Find out what’s in store for the economy with experts from Arizona State University's W. P. Carey School of Business.

1. Subtitle text can go here
Welcome to the
Annual Economic Outlook
Luncheon!

2. US Forecast May 2018
Dennis Hoffman
Director
L. William Seidman Institute
Professor of Economics
#econclubphx

3. • Some of the graphics in this presentation are
obtained from Deutsche Bank Global Research
Division. The chart books they produce are simply
fantastic. If interested contact
Torsten.slok@db.com

4. Tight Labor Market

7. Wage Inflation is in the Pipeline

8. Record time to fill a job

9. A Neoclassical Production Function. The output of
an economy is a function of
productivity/technology, capital investment and
labor
𝐆𝐃𝐏 = 𝐀 ∗ 𝐅{𝐂𝐚𝐩, 𝐋𝐚𝐛𝐨𝐫}
Will Tax Cuts Stimulate Growth??
So A, CAP, or Labor to grow GDP
So think about the impact of tax cuts in this context

10. 0
500
1000
1500
2000
2500
3000 1/1/1950
9/1/1951
5/1/1953
1/1/1955
9/1/1956
5/1/1958
1/1/1960
9/1/1961
5/1/1963
1/1/1965
9/1/1966
5/1/1968
1/1/1970
9/1/1971
5/1/1973
1/1/1975
9/1/1976
5/1/1978
1/1/1980
9/1/1981
5/1/1983
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5/1/1988
1/1/1990
9/1/1991
5/1/1993
1/1/1995
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5/1/1998
1/1/2000
9/1/2001
5/1/2003
1/1/2005
9/1/2006
5/1/2008
1/1/2010
9/1/2011
5/1/2013
1/1/2015
9/1/2016
It has been Great to Own Equities for the Better part
of 40 years (S&P 500)

11. So Let’s
Consider
some Risks

12. What about the Future?

13. Youth do not Share Optimism
Of Euphoric Seniors

14. Millennials:
Which economic system do you prefer?
Total GOP DEM
58% 31% 65% Socialism
33% 63% 26% Capitalism
9% 6% 10% Communism
Assembled from National Pollster
Frank Luntz Focus Groups

15. POSITIVE
Which of the following do
you have the most …
opinion of?
Total Swing
46% 44%
Economic
Freedom
36% 44%
The Free
Market System
18% 11% Capitalism
NEGATIVE
Total Swing
42% 53% Capitalism
32%
23
%
Economic
Freedom
26% 25%
The Free
Market System

16. What about Wealth inequality?
Is that part of the explanation?

18. Long Term Issues
• Debt and Entitlement Reforms require hard choices that no-
one wants to address
– Average Senior has paid about 30% of their estimated Medicare
expenses over their lifetimes
• Climate Change Challenges
– Water/Heat in the West
• Plans to Cope vs. Debate over “solutions” to the
consequences of Climate Change

19. Inflation
Worries

20. But Historically
Very Low
-0.04
-0.02
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
1948-01-01
1949-11-01
1951-09-01
1953-07-01
1955-05-01
1957-03-01
1959-01-01
1960-11-01
1962-09-01
1964-07-01
1966-05-01
1968-03-01
1970-01-01
1971-11-01
1973-09-01
1975-07-01
1977-05-01
1979-03-01
1981-01-01
1982-11-01
1984-09-01
1986-07-01
1988-05-01
1990-03-01
1992-01-01
1993-11-01
1995-09-01
1997-07-01
1999-05-01
2001-03-01
2003-01-01
2004-11-01
2006-09-01
2008-07-01
2010-05-01
2012-03-01
2014-01-01
2015-11-01
2017-09-01
PCE INFLATION (1948-2018)

21. The Interest Rate Worry

22. 0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
MORTGAGE30US
But Historically
Very Low

23. So what about a
Trade War Worry
• Goal: A Level Playing Field with Open Markets
• Mis-guided Goal, Eliminating Trade Deficits
– Bad measure of balance of trade
• Services
• Value added
– Driven by US consumers low savings rate
– Results in Significant Capital inflows from foreign countries
– So a Trade Deficit need not be killing jobs
– Any attempt to eliminate it with tariffs or deals will be
counterproductive

24. Economists Suck
When explaining trade, keep it
simple, be direct, and be clear.
Economists may be popular at
M.I.T. – but nowhere else.
So this is what you are thinking

25. Hardworking American families deserve a better standard
of living, high-quality jobs, and access to quality,
affordable products and services. Free trade gives
American employers access to literally billions of
consumers, and it gives consumers access to more
choices at cheaper costs. And everyone
benefits from a healthier economy that lifts people out of
poverty and gives them a clear path to
prosperity.

