has the game changed? · has the game changed? irem/ccim 12th annual economic forecast january...

Elliott D. Pollack & Company

7th Inning Stretch:

Has The Game Changed?

IREM/CCIM

12th Annual Economic Forecast

January 24th, 2019

Presented By:

Elliott D. Pollack

CEO, Elliott D. Pollack & Company


Is the party Over?

2

Elliott D. Pollack & Company 3


Are we near the edge?

4


Not Yet!


Will the economy continue

to grow?

6


Yes!

7

But, the expansion’s

momentum is decelerating.


Recovery is Old but still going

8


Current Economy

➢ Tax cuts helped a lot

➢ Continued fiscal stimulus

➢ Significant Trade war unlikely

➢ Strong plant and equipment spending

➢ Few obvious significant imbalances-yet

9


Too early to tell how much

of a slowdown it will be.5

It is likely to be mild.5

Psychology has turned

less positive/negative.

10


A Recession will happen

but not very soon.

Right now imbalances

seem relatively mild.

11


But things can change quickly!

12


Where do we stand in the

cycle?

13


Strong Growth in Demand

Strong Labor Market

Lower Unemployment

Higher Wages

Higher Rates of Inflation

Fed Tightening

Credit Affordability

Credit Availability

Slower Growth

Fewer Jobs14

Credit Constraints


Quantitative

Easing

Quantitative

Tightening

15


Quantitative Easing

Versus

Quantitative Tightening

• Slowly restricting credit

• Bad for asset prices

• Higher short term rates

• Higher long term rates

• Flattening of the Yield Curve

• Cap rates increase

• Companies delay investment

16


Where do we stand?

17


U.S. Leading Indicators1970 – 2018*

Source: The Conference Board

Recession Periods

40

50

60

70

80

90

100

110

120

*Data through November 2018 18


Consumer Confidence

1978 – 2018* Source: The Conference Board

Recession Periods

20

30

40

50

60

70

80

90

100

110

120

130

140

150

*Data through December 2018 19


Recession Probability1959 – 2019*

Source: Federal Reserve Bank of New York

Recession Periods

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%



Recession Periods

50%

53%

56%

59%

62%

65%

*Data through December 2018

Employment-to-Population Ratio1948 – 2018*

Source: Bureau of Labor Statistics

21


U.S. Consumer Price Index

Annual Percent Growth

1970 – 2018* Source: Bureau of Labor Statistics Recession Periods

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%



Personal Consumption Expenditures (excluding food and energy):

Implicit Price Deflator

Annual Percent Growth

1970 – 2018* Source: Bureau of Labor Statistics Recession Periods

-2%

0%

2%

4%

6%

8%

10%

12%



14%

15%

16%

17%

18%

19%

20%

198

0 Q

1

198

1 Q

1

198

2 Q

1

198

3 Q

1

198

4 Q

1

198

5 Q

1

198

6 Q

1

198

7 Q

1

198

8 Q

1

198

9 Q

1

199

0 Q

1

199

1 Q

1

199

2 Q

1

199

3 Q

1

199

4 Q

1

199

5 Q

1

199

6 Q

1

199

7 Q

1

199

8 Q

1

199

9 Q

1

200

0 Q

1

200

1 Q

1

200

2 Q

1

200

3 Q

1

200

4 Q

1

200

5 Q

1

200

6 Q

1

200

7 Q

1

200

8 Q

1

200

9 Q

1

201

0 Q

1

201

1 Q

1

201

2 Q

1

201

3 Q

1

2014 Q

1

201

5 Q

1

201

6 Q

1

201

7 Q

1

201

8 Q

1

Financial Obligation*

1980 – 2018**Source: Federal Reserve

* Household Financial Obligations as a percent of Disposable Personal Income

**Data through the third quarter 2018 24


Federal Surplus or Deficit

FY 1989-2019*Source: U.S. Office of Management and Budget

25

-$1,600,000

-$1,400,000

-$1,200,000

-$1,000,000

-$800,000

-$600,000

-$400,000

-$200,000

$0

$200,000

$400,000

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

(Millions)

George

H. Bush Clinton

George

W. Bush Obama

Recession Periods

Trump

*FY 2019 Data through November 2018


What keeps me up at night?

