Progress Finally Being Made

By Elliott Pollack

Recent strength in single-family activity has caused the Greater Phoenix Real Estate Consensus Panel to raise its estimates for 2012 and 2013. Estimates for 2012 are up from just under 11,000 units to more than 12,500 units. Estimates for 2013 are up from just over 17,000 units to just under 20,000 units. The pattern remains the same, however, with substantial percentage increases expected over the next year. Even though the absolute number of permits in 2013 is still expected to be below normal, the panel expects the best year for single family activity since 2007. Even 2012, relative to the last three years, will look quite good, with permits expected to approach the 2008 level. The range of permits expected in 2013 is quite wide, from a low of 9,400 units (projected by the University of Arizona), to 32,000 permits (projected by Cushman & Wakefield). Most forecasts are between 15,000 and 18,000 units. The story, however, remains the same; a strong percentage growth this year and next. This will result not only in a stronger housing market but in a stronger economy overall; substantial increases in construction employment will be necessary for the type of gains projected.

The office market, while improving, is doing so slowly. Vacancy rates by the end of next year are still expected to be just below 23%. This is because, even though very little new construction is anticipated, the economy is projected to be slow enough so that absorption will be relatively modest (about 1 million square feet this year and 1.6 million square feet in 2013).

The same is true in the retail market, where vacancy rates are projected to be just under 11.5% by the end of next year. While construction is expected to be about 0.5 million square feet this year and about 800,000 square feet next year, absorption is expected to be somewhat higher (about 1.2 million square feet this year and 1.5 million square feet next year). Once again, this reflects the relatively modest growth in overall economic activity projected.

Industrial activity appears to be much higher, with vacancy rates declining to just over 10.5% by the end of 2013. This is because absorptions are expected to be strong this year and next. While new construction is expected to be up, it is far below the level of absorption. New construction is expected to be about 1.2 million square feet this year and 2.9 million square feet next year, while absorption is expected to be 4.7 million square feet this year and 6.2 million square feet next year.

Overall, progress is finally being made in commercial markets; however, they are far from healthy. It appears that industrial markets are improving the most rapidly, followed by retail, and then office. The apartment market remains quite strong and the improvement in single-family activity projected will certainly be a positive for the economy as a whole.