26. Are Equity Prices
Too High?

27. ON to the Forecasts!!

28. 50 Top Business Forecasters
April Blue Chip US Forecasts in Pct.
RGDP NomGDP 10 yr UN Rate
2018 2.8 4.9 2.9 3.9
2019 2.6 4.8 3.4 3.6

29. Immediate Risks
• Geo-Political or Natural Shock
• Inflation Scare Spooks Equities & Bond Markets
• Gas Price hikes dampen consumer mood
• Capital Investment Boom Fails to Materialize
• Trade War proves to be disruptive
• Inequality breeds discontent
• Big deficits stifle opportunities for Infrastructure
Investments

30. Abundant Opportunities
• Immigration reform
• Tax Reform Spurs Capital Investment
• Trade reform with real improvements
• A plan for fiscal responsibility longer term
• Realize potential of Global Growth Cycle

31. Lee McPheters
Director
JPMorgan Chase
Economic Outlook Center

32. The Arizona Economy
Update & Outlook
Economic Club Of Phoenix
May 3, 2018

33. Consensus: No Recession in Sight
for U. S. or Arizona Economies
Odds of U.S. Recession
Before 2020
Year Odds
2018 15%
2019 27%
Blue Chip Economic Indicators, Consensus
of leading national economists, April 8, 2018

34. Thousands of Employees
Peak - October 2007 2,686 Employees
Trough – September 2010 2,373 Employees
Trump Administration
March 2018 2,819 Employees
U. S. Bureau of Labor Statistics; Arizona seasonally adjusted monthly employment
The Arizona Economy is in a 90 Month
Expansion That Started September 2010

35. ARIZONA
Economic Outlook
Indicators 2017 2018 2019
Personal Income (% change) 4.3 5.2 6.3
Nonfarm Employment (% change) 2.4 2.5 3.0
New Jobs (thousands) 63.9 69.3 85.2
Population (% change) 1.6 1.6 1.7
Single Family Permits (thousands) 27,588 31,725 35,530
W. P. Carey School of Business, based on data available May 2018

36. Real Household Income Up
Less Than 2% in 10 Years
U.S.
Arizona

37. Metro Phoenix Home Prices are
Rising More Rapidly than Wages
Index: 2010 = 100
Data through Q3 2017
Wages up 21% since
2010
Phoenix Metro Home Prices up 53% since
2010*
*(Note: Q3 2017 home prices = 76% of 2006
peak)
U. S. Bureau of Labor Statistics and S&P Dow Jones Indices

38. Arizona 5th in Job Creation
Among States in 2017
Ranked by % Change:
(2017 over 2016)
6
10
40
1
3
5
Top 10 Job Growth
4
7
8
9
2
Lost Jobs
U. S. Bureau of Labor Statistics
& W. P. Cary School of Business

39. First Quarter 2018 Arizona Job Growth
Area % Growth New Jobs
Arizona 2.4% 65,330
Prescott MSA 3.1% 1,930
Phoenix MSA 3.0% 60,430
Lake Havasu MSA 2.9% 1,430
Flagstaff MSA 2.0% 1,300
Tucson MSA 0.9% 3,470
Yuma MSA -0.3% -160
Sierra Vista MSA -2.6% -900
Job Growth USA, W. P. Carey School of Business

40. Arizona Industry U.S. Rank % Change
Nonfarm Employment 5 2.4
Financial Activities 1 4.5
Construction 3 7.4
Manufacturing 4 2.6
Retail Trade 6 1.0
Health Care 6 3.3
Leisure & Hospitality 6 3.0
Professional Services 8 3.1
Educational Services 9 3.5
Transport/Warehousing 10 4.0
Arizona’s Leading Growth Industries
U.S. Rank & Percent Change: 2017
Job Growth USA, W. P. Carey School of Business

