BuildingTeam Construction Forecast

Phoenix is Still Flying High

Despite a sharp 30% drop in new housing starts in 2006, the Phoenix economy has lost little of its economic altitude as it heads into late spring-early summer of 2007.

Major City Snapshots

This observation is based on the city’s 5% year-over-year employment growth in February 2007, the fastest of the 25 largest U.S. metropolitan areas. Phoenix’s recent pattern of employment growth, particularly its broad base across most major industrial sectors, is also noteworthy. In fact, February employment growth was particularly strong in two sectors: construction at +8.8% year over year and business and professional services at +8.7% year over year.

The key to the metro area’s strong employment picture is the surging growth of its population. Over the past five years, Phoenix’s population has grown at an annual average rate of 3.2%, well above the national figure of 1.0%.

With one of the sunniest climates in the country, a lower cost of living and lower business operating costs, Phoenix is a magnet for those seeking relief from nearby California’s high house prices and business costs.

However, despite the strong pace of in-migration, the Phoenix housing market has become seriously overbuilt. According to E. Pollack, a local real estate and housing consultant, Phoenix has an estimated excess supply of 18,000 homes for sale.

Consequently, new single-family house construction will probably slow to 35,000 to 40,000 units over the next 12 months, in order to reduce the unsold inventory to a more normal level. This retreat in single-family building will be partly offset by sustained growth of multi-family building. Healthy increases in apartment rents and declining vacancy rates have led to an increase in planned apartment construction that is likely to partly offset the pullback in single-family construction over the next several quarters.

As in the case in several other large U.S. metro areas, increased spending on commercial and institutional construction will underpin the metro area’s growth into 2008. Two major projects currently under construction include the light rail system between Phoenix, Tempe and Mesa and the expansion of the Phoenix convention centre. It is likely that both of these projects will act as catalysts to other development, once they are completed.

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