DESERT LAW BLOG

NO WELLS FARGO/WACHOVIA ANCHOR FOR CITYSCAPE

I've been waiting to see whether Wells Fargo, following their purchase of Wachovia, would honor the Wachovia lease with CityScape to be the anchor tenant in their new office tower in downtown Phoenix.  Apparently, we have our answer.  The Business Journal reports that Wells has plenty of space in its existing downtown building to handle local Wachovia operations and will instead sublease the space under the lease assumed by Wells Fargo in the purchase.

The lease is for about 68,000 square feet and its term is 10 years.  As the anchor tenant, Wachovia was also supposed to have its name on the building (which is about half complete now).  No word on what the tower will not be called.

In better news for CityScape, they anounced yesterday that CVS will open in their first tower, becoming the first downtown drugstore since 1976.

Some construction progress photos can be seen here (scroll down a bit).

FORECLOSED HOMES COMPETING WITH HOME BUILDERS IN ARIZONA

An article today in the WSJ points out what many first-time homebuyers in Phoenix already know - buying a bank owned (foreclosed) home is usually a better deal than buying a new home from the builder.  The article notes that often, foreclosed homes are priced 25% or more below what homebuilders are trying to sell their homes for in the same neighborhood.  

Apart from perhaps having to do some minor repair to the foreclosed home, I'm not sure why a homebuyer would purchase a brand new home priced 25% more - particularly in a market with housing prices that are still declining.  As the Phoenix area monthly sales figures rise, many agree this is the way to go.  Approximately 50% of sales in Phoenix metro are now foreclosed homes.  Savvy homebuyers can easily find a home that is only a year or two old that needs little to no repair and is ready to be moved into.  And they can choose their neighborhood in the Phoenix metro area as there are foreclosures in all areas. 

The net impact of this is that homebuilders are finding a tough time out there.  The Republic reported earlier this week that Chandler (formerly a top 10 fastest growing city in the nation) had only one new construction permit issued in February.   The WSJ sums up the reason for this:

Analysts question how low builders can go before building a house costs more than they can charge for it. In some markets in California and Florida, builders have reached that point and have stopped building.

I would guess we are at that point in many of the areas around Phoenix as well, leading to many builder failures already and lots of layoffs in the construction industry.  This is a big part of the reason that Arizona has had the second highest jump in unemployment numbers - next to Michigan.

WESTCOR DELAYS GOODYEAR MALL (AGAIN)

A rather strange article appeared in the Republic a few weeks ago quoting Westcor officials who were saying they were going to break ground on their massive new mall in Goodyear this quarter.  The mall - named Estrella Falls - had already been delayed by one year and this was apparently the new schedule they were planning.  When reading the article, my immediate thought was it was putting on a happy face to try to convince retailers who were on the fence that they were in fact going ot build the mall, and they therefore should go ahead and sign leases.  I mean, why else would you be announcing you were breaking ground on a new mall now?

My hunch seems to be correct (although I have no inside info on this), as the announcement a few weeks ago apparently did not have the intended effect and Westcor finally faced the reality of what is going on in our economy - deciding to postpone groundbreaking for another year.   And wisely, when asked if they were actually going to be able to open on the new schedule (now in 2011), they hedged and said that it appears that way, for now.

Goodyear is getting hammered by massive housing price declines along with the whole far west side of the Valley - seeing some of the deepest drops in Arizona (and the nation for that matter).  Residential foreclosures and vacancies are common and the consumer spending dropoff is really hurting the Goodyear economy - which survives primarily on retail (and formerly from economic growth from new housing and residents).  Adding in bankruptcies for some of the big retailers who recently opened stores on the far west side (e.g., Linens n' Things, Mervyns) and that creates lots of empty retail space on the west side.

So the reality for Westcor is that retail vacancies are skyrocketing, businesses are going bankrupt and consumers are drastically reducing their spending because they feel scared about the economy, are deeply underwater on their homes and are losing their jobs.  In other words, it is a very bad time to be introducing a massive new mall - even in the next two years.  There's too much uncertainty about where we will be in two or three years for tenants to sign leases (or to commit to open their stores) - particularly in a place hit as hard as Goodyear.