41. 11,700
10,000
9,100
7,300
4,500
4,100
3,300
3,100
2,100
1,300
Health Care
Construction
Financial Activities
Food Services
Professional/Scientific
Manufacturing
Transport/Warehousing
Retail Trade
Educational Services
Real Estate/Rental
Job Growth Notes
• Arizona added 63,890 new
jobs in 2017
• The health care industry
was the source of the most
new jobs (11,700)
• Construction added 10,000
new jobs, the most since
the boom period of 2006
• There were 9,100 new
financial jobs, with an
annualized growth rate of
4.5 %, first in the nation for
the second straight year
Number of Arizona Jobs Added by Industry: 2017
Arizona New Jobs Created: 2017
U. S. Bureau of Labor Statistics

42. Unemployment in Western Region
(Seasonally Adjusted Unemployment Rates, March 2018)
3.1
UT
4.9
NV
3.0
CO
5.6
NM
4.3
CA
4.9
AZ
U. S. Bureau of Labor Statistics
Unemployment Notes
• Arizona’s 4.9% rate is the 4th
highest in the nation
• Colorado 3.0% is 10th lowest
unemployment in the nation
• California 4.3% unemployment
rate is all-time lowest on record
for the state
• Arizona’s all time low rate was
3.6% in July 2007
Below 4.1% National Rate Above National Rate

43. 2
3
5
10
U. S. States Ranked by
Percent Change 2016-2017
6
U. S. Census Bureau, Dec. 2017
7
8
4
1
12
20
9
39
Top 10 Growth States Lost Population
Arizona Ranked 6th Fastest in
Population Growth in 2017

44. Arizona Population: 2017
 14th Largest State (7.0 mil)
 6th Fastest Growth Rate (1.6%)
 7th In New Residents (108k)
 5th in Domestic Migration
 18th in International Migration
U.S. Census Bureau, Dec. 2017

45. 2
4
3
1
6
9
7
11
10
Arizona Ranked 5th Among All
States for Domestic In-Migration
5
Alaska
Hawaii
28 States in Red Lost
Domestic Population
to 22 States in Green
8
12
13
14
Gained In-Migrants Lost Out-Migrants
U. S. Census Bureau, Dec. 2017

46. Maricopa Co.
population
increased by
202 residents
(net) every day
in 2017

47. Rank Origination Inflow % of Total
1 Other Arizona Counties 39,615 19.9%
2 California 25,925 13.0
3 Foreign Sources 24,314 12.2
4 Texas 8,607 4.3
5 Washington 7,809 3.9
6 Illinois 7,451 3.7
7 Colorado 6,489 3.3
8 Utah 4,720 2.4
9 Michigan 4,378 2.2
10 Minnesota 3,958 2.0
Subtotal 133,266 67.0
Notes: Total inflow (NOT net) 2011 – 2015 was 198,872; largest foreign sources –
Asia (8,762), Central America (5,184), North America (4,651); South America (1,510)
https://www.census.gov/data/tables/2015/demo/geographic-mobility/county-to-county-migration-2011-2015.html
Maricopa Co. In-Migration Dominated by
Arizona, California, Foreign Origination

48. Characteristics Phoenix Tucson Prescott Los
Angeles
Toledo
Income in ($000) $49.4 $41.2 $45.0 $55.0 $30.1
Income Out ($000) $45.5 $45.9 $38.1 $46.8 $40.8
College BA In (%) 39.9 40.4 31.5 51.7 33.2
College BA Out (%) 36.1 43.4 30.8 39.9 43.0
Home Owner In (%) 33 28 41 17 20
Home Owner Out (%) 25 25 29 26 22
Notes: The analysis compares domestic in-migrant and out-migrant
characteristics by metropolitan areas. For example, in-migrants to
Phoenix and Prescott have higher incomes than out-migrants, while
those moving in to Tucson have lower incomes than those moving out.
Data from U.S. Census 2005-2016, metro to metro movement.
https://www.buildzoom.com/blog/characteristics-of-domestic-cross-metropolitan-migrants
Phoenix In-Migrants Have Higher Incomes
and Education Levels Than Out-Migrants

