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The State’s Economic Forecast For The Rest Of The Year - AZ Business Magazine Jul/Aug 2010

The State’s Economic Forecast For The Rest Of The Year Calls For An Agonizingly Slow Recovery

Ready to heave a sigh of relief over Arizona’s economy? Go ahead — but don’t get carried away. Some observers expect the second half of this year will bring positive signs that the economy is recovering, turning the dial toward even stronger growth in 2011 and 2012. Others aren’t so sure the state’s recession is in the rear-view mirror yet, and that a quick rebound is in the cards. Two of Arizona’s leading economists, Marshall Vest and Lee McPheters, disagree on how this year will shake out and how quickly a full recovery will be reached.

Half full

Vest, an economist at the University of Arizona’s Eller College of Management, believes Arizona’s economy hit bottom at the end of 2009. He forecasts retail sales will increase 5 percent this year and 10 percent in 2011. Home builders are buying back land they sold a few years ago and preparing for new construction. The housing market is improving “fairly rapidly,” with sales of existing homes up and housing prices stabilizing.

“Housing prices will continue to move up because they are well-below trend,” Vest says. “New-home permits are off the bottom, but I don’t see a whole lot of upward potential until we have absorbed all the vacant houses.”

He estimates inventory at 120,000 homes statewide.

As for that other troublesome spot in the economy, jobs, unemployment dropped to 9.5 percent in April, and may already have peaked.

“I think we’ll see slow improvement in the number of unemployed,” Vest says. “But it probably will be two or three years before we get the (unemployment) rate below 6 percent.”

He expects the hospitality industry, wholesale trade, and the professional and business services sector to show employment gains the second half of this year. New jobs will attract more people to Arizona and Vest predicts the state’s population will grow by 2.5 percent in 2012.

“I don’t expect to see the 4 and 4.5 percent growth from the last expansion because the population base is so large now,” Vest says. “But a 2.5 percent increase is a lot of people.”

Although he says it will take years to repair the damage, Vest sees better days ahead, with the economy in full recovery by 2013.

“This year simply sets the stage for much stronger and broad-based growth in 2011,” he notes. “We should see some significant growth in most sectors of the economy in 2011 and 2012. The areas growing fastest likely will be professional and business services, trade, hospitality, health care and residential construction.”

However, commercial real estate and the public sector will continue to be a drag on the economy, according to Vest.

“Tax revenues lag at least a year behind an economy that is recovering,” he says. “It will be at least a year, maybe two or three, before state and local government regains its footing.”

Half empty

McPheters, research professor of economics at the W.P. Carey School of Business at Arizona State University, thinks Arizona’s recession is still in play as measured by employment. Reaching 2.7 million jobs, the peak of employment in 2007, indicates a full recovery, McPheters says. More jobs may be lost this year — perhaps 24,000 — and 2010 could close out with 2.4 million people employed.

“So 2010 is another recession year,” he notes.

McPheters sees recovery in three to four years. Full recovery could come in 2013 if Arizona averages 3.7 percent job growth between now and then, McPheters says. Three percent job growth means recovery in 2014.

Arizona’s economy likely will creak along at its trough through the second half of the year but “2011 should be a year when home prices, population and jobs show modest improvement,” McPheters says.

He forecasts a gain of 48,000 jobs next year, a 2 percent increase over 2010. Population should grow 1.8 percent, a nudge of 0.3 percent. Homebuilders will take out 17,800 single-family housing permits this year and 28,480 next year, but “you would expect Arizona to generate 40,000 to 50,000 permits in a ‘normal year,’ ” McPheters says. “The housing recovery really hasn’t unfolded the way I thought it would.”

He won’t forecast retail sales until he has more data in hand.

A labor shortage?

Dennis Hoffman, professor of economics at the W.P. Carey School of Business, sees more questions than answers in Arizona’s immediate future.

“If you look at any kind of model about Arizona, you see significant growth coming in 2011 and 2012,” Hoffman says. “But that is nothing more than a reflection of history. The question is, are the dynamics that drove (economic) bounces in the past in place this time? This one may be different.”