26


Recession Periods

2,000

3,000

4,000

5,000

6,000

7,000

8,000


Job Openings2001 – 2018*

Source: Bureau of Labor Statistics(1000’s)


Recession Periods

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

Employment

Labor Force


Employment Versus Labor Force Growth1970– 2018*

Source: Bureau of Labor Statistics(1000’s)


Employment Cost Index2002-2018*


1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

29*Data through third quarter 2018


Bear Markets


Recession Periods

0

5

10

15

20

25

30

35

40

45

50

Cyclically Adjusted PE Ratio**1950 – 2019*

Source: Robert Shiller, Yale University

31*Data through January 2019

**Price earnings ratio is based on average inflation-adjusted earnings from the

previous 10 years, known as the Cyclically Adjusted PE Ratio


Stock Market is a bad Predictor of Recessions:

Corrections since WWIISource: Goldman Sachs

S&P 500

Corrections

37

Recession

12

No Recession

25

A Bear Market is a decrease of 20% or More in Stocks prices

No Bear Market

5

Bear Market

7

Bear Market

4

No Bear Market

21

Correction:

decrease of

10% on the

Market

32


Treasury Spread 1977 – 2019*

Source: Federal Reserve Bank of St. LouisRecession Periods

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

10 year minus 2 year

*Data through January 2019 33


Lag BetweenYield Curve Inversion & Start of Recession

Source: Federal Reserve Bank of St. Louis; Federal Reserve Bank of New York

Start of Recession

Lag Time (months) from

First Inversion

10yr minus 2yr

Jan-80 16

Jul-81 10

Jul-90 18

Mar-01 33

Dec-07 22

34


Pending Home Sale Index

2001-2018* Source: National Association of Realtors

Recession Periods

70

80

90

100

110

120

130



Corporate Debt Outstanding

as % of GDPSource: Federal Reserve; Bureau of Economic Analysis

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

50.0%

19

52

Q1

19

54

Q1

19

56

Q1

19

58

Q1

19

60

Q1

1962 Q

1

19

64

Q1

19

66

Q1

19

68

Q1

19

70

Q1

19

72

Q1

19

74

Q1

19

76

Q1

19

78

Q1

19

80

Q1

19

82

Q1

19

84

Q1

19

86

Q1

19

88

Q1

19

90

Q1

19

92

Q1

19

94

Q1

19

96

Q1

19

98

Q1

2000 Q

1

20

02

Q1

20

04

Q1

2006 Q

1

20

08

Q1

20

10

Q1

20

12

Q1

20

14

Q1

20

16

Q1

20

18

Q1

36

Recession Periods


High Yield Spread Versus 2-year 2017-2018

Source: Federal Reserve; ICE Benchmark Administration Limited

0.0

5.0

10.0

15.0

20.0

25.0

High Yield Spread 2-Year Treasury

37


Trade War


Canadians Response to NAFTA Negotiations:

Build the Wall!

39


Effects of a Trade War

1. Higher prices on inputs

2. Jobs? Depends on structure. Probably a minor

plus

3. Intellectual Property Rights

Will have a relatively minor effect on U.S. economy

40


• 4.6% of China’s economy depends on

exports to the U.S.

• 0.7% of U.S. economy depends on exports to

China.

• 65% of the U.S. trade deficit is with China.

Trade War or Negotiation?

41


• China needs exports to keep jobs.

• They probably don’t want a U.S. recession.

Trade War or Negotiation?

42


This Cycle is No Spring Chicken

43


March 1991 – March 2001

June 2009 - Present

February 1961 – December 1969

November 1982 – July 1990

November 2001 – December 2007

March 1975 - January 1980

October 1949 – July 1953

May 1954 – August 1957

November 1970 – November 1973

April 1958 – April 1960

July 1980 – July 1981

120

115

106

92

73

58

45

39

36

24

12

U.S. BUSINESS CYCLE EXPANSIONSSource: National Bureau of Economic Research

44


But, it is not over!

45


Expansions don't die

of old age.

46


They die because an economy

becomes vulnerable to

exogenous shocks or asset

bubbles or a tightening in

the credit market.

47


As recoveries get older, they

become more vulnerable to

shocks...

…Just as people get older they

become more vulnerable to

diseases.

48


So, where does this leave us?

49


2019 will probably still be a

good year.

Slower but continuing growth.

50


Tax cuts, deficit spending and plant

& equipment spending should keep

things going.

51


Probability of a recession still

relatively low

52


We’re probably in the 8th inning

53


Not All Recessions the Same

54


This is Not a Barcode

55


Length of RecessionsSource: NBER

56


U.S. BUSINESS CYCLE RECESSIONSSource: National Bureau of Economic Research

Recession Period # of Months

November 1948 – October 1949 11

July 1953 – May 1954 10

August 1957 – April 1958 8

April 1960 – February 1961 10

December 1969 – November 1970 11

November 1973 – March 1975 16

January 1980 – July 1980 6

July 1981 – November 1982 16

July 1990 – March 1991 8

March 2001 – November 2001 8

December 2007 – June 2009 18

*Subject to revision when NBER releases recession end date

57


Since WWII

• There have been 3 bad recessions

• 1973-1975

• OPEC Oil Embargo

• Wage Control instituted

• Off the Gold Standard

• 1981-1982

• Inflation

• 2007-2008

• Housing Bubble

• Bad Government Policy

58


Since WWII

• 8 have not been severe.

