Elliott D. Pollack & Company Making Lemonade Lemons out of Lemons By: Jim Rounds Senior V.P., Elliott D. Pollack & Company

Elliott D. Pollack & Company Your job? Your home? Your future? The economy’s impact on:

Elliott D. Pollack & Company U.S. Summary

Elliott D. Pollack & Company U.S. Y/Y Job Losses - Recent Recessions Duration in Months – BLS - May 1980/

Elliott D. Pollack & Company US New Job Data Change from Prior Month (S/A) June June 2011 Source: Bureau Labor of Statistics (000’s) ?

Elliott D. Pollack & Company Recession Indicators Summary: Still Moving Upward (Just Slowly) Real GDP Real Income Employment Industrial Production Wholesale – Retail Sales

Elliott D. Pollack & Company Household Net Worth ($$$) 1970 – 2010* Source: Federal Reserve Data through fourth quarter Recession Periods ( $ in trillions) But still feel poor…

Elliott D. Pollack & Company Consumer Confidence 1978 – 2011* Source: The Dismal Scientist *Data through March 2011 Recession Periods 1985 Benchmark = 100

Elliott D. Pollack & Company Jobs are being created but not quickly enough. Those that have jobs are spending a little more but will remain cautious. Most of those that don’t have jobs probably won’t anytime soon. Wealth levels are improving but people still feel poor. Congress and the President have done little to positively influence confidence. Consumer Summary:

Elliott D. Pollack & Company Business Depends on the sector…

Elliott D. Pollack & Company Doin’ God’s Work

Elliott D. Pollack & Company Corporate Profit (Billions of Dollars, SA) * Source: Freelunch.com * Data through fourth quarter 2010 Recession Periods

Elliott D. Pollack & Company Corporate Profit By Industry ($Billions) 2010 q4 Source: BEA

Elliott D. Pollack & Company U.S. Real Exports as a Percent of Real GDP 1971 – 2010* Source: Bureau of Economic Analysis Recession Periods *Data through fourth quarter 2010

Elliott D. Pollack & Company Hours Worked Percent Change from Year Ago 1976 – 2010** Source: Bureau of Labor Statistics Recession Periods **Data through fourth quarter 2010

Elliott D. Pollack & Company Capacity Utilization Rate 1970 – 2011* Source: The Conference Board *Data through February 2011 Recession Periods This is where investment occurs.

Elliott D. Pollack & Company Profits are high, but… Business spending on plant will be slow, but getting closer to seeing some limited investment. Hiring will still be relatively slow, but more pressure to hire by the end of the year. Lots of money sitting on the sidelines. Business Summary:

Elliott D. Pollack & Company U.S. Summary: Recovering but not recovered. Lots of small shocks thus far but none have been game changers (oil spikes, Middle East, Japan, etc.) Debt Ceiling???

Elliott D. Pollack & Company ARIZONA

Elliott D. Pollack & Company The “Lemons”

Elliott D. Pollack & Company Job Growth Source: US BLS 13 Jobs growing Jobs declining Top 10 Hawaii Alaska

Elliott D. Pollack & Company Job Growth 2007 Source: US BLS Jobs growing Jobs declining Top 10 Hawaii Alaska

Elliott D. Pollack & Company Job Growth 2008 Source: US BLS 50 Jobs growing Jobs declining Top 10 Hawaii Alaska

Elliott D. Pollack & Company Alaska Job Growth 2009 Source: US BLS 46 Jobs growing Jobs declining Top 10 Hawaii

Elliott D. Pollack & Company Hawaii Alaska Jobs growing Jobs declining Top Job Growth 2010

Elliott D. Pollack & Company 3 May 2011 v May Job Growth Update: Arizona Ranked 36th Alaska Jobs growing Jobs declining Top 10 Hawaii

Elliott D. Pollack & Company How did we go from 2nd to 49th in the rankings?

Elliott D. Pollack & Company How did AZ go from 2 nd to 49 th ? Financial meltdown. Credit crunch/freeze. Overextended consumer. Excess single family inventory. Housing prices decline. Loss of wealth incl. home equity. Can’t sell homes or retire. Homebuilding crash. Population inflows weaken in AZ. Household formations decline. Household size increases. Excess commercial construction Construction job losses. All sector job loses.

Elliott D. Pollack & Company How does AZ go from 49 th to 2 nd ? Slow recovery. Credit frees up slowly. Consumers more confident. Overall US economy improves. Stock market improves. Limited AZ job and population growth. Excess housing absorbed. Smaller household size. Housing prices rise. Construction kicks in. All sector job gains; more robust %s. Even more people move to AZ.

