Continued Road to Recovery
By Elliott Pollack
September 27, 2013
The Greater Phoenix Blue Chip Real Estate Consensus Forecast panel gave us our first look at 2015. According to the panel, it should be a good year for real estate. In terms of single family permits, the consensus forecast is for about 14,640 units in the Greater Phoenix area this year, increasing to 20,657 units next year and over 25,000 units in 2015. Every panelist has permits increasing in 2014 and again in 2015.
In terms of apartments, permits are expected to stay stable at about 6,400 in 2015 after a level of about 6,600 in 2014 and 4,600 this year. Absorptions are also projected to be relatively stable with 6,100 this year, 6,000 next and 5,700 in 2015. The result is that vacancy rates will continue to decline to 6.5% next year and in 2015.
The office market is also expected to see better days ahead with vacancy rates declining to about 20% by the end of this year and slightly below 19% in 2015. Absorption is projected to pick up each year and be more than 2.3 million square feet by 2015, while construction will be relatively modest during this whole period.
Retail markets are also expected to improve with vacancy rates dropping from 11% this year to approximately 8.5% by 2015. Absorption will pick up in 2014 and remain at that level in 2015 while new construction is projected to stay at around a million square feet per year.
The industrial market is expected to stabilize with absorptions in the 3.6 to 4.0 million square feet range between now and 2015 and construction at about 2.5 million square feet next year and in 2015.
Thus, the general outlook is for a significant pick up in single family permit activity, although even by 2015, permits will be well below the long term trend. Continued strong apartment activity and commercial markets are expected to continue down the road to stability of declining vacancy rates and stronger absorption. Major new construction in commercial markets, especially office and retail, are likely beyond 2015. While construction has been very strong, industrial is expected to stabilize at a more modest rate. Commercial, therefore, will act as more of a stimulus to the economy after 2015 where residential should be a stimulus to the economy in 2014 and 2015.
Real Estate Outlook Remains Positive
By Elliott Pollack
June 21 2013
The second quarter Greater Phoenix Blue Chip Real Estate Consensus Forecast indicates that the panel of experts believes that the real estate sector will continue to expand. However, for single family residential, a slower rate of growth was anticipated in the latest forecast. Single family permits in 2013 are expected to be in the range of 15,800. While this is a substantial increase from the 2012 actual of 11,615, it is down from last quarter?s expectation of more than 18,000 units in 2013. The same is true with 2014 where the panel now expects growth of nearly 50% to roughly 23,500 single family permits next year. This is down from 25,000 permits expected in the first quarter. Despite the cutbacks and the level of permits expected this year, it should still be a good year in terms of percentage growth. Several analysts have suggested that the problem is not a slowdown in demand, but an inability of homebuilders to deliver sufficient supply. In that regard, the number of active subdivisions remains at a very low level.
The panel believes that multi-family housing will continue to recover. Vacancy rates are expected to drop to roughly 7% by year end 2013 and 6.5% by year end 2014. The level of permits is expected to more than double this year to almost 5,000 and be up another 40% next year to over 7,000. Absorptions are expected to pick up dramatically this year to over 6,700 compared with just less than 3,000 in 2012. Absorptions in 2014 are expected to be in the area of 6,800 units. Given the lags between permitting and actual occupancy of apartment buildings, it is likely that vacancy rates will continue to decline over at least the next two to three years. The key, however, is that strong apartment construction is anticipated.
The office market is expected to continue a slow recovery. Vacancy rates peaked in 2011 at more than 25% and should be about 21% at year end 2013 and 19.5% by year end 2014. This is still above levels that have historically been associated with rapid increases in rents and values. Construction is expected to be limited this year and next with less than half a million square feet being built. Absorption is expected to be somewhat less this year at 1.7 million square feet, but grow to 2.2 million square feet in 2014. The bottom line is that a modest level of construction relative to absorption is necessary for the excess space to be absorbed. It is likely that it will be about 2016 before the market gains any sense of normality.
The retail market continues to improve for the same reason. Vacancy rates are declining because there is modest construction (about 0.5 million square feet this year and about one million next) relative to absorption, (about 1.7 million square feet this year and 2.3 million next). Vacancy rates have dropped from more than 12% to 11.3% this year and are expected to be 10.5% next year. As the economy continues to improve and the single family market continues to gain momentum, there will be more absorption of currently vacant retail space.
The industrial market is doing well - vacancy rates are expected to be 10% by year end 2014. Construction is expected to remain strong at about 3.3 million square feet this year and 3.0 million next. Absorption is expected to exceed construction for the next two years.
Thus, the pattern seems clear for apartment and other commercial markets ? declining vacancy rates as new construction lags absorption. However, there will be more total construction each year than the previous year, thus helping the job market. Large increases in percentage terms are expected for single family permits this year and next. Even so, the forecast for 2014 is still below the long-term trend. To reach that trend level, population flows will have to pick up. Given the increase in housing prices and continued growth in the job market, that is a distinct possibility over the next few years.
