Elliott D. Pollack & Company Outlook 2012: A Grind of a Recovery September 30, 2011 By: Elliott D. Pollack CEO, Elliott D. Pollack & Company

Elliott D. Pollack & Company

Outlook 2012:A Grind of a Recovery

September 30, 2011

By:Elliott D. Pollack

CEO, Elliott D. Pollack & Company


U.S. Economy


United States Real Gross Domestic Product* Annual Growth 1970 - 2012**

Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators

0.2%

3.4%

5.3%

5.8%

-0.6%-0.2%

5.4%

4.6%

5.6%

3.1%

-0.3%

2.5%

-1.9%

4.5%

7.2%

4.1%

3.5%3.2%

4.1%

3.6%

1.9%

-0.2%

3.4%2.9%

4.1%

2.5%

3.7%

4.5%4.4%4.8%

4.1%

1.1%1.8%

2.5%

3.5%3.1%

2.7%

1.9%

-0.3%

-3.5%

3.0%

1.6%2.2%

-4%

-2%

0%

2%

4%

6%

8%

* Based on chained 2005 dollars.

** 2011 - 2012 are forecasts from the Blue Chip Economic Indicators, September 2011Recession Periods


Recession End v. 8 Quarters LaterSources: NAHB; Census, BEA, BLS

40.7%

10.7%

21.6%

10.0%

17.6% 18.7%

5.2%

7.5%8.0%

11.5%

5.0%

10.4%

6.7%

0.5%0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Housing Starts Retail Sales IndustrialProduction

GDP Non-ResidentialConstruction

Nonfarm Payroll NonfarmEmployment

Average of 8 Prior Recoveries Current Recovery


Economy is likely to continue to grow, but growth will remain weak because of the following:

• Consumer spending weak.• Excess industrial capacity.• No immediate housing recovery.• Limited commercial construction.• Continued pressure on state

and local government.• Limited policy options on part of

Federal government.


Comments on Debt & Jobs


The Federal government is…

….Forcibly impoverishing future generations with a colossal debt

incurred on behalf of current beneficiaries.

~Mark R. Levin

The Intellectual Approach


The Redneck Approach


“I’ll gladly pay you

Tuesday for.

a hamburger today”

1.3 million jobs

Wimpy (Friend of Popeye)

The Real Approach


Obama’s Job PlanPLAN COST

Payroll tax cuts from 6.2% to 3.1% for workers in 2012, down further from a 2% reduction this year.

$175 BILLION

Payroll tax cut from 6.2% to 3.1% for employers and eliminated for qualifying new hires in 2012, plus 100% expensing for new investments.

$70 BILLION

Infrastructure investments, including modernizing schools and rehabbing vacant homes, and funding states to rehire teachers and first responders.

$140 BILLION

Extending unemployment insurance and new programs for the jobless.

$62 BILLION

TOTAL $447 BILLION


$447 billion1.3 – 1.9 million jobs

= $235,000 to $345,000 per job

*Job estimates from Mark Zandi Moody’s Economy.com and MacroEconomics


American Recovery and Reinvestment Act of 2009

= $1,000,000 per job*

*Source: Environmental Protection Agency


National Outlook


ARIZONA


Arizona & US Move Together (Nonfarm Employment Percent Change 1980 – Aug 2011)

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

7%

9%

11%

U.S. Arizona Recession Periods


Think of Arizona in 2 parts:

Export Domestic


Export – function of the U.S. economy

(and, the U.S. economy is weak)


The health of an economy is a function of its export,

or “base” industries.


Arizona Economic Drivers (Base Industries):

Base Industry Current Health

Manufacturing +Tourism +Advanced Business Services +Federal government -Retirement and second homes -Others ?


Flow of a Region’s Economy

Base IndustriesManufacturing, Tourism, Export-Related Business Services,

Retirement, Etc.

Local Market IndustriesRetail, Construction, Local Business Services, Banks,

Local Government

Spendingby

Base Industries


Arizona

Domestic Industry ExamplesGeneral merchandise stores Home Improvement Stores

Restaurants & bars Gas Stations

Realtors Mortgage brokers

Title companies Lawyers

Banks Education

Construction Landscapers


Domestic – ripple effects of the export sector

(Direct indirect induced)


A new suit at Dillard’s A Slurpee at 7-11 Gas for their car Dinner at a nice restaurant.

