Greater Phoenix Blue Chip

Issue 2, 2007

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% this year to just under 37,000 units, down from 43,400 units in 2006. A recovery is anticipated for 2008, however. The panel anticipates that 40,000 single family units will be permitted, an increase of nearly 10%.

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. Whether this turns out to be an aberration or the worst is over remains to be seen.

The multi-family market is anticipated to increase by more than 25% in 2007 to nearly 5,000 permits in 2007 and by another nearly 9.5% to 5,400 permits in 2008. This would be the first year of growth in multi-family 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% at year-end 2006 to 5.8% in 2007 and 6.2% in 2008.

As for commercial markets, construction is expected to remain strong. 2.2 million square feet of office space was built last year. 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 are expected to remain relatively stable at just under 13%.

The retail market also remains strong. Construction is expected to exceed 7.0 million square feet this year and reach almost 6.5 million square next year. Absorption is also expected to remain strong at about 6.4 million square feet this year and 6.0 million in 2008. Thus, vacancy rates are expected to remain hovering around the 6% 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. The slowdown in commercial construction starting in 2008 is expected to be relatively modest.

View Source: http://www.elliottpollack.com/files/gpbc0702.pdf