• Most recessions are shallow and 8-11 months in

length and caused by imbalances are due to

overheating.

• Right now, employment is growing faster than

the labor force. As this continues, job growth will

slow. Wage pressure will increase and lead to

inflation. The FED will attempt to slow inflation

using interest rates.

• There is nothing on the horizon that we think can

cause a long and severe recession.

59


Welcome to Phoenix


The New Norm

61


6

10

13

15

9

1

4

2

Jobs growing

Jobs declining

Top 10

Hawaii

19

332

Alaska

50

7

5

Job Growth 2018Preliminary 2018 vs. 2017

Source: U.S. BLS

8

62


Year Rank

2008 46

2009 49

2010 49

2011 27

2012 9

2013 9

2014 18

2015 11

2016 7

2017 5

2018* 6

Year Rank

1997 2

1998 1

1999 2

2000 5

2001 9

2002 10

2003 4

2004 2

2005 2

2006 2

2007 17

Arizona Employment Growth

Arizona’s Rank Out of 50 StatesSource: Arizona State University, U.S. Bureau of Labor Statistics

63*Preliminary 2018 vs 2017


Top 10 Growing States

by PercentageSource: Bureau Labor Statistics

Rank State % Change

1 Nevada 3.334%

2 Utah 3.313%

3 Washington 3.013%

4 Idaho 2.893%

5 Texas 2.886%

6 Arizona 2.807%

7 Colorado 2.731%

8 Florida 2.530%

9 Oregon 2.365%

10 Wyoming 2.183%

64*Preliminary 2018 vs 2017


Employment GrowthFrom Bottom of Recession to Now

Seasonally AdjustedSource: BLS

Area % Change

% of Arizona

Growth

Household

Income

United States 15.3% $60,336

Arizona 21.8% 100.0% $56,581

Greater Phoenix 26.7% 87.1% $61,506

Greater Tucson 10.4% 7.1% $51,425

Balance of State 8.8% 5.8% $45,987

65Bottom of Recession Sept. 2010 to December 2018


Phoenix-Mesa-Scottsdale Employment Growth(Ranking among all metro areas greater than 1,000,000)

Source: Arizona State University, U.S. Bureau of Labor Statistics

Year Rank # MSA’s

1997 2 22

1998 1 23

1999 3 24

2000 7 25

2001 7 26

2002 5 25

2003 3 25

2004 3 25

2005 1 26

2006 1 27

2007 10 29

66

Year Rank # MSA’s

2008 25 29

2009 23 24

2010 23 23

2011 14 25

2012 10 28

2013 7 29

2014 15 31

2015 10 32

2016 7 34

2017 5 34

2018* 4 36

*Preliminary 2018 vs 2017


Top 10 Growing Metros

by Percentage

67

Rank Metro % Change

1 Orlando 4.071%

2 Austin 3.531%

3 Seattle 3.358%

4 Phoenix 3.315%

5 San Jose 3.197%

6 Las Vegas 3.166%

7 Houston 3.164%

8 Riverside 3.151%

9 Dallas 3.053%

10 Charlotte 2.634%

*Preliminary 2018


Jobs in Phoenix?

68


Greater Phoenix 2018* Net Job Growth and Wages

-2 0 2 4 6 8 10 12 14

Natural Resources and Mining

Other Services

Information

Government

Financial Activities

Trade, Transportation, and Utilities

Manufacturing

Leisure and Hospitality

Professional and Business Services

Educational and Health Services

Construction

(1000’s)

69*Preliminary 2018; 2017 private wages

$56,408

$51,700

$56,940

$25,004

$73,952

$47,404

$53,828

$73,882

$38,901

$50,605

$69,822


Greater Phoenix 2018*% Job Growth and Wages

-2.0% 0.0% 2.0% 4.0% 6.0% 8.0%10.0%12.0%14.0%

Natural Resources and Mining

Other Services

Government

Trade, Transportation, and Utilities

Financial Activities

Professional and Business Services

Leisure and Hospitality

Information

Educational and Health Services

Manufacturing

Construction

70

$56,408

$73,952

$51,700

$73,882

$25,004

$69,822

$47,404

$53,828

$38,901

$50,605

$56,940

*Preliminary 2018; 2017 private wages


5.9%

2.5%2.2%

-0.4%

1.1%

4.9%

6.6%7.2%7.3%

5.4%5.4%

4.6%

3.5%

1.3%

0.0%

1.5%

3.9%

6.2%

5.4%

1.7%

-2.5%

-7.8%

-1.9%

1.5%

2.5%2.9%

2.3%

3.3%3.4%2.8%

3.3%2.8%

2.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Greater Phoenix Employment*

Annual Percent Change 1988–2020**Source: Office of Economic Opportunity

Pre-2008 Avg. 3.8%

Recession Periods

*Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in 1990.