Elliott D. Pollack & Company In 2008, 2009, and 2010 no one showed up!

Elliott D. Pollack & Company Greater Phoenix Population Annual Percent Change 1976–2012* Source: Arizona State University & Department of Commerce, Research Administration 2008 and 2009 are estimates put out by ADES and may be subject to substantial revision. * 2011 & 2012 forecast is from Elliott D. Pollack & Co. Recession Periods * estimates based on 2010 Census release ?

Elliott D. Pollack & Company Greater Phoenix Y/Y Job Losses - Recent Recessions Duration in Months – BLS - April 1980/ = Job Growth

Elliott D. Pollack & Company AZ New Job Data Change from Prior Month (S/A) May May 2011 Source: Bureau Labor of Statistics (000’s) About 2k not S/A

Elliott D. Pollack & Company Greater Phoenix Employment* Annual Percent Change 1975–2012** Source: Department of Commerce, Research Administration *Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in ** 2011& 2012 forecast is from Elliott D. Pollack & Co. Recession Periods

Elliott D. Pollack & Company This is NOT a multi decade recovery… Think 2015 – 2016 for full recovery, but growth before then.

Elliott D. Pollack & Company Employment Levels: Greater Phoenix back to Peak in 2015? Source: ADOC Recession Periods Peak

Elliott D. Pollack & Company Single Family Housing

Elliott D. Pollack & Company Across the US, underproduction has been occurring. This helps with the oversupply.

Elliott D. Pollack & Company U.S. Single-Family Starts 1978–2011 1/ Source: Census Bureau (Millions) 1/ Through Febuary 2011 Recession Periods Over- supply Under- supply LTA: 1.2

Elliott D. Pollack & Company In AZ, because of the weak population inflows, this underproduction only recently started.

Elliott D. Pollack & Company Single-Family Permits vs. Population Demand Greater Phoenix 1975–2015 Source: PMHS / RL Brown # Permits Recession Periods * forecast is from Elliott D. Pollack & Co.

Elliott D. Pollack & Company Single-Family Vacant Units Maricopa County 1993–2010 Source: PMHS

Elliott D. Pollack & Company How Investors Impact the Market: Investors temporarily create demand. How many of those homes will come back on the market and add to the supply? But, how many will be kept as permanent rental units or purchased by current renters?

Elliott D. Pollack & Company Home Prices Indices 2000 – 2011 (January) Source: Macro Markets, LLC; AMLS Recession Periods Weak Pop/Emp Investors ?

Elliott D. Pollack & Company Negative Equity in Homes Affects Ability to Sell or Buy Source: First American Core Logic 50% of homes in Arizona have negative equity.

Elliott D. Pollack & Company Persons per Household

Elliott D. Pollack & Company Household Formations Fewer during recessions (doubling up, living at home with mom & dad, etc).

Elliott D. Pollack & Company Persons per HH Source: U.S. Census Bureau & American Community Survey Single Family Owner Occupied Single Family Renter Occupied Apartments

Elliott D. Pollack & Company Commercial

Elliott D. Pollack & Company Commercial Markets (Not making things worse anymore)

Elliott D. Pollack & Company APARTMENTS

Elliott D. Pollack & Company Multi-Family Year-End Vacancy Rates Maricopa County 1986–2012* Source: ASU Realty Studies * are forecasts from the Greater Phoenix Blue Chip Recession Periods

Elliott D. Pollack & Company OFFICE

Elliott D. Pollack & Company Office Space Year-End Vacancy Rates Maricopa County 1986–2012* Source: CB Richard Ellis * are forecasts from the GPBC Recession Periods

Elliott D. Pollack & Company INDUSTRIAL

Elliott D. Pollack & Company Industrial Space Vacancy Rates Maricopa County 1980 – 2012* Source: CB Richard Ellis * are forecasts from the GPBC Recession Periods

Elliott D. Pollack & Company RETAIL

Elliott D. Pollack & Company Retail Space Vacancy Rates Maricopa County 1985–2012* Source: CB Richard Ellis** * are forecasts from the GPBC ** Data prior to 1992 is from Grubb & Ellis Recession Periods

Elliott D. Pollack & Company Financial Problems…

Elliott D. Pollack & Company U.S. Problem Commercial Real Estate Loans Rise Delinquency Rates at Commercial Banks 1991 – 2010* Source: Federal Reserve * Data through fourth quarter 2010 Recession Periods Temporary before flat again?

