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

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

3. Elliott D. Pollack & Company U.S. Summary

4. Elliott D. Pollack & Company U.S. Y/Y Job Losses - Recent Recessions Duration in Months – BLS - May 1980/81 1974 2001 1991

5. Elliott D. Pollack & Company US New Job Data Change from Prior Month (S/A) June 2010 - June 2011 Source: Bureau Labor of Statistics (000’s) ?

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

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

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

9. 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:

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

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

12. Elliott D. Pollack & Company Corporate Profit (Billions of Dollars, SA) 1975-2010* Source: Freelunch.com * Data through fourth quarter 2010 Recession Periods

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

14. 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

15. 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

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

17. 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:

18. 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???

19. Elliott D. Pollack & Company ARIZONA

20. Elliott D. Pollack & Company The “Lemons”

21. Elliott D. Pollack & Company 9 4 1 5 2 10 3 7 Job Growth 2006 11 15 6 22 8 Source: US BLS 13 Jobs growing Jobs declining Top 10 Hawaii Alaska

22. Elliott D. Pollack & Company 4 22 2 5 3 1 8 Job Growth 2007 Source: US BLS 11 10 28 36 15 7 20 6 9 45 Jobs growing Jobs declining Top 10 Hawaii Alaska

23. Elliott D. Pollack & Company 11 47 1 17 45 6 10 3 8 14 34 46 42 2 4 7 9 15 Job Growth 2008 Source: US BLS 50 Jobs growing Jobs declining Top 10 Hawaii Alaska

24. Elliott D. Pollack & Company 5 49 23 35 45 4 32 8 24 47 50 44 1 16 3 Alaska 2 13 18 30 Job Growth 2009 Source: US BLS 46 Jobs growing Jobs declining Top 10 Hawaii

25. Elliott D. Pollack & Company 19 49 43 25 44 38 3 42 28 50 Hawaii 40 1 35 12 Alaska 2 47 17 48 4 8 5 37 Jobs growing Jobs declining Top 10 6 7 9 10 Job Growth 2010

26. Elliott D. Pollack & Company 3 May 2011 v May 2010 36 4 23 39 2 50 7 Job Growth Update: Arizona Ranked 36th 46 33 1 5 38 Alaska 11 45 34 22 37 Jobs growing Jobs declining Top 10 Hawaii 13 9 18 6 8 10

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

28. 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.

29. 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.

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

31. 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 *2000-2010 estimates based on 2010 Census release ?

32. Elliott D. Pollack & Company Greater Phoenix Y/Y Job Losses - Recent Recessions Duration in Months – BLS - April 1980/81 1974 2001 1991 = Job Growth

33. Elliott D. Pollack & Company AZ New Job Data Change from Prior Month (S/A) May 2010 - May 2011 Source: Bureau Labor of Statistics (000’s) About 2k not S/A

34. 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 1990. ** 2011& 2012 forecast is from Elliott D. Pollack & Co. Recession Periods

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

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

37. Elliott D. Pollack & Company Single Family Housing

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

39. 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

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

41. Elliott D. Pollack & Company Single-Family Permits vs. Population Demand Greater Phoenix 1975–2015 Source: PMHS / RL Brown # Permits Recession Periods * 2011 - 2015 forecast is from Elliott D. Pollack & Co.

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

43. 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?

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

45. 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.

46. Elliott D. Pollack & Company Persons per Household

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

48. Elliott D. Pollack & Company Persons per HH Source: U.S. Census Bureau & American Community Survey 20002009 Single Family Owner Occupied2.833.02 Single Family Renter Occupied3.203.72 Apartments2.102.21

49. Elliott D. Pollack & Company Commercial

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

51. Elliott D. Pollack & Company APARTMENTS

52. Elliott D. Pollack & Company Multi-Family Year-End Vacancy Rates Maricopa County 1986–2012* Source: ASU Realty Studies *2011 -2012 are forecasts from the Greater Phoenix Blue Chip Recession Periods

53. Elliott D. Pollack & Company OFFICE

54. Elliott D. Pollack & Company Office Space Year-End Vacancy Rates Maricopa County 1986–2012* Source: CB Richard Ellis *2011 -2012 are forecasts from the GPBC Recession Periods