**2019 & 2020 forecasts from Elliott D. Pollack & Co. as of January 2019. 71


53.9

23.821.8

-3.5

11.2

49.8

70.882.1

88.8

70.575.166.8

53.7

20.0

-0.1

24.1

64.4

104.597.4

31.6

-47.9

-146.8

-32.2

25.6

43.051.3

41.1

62.064.654.9

67.458.8

43.2

-160.0

-120.0

-80.0

-40.0

0.0

40.0

80.0

120.0

Greater Phoenix Employment*

Net Annual Growth Change 1988–2020**Source: Office of Economic Opportunity

Recession Periods(000’s)

72*Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in 1990.

**2019 & 2020 forecasts from Elliott D. Pollack & Co. as of January 2019.


Employment: Greater Phoenix to U.S.

Annual Growth Rate1990-2018


-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

U.S.

Greater Phoenix

73

Recession Periods


Where are the Inflows of

Population?

74


Moving???

75


3%

4%

5%

6%

7%

8%

Note: Includes all movers except movers within same

county

Total Movers as a % of

Total U.S. PopulationSource: U.S. Census Bureau

Recession Periods

76


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Same State Different State Abroad

Movers from an Outside Area

1981-2018Source: U.S. Census Bureau

Recession Periods

77

(1,000’s)


0%

2%

4%

6%

8%

10%

12%

Arizona Capture RateSource: U.S. Census Bureau

Note: Does not include in-state movers;

Net migration numbers.

Recession Periods

78


0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

United States Population

Annual % Change 1985–2018Source: U.S. Census Bureau

79


Population Growth after RecessionsGreater Phoenix

Source: Office of Economic Opportunity

Years % Growth APR

1975-1980 20.1% 3.7%

1981-1990 35.5% 3.4%

1991-2001 46.0% 3.9%

2001-2007 21.6% 3.3%

2009-2018 13.1% 1.4%

80


Growth itself is an economic driver in

Greater Phoenix–

People moving to the State create demand for goods

and services that create more jobs.

When you grow around 1.8% instead of 3.6%, the

part of the economy that is based on servicing new

population becomes much smaller.

81


Greater Phoenix PopulationSource: U.S. Bureau of Census; Office of Economic Opportunity; UofA Forecasting Project

Period

Ending Population Change APR

1970 1,039,807 3.5%

1980 1,600,093 560,286 4.4%

1990 2,249,116 649,023 3.5%

2000 3,275,362 1,026,246 3.8%

2010 4,200,427 925,065 2.5%

2015 4,482,906 282,479 1.3%

2020* 4,903,717 420,811 1.8%

2025* 5,339,441 435,724 1.7%*Forecasts from UofA

1970-2010 10 year period

2010-2025 5 year period 82


2.9%

2.5%

1.3%

2.4%

2.8%

3.5%

4.3%

4.6%

4.2%4.2%

3.8%

4.3%4.3%

2.6%2.7%

3.1%

3.6%3.8%

3.7%

3.0%

1.9%

0.5%0.3%

0.7%

1.2%

1.5%1.6%1.6%

1.7%1.7%1.8%

1.9%2.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

Pre-2008 Avg. 3.4%

83

Recession Periods

Greater Phoenix Population

Annual Percent Change 1988–2020*Source: Office of Economic Opportunity, EDPCo

*Estimates for 2011, 2012, 2013, 2014, 2015 and 2016 and forecasts for 2019 and

2020 from Elliott D. Pollack & Co. as of January 2019.


60.154.9

29.7

54.6

64.5

83.8

104.2

118.6111.9

115.6111.0

130.4133.6

84.7

92.0

105.9

127.7

141.6 141.5

118.6

79.6

19.114.3

29.4

52.4

65.971.372.5

78.378.9

85.890.0

96.5

0.0

40.0

80.0

120.0

160.0

Greater Phoenix Population

Annual Net Change 1988–2020*Source: Office of Economic Opportunity, EDPCo

84

Recession Periods(000’s)

*Estimates for 2011, 2012, 2013, 2014, 2015 and 2016 and forecasts for 2019 and 2020

from Elliott D. Pollack & Co. as of January 2019.


Population: Greater Phoenix to U.S.

Annual Growth Rate1990-2018

Source: U.S. Census Bureau; Office of Economic Opportunity; EDPCo

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

U.S.