In other words, the news today is not a surprise.

INTEL INVESTING $3 BILLION IN CHANDLER

This is good news, creating 1,500 construction jobs during a downturn and indicating they won't be shipping these Arizona high tech jobs overseas (at least for awhile).

Update:  More from the Business Journal, including this tidbit about the investment decision:

Walden credited state policies enacted prior to the launch of Fab 32, such as research and development and property tax credits, with bringing the investment to the state.

“We’d really like to see that continue to help other companies in Arizona,” he said.

These incentives are something Arizona needs more of, not less, to help manufacturing, high tech and renewable energy companies locate and thrive here.  Perhaps an investment like this will help open the eyes of the Arizona legislature and new governor to the benefits of passing the package of new incentives requested by business leaders over the last several sessions.  Even though we are in a terrible budget crunch, our leaders need to continue to plan for the future of the state by cultivating businesses that will provide well-paying jobs.

Update 2:  More coverage from CNBC.  Reading this, it also occurred to me that Intel - which has large cash reserves - is being smart by taking advantage of the downturn to lower its cost of construction.  Materials haven't exactly come down in price, but labor costs certainly have as the commercial construction market is taking a big hit.

KLUTZNICK TO APPEAL CITYNORTH RULING

Following the Arizona Appeals Court ruling that the tax incentives from the City of Phoenix for the CityNorth development in Desert Ridge were unconstitutional, the developer, Thomas J. Klutznick Cos., has decided to appeal the ruling, according to the Republic.  They have until February 23rd to file the appeal.  The City of Phoenix has not yet announced whether they will join in the appeal.  Here is my previous coverage of the story.

CONDOMINIUMS AND PHOENIX NOT GETTING ALONG

So the big craze for the last several years was for developers to purchase one of the many apartment communities in Phoenix metro and to "subdivide" them into condominiums and sell them off.  Other developers decided to start from scratch and build condominiums from the ground up.  More than a few of these projects made it about half way (or less) before the market for condominiums fell apart in Phoenix - wrecking the pro formas of these developers.

This leaves a stark choice for the condo converters - maintain the condominiums as apartments until they can be sold, do a fire sale or auction of the remaining units or simply liquidate in bankruptcy.  All three are happening.   Many developers allowed existing tenants to stay in converted condominium units until they were sold - a smart choice considering what has happened in the market.  Although rents are falling all over the Valley, damaging net operating incomes, having some form of income allows these developers to continue to satisfy their debt obligations acting as landlords.

Other condo developers (of both conversion and new builds) are going the fire sale/auction route.  The Republic has a story today about two new-build condominium/townhome projects in Scottsdale that are struggling to find buyers - one of which has decided to auction remaining units.  The starting bid prices they are asking at auction versus the price originally marketed at is stunning - from $340,00 to $520,000 versus previous asking prices of up to $1.5 million.  It's typical to see those kind of percentage price drops in lower priced condominium conversions as well.

This isn't an unusual occurrence as developers with a heavy debt load from purchase of an apartment complex for conversion or from construction loans need to figure out a way to pay their lenders.  The alternative, as some developers are being forced to do, is to go through foreclosure by their lenders (or more typically bankruptcy).  Needless to say, it is going to be a long while before Phoenix area developers start building condos again and even longer before they try conversions.

Interestingly, the article points out a trend that I have seen in my real estate legal practice, Canadian buyers on the lookout for deals in Phoenix.  I assume that Phoenix is a fairly popular place to be a Canadian snowbird, but Canada has not been immune from the economic crisis (although it's not nearly as bad as the U.S.).  And the Canadian dollar has dropped against the U.S. dollar - weakening Canadians' buying power in the U.S.   Nevertheless, it appears that Canadians have the money to buy and see Phoenix as a great place to purchase distressed properties during this downturn.

Auction information for the Artesia property mentioned above can be found here.