Employee of Intel spends their wages on….


Right now the ripple effects won’t be as strong as normal because…

1) Consumers are still paying down debt.

2) Demand for new construction is currently being met by existing inventory (so no need for new construction).

3) It is difficult for people to sell their homes in other states and move to Arizona.


Because all of these

problems are cyclical and/or

transitory.

You can pull your head out…


• When consumers finish restructuring their balance sheets.

• When home prices and wealth levels stabilize across the U.S.

• When those that postponed retirement, retire and absorb Arizona housing.

• When local job creation accelerates and people move here for a new job.• When people reverse the doubling up process.

When will things accelerate?


Now through about 2015 will still be slower than normal;

but 2015 through 2020 should be strong.

When will things accelerate?


One of the differences this time is the

population slowdown.


Greater Phoenix Net Migration1975–2011

Source: University of Arizona

23.2

17.3

38.147.3

56.1

38.0

42.4

32.335.4

58.5

74.5

59.466.5

36.930.3

6.3

44.8

54.5

70.2

98.5105.9

85.5

80.6

82.8

74.2

65.4

51.058.9

69.8

90.8

102.5 101.0

73.8

36.0

(21.1)(20.6)

(22.9)

-40

-20

0

20

40

60

80

100

120

140

Recession Periods

*Forecasts from UofA 2011 Q3


SRP Residential Utility Hookup Percentage Growth Greater Phoenix 2003 – 2011*

Source: SRP

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

*Data through June 2011.


APS Residential Utility Hookup Percentage Growth Greater Phoenix 1955 – 2011*

Source: APS

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

*Data through Quarter 2 2011.


School Enrollment Growth2001-2011

Source: Arizona Department of Education

2.8%3.2%

6.1%

3.5%

3.1%

4.9%

2.4% 2.5%

0.7%

-0.7%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

N/A

*Collection methodology changed in 2009, rendering 2009/2008 comparisons null.


We are optimistic about the long term and cautious about the short term.


It’s all about the basics: jobs and population growth.


2.1%

3.7%

4.2%

4.7%

3.9%

3.3%

3.0%

3.1%

4.3%

5.1%

4.2%4.4%

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%

2.5%

2.7%3.1%

3.6% 3.8%3.7%

3.0%

1.9%

0.5%

0.3%

0.9%

1.2%

0%

2%

4%

6%

1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

Greater Phoenix Population Annual Percent Change 1976–2012*

Source: Arizona State University & Department of Commerce, Research Administration

.

* 2011 & 2012 forecast is from Elliott D. Pollack & Co.

Recession Periods


Greater Phoenix Employment* Annual Percent Change 1975–2012**

Source: Department of Commerce, Research Administration

-3.7%

4.9%

8.7%

13.3%

10.4%

3.7%

3.0%

-0.1%

5.8%

11.2%9.3%

4.8%3.5%

5.9%

2.5%

2.2%

-0.3%

1.1%

4.9%

6.6%7.2%7.3%

5.4%5.4%

4.6%3.5%

1.2%

-0.1%

1.5%

3.9%

6.2%5.4%

1.6%

-2.5%

-7.9%

-2.1%

1.0%

2.0%

-10%-8%-6%-4%-2%0%2%4%6%8%

10%12%14%

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

** 2011& 2012 forecast is from Elliott D. Pollack & Co.

Recession Periods


Arizona was one of the only two states to be in the top 5 growth states in terms of population,

employment and personal income every decade since WWII.

Pre 2007



Below average performance in many economic categories, but…

Post 2007


How Arizona Ranks Among the States in Percentage Growth

Source: U.S. Bureau of Census; Bureau of Labor Statistics; Bureau of Economic Analysis PERSONAL DECADE POPULATION EMPLOYMENT INCOME

1950 - 1960 4TH 3RD 4TH

1960 - 1970 3RD 3RD 4TH 1970 - 1980 2ND 3RD 3RD

1980 - 1990 3RD 3RD 5TH

1990 - 2000 2ND 2ND 3RD

2000 – 2006 3RD 2ND 3RD

2007—2010 44TH 49TH 46TH


…this is a temporary condition and is already improving.