55. Elliott D. Pollack & Company INDUSTRIAL

56. Elliott D. Pollack & Company Industrial Space Vacancy Rates Maricopa County 1980 – 2012* Source: CB Richard Ellis * 2011 - 2012 are forecasts from the GPBC Recession Periods

57. Elliott D. Pollack & Company RETAIL

58. Elliott D. Pollack & Company Retail Space Vacancy Rates Maricopa County 1985–2012* Source: CB Richard Ellis** * 2011-2012 are forecasts from the GPBC ** Data prior to 1992 is from Grubb & Ellis Recession Periods

59. Elliott D. Pollack & Company Financial Problems…

60. 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?

61. 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 2004 - Upside Down? Borrowed Loan Due

62. Elliott D. Pollack & Company Commercial Property Values?

63. 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 2011/2012. 2012-2013 should see more improvement.

64. 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).

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

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

67. Elliott D. Pollack & Company Back to Normal Vacancy? Office = 2014 - 2015 Industrial = 2013 - 2014 Retail = 2014 - 2015

68. Elliott D. Pollack & Company Tax Revenues

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

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

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

72. 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?

73. Elliott D. Pollack & Company The “Lemonade”

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

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

76. 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 1950 - 19604 TH 3 RD 4 TH 1960 - 19703 RD 3 RD 4 TH 1970 - 19802 ND 3 RD 3 RD 1980 - 19903 RD 3 RD 5 TH 1990 - 20002 ND 2 ND 3 RD 2000 – 20063 rd 2 nd 3 RD 2007—2010 44 th 49 th 46 th

77. 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 1991 4 20 1992 5 20 1993 2 20 1994 1 20 1995 1 21 1996 1 23 1997 2 23 1998 1 24 1999 3 26 2000 8 26 2001 6 28 2002 5 28 2003 329 2004 429 2005 130 2006 131 2007 1032 2008 2932 2009 31 32 2010 3132 2011 1532

78. Elliott D. Pollack & Company Greater Phoenix Population Source: U.S. Bureau of Census; Arizona Department of Economic Security Year Population 1950 331,770 1960 726,183 1970 1,039,807 1980 1,600,093 1990 2,238,498 2000 3,251,876 2010 4,192,887 U.S. 2010 308,745,538

79. 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…

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

81. 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!

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

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

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

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

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

87. Elliott D. Pollack & Company Housing Opportunity Index* Greater Phoenix vs. US 1992-2011** Source: NAHB *Data through Q1 2011. ** Years 2002 & 2003 only have one data figure

88. 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%)

89. Elliott D. Pollack & Company 5 9 10 Benefits of the “SUNBELT” Alaska Hawaii Industrial Northwest

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

91. 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

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

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

94. Elliott D. Pollack & Company Retirement Home Buying Cycle Net Change in Maricopa County Population Ages 55 to 69 1991-2030 Source: U.S. Bureau of the Census, Arizona Department of Economic Security

95. Elliott D. Pollack & Company Trade-Up Home Buying Cycle Net Change in Maricopa County Population Ages 34 to 44 1991-2030 Source: U.S. Bureau of the Census, Arizona Department of Economic Security

96. Elliott D. Pollack & Company Starter Home Buying Cycle Net Change in Maricopa County Population Ages 25 to 34 1991-2030 Source: U.S. Bureau of the Census, Arizona Department of Economic Security

97. 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.

98. 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(?).

99. Elliott D. Pollack & Company Economic Competitiveness

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

101. 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).

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

103. 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.

104. Elliott D. Pollack & Company Being addressed now…

105. Elliott D. Pollack & Company In 2012

106. 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)

107. Elliott D. Pollack & Company What about the rest?

108. Elliott D. Pollack & Company In 2012

109. 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:

110. 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:

111. 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:

112. Elliott D. Pollack & Company Arizona Summary

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

114. 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?

115. 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.

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

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

118. Elliott D. Pollack & Company 118 ELLIOTT D. POLLACK & Company 7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251 480-423-9200 P / 480-423-5942 F / www.arizonaeconomy.com / info@edpco.com 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