NEW HOME SALES FALL OFF A CLIFF

New home sales numbers were announced today and they recorded the lowest level since records started being kept back in 1963.  Here is a chart prepared by Calculated Risk showing the numbers (click for a larger picture):

As you can see it hasn't been pretty.  Arizona has always relied on new home sales as a big economic driver - providing realtor, contractor, mortgage broker and other ancillary jobs.  Many of those jobs are now gone and the big builders in Arizona are going bankrupt.

Calculated Risk has a few more charts and commentary today here.

ANOTHER ARIZONA HOMEBUILDER SUCCUMBS

Fulton Homes declared Chapter 11 bankruptcy today.  It appears they will attempt to continue operating, seek to reorganize and emerge from bankruptcy.  Whether they are successful in coming out of bankruptcy in one of the worst housing slumps in Arizona history remains to be seen.   Tempe-based Fulton, founded by Ira Fulton, is one of the largest and oldest builders in Arizona and is a major philanthropist in the community, particularly for education.

Short article from the Republic is here.

Update:  Further coverage from the Business Journal here.

Update #2:  Some more from the Republic here and here.

W HOTEL SCOTTSDALE TO REMAIN OPEN DURING FORECLOSURE PROCEEDINGS

As anticipated, operations of the W Hotel Scottsdale will not be impacted by the disputes between the developer, builder and lender (see here, here and here).  The Phoenix Business Journal has a story today with comments from Starwood Hotels (the manager of the W) and they indicate it will be business as usual:

“The W is not involved in the dispute and we’ll continue to manage the W Scottsdale,” said K. C. Kavanaugh, vice president of public relations for Starwood Hotels and Resorts, based in White Plains, N.Y.

Kavanaugh said Starwood has received numerous phone calls from future hotel guests who are wondering whether they should book a reservation after reading about the pending foreclosure action on the chic hotel that opened in October. She said she wanted to set the record straight that the hotel is open for business and will remain that way.

The Notice of Trustee's Sale is now online and can be read here (pdf).  Scott Klundt from Quarles & Brady is acting as the trustee in the foreclosure proceeding.  The article today also indicates that Snell & Wilmer is representing Starwood.

W HOTEL SCOTTSDALE MAY BE FORECLOSED UPON

HSH Nordbank, the construction lender for the recently opened W Hotel in Scottsdale has jumped into the fray, filing a Notice of Trustee Sale to foreclose and take ownership of the property away from the developer - Triyar.  As I wrote a couple of weeks ago, the builder, Hunt Construction, has already filed a $20 million lien against the W for unpaid fees for their construction.  I am anticipating Triyar may go bankrupt to try to slow down the foreclosure process and to reach a settlement with their lender and builder.  It is likely that the builder's claims are subordinated to the lender's, so Hunt may end up with the short end of the stick.

The foreclosure proceeding isn't likely to affect the hotel operations as the lender and operator (Starwood) of course want to keep as much money coming in as possible.  Still, it's a tough time for hotel owners in Scottsdale as occupancy is reportedly way down.

The article from the Republic can be read here.

SMALL HOMEBUILDERS FEELING CREDIT CRUNCH IN ARIZONA

The NYTimes has a story tonight that focuses on the plight of small and medium-sized private homebuilders who are being foreclosed upon by banks in record numbers.  Notably, they highlight long-time Arizona homebuilder Brown Family Communities, which effectively went out of business this past October due to their banks pulling credit and foreclosing on much of their property. 

The Arizona Republic covered this in a brief story back in October here, noting that BFC was not late on any payments, was not on the Arizona Department of Real Estate list of "builders in financial trouble" and was a well-regarding company that had been operating for over 30 years in the Valley.

Brown Family Communities' story is a familiar one in Phoenix as many homebuilders, large and small, purchased land planned for future projects and either land banked it or began to put in infrastructure for development of single family home communities.  At the time, buying land as early as possible seemed advisable as land speculators were swarming Phoenix metro driving up land to a price that would make cost of development difficult.  Banks were even lending up to 50% LTV on raw land - something you won't find today - further stoking the increase in land values.