Post 2007


The recovery

has already started.


Signs of Recovery• Jobs• Retail Sales• Jobs rebound in other cities• Fewer excess homes• Population growth


Greater Phoenix - Jobs Finally in the Black

Over last 12 months: 31,300 12 months before that: (15,000)

12 months before that: (169,600)12 months before that: (61,800)12 months before that: 31,600

* As of August 2011


Greater Phoenix Employment* Source: Bureau of Labor Statistics

Sectors in Decline

Net

Change

Federal Government -1,000

Prof. & Bus. Services -4,200

*August 2011/August 2010

Sectors Improving

Net

Change

Education & Health Services 14,700

Leisure & Hospitality 7,100

Transp, Trade, & Utilities 4,900

Construction 2,300

Financial Activities 2,300

Manufacturing 1,900

Other services 1,800

State Government 600

Local Government 400

Mining 300

Information 200


Employment Levels: Greater Phoenix back to Peak in 2015?

Source: ADOC

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2,000.0

2,200.0

2,400.0

Recession Periods

Peak


Year Rank # MSA’s

2000 8 26

2001 6 28

2002 5 28

2003 3 29

2004 4 29

2005 1 30

2006 1 31

2007 10 32

2008 29 32

2009 31 32

2010 31 32

2011ytd 17 32

Year Rank # MSA’s

1991 4 20

1992 5 20

1993 2 20

1994 1 20

1995 1 21

1996 1 23

1997 2 23

1998 1 24

1999 3 26

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

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

*YTD through August


Maricopa County Retail Sales*Percent Change Year Ago

1990 to 2011**Source: Arizona Department of Revenue

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

*3-month moving average**Data through June 2011.

Recession Periods


“No strong recovery withouta recovery in construction.”


Spec commercial construction

approaching 0.

New single family residential

construction 89% off peak.


For Housing -This is NOT a multi decade

recovery…

Think 2015 or so for a full recovery, but growth

before then.


Single Family Permits (Forecast)Greater Phoenix 1975–2015*

Source: RL BROWN

8.711.1

22.3

28.9

18.8

11.510.6

11.6

19.4 18.1

22.623.2

17.915.1

12.010.6

13.7

18.4

22.7

27.428.5

29.631.7

36.035.3

34.736.2

38.9

47.7

60.9

63.6

42.4

31.2

12.6

8.06.8

5.07.08.0

15.0

25.0

0

10

20

30

40

50

60

70

# Permits(000)

* 2011 - 2015 forecast is from Elliott D. Pollack & Co.


• Across the US, little new building has been occurring.

• This helps reduce theoversupply.


U.S. Single-Family Starts1978–2011*

Source: Census Bureau

1.4

1.2

0.9

0.7 0.7

1.1 1.1 1.1

1.2 1.11.1

1.00.9

0.8

1.01.1

1.2

1.1

1.21.1

1.3 1.31.2 1.3

1.4

1.5

1.6

1.7

1.5

1.0

0.6

0.4 0.50.4

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

(Millions)

*YTD through August 2011

Recession Periods

Over-supply

Under-supply

LTA: 1.2


Excess supply in Greater Phoenix is

about 50-55k units as

of today, down from

about 80k units.

SUPPLY

demand


• Think of what the housing market is going through as the same as any manufacturer that finds themselves with excess inventory…

• Prices are cut until the excessis sold.

• Then prices rise.


As excess is absorbed, prices will increase.This is Economics 101


Single-Family Vacant UnitsMaricopa County 1993–2011

Source: Phoenix Metro Housing Study

0

20,000

40,000

60,000

80,000

100,000

120,000

13,600

15,250 14,800

13,550 13,925 14,725

17,550 20,000

18,725 23,850 24,725

16,755 19,400

30,200

51,725

60,175

106,125 101,625

83,475


Single-Family Vacancy RateMaricopa County 1993–2011

Source: PMHS

0%

2%

4%

6%

8%

10%

12%


US Total Vacant Housing Units1965-2011*

Source: US Census Bureau

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

*Data through 2011 Q2

Recession Periods

Excess inventory is about 800k homes

Longer term trend


Household Formations

Lower during recessions (doubling up, living at home with mom & dad, etc)


Percent of 25-34 Year Olds Living With Parents vs. Homeownership Rate, Under 35 Years Old

U.S.: 1983 – 2010 Source: US Census Bureau

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

1983

1984

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

% L

ivin

g w

/ Pa

ren

ts

36%

37%

38%

39%

40%

41%

42%

43%

44%

Ho

me

ow

ne

rsh

ip R

ate

% Living w/ parents Homeownership Rate


Why are households not forming?