Arizona’s rapid-paced recoveries from prior recessions “were fueled by the immediate availability of an abundant supply of undocumented cheap labor,” Hoffman says. “With Arizona’s attitude toward undocumented laborers, it’s pretty clear that abundant undocumented workers may be a headwind for us.”

With much of their assets tied up in real estate, Arizonans suffered “wealth erosion of massive proportions” as home prices slid 40 percent to 60 percent, Hoffman adds. Personal spending cratered and tax revenues plunged. Hoffman says the country’s household wealth fell 3 percent from December 1928 to December 1929 during the Great Depression. National wealth deteriorated 17 percent from December 2007 to December 2008 during the current recession, and Arizona was at least twice that bad, he notes.

“If we could regain consumer confidence and begin consuming close to historical norms, you’re talking between $14 billion and $16 billion in taxable spending,” Hoffman says. “That would do a lot to cure the ills of our very wounded economy.”

Arizona must become a magnet for new residents again, according to Hoffman, because in-migration fuels tax receipts as new arrivals buy homes, cars, furniture and other goods and services.

Residents needed

Indeed, economist Elliott Pollack, CEO of Elliott D. Pollack & Company, says Arizona will recover only if more people relocate to the state.

“We won’t need another square foot of housing, we won’t need another square foot of office space if people don’t move here,” Pollack says. “I expected population inflows to slow, but I never dreamed it would come to a screeching halt.”

Arizona’s total population growth (in-migration, plus births, minus deaths) was 3.1 percent in 2007 and 0.8 percent in 2009, Pollack says, noting that population will pick up slowly over the next four or five years.

He adds that Arizona’s recovery will be gradual and painful because the national recovery will be sluggish.

“Consumers are not nearly as able to spend as they have coming out of past recessions because they have to pay down debt and increase savings,” Pollack says. “That is not something they had to do in past recoveries.”

Becoming business friendly

Don Cardon, director of the Arizona Department of Commerce, sees “significant things happening in invisible areas.” He is bullish on the re-emergence of investment capital in Arizona this year.

“I am sincerely positive about what’s anticipated for the third and fourth quarters,” Cardon says. “I think we will see a re-engagement of capital streams, a softening of the ability of large investors to be interested in Arizona industry.”

Large investors will “beta test” the state and then secondary investors will decide they “have been out of the water way too long,” Cardon says. He sees Arizona businesses gaining traction over the next year. He also believes new capital will flow to energy-related industries, particularly renewable energy, the technology sector, small business and entrepreneurial ventures.

Last year, Gov. Jan Brewer appointed a commerce advisory council to identify an economic development model for the state and, following the group’s recommendations, has proposed scrapping the Commerce Department and replacing it with a so-called public-private commerce authority. Cardon says the authority would give Arizona a vital ingredient for improving the economy — focus.

“(The authority) has received unparalleled favor across party lines and in all sectors of business because it represents a sense of focus,” Cardon says. “We’re saying that at the state level, we haven’t been focused and we lost our connection with legislative support and confidence.”

Once necessary laws are passed to establish the authority, it “will create a tool for the private sector to say, ‘I understand this. We can count on them.’ We will go from an intangible entity to something that is specific and highly energized,” Cardon says.

The authority will emphasize energy and business attraction, retention and expansion, he says.

A boost to Arizona’s competitive position is critical to an economic recovery, and a statewide economic development program backed by a supportive tax policy is overdue, says Barry Broome, president and CEO of the Greater Phoenix Economic Council. In the meantime, he believes Arizona’s economy will bounce back “quicker than people realize, that it will be strong and that it will result in a faster rate of job recovery than economists are projecting for Phoenix and Arizona.”