As people stopped buying new homes and prices rapidly dropped in Arizona, the many builders who purchased large quantities of land for future projects or had land in mid-development got stuck with land and homes they couldn't sell easily, loans that they could not refinance and/or loans that could be called upon lower appraisal values.  The NYTimes article notes:

Many loans in the building industry are of short duration, coming up for renewal at least once a year. This allows banks to take a fresh look at the financial health of a borrower, as well as the assets securing their debt. A steep fall in cash flow or a decline in the value of the collateral — usually building lots or half-built houses — can mean an automatic default, whether a borrower has missed payments or not.

According to the article, this is what happened to BFC.  They had purchased hundreds of acres of land on the west side in Buckeye and Goodyear in anticipation of the boom continuing and got caught in the downturn.  It's a common story in Phoenix these days as well-known small and medium-sized builders that have survived some pretty rocky times in Phoenix real estate history are not making it through this difficult period, laying off hundreds at a time.  Driving into the outskirts of the city, one can see many partially-built developments with paved streets lined with dirt lots, weeds and "For Sale" signs on whatever homes were built and sold (and then often foreclosed upon).

The article makes brief mention of a request for federal bailout by homebuilders, trying to stoke buyer interest in new homes.  Although it would create new jobs, this is the last thing we need right now in Phoenix.  Our inventory is still very high and builders are just going to have to take their lumps for a few years or find other work until inventory clears and prices hit bottom.  Hopefully the ones that do survive maintain the institutional knowledge of what can happen in a housing boom and will not make the same mistakes 10 or 20 years down the road.  Phoenix will go back to a rapidly growing city soon enough, but it is going to take a few years to get back to normal growth again.

FORECLOSURE CRISIS HITTING ALL LEVELS IN ARIZONA

As I have written previously, it's not just homeowners with subprime loans that are being foreclosed upon these days.  Alt-A, Option ARMs and now even Prime loans are increasingly resulting in foreclosures - meaning that the foreclosure wave has hit all levels of incomes and classes in the U.S., and particularly in Arizona.  And a second large wave of foreclosures is expected to hit the market starting this year and over the next two years as a huge wave of negative amortization loans recast, more jobs are lost and more people simply decide that walking  away from their home is their best option.

The Washington Post has a good story today that relates some of the human side of the foreclosure fallout, focusing primarily on California. There, many people who had great incomes who could responsibly purchase homes are now very far underwater, losing their jobs and defaulting on their loans.  This creates a domino effect as values in neighborhoods are drastically reduced and buyers refuse to purchase anything other than a property priced at foreclosure levels - making it nearly impossible to sell homes.  Homes there are worth literally hundreds of thousands of dollars less than the mortgage principal amount.

While the article focuses primarily on California, it could have been written about Phoenix just as easily.  The Phoenix metro area had one of the highest run-ups in valuations (50% in a year at one point) and many people who purchased responsibly are now caught very far underwater on their home loans.  For most, this means they will be in their house for many years until the house is again worth as much as the loan amount (10 to 15 years I estimate for many), or as long as they have a job that allows them to pay the mortgage.  For others, this means making the financial decision to use the protection of Arizona's anti-deficiency statutes to walk away from the house and deal with repairing their credit instead of paying on a home that is underwater.

The foreclosure crisis is a sad story in Arizona that is now affecting people in even the most exclusive neighborhoods - not only in their home values, but in many jobs lost due to the disappearance of mortgage broker, realtor, construction, banking and other jobs related to the industry.  The same industry that generated much prosperity in the state is now dragging it back down to earth and creating some very difficult times for many Arizonans.  It's a difficult situation that Arizona will be dealing with for at least the next three years on the macro level and for a decade or more at the family level.

I encourage you to read the article as it does a good job of painting a picture of what is happening out there at the family level today.  I think a lot of people who do not live in a state that had such a severe run-up in prices and subsequent drop have a hard time grasping the devastating and wide-ranging effects of the real estate bust in areas such as Phoenix and it hopefully gives some better perspective on the situation.

ARE ARIZONA REGIONAL AND COMMUNITY BANKS NEXT TO FAIL?

