Phoenix real estate outlook: Residential recovering in 2010, but commercial continues to slide

October 13, 2009

by Elliott D. Pollack

Forecasts by the Greater Phoenix Blue Chip real estate consensus panel show that perceptions of the metro real estate market continued to deteriorate in the third quarter of 2009. Projections for residential development are less optimistic than for second quarter, but even so, this sector is on its way to becoming a positive force in the economy. On the other hand, the commercial sector is sliding toward a hole.

Residential

The Greater Phoenix panel confirmed their second quarter projection that 2009 should be the bottom of the cycle for single-family permits, declining to about 7,800 units, which is down from about 12,600 last year. For next year, however, the panel forecasts that permits will increase more than 40 percent, totaling about 11,200 -- a dampening of last quarter's projection of 50 percent growth.

Reaching forward another year, the panel forecasts that 2011 will produce an additional 45 percent increase in permits, more than 16,200 units. While this is a big increase in percentage terms, 2011 permits will reach only about 25 percent of the previous peak and less than half of the demographic demand during times of normal population flows.

Given that permits are on the rise, however, housing will clearly be a plus for the economy.

Commercial

Multifamily markets, on the other hand, will continue to be under pressure for the foreseeable future, with vacancy rates staying above 12 percent this year and next -- about what was expected in second quarter -- and falling to slightly above 11 percent in 2011. By 2011, the number of permits will be increasing from this year's trough of about 1,600 units to about 2,600 units. That number however, will be less than half of the 2007 actual. Absorption, which is expected to stay negative this year, is projected to be up slightly next year and stronger in 2011.

The office market continues to be under significant pressure. Vacancy rates are expected to stay near 25 percent this year and next before dipping to about 24 percent in 2011. In 2007 vacancy came in at rates of less than 14.

Office construction is expected to decline from almost 5 million square feet in 2007 to slightly over 2 million square feet this year, a million square feet next year and virtually none in 2011. Absorption in this sector is also a problem. Absorption is expected to be negative this year to the extent of almost 2 million square feet, flat next year and up only slightly -- to about 1.2 million square feet -- in 2011. Given the continuing decline in jobs expected through the first half of 2010, this should not be surprising.

The retail market is also expected to remain under pressure. Vacancy rates are projected to stay in the 12 to 13 percent range this year, next year and in 2011. Once again, absorption is expected to be negative this year and negative next (but less so), and picking up only slightly in 2011. Construction activity is expected to remain low.

The panel also predicts a significant drop in industrial activity. Construction, which totaled almost 14 million square feet in 2008, is expected to be only 2.5 million square feet in 2009 and less than 1 million square feet in 2010 and 2011. Vacancy rates are expected to stay in the 16-17 percent range -- the highest since 1984. Absorption is expected to be significantly negative this year because of the loss of jobs, and modestly negative next year, before turning up in 2011.

Overall, the commercial market is not a pretty picture. High vacancy rates, diminished construction activity, negative absorption this year and next, and significant downward pressure on rents seem to be the order of the day. It will take several years to work out of this hole.

-- Elliott D. Pollack is CEO of Elliott D. Pollack and Company in Scottsdale, an economic and real estate consulting firm established in 1987. The views expressed in this article are not necessarily those of the university or the W. P. Carey School of Business.