

Retail
Sales

Wage &
Salary
Empl.

Manufacturing
Empl.

Arizona Department of Commerce
Arizona Public Service
ASU - Economic Outlook Center
ECON-LINC
EconLit LLC
Elliott D. Pollack and Co.
H.C. Reardon Economics
Joint Legislative Budget Committee
The Maguire Company
Salt River Project
U of A - Eller College
VisionEcon/Governing Star Group

2.2
1.0 L
2.6
2.7
2.9
2.5
3.0 H
2.7

5.3
4.0
6.8
6.5
6.9 H
5.0
5.5
6.0

3.6
2.5
2.0
4.8
5.5 H
2.5
3.5
3.0

0.1
1.0
0.5
2.4
2.9 H
1.0
2.5
2.0

-0.9
0.0
0.0
1.0 H
0.0
0.0
0.0
0.0

-2.9
-10.0 L
0.0
-5.0
0.0
-5.0
0.0
0.0

2.7
2.2
2.7

6.3
2.5 L
4.6

4.6
0.4 L
3.0

2.2
-0.9 L
1.3

0.0
-3.2 L
1.0 H

Consensus

2.5

5.4

3.2

1.4

-0.2

SOURCE

AVERAGE RATE FOR 2009

Construction
Empl.

National
CPI

Unemployment
Rate

2.9
2.0
3.3
3.0
3.9
2.5
4.0 H
3.0

2.0
3.0
2.2
2.4
2.6
2.0
2.2
2.5

4.3
4.5
4.9 H
4.0 L
4.1
4.0 L
4.4
4.4

1.0 H
-7.9
1.0 H

3.2
-0.2 L
4.0 H

1.8
1.6 L
3.7 H

4.1
4.0 L

-2.6

2.9

2.4

4.3

Services
Empl.

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

2007
2006
2005
* Estimate

Population
(thousands)
3,876
3.0%
3,764
3.5%
3,636
3.9%

Personal
Income
(millions)
140,288*
7.2%
130,857*
8.4%
120,717
9.5%

Retail
Sales
(millions)
43,712
0.1%
43,686
7.9%
40,500
14.2%

Wage &
Salary
Empl.
(thousands)
1,854.0
1.0%
1,836.0
5.3%
1,743.0
6.2%

Manufacturing
Empl.
(thousands)
133.3
-2.1%
136.2
2.3%
133.1
3.2%

Construction
Empl.
(thousands)
167.7
-6.4%
179.2
9.8%
163.2
15.8%

Services
Empl.
(thousands)
771.7
2.4%
753.7
7.0%
704.6
6.5%

National
CPI
207.3
2.8%
201.6
3.2%
195.3
3.4%

Unemployment
Rate
3.2
3.5*
4.0

PAGE 3

GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2008 ...............................................................................

GREATER PHOENIX REAL ESTATE CONSENSUS FORECAST
RESIDENTIAL
2008
Singlefamily
Permits

Multifamily
Permits

Arizona Public Service
ASU, Realty Studies
Belfiore Real Estate Consulting
CB Richard Ellis
Commerce Realty Advisors
Elliott D. Pollack & Co.
Griffin Consulting
Grubb & Ellis/BRE Commercial
U of A, Eller College

15,500
15,000
21,600
18,000
16,000
15,000
17,000
20,000
20,500

3,500
3,000
5,000
6,500
3,300
5,000
5,250
4,500
8,800

CONSENSUS

17,622

4,983

2009
Apartment
Vacancy
(Year End %)

Apt.
Absorption

Singlefamily
Permits

Multifamily
Permits

Apartment
Vacancy
(Year End %)

Apt.
Absorption

9.0%
10.0%
8.0%
10.0%
9.0%
9.0%
8.0%
10.0%
NA

(4,000)
(3,500)
2,300
1,000
1,800
(3,000)
4,000
2,000
NA

12,500
22,000
28,000
22,000
25,000
15,000
23,000
30,000
23,000

2,000
2,000
5,500
5,500
3,000
4,000
5,400
4,000
7,500

10.0%
10.0%
7.5%
10.4%
9.5%
10.0%
7.5%
9.0%
NA

(1,500)
900
6,700
3,000
2,500
2,000
4,600
4,000
NA

9.1%

75

22,278

4,322

9.2%

2,775

2007 year-end inventory:
Single-family: 1,051,295
Multifamily: 326,273

Actuals from ASU and Phoenix Housing Market Letter:
2007 Actuals
31,172
6,676
2006 Actuals
42,423
3,922

GREATER PHOENIX REAL ESTATE CONSENSUS FORECAST
OFFICE (Millions of Square Feet)
2008

2009

Construction

Vacancy
(Year End %)