Elliott D. Pollack & Company U.S. Commercial 1 Mortgage Maturities 1980–2020* Source: Foresight Analytics 1/ Includes mainly office, retail, industrial and hotels Note: Forecast is from Foresight Analytics Recession Periods Post Upside Down? Borrowed Loan Due

Elliott D. Pollack & Company Commercial Property Values?

Elliott D. Pollack & Company So which influence will be bigger? Pop/Emp related gains may be offset by new leases adjusting for lower rents/less space, at least in 2011/2012. This means the possibility of relatively flat rental and vacancy rates in 2011/ should see more improvement.

Elliott D. Pollack & Company How does this impact commercial property values? Flat activity often means flat prices. But, values through 2010 were propped up by: - Owners depleting reserve funds (done); -Extend and Pretend (still pretending?); -Interest rates low (continues but small increase); -Multi-year leases carrying higher rents (fewer).

Elliott D. Pollack & Company Commercial Summary: Flat or only slightly improving indicators but declining prices? Maybe. Will vary by location though.

Elliott D. Pollack & Company When do we get back to normal vacancy rates in commercial?

Elliott D. Pollack & Company Back to Normal Vacancy? Office = Industrial = Retail =

Elliott D. Pollack & Company Tax Revenues

Elliott D. Pollack & Company ? Now State forecast revisions in our future?

Elliott D. Pollack & Company But, local revenues related to single family and commercial taxation will remain weak.

Elliott D. Pollack & Company AZ Summary: Lagging the US in terms of full recovery; just now starting to expand the employment base.

Elliott D. Pollack & Company Full Recovery: 2015-ish Fully recovered in terms of: 1) Housing oversupply; 2) Commercial vacancy rates; 3) Retail sales activity; 4) Employment levels. 5) Tax revenues?

Elliott D. Pollack & Company The “Lemonade”

Elliott D. Pollack & Company A leader in population growth, A leader in employment growth, A leader in income growth. Pre 2007

Elliott D. Pollack & Company Below average performance in many economic categories, but this is a temporary condition and is already improving… Post 2007

Elliott D. Pollack & Company How Arizona Ranks Among the States in Percentage Growth Source: U.S. Bureau of Census; Bureau of Labor Statistics; Bureau of Economic Analysis PERSONAL DECADE POPULATION EMPLOYMENT INCOME TH 3 RD 4 TH RD 3 RD 4 TH ND 3 RD 3 RD RD 3 RD 5 TH ND 2 ND 3 RD 2000 – rd 2 nd 3 RD 2007— th 49 th 46 th

Elliott D. Pollack & Company Phoenix-Mesa Employment Growth (Ranking among all metro areas greater than 1,000,000; 2011 May/May) Source: Arizona State University, U.S. Bureau of Labor Statistics YEAR RANK # of MSAs

Elliott D. Pollack & Company Greater Phoenix Population Source: U.S. Bureau of Census; Arizona Department of Economic Security Year Population , , ,039, ,600, ,238, ,251, ,192,887 U.S ,745,538

Elliott D. Pollack & Company Why are households not forming? 1.Lack of jobs, 2.Inability to sell home elsewhere and move to Greater Phoenix, 3.Lack of jobs, 4.Lack of jobs, 5.Lack of jobs…

Elliott D. Pollack & Company These will improve over time.

Elliott D. Pollack & Company Surprising Econ Fact: If marginal household size was still at 2000 levels, there wouldn’t be any excess single family housing!

Elliott D. Pollack & Company Properties in the Foreclosure Process Maricopa County 2002 – 2011 Source: The Information Market *Data through April Recession Periods

Elliott D. Pollack & Company Also now more competitive in terms of housing prices (and commercial prices).

Elliott D. Pollack & Company Housing Affordability Index 2000 q2 Source: NAHB

Elliott D. Pollack & Company Housing Affordability Index 2006 q2 Source: NAHB

Elliott D. Pollack & Company Housing Affordability Index 2010 q2 Source: NAHB

Elliott D. Pollack & Company Housing Opportunity Index* Greater Phoenix vs. US ** Source: NAHB *Data through Q ** Years 2002 & 2003 only have one data figure

Elliott D. Pollack & Company Negative Equity in Homes Affects Ability to Sell or Buy Source: First American Core Logic 50% of homes in Arizona have negative equity. (National average about 25%)

Elliott D. Pollack & Company Benefits of the “SUNBELT” Alaska Hawaii Industrial Northwest

Elliott D. Pollack & Company What about the bad national press? Yes, SB1070

Elliott D. Pollack & Company Governor impeached Real estate depression Defense cutbacks AZ Scam Martin Luther King Holiday Crisis Keating Keating 5 Every S&L taken over by RTC Between 1987 and 1992

Elliott D. Pollack & Company No long-term effects in the past. Going forward?