Over the next year and a half, Broome says, Arizona will develop a full-fledged, renewable-energy cluster and transform itself into a solar energy hub; health care will experience a strong expansion with emphasis on information technology and telemedicine; and the aerospace market will hold its own. In addition, Broome expects an uptick in regional headquarter activity.

www.azcommerce.com | www.ebr.eller.arizona.edu |www.elliottpollack.com | www.gpec.org | www.wpcarey.asu.edu

Arizona Business Magazine Jul/Aug 2010

Phoenix_skyline_Arizona_USA

A Voyage Of Discovery In Phoenix

Facing a down economy, shrinking budgets and significant pressures to outperform the year’s commitments, how do you find time for sustainability? Let’s face it, if there is no payback within the current year, it’s unlikely you can get capital or modify your operating budget to make any kind of significant difference toward a green program, right? Wrong!

In a recessionary environment there’s more than one way to cut costs and leverage those savings to support other initiatives. In addition to pure cost savings, a little bit of planning and adjustment of current policies can yield results with little or no additional expense.

Our approach at the Greater Phoenix Chapter of IFMA, beginning in August 2008, was to establish a Facility Managers’ Green Peer Group (FMGPG) to foster open information exchange and provide a forum for sharing best practices.

What FMGPG has done is to create the environment for the peer group to be successful. A facilitator who is familiar with the subject matter is the primary pivot point; we manage and develop the agenda, secure the location and communicate through the FMGPG to the group members. The facilitator then leads the meeting and keeps the group focused on the agenda and future goals.

The initial goal of the peer group was to educate the members on the five major categories of LEED (Leadership in Energy and Environmental Design) as they related to the Existing Building Operations and Maintenance structure, or EBOM.

The LEED-EB system focuses on building maintenance and operations. Unlike the other LEED standards, points are awarded for established programs and policies with measured results over time. Metrics are taken during a performance period lasting from three to 12 months.

As with the LEED for new construction products, points are awarded in six categories: sustainable sites, water efficiency, energy and atmosphere, materials and resources, indoor air quality, and innovation in operations

There are 92 available points, with a minimum of 34 required for the lowest level of certification. Most organizations nationwide appear to be striving for Silver or Gold certification based on the initial condition of the building.

We established a yearlong program that was based on the following formula:
General Discussion and Checklist Review + Facility Examples and Benchmarking + Site Visit = A Solid Foundation of Understanding.

So, what’s the bottom line on the benefits of the peer group:

  • Approaching sustainability concepts with minimal or no impact to your FM resources and budget.
  • Marketing your FM organization through sustainability involvement.
  • Taking advantage of LEED benefits without certifying your site.
  • Decoding the myths and fears of LEED.
  • Strengthening your FM position by demonstrating sustainability initiatives.
  • Demonstrating the hidden value of your FM organization by introducing and achieving sustainable initiatives.
  • Educating your staff, customers and stakeholders, as well as yourself, on sustainability and the workplace.
  • One LEED case study, managed by an IFMA CFM (Certified Facility Manager), has shown the following validated results:

    • Effectively reduced electricity use by 35 percent.
    • Effectively reduced natural gas use by 41 percent.
    • Reduced domestic water use by 22 percent.
    • Reduced landscape water use by 76 percent.
    • Diverted up to 85 percent of its solid waste.
    • Reduced total pollution by 26 percent.
    • Reduced CO2 emissions by 17 percent.

    A new study by CoStar Group, the commercial equivalent of MLS, has found that sustainable “green” buildings outperform their peer, non-green assets in key areas such as occupancy, sale price and rental rates, sometimes by wide margins.

    The results indicate a broader demand by property investors and tenants for buildings that have earned either LEED certification or the Energy Star label, and strengthen the “business case” for green buildings, which proponents have increasingly cast as financially sound investments.

    According to the study, LEED buildings command rent premiums of $11.24 per square foot over their non-LEED peers, and have 3.8 percent higher occupancy. Rental rates in Energy Star buildings represent a $2.38 per square foot premium over comparable non-Energy Star buildings, and have 3.6 percent higher occupancy. And, in a trend that could signal greater attention from institutional investors and the C-level, Energy Star buildings are selling for an average of $61 per square foot more than their peers, while LEED buildings command a remarkable $171 more per square foot.

    At the end of the day — even in a down economy — you can make a difference, even with little or no budget.