DESERT LAW BLOG

PHOENIX INDUSTRIAL PROPERTY VACANCIES SETTING RECORDS

Craig Anderson from the Republic blogs that the pace of industrial property vacancies in the Phoenix metro has picked up considerably in 2009, according to a recent Grubb & Ellis report - with 1.8 million square feet being abandoned in the first quarter of 2009.  To put that in perspective, in all of 2008, 2.2 million square feet was vacated - a record at the time.  From Craig's post:

While the housing market has been plagued by foreclosures and oversupply for several months, Grubb & Ellis executives Mike Coover and Don Mudd agreed that the same problems are just beginning to occur in the commercial real estate market.

"We have just begun to see the tip of the iceberg," Mudd said, which includes a few scattered commercial foreclosures, mostly apartment buildings.

While many local residents may not think problems with commercial real estate have much relevance to their daily lives, the Grubb & Ellis analysts said there is one very important connection: Occupied space means jobs.

You can practically measure recent job losses by the square foot, they said.

It's no surprise that when asked what is needed to turn the local real estate market around, Coover and Mudd gave the same, one-word answer: "Jobs."

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.

ON SEMICONDUCTOR SENDS 350 PHOENIX MANUFACTURING JOBS TO MALAYSIA

Phoenix-based ON Semiconductor used the economic downturn and slowing demand for semiconductors to announce today that it is closing its last Phoenix semiconductor fabrication plan in first quarter 2010, leaving Phoenix with no remaining On Semiconductor manufacturing facilities.   Phoenix will lose 350 manufacturing jobs due to the closure with On's Malyasian fabricating facility picking up any slack.

Remaining will be On's corporate headquarters in Phoenix and an engineering and design center in Chandler - together employing approximately 750 workers.  This announcement doesn't necessarily come as a surprise, but it further erodes manufacturing in the Valley and further concentrates our local economy on construction and the service industry - not to mention 350 more Phoenix workers who will need to find new jobs in a difficult economy.

UNEMPLOYMENT NUMBERS BY STATE

The Wall Street Journal has a handy interactive map that shows state-by-state unemployment numbers.  Arizona is just below the national unemployment average and generally falls in the second tier of states for rate of job loss.  Check it out here.

Keep in mind that this map uses Bureau of Labor statistics, which does not count people who have given up searching for work and people who are underemployed (of which there are many these days).

SLOWER POPULATION GROWTH FOR ARIZONA IN 2008

While the U.S. Census reported yesterday that Arizona remained No. 2 for population growth over the last year (adding 147,000 from July 07 to July 08), the Wall Street Journal points out that migration within the U.S. moving from the Northeast and Midwest to the South and West has slowed - due in large part to the housing situation.  Arizona's rate of growth compared with the previous year was down half a percent.  And Nevada saw its growth cut in half (perhaps a harbinger for Arizona).

As I pointed out last week, the positive news about Arizona's precipitous drop in housing prices is that it is now as affordable as ever to purchase a home and live in Arizona.  However, the flip side is that we are seeing a lot of job loss here, which means fewer jobs for people who want to move to Arizona.  And an even bigger issue is that people who want to move to Arizona often can't sell their existing home.  I know quite a few people even during the housing boom who moved from midwestern states and took up to a year to sell their old home.  Today, with a difficult mortgage market, lots of layoffs and people underwater on their home mortgages across the U.S. (particularly California - a major Arizona feeder state), it is exceedingly difficult to move to Arizona or elsewhere.

The real problem with decreased mobility is that it harms the efficiency of the U.S. job market.  Workers can't move to where the jobs are.  For example, laid off workers from a closed auto parts manufacturing facility in Ohio can't sell their house and therefore can't move to areas that need workers.  Or a company in California that wants to move its operations to Arizona may want to bring employees, but can't because they are all underwater on their home loans and would have to default to leave.  It's a bad situation unlikely to rectify itself anytime soon.

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.

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%.