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Economic forecast

Economic Forecast Calls For Another Year Of Slow Recovery In 2011

Arizona’s economic recovery will continue to move at a glacial speed in 2011 — but at least it’s moving. The coming new year will see an increase in job creation, a rise in population and even a modest increase in single-family home permits. However, the consensus among economists at today’s 47th Annual Economic Forecast Luncheon, co-sponsored by the Department of Economics at Arizona State University’s W. P. Carey School of Business and JPMorgan Chase, is that Arizona’s recovery will continue to be far less robust than economic rebounds of the past.

“Arizona was much harder hit in this recession than the rest of the country,” said Lee McPheters, director of the JPMorgan Chase Economic Outlook Center at the W.P. Carey School of Business in an interview before the luncheon. “Overall the U.S. lost about 6 percent of jobs, while Arizona lost 11 percent of jobs and the Greater Phoenix area lost 12 percent of jobs. So, by that measure, Arizona’s problems were twice as large as the average state.”

According to McPheters, hampering Arizona’s growth in 2010 has been:

  • Consumers’ focusing on paying off debt rather than spending
  • Corporate profits improving but hiring deferred
  • The expected resurgence in single-family housing did not develop
  • Home prices have not yet stabilized
  • Small businesses facing tight credit conditions and weak demand
  • Stimulus programs ending


Job Growth

In terms of job creation, Arizona employment is expected to increase by 47,800 jobs in 2011, following three straight years of losses. The projected rate of growth for 2011 is 2 percent. That’s about double the rate of employment growth anticipated for the nation as a whole, but well below the state’s long-term average of 3.7 percent.

In addition, the state’s unemployment rate will remain above the 9 percent mark throughout 2011.

Still, even with Arizona being at ground zero of the burst housing bubble that dragged the rest of the nation into recession, the employment situation in the state has shown a marked improvement.

“For all of 2009, at the deepest point of the recession, only Nevada had weaker labor market conditions, and Arizona ranked 49th among the states in job growth (or losses),” McPheters said. “But in just the past couple of months, Arizona’s overall position is improving. The state ranked 12th based on October job creation in the 50 states. And in September, Phoenix added 27,400 jobs compared to the year before. Phoenix is the now the second-fastest growing metro area.”

Real Estate

The real estate and housing markets in Arizona remain weak in 2010, with single-family housing permits expected to be down 5 percent, marking a fifth consecutive year of declines. Single-family housing permits are expected to finally improve next year, with an anticipated increase of 25 percent. However, that increase stems from a base of 12,000 units in 2010, totaling just an additional 3,000 units. Compare that paltry number to the 80,000 annual permits handed out at the peak of the housing boom.

“Last year at this time, there was optimism about Arizona housing, but the growth never came,” McPheters said. “It looks like 2010 single-family building won’t even reach the level of 2009, which was the worst year of the recession. So most analysts are cautious right now about housing.”

One of those cautious analysts is Elliott Pollack, CEO of Elliott D. Pollack & Company in Scottsdale.

“The good news is that the worst is over, but it’s going to be a painfully slow recovery,” Pollack said in an interview before the forecast luncheon.

Pollack lists the following as reasons why the state’s housing market is showing only the slightest signs of improvement:

  • Tougher underwriting standards on mortgages
  • Up to 51 percent of the homes in Arizona have negative equity
  • Previous loan modifications have mostly failed
  • Foreclosures remain high
  • Option ARM resets do not peak until next year


Vacancy Rising in Phoenix

Vacancy Rising In Phoenix Despite Construction Pullback

Though employment growth will stimulate an increase in retail sales in 2010, the job additions will not be sufficient to prevent the vacancy rate in Phoenix from rising for the fifth consecutive year, according to the latest Retail Research market update from Marcus & Millichap.

Unlike previous years when excessive construction drove vacancy increases, lagging demand has become the anchor on the market. The pace of store closures clearly has slowed, but too few retailers have emerged to open new locations in the vacant space that has amassed. With the vacancy rate nearing its highest level in 20 years, rents continue to fall as tenants exercise the upper hand in discussions with owners.

Rents have yet to settle at a new, lower market level and may not reach their low point until late next year. The upside of reduced rents, however, has been a sharp decline in construction, as many projects simply no longer pencil for developers. After deliveries averaged 5.5 million square feet of new space each year during the past decade, a fraction of that total will come online in 2010.