Greater Phoenix

85


Housing Market Outlook

86


What’s Going On?

87


Builders are facing supply side constraints:

• Cost of buildable lots

• Increasing construction material costs

• insufficient labor

And demand side constraints of rising mortgage

interest rates

The result is upward pressure on housing prices and

reduced affordability.

88


Greater Phoenix Single Family Permits

Annual % Change1970-2018*

Source: U.S. Census Bureau

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

*YTD thought October 89


Greater Phoenix Housing PermitsSource: Home Builder Association of Central Arizona

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2016 2017 2018

90


Greater Phoenix New Home SalesSource: Belfiore

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2016 2017 2018

91


Greater Phoenix

Population Change-to-Total Permits Ratio

1988-2018Source: AOEO; U.S. Census Bureau; UofA Forecasting Project

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

92


Greater Phoenix

Population Change-to-Single Family Permits Ratio

1988-2018Source: AOEO; U.S. Census Bureau; UofA Forecasting Project

1.0

2.0

3.0

4.0

5.0

6.0

7.0

93


75

80

85

90

95

100

105

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64

Arizona Population by Age

65 and Under2018


94

(1,000’s)


Arizona Number of Persons vs. Home-Purchase Loan Applications

2018Source: U.S. Census Bureau

0

5

10

15

20

25

30

35

40

80.0

85.0

90.0

95.0

100.0

105.0

95

(1,000’s)


Arizona Number of Persons vs. Home-Purchase Loan Applications

2023Source: U.S. Census Bureau

0

5

10

15

20

25

30

35

40

80.0

85.0

90.0

95.0

100.0

105.0

96

(1,000’s)


Greater Phoenix

Homeownership Rates by Age GroupSource: 2017 American Community Survey 1-Year Estimates; OEO

Householder

Age

% of

Total

Occupied

Current

Population

15 to 24 years 13.9% 626,087

25 to 34 years 40.1% 679,718

35 to 44 years 55.6% 617,153

45 to 54 years 65.3% 596,066

55 to 64 years 76.6% 544,408

65 to 74 years 82.3% 426,671

75 to 84 years 82.9% 218,059

85 years and over 70.0% 79,972

Total 63.7% 3,788,134

97


Greater Phoenix Month’s Supply2002-2018

Source: ARMLS

0

2

4

6

8

10

12

14

16

18

20

Jan

-02

Ju

l-0

2

Jan

-03

Ju

l-0

3

Jan

-04

Ju

l-0

4

Jan

-05

Ju

l-0

5

Jan

-06

Ju

l-0

6

Jan

-07

Ju

l-0

7

Jan

-08

Ju

l-08

Jan

-09

Ju

l-0

9

Jan

-10

Ju

l-1

0

Jan

-11

Ju

l-1

1

Jan

-12

Ju

l-1

2

Jan

-13

Ju

l-1

3

Jan

-14

Ju

l-1

4

Jan

-15

Ju

l-1

5

Jan

-16

Ju

l-1

6

Jan

-17

Ju

l-1

7

Jan

-18

Ju

l-1

8



Greater Phoenix

Single Family Days on MarketSource: Cromford Report

0

20

40

60

80

100

120

140

160

Recession Periods

99*Data through December 2018


Greater Phoenix

Single Family Resales - Days on Market

Under $250,000Source: Cromford Report

0

20

40

60

80

100

120

140

160

Recession Periods

100*Data through December 2018


New Home InventorySource: Zonda by Meyers Research

22

24

26

28

30

32

34

36

38

40

42

44

46

39,160

40,940

42,720

44,500

46,280

48,060

49,840

51,620

53,400

55,180

56,960

58,740

60,520

Total Remainding Units

Months of Supply

101


Vacant Developed LotsSource: Zonda by Meyers Research

35,000

37,500

40,000

42,500

45,000

47,500

50,000

102


Foreclosure: Residential Notices

Maricopa CountySource: Information Market

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000



U.S.

Most new Housing demand over the next 10 years will

come from millennialsSource: JCHS tabulations of 2016 JCHS Household Projections, Harvard

104

0

5

10

15

20

25

30

35

40

45

50

Millenial (1985-2005) Gen-X (1965-1984) Baby-Boomer (1945-1964)

Number of Households

2015 2025

(Millions)


Greater Phoenix

Most new Housing demand over the next 10 years will

come from millennialsSource: ACS; MAG; EDPCo

105

0

50

100

150

200

250

300

350

400

450

500

Millenial (1985-2005) Gen-X (1965-1984) Baby-Boomer (1945-1964)

Number of Households

2015 2025

(1000’s)


Housing Troubles???

• Affordability is a Major Issue

• Greater Phoenix’s affordability is slightly

lower than normal. But, it is better than

most competitive western metros.