One of the fears of economists (and of course we, the taxpayer) is that regional and community banks will start to fail at an increasing rate.  Some of the regional banks who needed it have been able to take advantage of the TARP bailout money given to banks.  But that money isn't indefinite. 

Many of the smaller banks have escaped the fate of the massive banks so far because they were not caught up in derivatives trades and other financial markets that have caused so much pain on Wall Street.  They were also able to get rid of their residential loan portfolios through securitization, thus leaving them less exposed to the downside of the residential real estate collapse. 

However, regional and community banks are well-known for making commercial real estate and construction loans. This is the bread and butter of many of these banks as they have relationships with local developers and know local projects, often making them best suited for writing commercial and construction loans. 

Many economists anticipate that 2009 will see a significant increase in commercial loan defaults as companies go out of business, occupancy rates rise, and rents fall.  Falling rents often lead to a borrower defaulting on their loan covenants (failing to meet the debt service coverage ratio).  And many construction loans that were written by these smaller banks for development projects are coming due, with developers having no way of paying them off due to a combination of bad credit markets and low, or no, occupancy.

So 2009 may be the year that we see a lot of regional and community bank failures due to commercial loan defaults.  Yesterday, M&I Bank (well known in Arizona) announced what was described as a "surprising" fourth quarter loss, saying one of the reasons was a "surge" in commercial and construction loan defaults, especially in the states of Arizona and Florida.

Expect to see a lot more of that in 2009, with the only question being how many of these banks does the federal government save, and how many does it let go under.

Update:  Calculated Risk has some additional information on the regional bank difficulties expected in 2009 here - the key point being that many of these banks have a fair amount of exposure to commercial real estate loans which are going bad.

ARIZONA DEVELOPERS DUKING IT OUT IN COURT

Two high profile cases were in the news over the weekend involving disputes with Arizona commercial real estate developers.  As is usually the case, when the economy goes sour, lawyers are often brought in to try to clean up messes that might have been settled in good times.

The first dispute is between Gray Development and CityNorth developer, Thomas J. Klutznick Cos.  Gray is suing Klutznick for $100 million over a Desert Ridge parcel of land on which they say Klutznick, in its role as master developer of Desert Ridge, prevented them from building luxury apartments.  Gray recently turned the land back over to the State of Arizona and forfeited $13.6 million in past payments to Arizona.  Apparently, Arizona lawyers aren't high profile enough for this lawsuit as Gray has brought in Barry Ostrager from Simpson Thatcher in New York and Chicago-based Klutznick is being represented by Ed Aro of Hogan and Hartson out of Washington, DC.  The Business Journal has the full rundown of the dispute here.

Klutznick has, of course, been racking up the legal fees lately in another high profile lawsuit from the Goldwater Institute over tax incentives received from the City of Phoenix for the CityNorth development.  Two weeks ago, the Arizona Court of Appeals ruled that the tax incentives are unconstitutional under the Arizona State Constitution.  The City of Phoenix and Klutznick have until late February to decide whether to appeal.  I detailed the decision here.

The second high profile dispute brewing in the Arizona comercial development world is over payments owed to Hunt Construction by Triyar Companies for Hunt's work building the new W Hotel in Scottsdale.  The Arizona Republic writes that over $20 million in liens have been placed against the W in the last two months, primarily by Hunt, but also by a range of other subcontractors who worked on the recently completed W.  The W was delayed by over a year and the dispute is over whose fault those delays are.  Hunt is claiming Triyar's inexperience in hotel development (it's their first) led to Triyar requesting many design changes and running up the construction tab.  Triyar is claiming that Hunt was responsible for the long delays. 

In this case, it looks like there is more to the story since as many as 30 additional subcontractors have not been paid.  That smells like the developer may be having financial difficulties.   If Triyar does have the money to pay, expect some sort of settlement after some playing hardball in court.  If they don't have the money, I would expect Triyar to seek bankruptcy protection for the company that owns the W in order to protect the asset from foreclosure and Hunt would be forced to try to recover payments out of bankruptcy. It will be interesting to see how this one plays out.