1. Lack of jobs,

2. Lack of jobs,

3. Lack of jobs,

4. Lack of jobs

5. Inability to sell home elsewhere

and move to Greater Phoenix.


Historically, there is a one-to-one relationship between population growth and household growth

(meaning a 1% increase in population growth leads to a 1% increase in household growth).

Source: Linneman Letter


When unemployment exceeds 7%, a 1% increase in population leads to a

0.3% increase in households.

When unemployment falls below 7%, each 1% increase in population

leads to a 1.9% increase in households.



Thus, in a weak economy, population growth fails to

translate into household growth, but when the economy begins to

strengthen, there is pent-up demand for housing.



In Arizona, the same basic trend has occurred.


A Credit Score of less than 650is considered Subprime

Source: FICO

% of population


Homeownership Rate1994-2011*

Source: Census Bureau

63

64

65

66

67

68

69

70


Recession Periods%


Foreclosures at an all time high1979-2011*

Source: MBA%


mln


How Investors Impact the Market:

Investors temporarily create demand.

They are creating rentalunits for people who are losing their homes anddo not want to live inapartments.


0%

10%

20%

30%

40%

50%

1998

Q1

1998

Q3

1999

Q1

1999

Q3

2000

Q1

2000

Q3

2001

Q1

2001

Q3

2002

Q1

2002

Q3

2003

Q1

2003

Q3

2004

Q1

2004

Q3

2005

Q1

2005

Q3

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

Investors: 40% Market?Percent of Non-Owner Occupied Sales of Total Sales

Greater PhoenixSource: DataQuick


Greater Phoenix Median Price of Single Family Homes - Resale 2002 – 2011*

Source: MLS

$119.1$118.0

$264.8

0

25

50

75

100

125

150

175

200

225

250

275

*Data through August 2011.


Greater Phoenix S&P/Case-Schiller Home Price Index** Percent Change Month Ago

1990 – 2011* Source: Macro Markets, LLC

-6%

-4%

-2%

0%

2%

4%

6%

Jan-

90Ju

l-90

Jan-

91Ju

l-91

Jan-

92Ju

l-92

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07Ju

l-07

Jan-

08Ju

l-08

Jan-

09Ju

l-09

Jan-

10Ju

l-10

Jan-

11

Recession Periods

*Data through June2011**Measures changes in existing single family home prices given a constant level of quality.


100.0%

120.0%

140.0%

160.0%

180.0%

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011

Median Price of New Homes as a Percent of the Median Price of Resale Homes

Maricopa County 1985–2011*

Source: ASU Realty Studies

*YTD through second quarter 2011


Balance between supply and demand will not be fully achieved until about

2015.

But building will get progressively better

between now and then.

Balance = when you have to build for net in-migration


Home Price Indices 2000 – 2011

Source: Macro Markets, LLC; AMLS

70

90

110

130

150

170

190

210

230

250

Recession MLS Index Case-Shiller Index Trendline (4.0%)

Recession Periods

?


The Real Problem:• Too many vacant homes (but amount of excess is declining).• Not enough new households(but this will change as jobs increase).


What about the future?


Various Population Forecasts

Greater Phoenix

Source 2010 2020 2030

ADOC 4,192,887 5,385,944 6,460,836

Annual Growth 2.6% 2.5% 1.8%

U of A 4,192,887 5,044,130 6,088,575


Global Insights 4,192,887 5,111,106 6,291,762


Census 4,192,887 5,432,612 6,970,080



Single Family Forecasts

Greater Phoenix

Source 2000-2010 2010-2020 2020-2030

Person / HH 2.5 2.6 2.6

% Single family 85% 70% 70%

Projected Permits per Year

ADOC 31,900 32,100 28,900

U of A 31,900 22,900 28,100

Global Insights 31,900 24,700 31,800

Census 31,900 33,400 41,400


Commercial Markets…


APARTMENTS


Multi-Family Year-End Vacancy RatesMaricopa County 1986–2012*

Source: ASU Realty Studies

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%

5.0%5.3%

8.5%

10.8%

14.2%

10.3%9.5%

9.5%

0%

3%

6%

9%

12%

15%

18%

*2011 -2012 are forecasts from the Greater Phoenix Blue Chip

Recession Periods


Absorption Chg in Inventory*

2006 (4,653) (3,828)