• The pent up demand is massive.

106


Recession Periods

3%

4%

5%

6%

7%

8%

9%

30-Year Mortgage Rate2000 – 2019* Source: Freddie Mac

*Data through the week of January 17, 2019 107


100 Basis Point Increase in Mortgage Rates reduces

Borrowing Capacity by 7%

Source: John Burns

$259,000

$230,000

$213,000

$200,000

$210,000

$220,000

$230,000

$240,000

$250,000

$260,000

$270,000

At 3.5% At 5.0% At 6.0%

11%

7%

108


Housing Opportunity Index

1992-2018Source: NAHB/Wells Fargo

20

30

40

50

60

70

80

90

U.S.

Greater Phoenix

109


Housing Opportunity Index

2018 Q3Source: NAHB/Wells Fargo

67 66.7

56.6 56.452.3

47.642.9

35.6

14.17.6

0

10

20

30

40

50

60

70

80

110


Arizona

111


Affordability is a key-concern, for

millennials entering the marketplace and

for the retirement population moving to

Phoenix.

112


Pricing by Builders in Greater PhoenixSource: Belfiore

114

Subdivision Name Builder Name Net Pricing Range

Express at Santa Rosa Springs D. R. Horton $182,990 - $252,990

Cactus at Parkside Pulte Homes $164,870 - $214,870

Express at Tartesso D. R. Horton $178,660 - $237,660

Magma Ranch Unit 8 D. R. Horton $150,005 - $203,005

Harmony at Meridian William Lyon Homes $291,040 - $304,040

Cactus at Desert Oasis Pulte Homes $217,185 - $268,185

Inspiration at Solana Lennar $231,190 - $239,190

Cactus at Festival Foothills Pulte Homes $206,002 - $310,002

Coldwater Retreat Courtland Communities $212,012 - $250,012

Juniper at Desert Pass KB Home $161,990 - $184,990


Top-seller are mostly smaller-lot, lower-

priced new home communities-

communities target entry-level and

value–oriented buyers.

Source: Belfiore, KnowledgeBase Current and Future Market Insights 115


Millennials

116


Millennials


Baby Boomers


Baby Boomers Versus Millennials

Aged 25-34Source: Bowling Green State University; 1980 Decennial Census; 2015 American Community Survey; CDC

Baby Boomers

(1980)

Millennials

(2015)

Married 68% 40%

Never Married 20% 53%

Age first marriage Males 25 ≈30

Age first marriage Females 22 ≈28

Mean Age at First Child 23 ≈27

Live in Independent Households 84% 59%

Lived with Parents/Grandparents 9% 22%

119


Millennials were hit with

several factors that, for many,

delayed home buying from

their 20’s and 30’s.

120


These Factors Include:

• The Great Recession and the lack of job opportunities

• Greater acceptance of larger amounts of student debt

• Social mores are changing and becoming acceptable:

• Delay of Marriage

• Living with Mommy and Daddy

• Becoming less materialistic

121


Many of those changes are coming to an

end as millennials start to:

• Pay off student loan debt

• Benefit from a strong economy

• Realize they are subject to the laws of biology

122


Student LoansSource: Federal Reserve; Citizens Financial Group

• 70% of students leave college with debt

• Standard repayment plan is 10 years

• 60% of students are expected to pay off their

loan in their 40’s

124


Student Loan Debt Delaying

Homeownership Source: Bankrate Money Pulse Survey

30% of 18-40 years old with student

loan debt have delayed buying a

home.

125


Millennials Rent for Life?Source: Fannie Mae

According to Fannie Mae’s Renters Survey:

• 37% are renting in order to get ready to buy a home

• 46% said their biggest obstacle to doing so is saving up

for a down payment and closing costs

• 95% said they plan to own someday

126


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Renter

Owner

Single Family Occupancy

as % of Total Source: American Community Survey

Note: Single Family includes 1-unit detached and attached


What’s Going On?Source: American Community Survey

• Move up markets

➢ Majority of homeowners bought in the last 8 years.

• First time homebuyers are shocked by recent

increases in interest rates

• Number of single family renter households

increased from 179,624 to 253,364 between

2008 and 2017.

*Included attached and detached 1-unit households

128


Overview of Single Family Housing

• Current conditions in the single family market

are the polar opposite of 2007-2011

• No signs of oversupply

• Signs of strong pent-up demand

• With rising interest rates, affordability becomes

more of an issue

• While the housing market will be under pressure

over the near term, the outlook over the next 5

years is excellent

129


The slowdown in new single

family housing continues is

likely to be transitory.

