What will have the biggest impact on the Arizona economy in 2007?
Housing, commercial real estate, etc?
The item with the biggest impact in the Arizona economy in 2007 will be the direction of the national economy. Arizona follows the general trend of the U.S. economy except it does much better than the United States as a whole, during periods of expansion. On a local scene, the 800-pound gorilla is housing and how many units are built in 2007. My expectation is that while housing will decline by perhaps another 10 to 20 percent in 2007, commercial construction will be strong, at least partially offsetting the weakness in housing.

How will the slowing housing market
affect other Arizona industries in 2007?
The Greater Phoenix housing market is expected to slow by 10,000 to 20,000 single-family units in 2007. For some perspective, for every 10,000 homes that are built, over 15,000 direct jobs are created, related to construction. An additional 17,000 indirect and induced jobs are created from related activities, generating a ripple effect on the economy. The industries most affected are wholesale and building materials stores, business services, education and health services, and other repair and maintenance services. Fortunately, commercial markets are strong to offset the impacts of the residential market slowdown.

What’s your 2007 forecast for
the commercial real estate market?
The outlook for commercial real estate in Greater Phoenix and Arizona is excellent. Vacancy rates in office are low, rents have increased significantly and as a result, substantial new construction is likely to continue in 2007. The same is true for industrial, where vacancy rates are at an all-time low and rents for the first time in a decade have risen. This suggests continued significant construction as long as the economy continues to grow. Retail follows the housing cycle and even though housing has slowed, there will still be between 35,000 and 40,000 new housing permits in 2007. This is still a historically normal level of housing and will result in continued growth of retail.

What job sectors will see
the most growth in 2007?
The most significant increases in job growth are likely to occur in professional and business services, trade and education and health services. Leisure and hospitality will also continue to be strong because of the large population growth and the continued gains in income in the Greater Phoenix area.

What’s your forecast for cities outside the metro areas in Arizona?
How will the southern and northern area economies fare in 2007?
The cities outside metro Phoenix and metro Tucson should fare well in 2007. Growth in the non-metro areas tends to be somewhat modest during expansions than in Greater Phoenix, but the downturns are not as severe either. This is because the non-metro areas tend to be dependent on less cyclical industries than manufacturing and construction and more reliant on tourism, government and in some areas, mining and manufacturing. Growth in the non-metro areas should result in employment growing by 3 percent to 3.5 percent in 2007.

Will housing affordability hurt
Arizona’s economy next year?
Housing affordability is more of a problem than it once was but it still is not a significant problem. Keep in mind that housing affordability is a relative thing. Historically, Greater Phoenix has been the most affordable major market west of the Mississippi. After the quick run-up in housing prices due to a supply-demand imbalance in late 2004 to 2005, Phoenix can no longer claim that strong position. Indeed, today Dallas, Denver, Austin, Houston, Salt Lake and Albuquerque are relatively more affordable. On the other hand, Phoenix is still cheap compared to virtually any California city and most of the other cities west of the Mississippi. Given what is likely to happen to housing prices in late 2006 and early 2007, affordability is likely to improve here more than in most places. Thus, while we might not reclaim the position as the least expensive major market west of the Mississippi, we will certainly look more affordable.

Long term, does the regional
economy still have a strong future?
The basic underlying dynamics that caused Phoenix and Arizona to grow will remain intact. Indeed, other than housing affordability, the other major factors are positive such as climate, lifestyle, geographic location, competitive tax structure and a pro-growth attitude.

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