Arizona Public Service
CB Richard Ellis
Colliers International
Cushman and Wakefield
Elliott D. Pollack & Co.
Grubb & Ellis/BRE Commercial
Lee & Associates

3.00
3.00
4.50
3.44
3.50
3.80
4.00

19.5%
15.7%
13.6%
18.5%
17.0%
19.5%
17.5%

0.5
1.0
1.9
0.5
0.5
(0.3)
0.9

2.5
1.8
1.8
0.7
1.0
2.0
2.0

21.5%
17.0%
13.2%
18.2%
18.0%
19.0%
18.5%

0.8
1.5
2.8
0.8
0.5
0.5
1.2

CONSENSUS

3.61

17.3%

0.71

1.68

17.9%

1.15

3.8
2.2

13.9%
11.1%

3.1
1.5

Actuals from Lee & Associates:
2007 Actuals
2006 Actuals

Absorption

Construction

Vacancy
(Year End %)

2007 year-end inventory:

Absorption

68.9 million square feet

GREATER PHOENIX REAL ESTATE CONSENSUS FORECAST
RETAIL (Millions of Square Feet)
2008
Construction

2009

Vacancy
(Year End %)

Absorption

Construction

Vacancy
(Year End %)

Absorption

Arizona Public Service
CB Richard Ellis
Grubb & Ellis/BRE Commercial

8.30
7.00
6.50

11.5%
7.5%
7.5%

4.80
5.00
5.50

2.5
3.5
7.0

12.5%
8.2%
7.0%

0.9
4.0
6.5

CONSENSUS

7.27

8.8%

5.10

4.33

9.2%

3.80

Actuals from CB Richard Ellis:
2007 Actuals
2006 Actuals

11.6
4.5

6.2%
5.1%

9.4
5.2

2007 year-end inventory:

137.4 million square feet

PAGE 4

................................................................................ GREATER PHOENIX BLUE CHIP • SECOND QUARTER 2008

GREATER PHOENIX REAL ESTATE CONSENSUS FORECAST
INDUSTRIAL (Millions of Square Feet)
2008
Construction

2009

Vacancy
(Year End %)

Absorption

Construction

Vacancy
(Year End %)

Absorption

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

10.00
5.90
4.50
10.50
5.50

11.1%
8.7%
9.2%
10.5%
12.5%

2.5
2.2
2.6
(0.5)
3.0

6.0
5.0
2.2
8.5
7.0

11.8%
9.3%
8.7%
12.5%
13.0%

4.0
3.0
3.4
2.0
3.0

CONSENSUS — TOTAL SPACE

7.28

10.4%

1.96

5.74

11.1%

3.08

8.4%
6.7%

8.4
6.0

Actuals from CB Richard Ellis:
2007 Actuals - Total Space
2006 Actuals - Total Space
*All space over 5,000 sq. ft.

13.2
8.5

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

REAL ESTATE FORECAST PANEL
Arizona Public Service
Pete Ewen

Colliers International
Stewart Park

Griffin Consulting
Brian J. Smargiassi

Arizona State University
Realty Studies
Jay Q. Butler

Commerce Realty Advisors Ltd.
Todd Vesledahl

Grubb & Ellis / BRE Commercial
Mike Coover

Cushman and Wakefield
Mark Urbanowicz

Lee & Associates Arizona
Kyle Mecker and Chris Seale

Elliott D. Pollack and Co.
Elliott Pollack

University of Arizona
Eller College
Marshall Vest

Belfiore Real Estate Consulting
Jim Belfiore
CB Richard Ellis
Jeff Cooledge

ECONOMIC FORECAST PANEL
Arizona Department of Commerce
Dennis Doby and Chen Levenson

EconLit LLC
Dwight Duncan

The Maguire Co.
Alan Maguire

Arizona Public Service Co.
Pete Ewen

Elliott D. Pollack and Co.
Elliott Pollack

Salt River Project
Arlyn Herrera, Janna Lorenzen and Karen Wolfe

Arizona State University
JPMorgan Chase Economic Outlook Center
Tracy Clark

H. C. Reardon Economics
Hank Reardon

University of Arizona
Eller College
Marshall Vest

ECON-LINC
John Lucking

JPMorgan Chase
Economic
Outlook Center
Tracy L. Clark, Economics Editor
Elliott Pollack, Topics Editor
Jim Dodson, Editorial Coordinator

Joint Legislative Budget Committee
Staff

VisionEcon/Governing Star Group
Debra J. Roubik

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. For information, call the
Economic Outlook Center at (480) 965–5543.
©2008 Arizona Board of Regents for Arizona State University. Reprint
permission required from the JPMorgan Chase Economic Outlook
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