Although the slowdown in construction represents a positive trend in a market with frequent overbuilding spells, the lack of properties under construction will restrain sales of new single-tenant, net-leased assets. As in other markets around the country, single-tenant properties net-leased to top-rated corporate tenants generate intense bidding when listed. In fact, cap rates for nationally branded drugstores and fast-food properties have fallen about 50 basis points since early this year to around 7 percent, with ground leases commanding even lower first-year returns.

In the multi-tenant segment, buyers have intensified searches for suitable listings, but the ongoing reduction in rents continues to present challenges to arriving at valuations upon which owners and prospective buyers can agree. Current underwriting assumes additional increases in vacancy and further rent reductions, such that cap rates must vary from 10 percent to 11 percent to generate bids. Among specific properties, those with tenants that signed leases at the peak of the market
in 2006 and 2007 invariably face the prospect of re-leasing space at substantially lower rents when leases expire.

2010 Annual Retail Forecast

Employment: Government employment will decline over the second half due to the termination of census jobs and budget constraints at the state and local levels, while private
sector employers will hire conservatively. As a result, total employment will expand 0.8 percent in 2010, or by 13,700 jobs. Last year, 116,000 positions were cut.
Construction: Developers will complete 500,000 square feet of space this year, the lowest annual total in 30 years. In 2009, approximately 2.9 million square feet came online. Planned projects total 28 million square feet, although none has a scheduled start date.
Vacancy: The vacancy rate will increase 70 basis points this year to 12.6 percent, as store closures and a lack of new demand will result in negative net absorption of 721,000 square feet. Vacancy spiked 260 basis points last year and most recently surpassed 12 percent, a level last reached in 1991.
Rents: This year, asking rents will decrease 1.3 percent to $18.11 per square foot, following a 5.5 percent dip in 2009. Effective rents will slide 2.6 percent to $15.13 per square foot, compared with a 9.1 percent drop last year.

Projections

Fewer Jobs Will Be Lost This Year, But Growth Will Remain Slow In 2011

In an updated forecast released today, the Arizona Department of Commerce Forecast reports that the state’s nonfarm job losses for 2010 have been revised downwardly. The department now forecasts that the state’s economy will lose 25,700 jobs this year, as opposed to the 50,400 originally forecast. However, the department also revised its forecast on how many nonfarm jobs Arizona’s economy will create in 2011, from 23,100 to 16,500. The fact that Arizona will be losing fewer jobs this year is being attributed to:

  • Federal government economic stimulus program spending that began in 2009.
  • Continued employment growth in the education and health services sector.
  • Improved job growth in the professional and business services; trade, transportation, and utilities; leisure and hospitality; and natural resources and mining sectors.
  • Stronger than anticipated global economic growth.


The downward revision in 2011’s job growth rate is being attributed to:

  • Tepid growth in the private sector due to sluggish business and consumer spending.
  • Large state and local government budget deficits.
  • A slowdown in population growth.
  • Limited consumer and small business lending by banks.


Gains in five sectors and losses in six sectors are expected over the two-year period (2009 to 2011). The major sectors in the Arizona economy where job gains are forecast include: educational and health services; professional and business services; trade, transportation and utilities; leisure and hospitality; and natural resources and mining. Sectors with projected job losses during the same time period include: government; construction; financial activities; information; manufacturing; and other services.

Arizona Sector Employment
Average Annual Over-the-Year Change


2009

2010

2011

Total Nonfarm

-7.3%

-1.1%

0.7%

Manufacturing

-11.6

-3.0%

1.3%

Natural Resources/Mining

-17.8%

1.8%

12.3%

Construction

-30.8%

-11.8%

1.8%

Trade, Trans. & Utilities

-7.1%

0.6%

0.6%

Information

-6.4%

-6.4%

-2.9%

Financial Activities

-5.0%

-3.2%

-1.6%

Professional & Business Svcs

-10.4%

-0.3%

2.8%

Educational & Health Svcs

2.7%

2.6%

1.8%

Leisure & Hospitality

-5.2%

0.4%

0.8%

Other Services

-6.6%

-2.1%

2.0%

Government

-2.2%

-1.8%

-1.9%


Total Nonfarm Employment
Annual Average Growth Rate

2009

2010

2011

Arizona

-7.3%

-1.1%

0.7%

Phoenix MSA

-7.9%

-1.0%

0.8%

Tucson MSA

-5.1%

-1.1%

0.4%

Rest of State

-6.4%

-1.1%

0.6%