49. Indicators 2017 2018 2019
Nonfarm Employment (% change) 2.8 3.2 3.3
New Jobs (thousands) 54.9 65.1 69.3
Population (% change) 1.9 2.0 2.1
Single Family Permits (thousands) 20,551 24,342 27,411
W. P. Carey School of Business, based on data available May 2018
Metro Phoenix
Economic Outlook

50. No Recession in Sight – As of Now
 Arizona is firmly established as a top 10 state for
job creation and population growth
 Key industries are strong and growing: finance,
manufacturing, construction, health care
 What to watch: will the Fed “get it right?”
 Labor force, quality of life, cost structure will drive
Arizona growth – the U.S. business cycle is major
risk - but as of now recession probability is low

51. The Arizona Economy
Update & Outlook
Economic Club Of Phoenix
May 3, 2018
Lee McPheters
Lee.McPheters@asu.edu

52. Mark Stapp
Director
Master of Real Estate Development
Professor of Real Estate

53. Subtitle text can go here
Metro Phoenix
Commercial
Real Estate

55. • Supply in line with demand – not over building
in any sector
• Strong But Moderating Growth.
• Industrial still strongest sector, apartments
tempered, office keeps improving, single
family slowly improving – land supply very
tight
• Retail still weird

56. What does market think about itself?
Commercial Real Estate Brokers Forecast
Survey
(6 month forward looking)

57. Where are we in the cycle?

58. In what direction is the Metro Phoenix
market moving?

59. Is uncertainty in the Federal Government affecting the
commercial real estate market and hindering our local growth.

60. Where are investor returns headed in the
next 6 months?

61. What is your overall feeling about the Metro Phoenix
commercial real estate market?
100% 100% 100% 100% 100%
94% 97% 98% 98%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10/13 04/14 10/14 04/15 10/15 04/16 10/16 04/17 10/17 04/18
OPTIMISTIC

62. Where are Vacancy Rates for all markets
heading in the next 6 months?
30%
33%
5%
21%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10/13 04/14 10/14 04/15 10/15 04/16 10/16 04/17 10/17 04/18
VACANCY RATES = UP
Industrial Multifamily Office Retail

63. Where are rents for all markets heading in
the next 6 months?
54%
58%
84%
38%
34%
9%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
10/13 04/14 10/14 04/15 10/15 04/16 10/16 04/17 10/17 04/18
RENTS = UP
Industrial Multifamily Office Retail - Anchored Retail - UnAnchored Retail - Big Box

64. OFFICE

65. “The biggest problem is that we have a lot of obsolete
product, it is not easy to tear it down and get it out of
the market.”

66. “What is the vacancy rate right now? It depends on
who you ask, but most of us are around 20 to 21
percent. It was as high as 27 percent back in 2012-
2013.”

67. “The kind of office space that new companies
want is different now. A big company will come
to town and the office guys are talking to them
about six or eight potential deals that are
150,000 to 300,000 square feet of office space
along the 101 corridor, but each one of them
wants to build new buildings. State Farm is a
perfect example.”

68. INDUSTRIAL

69. “Vacancy rates are going up because of the
general profile of tenants; what they do in the
space is higher up the food chain, it is e-
commerce and high-end manufacturing.”

70. “They pay their workers higher wages because
they are doing more skilled labor activities in
the box, and the rent follows that, so the rent
goes up.”

71. “The other thing that will have a big effect on
the West Valley is the [202] South Mountain
freeway. When that opens up, you can bypass
downtown. …….. might bring distribution to the
Southeast Valley ….. that opens up your
population, your employment pool. I think you
might start to see some more distribution in the
Southeast Valley. “

72. RETAIL

73. “Lots of uncertainty in the retail market. It’s just
constant change and you have to ask - who’s
gonna survive? What do you do? “

74. “There are approximately 223 empty big boxes
over 10,000 square feet [available], because a
lot of the Fresh and Easys have never
converted...”

75. “All the new construction is basically almost
preleased. However, I don’t know how they can
afford it. How can you sell sandwiches and pay
$42 a foot and still stay around. There will be
some fall out. We’re now big foodies.”

