Elliott D. Pollack & Company Outlook 2012: A Grind of a Recovery September 30, 2011 By: Elliott D. Pollack CEO, Elliott D. Pollack & Company

Elliott D. Pollack & Company U.S. Economy

Elliott D. Pollack & Company United States Real Gross Domestic Product* Annual Growth ** Source: U.S. Bureau of Economic Analysis & Blue Chip Economic Indicators * Based on chained 2005 dollars. ** are forecasts from the Blue Chip Economic Indicators, September 2011 Recession Periods

Elliott D. Pollack & Company Recession End v. 8 Quarters Later Sources: NAHB; Census, BEA, BLS

Elliott D. Pollack & Company Economy is likely to continue to grow, but growth will remain weak because of the following : Consumer spending weak. Excess industrial capacity. No immediate housing recovery. Limited commercial construction. Continued pressure on state and local government. Limited policy options on part of Federal government.

Elliott D. Pollack & Company Comments on Debt & Jobs

Elliott D. Pollack & Company The Federal government is… ….Forcibly impoverishing future generations with a colossal debt incurred on behalf of current beneficiaries. ~Mark R. Levin The Intellectual Approach

Elliott D. Pollack & Company The Redneck Approach

Elliott D. Pollack & Company “I’ll gladly pay you Tuesday for. a hamburger today” 1.3 million jobs Wimpy (Friend of Popeye) The Real Approach

Elliott D. Pollack & Company Obama’s Job Plan PLANCOST Payroll tax cuts from 6.2% to 3.1% for workers in 2012, down further from a 2% reduction this year. $175 BILLION Payroll tax cut from 6.2% to 3.1% for employers and eliminated for qualifying new hires in 2012, plus 100% expensing for new investments. $70 BILLION Infrastructure investments, including modernizing schools and rehabbing vacant homes, and funding states to rehire teachers and first responders. $140 BILLION Extending unemployment insurance and new programs for the jobless. $62 BILLION TOTAL $447 BILLION

Elliott D. Pollack & Company $447 billion 1.3 – 1.9 million jobs = $235,000 to $345,000 per job *Job estimates from Mark Zandi Moody’s Economy.com and MacroEconomics

Elliott D. Pollack & Company American Recovery and Reinvestment Act of 2009 = $1,000,000 per job* *Source: Environmental Protection Agency

Elliott D. Pollack & Company National Outlook

Elliott D. Pollack & Company ARIZONA

Elliott D. Pollack & Company Arizona & US Move Together (Nonfarm Employment Percent Change 1980 – Aug 2011) Recession Periods

Elliott D. Pollack & Company Think of Arizona in 2 parts: Export Domestic

Elliott D. Pollack & Company Export – function of the U.S. economy (and, the U.S. economy is weak)

Elliott D. Pollack & Company The health of an economy is a function of its export, or “base” industries.

Elliott D. Pollack & Company Arizona Economic Drivers (Base Industries): Base IndustryCurrent Health Manufacturing + Tourism + Advanced Business Services + Federal government - Retirement and second homes - Others ?

Elliott D. Pollack & Company Flow of a Region’s Economy Base Industries Manufacturing, Tourism, Export-Related Business Services, Retirement, Etc. Local Market Industries Retail, Construction, Local Business Services, Banks, Local Government Spending by Base Industries

Elliott D. Pollack & Company Arizona Domestic Industry Examples General merchandise storesHome Improvement Stores Restaurants & barsGas Stations RealtorsMortgage brokers Title companiesLawyers BanksEducation ConstructionLandscapers

Elliott D. Pollack & Company Domestic – ripple effects of the export sector (Direct  indirect  induced)

Elliott D. Pollack & Company A new suit at Dillard’s A Slurpee at 7-11 Gas for their car Dinner at a nice restaurant. Employee of Intel spends their wages on….

Elliott D. Pollack & Company Right now the ripple effects won’t be as strong as normal because… 1) Consumers are still paying down debt. 2) Demand for new construction is currently being met by existing inventory (so no need for new construction). 3) It is difficult for people to sell their homes in other states and move to Arizona.

Elliott D. Pollack & Company Because all of these problems are cyclical and/or transitory. You can pull your head out…

Elliott D. Pollack & Company When consumers finish restructuring their balance sheets. When home prices and wealth levels stabilize across the U.S. When those that postponed retirement, retire and absorb Arizona housing. When local job creation accelerates and people move here for a new job. When people reverse the doubling up process. When will things accelerate?

Elliott D. Pollack & Company Now through about 2015 will still be slower than normal; but 2015 through 2020 should be strong. When will things accelerate?

Elliott D. Pollack & Company One of the differences this time is the population slowdown.

Elliott D. Pollack & Company Greater Phoenix Net Migration 1975–2011 Source: University of Arizona Recession Periods *Forecasts from UofA 2011 Q3

Elliott D. Pollack & Company SRP Residential Utility Hookup Percentage Growth Greater Phoenix 2003 – 2011* Source: SRP *Data through June 2011.

