1. Elliott D. Pollack & Company By: Elliott Pollack “The Not So Attractive Recovery” (But it has a great personality!) Outlook 2010 Greater Phoenix Chamber of Commerce

2. Elliott D. Pollack & Company Yes! For sure! Maybe. No! No way! I’m tired. Mmmm, beer. Is the recession over?

3. Elliott D. Pollack & Company Yes. But, due more to a swing in inventories than a change in the basic dynamics of the consumer.

4. Elliott D. Pollack & Company So finally going in the right direction, but…

5. Elliott D. Pollack & Company The Shape of Recoveries V U L W >.

6. Elliott D. Pollack & Company State of Arizona

7. Elliott D. Pollack & Company Arizona Employment Rank Among 50 States 1980 – 2009 Growth Over Previous Year Source: Arizona State University 1980 20081994198219841986198819901992199619982000200220042006 = YTD August = 49 Recession Periods

8. Elliott D. Pollack & Company 9 4 1 5 2 10 3 7 Job Growth 2006 11 15 6 22 8 Source: US BLS

9. 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

10. 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

11. Elliott D. Pollack & Company 6 YTD August 09 v YTD August 08 49 10 26 39 2 30 8 17 47 Job Growth Update: Arizona Falls to 49 th 48 Hawaii 44 1 5 4 Alaska 3 12 7 27

12. Elliott D. Pollack & Company So, how did we go from 2 nd to 49 th ??

13. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? Population growth slowed. People’s inability to sell their homes, take out equity, move to a new community and find a new job.

14. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? 20072009 (f) U.S.0.9% Arizona3.1%1.6% Population Growth

15. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? Housing boom turns into bust. Housing permits nationally down -75.3% Housing permits in AZ down -92.3% *Based on adjusted annual rates as of June 2009 decline from peak

16. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? Commercial Construction Peak to Current 2009(f) Percent Decline OfficeRetailIndustrial U.S.-15.4%-51.4%-57.5% Greater Phoenix-53.1%-79.3%-82.0%

17. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? Commercial construction real estate drops dramatically. Millions of Sq. Feet Built OfficeRetailIndustrial Peak4.911.113.9 2009 (f)2.3 2.5 2010 (f)>1.0

18. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? A very severe national cycle It is likely to hit more rapidly growing states than states that are already not growing.

19. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? Base industries of Arizona were impacted a) Semi-conductors Go into durables Jobs being sent overseas b) Tourism c) Retirement

20. Elliott D. Pollack & Company How did we go from 2 nd to 49 th ? Government revenue losses in Arizona higher than most other states.

21. Elliott D. Pollack & Company So, how do we go from 49 th to 2 nd ???

22. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? It will take a while, but we can get there if…

23. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? There is a rebound in the U.S. economy

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25. How do we go from 49 th to 2 nd ? A continuous easing of credit should enable the housing market to recover but also need: Housing prices to begin to rise An increase in people’s confidence Population flows to increase Job growth to turn around (This should happen slowly and incrementally over the next few years).

26. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? Increased population flows allows significant overhang of commercial and residential real estate to be absorbed.

27. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? People begin to travel and retire.

28. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? The State Government creates an environment where Arizona becomes more competitive for “export” related jobs Export industry jobs typically have higher wages and larger ripple effects on the economy. Reexamine the tax policy and level of bureaucracy in the State.

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30. How do we go from 49 th to 2 nd ? This is a ONCE IN A GENERATION OPPORTUNITY If we don’t do it, real per capita income is likely to drop relative to the U.S. as a whole and it will continue to slide. (i.e. our relative “standard of living” will diminish)

31. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? Each of these items should occur over the next few years, though there will still be job lossesin the short term.

32. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? 2010 will be better than 2009 2011 will be better than 2010. It will be 2012 or 2013 before the State is growing rapidly again.

33. Elliott D. Pollack & Company How do we go from 49 th to 2 nd ? We have backed away from the abyss. But, getting back to where we were will take a while.

