At Least it's a Recovery

By Elliott Pollack

The fourth quarter Greater Phoenix Blue Chip Real Estate Consensus reaffirms that the panel believes 2010 was the bottom of the housing market in terms of permits. While single family permits are expected to be up only modestly in 2011 to 7,200 versus 6,800 in 2010, expectations are that 2012 will improve to more than 10,000 units and in 2013 we?ll enjoy 17,000 units permitted in the Greater Phoenix area. While 17,000 single family units are still only slightly more than a quarter of what Greater Phoenix permitted for at the peak, it is a huge percentage gain from the 2010 trough. Beware, however, there is a substantial difference of opinion about 2013. Projections vary from a low of 9,500 units to a high of 32,000 units. This is an extremely variable forecast.

The multi-family market remains the bright spot with vacancy rates expected to decline from 8.8% at year-end 2011 to 7.5% by year end 2013. That is true despite the fact that multi-family permits are expected to increase from slightly over 1,800 in 2011, to almost 3,900 in 2012 and 5,900 in 2013. This, of course, is because absorptions are expected to stay strong in all three years. Given the lags between new construction commencing and when the units finally come on stream, it is likely vacancy rates will continue to decline over the next couple of years.

For office, however, the recovery is expected to be slower. From a 25% vacancy rate in 2011, vacancy rates are expected to decline to about 22% by 2013. Spec construction of multi-tenant buildings is expected to be extremely low. Absorptions are expected to pick up. Absorptions, however, are expected to be less than 2.0 million square feet by 2013. Keep in mind that Greater Phoenix went through a period for almost five years (1991 to 1995) when there was virtually no new multi-tenant spec construction. During that period, vacancy rates dropped precipitously. The same general dynamics exist today.

Retail vacancy rates are expected to stay relatively high during the entire three year period ending 2011 at about 12.6% and declining to 11.4% by year end 2013. This is despite the fact that new spec construction is expected to be modest. The difference is that absorption is also expected to be modest. Absorption is projected to be less than new construction in 2011 and only slightly higher in 2012 and 2013.

Industrial vacancy rates are also expected to decline from 13.5% at present to about 11% by year end 2013. This is because absorption is on track to remain relatively strong at about five million square feet. New spec construction should be less than half a million square feet this year. It is expected to grow to about 2.3 million square feet in 2013.

Overall, we are into a period when the recovery has started, but it will take a while to burn off the excess supply. Only multi-family activity looks strong at the present time.