More detail from the Republic can be read here.  The lien and a copy of the construction agreement between Triyar and Hunt can be found here (pdf).

COMMERCIAL VACANCY IN PHOENIX SKYROCKETS

Not surprising reports from the Arizona Republic and Phoenix Business Journal this morning that commercial vacancies skyrocketed in the Phoenix metro area.  The fourth quarter was particularly bad according to the CB Richard Ellis report quoted in the articles, with 10 times the amount of negative absorption seen in the previous three quarters.  Office vacancies rose from 13.9% at the end of 2007 to 19.1% a year later.  Retail vacancies rose from 6.2% to 7.5%.  In other words, occupancy fell off a cliff in the fourth quarter.  And that was going into the holiday shopping season (one of the few things holding up retail).   

As I have written previously, experts are predicting many retail stores nationwide will close in 2009, with retail bankruptcies skyrocketing in the 1st quarter of 2009 following a very bad holiday shopping season.  So expect retail vacancy to continue to rise significantly in Arizona.

And in the office sector, some Phoenix developers are still putting the finishing touches on their office space that they had started in 2008.  Additionally, as I have written about, there is a few million square feet of new space due to come on the market in 2009 in downtown Phoenix.  This will further increase the vacancy rate in the office sector in 2009.  As the Business Journal notes however, no ground was broken on new office projects in Phoenix in the last 3 months, so increased supply should not continue to be a problem beyond 2009.  That's good news for current landlords, but bad news for the commercial construction industry and thousands of its employees in Arizona.

Update:  Here is a story on the dismal retail sales numbers for December.  Even Wal-Mart did worse than expected.

PICTURES FROM MY DOWNTOWN PHOENIX TOUR YESTERDAY

Here are a few pictures from my time spent downtown yesterday on the new Phoenix Light Rail, touring the new North Wing of the Phoenix Convention Center and checking out the new downtown Sheraton.

CITYNORTH DECISION (TURKEN V. GORDON) OVERTURNED BY ARIZONA COURT OF APPEALS

In a fairly important decision affecting commercial real estate developers in Arizona, Turken v. Gordon(pdf), the Arizona Court of Appeals today overturned the prior Arizona Superior Court decision, saying that the City of Phoenix did in fact violate the "gift clause" of the Arizona Constitution (Art. 9, Sec. 7) in granting certain payments to the developers of CityNorth - a partially-built 144 acre mixed-use development in north Phoenix.  Plaintiffs/Appellants in the case were led by the Goldwater Institute.

In this case, the City of Phoenix agreed to make payments of up to $97.4 million over an 11 year period to the developers of CityNorth - Thomas J. Klutznick & Co. and its joint venture partner The Related Companies - for a parking facility that the developers were to build on the CityNorth site.  The parking structure would provide free public parking - not restricted to use by CityNorth customers, but for all practical purposes for the customers of CityNorth.  The payments would be made out of sales taxes collected by the city from retailers, restaurants and other groups associated with the CityNorth development - limited to 50% of the taxes collected annually.

Without the $97+ million of assistance, the developers had indicated the project would not be viable.  Phoenix felt it was necessary to step up to the plate to provide the payments in order to keep the sales tax revenues from slipping away to Scottsdale (the city estimates it will receive up to $1 billion in sales tax revenue over a 99 year period).  So as E.J. Montini pointed out tonight, essentially the developers played the city v. city game and Phoenix ponied up the tax incentive money to attract the developer (a pretty standard thing these days).

ARCHITECTURAL BILLINGS INDEX CONTINUES TO TANK

One of the leading indicators for the commercial construction industry (or more accurately the non-residential construction industry) is the Architectural Billings Index compiled by the American Institute of Architects.  Started in 1995, the index keeps track of its member firms' current billings and anticipates a 9 to 12 month lag time between their billing and actual construction.  A score above 50 means billings are going up and below 50 means they are falling.

For the last two months, the index has set record lows since the index was started, clocking in at 34,7 for November, down from 36.2 in October.  Calculated Risk has a chart showing the historical index here.