130


Apartments

131


Multi-Family Housing Market Source: PMHS; RealData CBRE

Year Absorption (sf) Chg in Inventory (sf)

2004 4,348 3,612

2005 -275 (4,181)

2006 -6,431 (3,798)

2007 -3,058 1,797

2008 960 8,484

2009 5,151 8,443

2010 10,021 1,441

2011 3,326 1,224

2012 2,756 1,573

2013 4,584 3,830

2014 5,823 6,351

2015 6,140 6,804

2016 5,731 8,018

2017 6,179 10,033

132


Apartment Unit DeliveriesGreater Phoenix

2005-2018Source: RealData; CBRE

8,459

6,620 6,645

3,756

4,502 4,660 4,5444,359

6,603 6,474

565 545

1,651

4,299

5,768

7,394

5,813

8,880

8,040

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Note: 100 units or more 133


Potential Supply Increase

CBRE

Year Units

2019 7,109

2020 6,667

134


High end apartment demand will

continue to be strong..

But there is a lot of high priced

supply coming to market.

135


Where is the supply/demand

imbalance?

136


Worker HousingSource: Everest Holdings

• The strongest demand is in worker housing

• Households earning between 60% and 120% of median

household income.

• This not Subsidized housing

• Police officer, firefighters, teachers, retail workers, hospital

workers, etc.

• Housing that is affordable (20 to 30 percent of Household

income).

• Traditional Apartments, SF rentals and for-sale housing.

• Close to major employment centers and transportation

routes.

138


-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

Greater Phoenix Multi-Family Average Rent

Percent Change a Year Ago

2004 – 2018* Source: RealData Inc.

Recession Periods

*Data through the fourth quarter 2018 139


Multi-Family Year-End Vacancy Rates

Greater Phoenix County 1975–2020Source: ASU Realty Studies / Berkadia**

6.2%

4.1%3.3%

2.8%

3.9%

6.1%

4.4%

6.1%

6.9%

7.7%

10.1%10.6%

13.0%14.1%

13.4%

10.0%9.5%

8.0%

4.0%3.8%4.5%4.5%

4.8%

5.1%5.9%

6.8%

8.2%

9.4%9.6%

7.9%

6.8%

7.8%

10.2%

12.5%

13.4%

10.8%

7.5%

6.3%6.6%

5.9%5.4%

5.8%5.6%

4.6%

0%

3%

6%

9%

12%

15%

18%

197519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

18

**Data prior to 2005 is from ASU

Forecast from Greater Phoenix Blue Chip

Recession Periods

140


Office, Industrial and Retail are

a function of Employment and

Population. a

Both of those look positive

for 2019

141


OFFICE

142


Office Space Year-End Vacancy Rates

Greater Phoenix 1986–2020*Source: CBRE

26.7%

22.8%

24.0%

26.7%26.4%

25.4%

22.7%

18.8%

14.8%

11.7%

9.5% 9.2%

9.5%10.0%

9.9%

16.0%

18.8%

18.3%

16.4%

12.6%

11.1%

13.9%

19.1%

24.5%

26.2%25.5%

23.9%

22.4%21.3%

19.4%

17.4%16.4%

15.2%15.8%16.5%

0%

5%

10%

15%

20%

25%

30%

35%

198619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

1020

1120

1220

1320

1420

1520

1620

1720

1820

1920

20

*2019 & 2020 are forecasts from CBRE.

Recession Periods

143


-1.0

0.0

1.0

2.0

3.0

4.0

5.0

New Supply Absorption

(Millions)

Greater Phoenix Office Market

New Supply versus Absorption

1998–2018Source: CBRE

144


Greater Phoenix Office Market*Source: CBRE


2005 3,119,293 7,987

2006 3,245,888 2,320,302

2007 1,500,704 4,905,374

2008 (603,112) 3,402,646

2009 (667,329) 1,798,415

2010 233,670 1,785,620

2011 1,857,433 3,370,694

2012 2,020,529 973,282

2013 1,721,366 (35,566)

2014 1,816,411 1,107,906

2015 3,704,039 3,763,828

2016 3,219,853 1,045,155

2017 2,839,559 1,912,217

2018 2,473,034 803,403

*All Leased multi-tenant space greater than 10,000 SF. 145


Current Office MarketSource: CBRE

• Over 88.9 million of sq. ft.

• 13.4 million sq. ft. vacant• Multi-tenant non owner occupied 12.5 million sq. ft. vacant

• Available by class

• Class A 2.8 million sq. ft.

• Class B 6.8 million sq. ft.

• Class C 2.8 million sq. ft.

• 2.6 million sq. ft. under construction. • Under Construction by class

• Class A 1.4 million sq. ft.

• Class B 1.2 million sq. ft.

