Greater Phoenix Blue Chip

CONSTRUCTION FORECAST
REAL ESTATE MARKET STILL RELATIVELY STRONG
First Quarter, 2019
Elliott Pollack

The real estate market in Greater Phoenix continues to perform well.  According to the latest survey of the Blue Chip panel, 2019 should continue to be a good year.  Most sectors are expected to perform well in 2020 as well despite expectations for lower levels of absorption in apartments, office, retail and industrial.

Permits for new single family units are expected to improve in both 2019 and 2020.  This is true despite a weak fourth quarter in 2018.  Interest rate increases in the last quarter of 2018 plus the rise in new home prices affected affordability in a negative way.  So far in the first quarter of this year, price increases have slowed and interest rates have unexpectedly declined.  The result has been better affordability.  In addition, more new home builders are attempting to better serve the affordable market by adding more affordable product to their housing lines.  As a result of this and a strong local economy, the panel is estimating that single family permits will increase by 12% this year and almost 4% next.

The panel is projecting that more than 8,100 apartment permits will be issued this year and over 7,800 will be issued next year.  This compares to 6,900 permits last year.  Absorption is expected to exceed 7,100 units this year and almost 6,900 next.  As a result, vacancy rates in apartments are expected to remain low with rates at 5.5% this year and 5.7% next.  This follows a vacancy rate of 5.7% in 2018.

Office vacancy rates declined to 15.2% in 2018.  According to the panel, they are expected to stay flattish over the next two years.  Spec construction is expected to be nearly 1.9 million square feet this year and about 1.7 next while absorption is expected to slow very modestly from 2018 this year and to slow again in 2020.

The spec industrial market continues to do well.  Construction increased to over 6 million square feet last year.  This year, the expectation is for another 5.4 million square feet followed by 5 million next year.  Absorption continues to outrun construction.  Last year, 9.78 million square feet were absorbed.  This year another 6.5 million are expected to be absorbed.  Next year, the panel is anticipating 5 million.  As a result, vacancy rates should stay low over the forecast period.

Retail markets are expected to pick up but only mildly so.  Spec construction is projected to be about 700,000 square feet this year and 580,000 next.  Absorption is expected to increase to 1.6 million square feet this year and 1.3 million next.  These numbers are anemic by post Great Recession standards.  Vacancy rates are likely to stay in the 8% range.