2007 (5,846) 4,979

2008 (4,466) 3,234

2009 (5,319) 6,831

2010 20,743 8,493

2011q2 (1,737) 463

Multi-Family Construction Activity

Source: PMHS

*There were 19,949 condo conversion in the Greater Phoenix area from q1 2005 through q4 2009.


There are currently 191 multi-family units under

construction (Q2 11).


OFFICE


Office Space Year-End Vacancy RatesMaricopa County 1986–2012*

Source: CB Richard Ellis

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%25.6%

23.6%

0%

5%

10%

15%

20%

25%

30%

35%

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

*2011 -2012 are forecasts from CB Richard Ellis

Recession Periods


Greater Phoenix Office Market Construction Activity


Year Absorption (sf) Chg in Inventory (sf)

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 (677,329) 1,798,415

2010 233,670 2,011,404

2011q2 960,477 ***2,408,630*Only includes multi-tenant space greater than 10,000 SF

** A number of buildings in downtown and mid-town are being converted to office condos.***The 2.4 million square feet in 2011 are build-to-suit FBI building and Univ. of Phoenix building


There is currently NO spec multi-tenant office space

under construction (q2 11).

*Greater than 10,000 sf


There will be no significant spec office construction in Greater Phoenix* for next

3-5 years.


Under any reasonable employment growth scenario,

we believe it will be 2016 before any significant office construction occurs

(although some sub-markets will be sooner).


INDUSTRIAL


Greater Phoenix Industrial Market Construction Activity



2005 12,339,591 7,072,477

2006 6,032,175 7,829,959

2007 8,359,835 13,914,181

2008 629,838 13,467,215

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

2010

2011q2

4,455,097

2,931,634

2,451,202

580,554


There are currently 3.9 million square feet* of

industrial space under construction (q2 11).

*2.4 million sf major users(Intel and First Solar)


Industrial Space Vacancy RatesMaricopa County 1980 – 2012*


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%

13.1%

11.5%

0%

5%

10%

15%

20%

* 2011 - 2012 are forecasts from CB Richard Ellis

Recession Periods


RETAIL


Greater Phoenix Retail Market Construction Activity



2005 6,708,155 6,248,789

2006 5,244,597 4,582,618

2007 9,424,362 11,104,865

2008 3,395,986 6,229,205

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

2010

2011q2

(75,352)

(648,697)

902,380

(181,048)

NOTE: 325,000 sf were deleted from inventory during 2011 due to market data updates and demolitions.


Retail Space Vacancy RatesMaricopa County 1985–2012*

Source: CB Richard Ellis**

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%

12.6%12.7%

0%

5%

10%

15%

20%

* 2011-2012 are forecasts from CB Richard Ellis** Data prior to 1992 is from Grubb & Ellis

Recession Periods


Back to Normal Vacancy?

• Office = 2015 – 2016

• Industrial = 2014 – 2016

• Retail = 2015 – 2016


How will it allturn out?


There is a BOOM for Arizona out there somewhere.


But not in 2011, 2012 or 2013.


Patience, my ass!

I am going to kill something!!


The long term economic outlook remains favorable.

The near term outlook calls for modest growth.

Arizona will once again be a national growth leader by

mid-decade.


ELLIOTT D. POLLACK & Company

7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251

480-423-9200 P / 480-423-5942 F / www.arizonaeconomy.com / [email protected]

• Economic and Fiscal Impact Analysis/Modeling

• Real Estate Market and Feasibility Studies

• Litigation Support

• Revenue Forecasting

• Keynote Speaking

• Public Finance and Policy Development

• Land Use Economics

• Economic Development

Documents

Elliott D. Pollack & Company Outlook 2012: A Grind of a Recovery September 30, 2011 By: Elliott D. Pollack CEO, Elliott D. Pollack & Company