More Good News
By Elliott Pollack
March 28 2013
By Elliott Pollack
The first quarter 2013 Blue Chip Forecast continues to suggest strong improvement in the real estate sector, especially in residential real estate. Single family permits, after reaching 11,615 permits in 2012, are expected to grow to more than 18,000 units in 2013 and about 25,000 permits in 2014. The range of forecasts in 2013 is within a fairly narrow band (15,000 to 20,000 permits) with one exception (25,000). The range of forecasts for 2014 is somewhat broader. Most of the forecasts for 2014 are between 22,000 and 25,000 permits, but the range of forecasts fall between 19,700 and 32,300 permits for 2014. The 2013 forecast suggests more than a 55% gain in 2013 and the 2014 forecast projects another 40% gain. The 2014 forecast suggests that the Phoenix market would be approaching back to trend at that point. If that occurs, it would be an amazing recovery from the 2011 bottom. In any case, the trend seems positive.
Multifamily vacancy rates are expected to continue to decline to about 7% at year-end 2013 and just over 6.6% by year-end 2014. This is because absorption is expected to exceed new construction in both years, albeit, modestly so. While there has been a lot of talk in the press about the number of apartments being built, the lead times are such that most will not come on stream in 2013 and many will not come on stream until past 2014. Thus, that market should continue to be tight.
The office market has begun its recovery and office vacancy rates are expected to continue their decline in 2013 and 2014. From about a 24% vacancy rate at the end of 2012, vacancy rates are expected to drop to 22% by year end 2013 and 19% by year end 2014. That still suggests that the office market has a ways to go to get to a point where rents will start to increase. Usually, that is seen as vacancy rates approach and pass below 15%. The good news is that construction is expected to be limited in 2013 and 2014, but absorption is expected to pick up to about 1.8 million square feet in 2013 and to about 2.2 million square feet in 2014. Major new construction will have to wait until vacancy rates drop to or below 15%.
The retail market is also expected to improve as absorption is expected to outpace new supply in both 2013 and 2014. Vacancy rates at year-end 2013 are expected to be 11% and drop to 10% by year-end 2014. So, while the retail market is making a recovery, the recovery is relatively slow.On the other hand, the industrial market continues to show strength. Vacancy rates are expected to decline to 10.9% by year end 2013 and to almost 10% by year-end 2014. Total construction, while remaining strong, is expected to lag absorption. Most absorption has been in large box users. As the economy improves, absorption in small space should do better.
Thus, the panel believes that the housing market will continue to improve, that the outlook for apartments is quite good, and that the outlook for office, retail and industrial, while lagging, is also improving. It should be noted that the survey was done before sequestration in early March.
It’s Hard not to be Optimistic about Housing
By Elliott Pollack
December 14 2012
By Elliott Pollack
Virtually every sector of real estate will be improving through 2014, according to the Greater Phoenix Blue Chip Real Estate Consensus panel. The issue for each sector is how quickly the improvement will occur. For single family, the outlook is bright according to the panel. The consensus forecast calls for slightly over 12,000 units in 2012, 18,300 units in 2013 and over 25,500 units in 2014. Those imply huge percentage gains. Should those numbers come to fruition, it implies gains of 92%, 51% and 40% respectively in 2012, 2013 and 2014. For 2013, except for one outlier forecast on the down side and one outlier forecast on the upside, there?s a tight forecast range of between 15,000 to 20,000 units. For 2014, all but two of the forecasts call for 20,000 units or more and four of the total forecasts call for 30,000 units or more. These forecasts suggest substantial improvement in the outlook for single family housing and imply that Greater Phoenix will start approaching its long term trend line in 2014.
As for apartments, vacancies are expected to decline from 7.6% in year end 2012, to 6.8% at year end 2013 and 6.3% at year end 2014. This is despite a permit level of 5,700 units next year and 8,000 in 2014. The decline in vacancy occurs because of continued strong absorption next year and in 2014.
Improvement in office activity is expected as well, although stability in the office market is still years away. Vacancy rates, which are expected to be 23.8% at year end 2012, 21.9% at year end 2013 and 20.1% at year end 2014 clearly show improvement. But, by the end of 2014, vacancy rates are still expected to be well above levels that have been associated with increasing rents. The improvement is because absorption, which is estimated to be 1.85 million square feet next year and 2.2 million square feet in 2014, exceeds a very low level of anticipated construction. Thus, while the office market will be improving, it will still have a long way to go by the end of the forecast period.
The same is true with retail, where vacancy rates are expected to be 11.9% at the end of 2012, 11.1% at the end of 2013, and 10.1% at the end of 2014. Again, this is because absorption exceeds new construction. Vacancy rates, though, would still be relatively high at the end of 2014 suggesting that that market would not yet have fully adjusted.
As for the industrial market, vacancy rates are expected to come down from 11.9% this year, to 11% next and 10.2% at year-end 2014. Construction is expected to pick up in 2013 and again in 2014, but absorption is expected to be strong as well.
Thus, it?s clear that the housing market is adjusting more rapidly than the commercial markets. It?s hard not to be optimistic about single family. The apartment markets should remain strong, while improvement continues in the office, industrial and retail markets, albeit, at a slower rate.