Elliott D. Pollack & Company APS Residential Utility Hookup Percentage Growth Greater Phoenix 1955 – 2011* Source: APS *Data through Quarter

Elliott D. Pollack & Company School Enrollment Growth Source: Arizona Department of Education N/A *Collection methodology changed in 2009, rendering 2009/2008 comparisons null.

Elliott D. Pollack & Company We are optimistic about the long term and cautious about the short term.

Elliott D. Pollack & Company It’s all about the basics: jobs and population growth.

Elliott D. Pollack & Company Greater Phoenix Population Annual Percent Change 1976–2012* Source: Arizona State University & Department of Commerce, Research Administration. * 2011 & 2012 forecast is from Elliott D. Pollack & Co. Recession Periods

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 Arizona was one of the only two states to be in the top 5 growth states in terms of population, employment and personal income every decade since WWII. Pre 2007

Elliott D. Pollack & Company

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

Elliott D. Pollack & Company The recovery has already started.

Elliott D. Pollack & Company Signs of Recovery Jobs Retail Sales Jobs rebound in other cities Fewer excess homes Population growth

Elliott D. Pollack & Company Greater Phoenix - Jobs Finally in the Black Over last 12 months: 31, months before that: (15,000) 12 months before that: (169,600) 12 months before that: (61,800) 12 months before that: 31,600 * As of August 2011

Elliott D. Pollack & Company Greater Phoenix Employment* Source: Bureau of Labor Statistics Sectors in Decline Net Change Federal Government-1,000 Prof. & Bus. Services-4,200 *August 2011/August 2010 Sectors Improving Net Change Education & Health Services14,700 Leisure & Hospitality7,100 Transp, Trade, & Utilities4,900 Construction2,300 Financial Activities2,300 Manufacturing1,900 Other services1,800 State Government600 Local Government400 Mining300 Information200

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

Elliott D. Pollack & Company YearRank# MSA’s ytd1732 YearRank# MSA’s Phoenix-Mesa Employment Growth (Ranking among all metro areas greater than 1,000,000) Source: Arizona State University, U.S. Bureau of Labor Statistics *YTD through August

Elliott D. Pollack & Company Maricopa County Retail Sales* Percent Change Year Ago 1990 to 2011** Source: Arizona Department of Revenue *3-month moving average **Data through June Recession Periods

Elliott D. Pollack & Company “No strong recovery without a recovery in construction.”

Elliott D. Pollack & Company Spec commercial construction approaching 0. New single family residential construction 89% off peak.

Elliott D. Pollack & Company For Housing - This is NOT a multi decade recovery… Think 2015 or so for a full recovery, but growth before then.

Elliott D. Pollack & Company Single Family Permits (Forecast) Greater Phoenix 1975–2015* Source: RL BROWN # Permits (000) * forecast is from Elliott D. Pollack & Co.

Elliott D. Pollack & Company Across the US, little new building has been occurring. This helps reduce the oversupply.

Elliott D. Pollack & Company U.S. Single-Family Starts 1978–2011* Source: Census Bureau (Millions) *YTD through August 2011 Recession Periods Over- supply Under- supply LTA: 1.2

Elliott D. Pollack & Company Excess supply in Greater Phoenix is about 50-55k units as of today, down from about 80k units. SUPPLY demand

Elliott D. Pollack & Company Think of what the housing market is going through as the same as any manufacturer that finds themselves with excess inventory… Prices are cut until the excess is sold. Then prices rise.

Elliott D. Pollack & Company As excess is absorbed, prices will increase. This is Economics 101

Elliott D. Pollack & Company Single-Family Vacant Units Maricopa County 1993–2011 Source: Phoenix Metro Housing Study

Elliott D. Pollack & Company Single-Family Vacancy Rate Maricopa County 1993–2011 Source: PMHS

Elliott D. Pollack & Company US Total Vacant Housing Units * Source: US Census Bureau *Data through 2011 Q2 Recession Periods Excess inventory is about 800k homes Longer term trend

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

Elliott D. Pollack & Company Percent of Year Olds Living With Parents vs. Homeownership Rate, Under 35 Years Old U.S.: 1983 – 2010 Source: US Census Bureau

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

Elliott D. Pollack & Company Historically, there is a one-to-one relationship between population growth and household growth (meaning a 1% increase in population growth leads to a 1% increase in household growth). Source: Linneman Letter

Elliott D. Pollack & Company When unemployment exceeds 7%, a 1% increase in population leads to a 0.3% increase in households. When unemployment falls below 7%, each 1% increase in population leads to a 1.9% increase in households. Source: Linneman Letter

Elliott D. Pollack & Company Thus, in a weak economy, population growth fails to translate into household growth, but when the economy begins to strengthen, there is pent-up demand for housing. Source: Linneman Letter

Elliott D. Pollack & Company In Arizona, the same basic trend has occurred.

Elliott D. Pollack & Company A Credit Score of less than 650 is considered Subprime Source: FICO % of population

Elliott D. Pollack & Company Homeownership Rate * Source: Census Bureau *Data through 2011 Q2 Recession Periods %

Elliott D. Pollack & Company Foreclosures at an all time high * Source: MBA % *Data through 2011 Q1 mln

Elliott D. Pollack & Company How Investors Impact the Market: Investors temporarily create demand. They are creating rental units for people who are losing their homes and do not want to live in apartments.