The index breaks down billings into four U.S. regions, with the Midwest currently the worst at 31.4 and the West second worst at 33.4.  From the release: 

“With mounting job losses, declines in retail sales, and travel cut-backs the need for new commercial facilities has dropped considerably recently,” said AIA Chief Economist Kermit Baker, PhD, Hon. AIA. “What’s just as troubling is that the institutional sector --schools, hospitals and public buildings -- is also beginning to react to tighter credit conditions and a weakening economy.”

This, obviously, does not paint a pretty picture for the construction industry and points to further job losses in the Arizona construction industry through 2009.

CITYSCAPE IN DOWNTOWN PHOENIX DOWNSIZED

As I wrote about last week, projects like CityScape in downtown Phoenix are in for a very difficult 2009 and 2010 as the commercial real estate market slumps.  The Arizona Republic follows up today with news that CityScape is downsizing its project and has lost more than one commercial tenant.  The residential condominium portion of the project has been put on hold indefinitely - 1,000 or more were planned.  And the article mentions that P.F. Chang's and likely Wachovia (being purchased by Wells Fargo which already has their own building downtown) will not be tenants, leaving a lot of extra space to fill.

The CityScape developers in the article try to put a good spin on the project's prospects, noting that the AJ's grocery store is still expected to eventually open and a hotel and Gold's Gym will be part of the mix.  They also anticipate announcing the addition of a drug store as a tenant sometime soon - something downtown Phoenix currently lacks.

In these times, the condominiums just don't make sense because of the oversaturated residential real estate market in Phoenix.  It is hard to get the prices needed to build a profitable condominium tower - even with the cost of materials and labor falling recently.  And without condominiums - and all the shoppers they would supply - I wouldn't be surprised to see AJ's and other retailers be reluctant to open in CityScape.  It's a chicken and egg problem for revitalizing downtown spaces as grocery stores don't want to open until people live there - and people don't want to live there until they have a grocery store.

Coming from Chicago, I'm a big fan of downtown living.  So this is bad news in my view.  However, it is not surprising as the economic slump is stunting downtown growth.  Hopefully the momentum generated through the condominiums that have been built downtown, the new downtown Sheraton, ASU downtown campus, expanded Phoenix Convention Center and new light rail will carry through to when we see economic recovery.  But I expect to see downtown development slow to a crawl for the next several years.

CONSTRUCTION EMPLOYMENT DOWN IN ARIZONA

One of Arizona's largest sectors of employment is in the construction industry.  Jobs in the construction industry are down over 17% in the past year (over 40,000 jobs lost), according to the Arizona Department of Commerce's monthly jobs report (pdf), as permits for new construction have plummeted.  It is pretty normal to see half-finished subdivisions covered with weeds these days as you drive around Phoenix and its outskirts. 

The loss of construction jobs (not to mention realtors, mortgage brokers, bankers, etc.) further exacerbates the Arizona housing bust as unemployment and under-employment keep more and more families from being able to pay their mortgages.  It's not a pretty sight and highlights the diversification into other employment sectors that is needed in Arizona. 

Arizona currently relies heavily on the construction and service industries, while lagging in manufacturing.  In other words, Arizona's employment backbone is selling services and building homes - not production of other goods - and therefore during recessions when people stop going out to restaurants, staying in hotels, vacationing, etc., the businesses here wilt from lack of revenue.   Add into the mix a massive housing downturn and our top production item - homes - also dries up, exacerbating the problems in Arizona.

Arizona is still behind the national unemployment rate (6.1% versus 6.5%), but we could be in for a slower recovery than the rest of the U.S. - particularly in creation of new jobs - because of the massive housing inventory we have to burn through in the state.  Until construction comes back and Arizona is able to start to attract more manufacturing and industry, I expect Arizona unemployment numbers to look pretty ugly.

Here is a blog post on Calculated Risk about the same issue as it relates to California.  For comparison against their California charts, our construction as a percentage of total non-farm jobs in Arizona currently runs about 7%, and was over 8% last year.  California as a whole is closer to 5.5%, with San Diego just over 6%.  Arizona is also pretty high compared to the national average that is closer to 5%.