34. Elliott D. Pollack & Company Greater Phoenix

35. Elliott D. Pollack & Company Greater Phoenix Y/Y Job Losses - Recent Recessions Duration in Months - BLS 1980/81 1974 2001 1991 August

36. Elliott D. Pollack & Company From Peak (Oct 2007) to Current (Aug 2009) Greater Phoenix has lost ONE job for every NINE jobs

37. Elliott D. Pollack & Company Greater Phoenix Population Annual Percent Change 1976–2010* Source: Arizona State University & Department of Commerce, Research Administration 2007 and 2008 are estimates put out by ADES and may be subject to substantial revision. * 2009 & 2010 forecast is from Elliott D. Pollack & Co. Recession Periods

38. Elliott D. Pollack & Company Greater Phoenix Population Net Change 1975–2010 Source: ADOC Recession Periods *Forecasts from Elliott D. Pollack & Company

39. Elliott D. Pollack & Company APS: Slowest Growth in over 50 years Source: APS

40. Elliott D. Pollack & Company Greater Phoenix Net Migration 1975–2010 Source: University of Arizona Recession Periods *Forecasts from UofA

41. Elliott D. Pollack & Company Phoenix-Mesa MSA Employment* Annual Percent Change 1975–2010** Source: Department of Commerce, Research Administration *Non-agricultural wage & salary employment. Changed from SIC to NAICS reporting in 1990. ** 2008, 2009, & 2010 forecast is from Elliott D. Pollack & Co. Recession Periods

42. Elliott D. Pollack & Company Phoenix-Mesa Employment Source: Arizona Department of Commerce, Research Administration Sectors in Decline Mining -16.2% Construction -26.2% Manufacturing-8.0% Trade-7.4% Transp. & Utilities-9.2% Information-4.1% Financial Activities-6.3% Prof. & Bus. Services-11.7% Other Services-6.5% Educational Services0.0% Leisure & hosp svcs-2.2% Health Services-0.7% Government-5.5% Sectors Increasing NONE!!!

43. Elliott D. Pollack & Company Employment Levels: Greater Phoenix back to Peak in 2014 Source: ADOC Recession Periods Peak

44. Elliott D. Pollack & Company Generally, the more severe the recession, the stronger the recovery.

45. Elliott D. Pollack & Company For obvious reasons.

46. Elliott D. Pollack & Company We won’t get out of this until population inflows improve.

47. Elliott D. Pollack & Company Again, for those in denial: We won’t get out of this until population inflows improve.

48. Elliott D. Pollack & Company Housing Market

49. Elliott D. Pollack & Company Greater Phoenix Listings January 2002 - August 2009 Source: AMLS Not all bank owned in series; investors; those waiting until $ improve.

50. Elliott D. Pollack & Company I don’t always buy houses, but when I do, I prefer foreclosures. Stay thirsty my friends.

51. Elliott D. Pollack & Company Properties in the Foreclosure Process Maricopa County 2002 – 2009 Source: The Information Market *Data through May 2009.

52. Elliott D. Pollack & Company Arizona Delinquency Rates Percent Change Quarter Ago 1998 – 2009 * Source: Mortgage Bankers Association * Data through 1st quarter 2009 Recession Periods

53. Elliott D. Pollack & Company Bad economies cause foreclosures.

54. Elliott D. Pollack & Company Single-Family Vacant Units Greater Phoenix 1993–2009q2 Source: PMHS

55. Elliott D. Pollack & Company Single-Family Vacancy Rate Greater Phoenix 1993–2009q2 Source: PMHS

56. Elliott D. Pollack & Company Greater Phoenix long-term demographics call for roughly 35,000-40,000 single family units each year. (It will be MUCH less in the next 2 years though)

57. Elliott D. Pollack & Company It appears that we overbuilt by as many as 75,000 units between 2003 and 2006. (exact figures depend on the actual population flows)

58. Elliott D. Pollack & Company Even at the end of next year, given the expectation that foreclosures will continue to flood the market, excess supply could still be 40,000 to 50,000 units regardless of how we do the calculation.

59. Elliott D. Pollack & Company Balance between supply and demand will not be fully achieved until about 2014. But building will still occur between now and then.

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61. Greater Phoenix S&P/Case-Schiller Home Price Index** Percent Change Year Ago 1990 – 2009* Source: Macro Markets, LLC Recession Periods *Data through June 2009 **Measures changes in existing single family home prices given a constant level of quality.

62. Elliott D. Pollack & Company Greater Phoenix Median Price of Single Family Homes - Resale 1982 – 2009* Source: Realty Studies Recession Periods *Data through first quarter 2009 (000)

63. Elliott D. Pollack & Company Home Prices Indices 2000 – 2009 Source: Macro Markets, LLC; AMLS Recession Periods ?

64. Elliott D. Pollack & Company Distinguish between % growth and level. Percent growth could be large. For example, if permits go from 9,000 to 13,500, that’s a 50% increase. It’s still 80% off peak or 65% off long-term demand

65. Elliott D. Pollack & Company Investors: 1/3 to 1/2 of Market?

66. Elliott D. Pollack & Company How Investors Impact the Market: Investors temporarily create demand. How many of those homes will come back on the market?