Elliott D. Pollack & Company Investors: 40% Market? Percent of Non-Owner Occupied Sales of Total Sales Greater Phoenix Source: DataQuick

Elliott D. Pollack & Company Greater Phoenix Median Price of Single Family Homes - Resale 2002 – 2011* Source: MLS *Data through August 2011.

Elliott D. Pollack & Company Greater Phoenix S&P/Case-Schiller Home Price Index** Percent Change Month Ago 1990 – 2011* Source: Macro Markets, LLC Recession Periods *Data through June2011 **Measures changes in existing single family home prices given a constant level of quality.

Elliott D. Pollack & Company Median Price of New Homes as a Percent of the Median Price of Resale Homes Maricopa County 1985–2011* Source: ASU Realty Studies *YTD through second quarter 2011

Elliott D. Pollack & Company Balance between supply and demand will not be fully achieved until about But building will get progressively better between now and then. Balance = when you have to build for net in-migration

Elliott D. Pollack & Company Home Price Indices 2000 – 2011 Source: Macro Markets, LLC; AMLS Recession Periods ?

Elliott D. Pollack & Company The Real Problem: Too many vacant homes (but amount of excess is declining). Not enough new households (but this will change as jobs increase).

Elliott D. Pollack & Company What about the future?

Elliott D. Pollack & Company Various Population Forecasts Greater Phoenix Source ADOC4,192,8875,385,9446,460,836 Annual Growth 2.6%2.5%1.8% U of A4,192,8875,044,1306,088,575 Annual Growth 2.6%1.9% Global Insights4,192,8875,111,1066,291,762 Annual Growth 2.6%2.0%2.1% Census4,192,8875,432,6126,970,080 Annual Growth 2.6% 2.5%

Elliott D. Pollack & Company Single Family Forecasts Greater Phoenix Source Person / HH % Single family85%70% Projected Permits per Year ADOC31,90032,10028,900 U of A31,90022,90028,100 Global Insights31,90024,70031,800 Census31,90033,40041,400

Elliott D. Pollack & Company Commercial Markets…

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 Absorption Chg in Inventory* 2006 (4,653) (3,828) 2007 (5,846) 4, (4,466) 3, (5,319) 6, ,743 8, q2 (1,737) 463 Multi-Family Construction Activity Source: PMHS *There were 19,949 condo conversion in the Greater Phoenix area from q through q

Elliott D. Pollack & Company There are currently 191 multi-family units under construction (Q2 11).

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 CB Richard Ellis Recession Periods

Elliott D. Pollack & Company Greater Phoenix Office Market Construction Activity Source: CB Richard Ellis YearAbsorption (sf)Chg in Inventory (sf) 20053,119,2937, ,245,888**2,320, ,500,7044,905, (603,112)3,402, (677,329)1,798, ,6702,011, q2960,477***2,408,630 *Only includes multi-tenant space greater than 10,000 SF ** A number of buildings in downtown and mid-town are being converted to office condos. ***The 2.4 million square feet in 2011 are build-to-suit FBI building and Univ. of Phoenix building

Elliott D. Pollack & Company There is currently NO spec multi-tenant office space under construction (q2 11). *Greater than 10,000 sf

Elliott D. Pollack & Company There will be no significant spec office construction in Greater Phoenix* for next 3-5 years.

Elliott D. Pollack & Company Under any reasonable employment growth scenario, we believe it will be 2016 before any significant office construction occurs (although some sub-markets will be sooner).

Elliott D. Pollack & Company INDUSTRIAL

Elliott D. Pollack & Company Greater Phoenix Industrial Market Construction Activity Source: CB Richard Ellis YearAbsorption (sf)Chg in Inventory (sf) ,339,5917,072, ,032,1757,829, ,359,83513,914, ,83813,467, (4,649,352)4,753, q2 4,455,097 2,931,634 2,451, ,554

Elliott D. Pollack & Company There are currently 3.9 million square feet* of industrial space under construction (q2 11). *2.4 million sf major users (Intel and First Solar)

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

Elliott D. Pollack & Company RETAIL

Elliott D. Pollack & Company Greater Phoenix Retail Market Construction Activity Source: CB Richard Ellis YearAbsorption (sf)Chg in Inventory (sf) 20056,708,1556,248, ,244,5974,582, ,424,36211,104, ,395,9866,229, (1,117,100)4,405, q2 (75,352) (648,697) 902,380 (181,048) NOTE: 325,000 sf were deleted from inventory during 2011 due to market data updates and demolitions.

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

Elliott D. Pollack & Company Back to Normal Vacancy? Office = 2015 – 2016 Industrial = 2014 – 2016 Retail = 2015 – 2016

Elliott D. Pollack & Company How will it all turn out?

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

Elliott D. Pollack & Company But not in 2011, 2012 or 2013.

Elliott D. Pollack & Company Patience, my ass! I am going to kill something!!

Elliott D. Pollack & Company The long term economic outlook remains favorable. The near term outlook calls for modest growth. Arizona will once again be a national growth leader by mid-decade.

Elliott D. Pollack & Company 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