By K. Robert Wendel

For economist Tracy Clark, the market in Phoenix is a "tale of two economies."

On the one hand, service industries are plugging along, with some signs of a recovery beginning to show. On the other hand, manufacturing is in the dumps, and most observers said it's going to stay that way until at least 2004.

"Industrial capacity is way up and that has to be absorbed before people start creating more capacity," said Clark, an economist at the Bank One Economic Outlook Center at the W.P. Cary School of Business at ASU.

"Part of the problem is that manufacturers are stuck in a deflationary environment where cost cutting and productivity improvement measures aren't getting much bang for the buck because suppliers are squeezing suppliers, who are squeezing their suppliers. What is keeping us out of a mess is the continued inflation in services and non goods sectors."

So what does that mean for contractors? Retail, hospitals, jails, infrastructure and schools, and job growth numbers bear those markets out. According to ERISS Corp., projected healthcare job growth through 2003 is a whopping 8.7 percent, while both construction and manufacturing register an anemic 1.6 percent job growth. Business services and service job growth is pegged at a healthy 7.9 and 6.9 percent, respectively.

After finishing 2002 with an overall drop of 15 percent from 2001, non residential construction seems to be roaring back to life with a 35 percent increase in permit valuations from 2002, according to the McGraw-Hill Construction Information Group.

But those numbers are somewhat deceiving. The valuations on two or three large projects, such as the $350 million Arizona Cardinals Stadium and the $107 million Phoenix Coyotes Arena can skew the actual numbers.

"You have a lot of big private projects on the backburner, but there are still a lot of little ones," said Jay Butler, director of the Arizona Real Estate Center at the W.P. Carey School of Business at ASU. "There are inconsistencies in the market at the moment. You have an arena project and the stadium project, and then the Wal Marts. We don't have much in between or big glamour projects."

What the market does have are commercial office vacancy rates of more than 20 percent, a number some predict will be around for quite sometime.

"The office market is basically in a situation of significant over-building," said Valley economist Elliot Pollack. "The market is weak in terms of new construction, and we are looking at 2006 or 2007 before the markets get back to normal. The same thing is true about apartments."

Low interest rates have been a boon to small businesses that after years of leasing office space are now beginning to purchase "office condos." The condos are creating a demand for small, 1,000 to 2,500-sq.-ft. spaces, with many being developed in existing retail strip malls that have fallen on hard times. A larger example of this is architect SmithGroup's plans to turn the former Arizona Center Food Court into office space.

"Phoenix is a relatively young city," said Marc Meyer of SmithGroup. "Phoenix is reaching a level where we are redefining office space out of existing stuff. It's happened in other cities and it is starting to happen here."

Residential Rules

With the lowest interest rates in more than 40 years, a residential building boom has buoyed the local economy, and with plans to develop massive planned communities in the West Valley and Buckeye, there are no signs of slowing. The low interest rates are giving opportunities to consumers who could never afford a home, cutting into the rental market.

The new homes will create demands for other services, such as schools, shopping centers and infrastructure, but it will be a few years before those needs develop. Still, especially on the west side, construction is holding its own. Besides the arena and stadium, where more than a million square feet of new space is planned, some major projects include the 52-acre Northern Crossing on 59th Avenue and insurance giant USAA's office campus on Happy Valley Road.

Schools are expected to continue their frenetic pace as more and more people immigrate to the Valley. One district alone, the Liberty Elementary District, which recently added a fourth school, plans to build a school every year until 2008, with many other districts introducing equally aggressive plans. According to Dodge Dataline, the Phoenix market shows some $2.9 billion of school work in various stages of planning or construction.

With all of the new homes, a massive amount of infrastructure is needed. Dataline numbers show $3.5 billion in infrastructure work in various stages of planning or construction. Some notable projects include the $50 million expansion at the 91st Avenue waste water treatment plant, and $40 million for a White Tanks regional water treatment plant.

Highway work figures prominently also, with plans to spend more than $75 million on State Route 51 and more than $100 million for work on the San Tan Freeway.
Perhaps the most high-profile ‚ transportation project, the valley wide light rail system, is still in the planning stages and has yet to achieve funding. At an estimated cost of more than $800 million, the light rail would run 20 miles, from downtown Mesa through Phoenix and then on to Metro Center.

At city of Phoenix-owned Sky Harbor, nearly $150 million in work is underway, including a $65 million repaving project on the center runway and plans call for the addition of a $40 million concourse at Terminal 4. The city of Phoenix is also attempting to gain $400 million in funding from the state legislature to expand the city's Civic Center to draw bigger conventions.

Healthcare Market Healthy

Healthcare is a firm market with low interest rates and demand teaming to create a sound Southwest healthcare market.

After spending much of the 1990s in a contraction mode, healthcare facilities owners appear to be cracking open their wallets, focusing on new general and specialty hospitals, while clinical and nursing home construction also appears to be bouncing back after a two-year slide.

Dodge Dataline numbers show more than $1.5 billion in healthcare projects in various stages of pre planning, planning and construction in Maricopa County.
There are several hospital projects in the $50 million range. On the West side of Phoenix, Banner Health and contractor DPR Construction are building a $50 million, three story, 452,000-sq.-ft. hospital, with Banner Health planning a Gilbert hospital, also valued at $50 million, and remodeling Good Samaritan.

Also, plans are calling for a $250 million, six-story addition to St. Joseph's in Phoenix, with Kitchell Contractors expected to break ground in the fourth quarter, 2003. The new bio science center in downtown Phoenix is expected to add another $88 million in construction value.

"I see the second half of the year to start picking up," said Timothy Hogan at the ASU Center for Business Research. "I don't think it is going to go like gang busters, but I think with the recent positive events, it will kick in once fall shows up."

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