67. Elliott D. Pollack & Company How Investors Impact the Market: The current resale market is buoyed by: 1.Investors 2.First time home buyers How deep are those markets?

68. Elliott D. Pollack & Company U.S. Homebuyer Demand Foreclosure (damaged) Source: Campbell Communications, July 2009

69. Elliott D. Pollack & Company U.S. Homebuyer Demand Foreclosure (move-in ready) Source: Campbell Communications, July 2009

70. Elliott D. Pollack & Company Reasons to smile? Really???

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

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

73. Elliott D. Pollack & Company Housing Affordability Index 2009 q2 Source: NAHB

74. Elliott D. Pollack & Company Commercial Real Estate?

75. Elliott D. Pollack & Company Some Warning Signs…

76. Elliott D. Pollack & Company Problem Commercial Real Estate Loans Rise Delinquency Rates at Commercial Banks 1991 – 2009* Source: Federal Reserve * Data through second quarter 2009 Recession Periods

77. Elliott D. Pollack & Company 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

78. Elliott D. Pollack & Company Multi-Family Mortgage Maturities 1980–2020* Source: Foresight Analytics *Forecast is from Foresight Analytics Recession Periods

79. Elliott D. Pollack & Company Multi-Family Year-End Vacancy Rates Maricopa County 1986–2010* Source: ASU Realty Studies *2009 -20010 are forecasts from CB Richard Ellis Recession Periods Too Low?

80. Elliott D. Pollack & Company Absorption Chg in Inventory* 2004 9,230 3,980 2005 4,756 (5,169) 2006 (4,653) (3,828) 2007 (5,846) 4,979 2008 (4,466) 3,234 2009 1,731 3,927 Multi-Family Construction Activity Source: PMHS *There were 19,949 condo conversion in the Greater Phoenix area from q1 2005 through q1 2009.

81. Elliott D. Pollack & Company There are currently 6,490 multi-family units under construction (q2 09). Don’t need ‘em…

82. Elliott D. Pollack & Company Apartment Sales: Price per Square Foot Maricopa County 1982–2009 Source: Kammrath & Associates *Data through second quarter 2009.

83. Elliott D. Pollack & Company There are currently 2.2 million square feet of office space under construction (q2 09). Don’t need ‘em…

84. Elliott D. Pollack & Company Office Sales: Price per Square Foot Maricopa County 1980–2009 Source: Kammrath & Associates *Data through second quarter 2009. Recession Periods

85. Elliott D. Pollack & Company No significant office building in Greater Phoenix for next 5 years.

86. Elliott D. Pollack & Company There are currently 2.5 million square feet of industrial space under construction (q2 09). Don’t need ‘em…

87. Elliott D. Pollack & Company Industrial Sales: Price per Square Foot Maricopa County 1980–2009 Source: Kammrath & Associates *Data through second quarter 2009.

88. Elliott D. Pollack & Company There are currently 808,000 thousand square feet of retail space under construction (q2 09). Don’t need ‘em…

89. Elliott D. Pollack & Company Shopping Center Sales: Price per Square Foot Maricopa County 1982–2009 Source: Kammrath & Associates *Data through second quarter 2009.

90. Elliott D. Pollack & Company It could take a decade before prices get back to peak levels in the commercial markets.

91. Elliott D. Pollack & Company AZ Summary: You are here. Mixed News Good News

92. Elliott D. Pollack & Company Greater Phoenix ECONOMIC OUTLOOK 2009 - 2010

93. Elliott D. Pollack & Company  Employment should be picking up by middle of next year.  Retail sales could have significant rebound because down so far. However, it is not sustainable in terms of percentage gains.  Population will lag growth in employment.  Underlying dynamics still good but changes in policy needed at State level. Greater Phoenix Summary

94. Elliott D. Pollack & Company Greater Phoenix Forecast 2009 – 2010 Source: Elliott D. Pollack & Company, AZ Blue Chip, Department of Commerce, Research Administration Indicator2007200820092010 Population3.5%2.4%1.6%1.8% Employment1.3%-2.0%-6.0%-1.0% Personal Income4.5%3.0%-1.0%2.5% Retail Sales0.1%-10.0%-9.0%5.0% ?? ?

95. Elliott D. Pollack & Company ELLIOTT D. POLLACK & Company 7505 East Sixth Avenue, Suite 100 Scottsdale, Arizona 85251 480-423-9200 P 480-423-5942 F www.arizonaeconomy.com Economic and Real Estate Consulting WWW.ARIZONAECONOMY.COM INFO @ EDPCO.COM