Elliott D. Pollack & Company Benefiting from basic demographic changes…

Elliott D. Pollack & Company Retirement Home Buying Cycle Net Change in Maricopa County Population Ages 55 to Source: U.S. Bureau of the Census, Arizona Department of Economic Security

Elliott D. Pollack & Company Trade-Up Home Buying Cycle Net Change in Maricopa County Population Ages 34 to Source: U.S. Bureau of the Census, Arizona Department of Economic Security

Elliott D. Pollack & Company Starter Home Buying Cycle Net Change in Maricopa County Population Ages 25 to Source: U.S. Bureau of the Census, Arizona Department of Economic Security

Elliott D. Pollack & Company One survey shows that over 80% of current single family RENTERS would like to soon own. Some of these homes are thus permanently absorbed.

Elliott D. Pollack & Company Thus, we will also likely see a permanent increase in the percentage of all single family homes that are maintained as rentals. Up from 11% to as high as 14%- 15% possibly(?).

Elliott D. Pollack & Company Economic Competitiveness

Elliott D. Pollack & Company Arizona’s government officials are even getting involved…

Elliott D. Pollack & Company Government isn’t going to turn everything around by itself. But, govt. can impact the economy at the margin (with the right policies).

Elliott D. Pollack & Company Old Competitiveness Map – AZ will be Moving Up!

Elliott D. Pollack & Company Rules if NOT Competitive: If it’s perception, fix the perception (example: effective tax rates). Doing that! If it’s reality, implement some strategic reforms. Doing that! Regarding the previous map, we now have the tools, we just need to implement them properly and our ranking will improve.

Elliott D. Pollack & Company Being addressed now…

Elliott D. Pollack & Company In 2012

Elliott D. Pollack & Company What We’ve Done: Arizona Competitiveness Package Arizona Competes Fund Deal Closing Grants/Loans - $25 Million Annually Arizona Job Training Fund Grants for Customized Training - $12 - $15 Million Annually Quality Jobs Tax Credit Job Creation/Capital Investment - $9,000 Tax Credit per Job Income Tax Reform (FY 2014 – FY 2017) Sales Factor – 100% Corporate Income Tax – 4.9% Property Tax Reform Accelerated Depreciation (2012) Personal Property Exemption (2012) Class 1 Property Assessment Ratio – 18% (2013 – 2016)

Elliott D. Pollack & Company What about the rest?

Elliott D. Pollack & Company In 2012

Elliott D. Pollack & Company Policymakers finally started to understand how our economy functions and how to improve our position. We have the economic development “tools” but need to see if the state can use them properly. More is to be done in terms of government policy, but so far so good. Economic Development Summary:

Elliott D. Pollack & Company In terms of other business development factors:  Competitive in terms of single family prices,  Competitive in terms of commercial rental rates and prices,  Competitive in terms of labor and land costs. Economic Development Summary:

Elliott D. Pollack & Company We will continue to grow faster than the rest of the country over the long run. If we do things right we might even grow in terms of quality…hmmm…maybe. Coordination among all of the E.D entities will be critical. Economic Development Summary:

Elliott D. Pollack & Company Arizona Summary

Elliott D. Pollack & Company AZ Summary: Lagging the US in terms of full recovery; just now starting to expand the employment base.

Elliott D. Pollack & Company Full Recovery: 2015-ish Fully recovered in terms of: 1) Housing oversupply; 2) Commercial vacancy rates; 3) Retail sales activity; 4) Employment levels. 5) Tax revenues?

Elliott D. Pollack & Company The long term economic fundamentals have not really changed. The long term economic outlook remains favorable (2015+). AZ will be a national growth leader by mid decade.

Elliott D. Pollack & Company There is a BOOM for Arizona out there somewhere.

Elliott D. Pollack & Company But, can we also grow in terms of quality?

Elliott D. Pollack & Company 118 ELLIOTT D. POLLACK & Company 7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona P / F / / Economic and Fiscal Impact Analysis/Modeling Real Estate Market and Feasibility Studies Litigation Support Revenue Forecasting Keynote Speaking Public Finance and Policy Development Land Use Economics Economic Development