146


INDUSTRIAL

147


Industrial Space Vacancy Rates

Greater Phoenix 1980 – 2020*Source: CBRE

8.4%

9.4%

11.1%

9.7%

12.8%

13.2%

16.4%15.2%14.6%

12.8%

14.0%

14.8%

13.6%

10.8%

7.4%

6.6%

5.7%

7.0%7.1%

8.1%7.4%

9.8%10.3%

9.7%

8.5%

5.6%

6.7%

8.4%

12.5%

16.1%

14.7%

12.4%

10.9%

11.4%11.0%

10.1%

8.0%

6.8%6.6%7.2%7.6%

0%

5%

10%

15%

20%

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

*2019 & 2020 are forecasts from CBRE

Recession Periods

148


-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0


(Millions)

Greater Phoenix Industrial Market


1998–2018Source: CBRE

149


Greater Phoenix Industrial MarketSource: CBRE


2005 12,361,368 7,072,477

2006 6,179,533 7,829,959

2007 8,359,835 13,914,181

2008 629,838 13,467,215

2009 (4,649,352) 4,753,218

2010 4,455,097 2,451,202

2011 7,745,111 1,954,037

2012 7,405,168 3,358,724

2013 8,783,982 8,902,571

2014 6,214,680 6,791,313

2015 7,046,663 3,966,434

2016 9,497,677 5,136,644

2017 9,898,883 6,988,240

2018 9,781,257 8,966,852

150


Current Industrial MarketSource: CBRE

Existing Vacant Vacancy

Rate

Under

Construction

Multi Tenant 37,052,525 2,083,604 5.6% 0

Distribution Buildings 109,967,121 10,780,241 9.8% 3,916,545

Freestanding Buildings 55,639,946 1,151,290 2.1% 276,220

General 68,518,048 4,224,280 6.2% 868,413

Back Office 14,406,595 2,498,802 17.3% 0

Major User 27,088,033 93,096 0.3% 536,533

Special Purpose 5,503,465 0 0.0% 487,000

Market 318,175,733 20,831,313 6.5% 6,084,711

151


Current Industrial MarketSource: CBRE

152

2018

Inventory 318,175,73

Vacant 20,831,313

Vacancy Rate 6.5%

Under Construction 6,084,711


RETAIL

153


Retail Space Vacancy Rates

Greater Phoenix 1985–2019*Source: CBRE**

6.6%

8.9%

10.0%

11.8%13.1%

14.2%

13.5%12.7%

11.1%

9.8%8.7%

7.9%7.5%

6.3%5.5%

5.3%6.6%7.3%

7.4%

6.1%5.3%

5.1%

6.2%

7.5%

11.4%12.2%12.2%

11.0%10.2%

9.6%9.1%8.9%

8.1%8.7%8.5%8.3%

0%

5%

10%

15%

20%

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

*2018, 2019 & 2020 are forecasts from CBRE

** Data prior to 1992 is from Grubb & Ellis

Recession Periods

154


-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0


(Millions)

Greater Phoenix Retail Market


1998–2018*Source: CBRE

*Data through the third quarter 2018 155



2005 6,708,155 6,248,789

2006 5,244,597 4,582,618

2007 9,409,985 11,104,865

2008 3,395,986 6,229,205

2009 (1,117,100) 4,405,985

2010 (75,352) 902,380

2011 (152,647) 24,543

2012 1,879,005 184,932

2013 1,579,202 (325,959)

2014 1,487,313 (49,225)

2015 1,150,192 164,859

2016 1,321,833 1,204,766

2017 1,039,989 336,152

2018* 147,471 794,295

*Data through the third quarter 2018

Greater Phoenix Retail MarketSource: CBRE

156


Current Retail MarketSource: CBRE

• Over 151.5 million of sq. ft.

• 12.7 million sq. ft. vacant

• Over 700,000 sq. ft. under construction.

• 2.8 million sq. ft. planned.

157


E-Commerce Retail Sales

as a Percent of Total Sales2000 – 2018*


Recession Periods

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

158*Data through the third quarter 2018


Maricopa County Retail Sales

Percent Change Year Ago*

1999 – 2018**Source: Arizona Department of Revenue

*Data through October 2018

**3-month moving average

Note: January 2010 and March 2010 retail sales are estimates.

Recession Periods

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

159


.

Rate of growth likely to slow

somewhat in 2019.

But 2019 should still be a good

year.

The Economics are still strong

but

the psychology is changing.

Overall Conclusions:


We are in the bottom of the 7th or the

top of the 8th inning of what has

been a very long game.

At the present time, there is nothing

that would suggest the next

recession, when it does show up,

would be very deep.

162


For a quick analysis of

important economic data released

each week, subscribe to the

Monday Morning Quarterback

www.arizonaeconomy.com(Click on Subscribe to MMQ)

163

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