76. “I do think you’ll see a bit of renaissance in
retail, where people will go for quality -
experience of going to a quality restaurant.
Even going to a quality tailor or something like
that. People who can afford will find things that
the Internet can never replace.”

77. MULTI-FAMILY

78. “The apartment market is strong. Obviously it’s
very strong. We do have some class A products,
all built in the same area - probably three
prominent areas and that would be downtown
Phoenix, Tempe, South Scottsdale.”

79. “…. estimate for delivery this year, 2017? Right
now 8,800 - 4,400 coming out of the ground
right now.”

80. “Multifamily is coming back to the West Valley.
This is the first time we’ve started building west
of I-17.”

81. Apt rents continue to increase for B and C
product
5/3/2018 81

82. LAND/HOMEBUILDING

83. 2.3 590 719

84. Metro Phoenix
$2.3 B – Total Land Sales 2017
$590 M – Q1/18 Total Land Sales
$719 M – YTD Total Land Sales

85. “What’s the end of the year number? Everybody
thinks it’s gonna be around 20,000 permits. We
were at 17.8 last year.”

86. “I don’t think they can get them on the ground.
That’s the issue, but everybody’s buying like
they have to increase—if everybody’s increasing
by 25 percent or something there is not enough
to go around.”

87. “The periphery market, people are driving out
again, whereas before—six months ago, they
said it wouldn’t happen. Then people were just
clippin’ along. We are seeing a big rush to
affordability in every market, even in the higher
price point markets”

88. “2.3 month supply existing homes, tight labor,
construction costs rising, land prices high, home prices
increasing.”

89. Where we going?

90. Housing market continues to perform in
2018 much as it did in 2017
5/3/2018 90

91. • Inflation
• Resulting interest
rate hikes
• Psychological and
real impact
5/3/2018 91
• Tax Law
• Wage Growth

92. 5/3/2018 92
• price of land in
desirable places
• labor shortages
• materials cost
increases
• affordability
• demographics

93. Shortage of existing homes
Inventory under $300k - 1.5 months
5/3/2018 93

94. Prices are likely to rise at a much faster
pace as demand continues to outstrip
supply
Creates affordability issues
5/3/2018 94

95. Profit is in the process and business model
5/3/2018 95

96. Prefabrication
Single family new home rental
5/3/2018 96

97. Single family detached, new home rental
will be solidified as a significant business
model and will continue to grow
5/3/2018 97

98. Phoenix is one of the few markets with a
functional prefabricated building materials
and assembly factory (Katerra).
5/3/2018 98

99. The significant increase in construction
costs for new apartments will slow the
development pipeline
5/3/2018 99

100. Retail evolves - hopefully
Food, local, contextual, experiential,
authentic, wellness, social
5/3/2018 100

101. 2017 Retail store closures (Nation wide) =
+/- 7,000 in
YTD 2018, store closure announcements
3,689 - number of store openings is 1,759*
Coresight Research and Fung
5/3/2018 101

102. Repositioning B & C retail
5/3/2018 102

103. Industrial remains the belle of the ball
5/3/2018 103

104. Completion South Mountain Freeway
(2019) change distribution of activities
5/3/2018 104

105. 2nd consecutive year more than 9 million sf
of net absorption
Highest since 2005
5/3/2018 105

106. 4.8 Million sf under construction
Less than 1/2 of 2007 peak activity
5/3/2018 106

107. 3Q17 industrial net absorption 26X office
net absorption YTD same period
5/3/2018 107

108. Office – select locations, alternative spaces,
shrinking space needs, adaptive reuse and
few submarkets
5/3/2018 108

109. How much runway do we have?
• Growth is steady – expanding beyond a
few core areas;
• Very good underlying economic
fundamentals driving growth;
• Not much spec development (few key
projects replacing obsolete space);

110. • Long term drivers - Technology, demographics and
experiences.
• Short term drivers – Competition for employees,
labor, solid local economics, solidifying “place”

111. “Everything is changing. People are taking the
comedians seriously and the politicians as a joke.”
Will Rogers

112. THANK YOU
Mark Stapp
Director Center for Real Estate Theory and Practice
W. P. Carey school of Business
Arizona State University