Spring Time for Housing

Spring Time for Housing Arizona State University December 2 nd, 2015 Presented By: Elliott D. Pollack CEO,

IN PHOENIX 1

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The World has Changed Pre-2007 Post-2007 3

Employment Growth From Bottom of Recession (Start of Recovery) Greater Phoenix Employment, Seasonally Adjusted Source: BLS Recession Emp. Trough 61 mos. Later % Growth 1974-1975 Dec-74 Jan-80 42.3% 1981-1982 Sep-82 Oct-97 41.5% 1991 Aug-91 Sep-96 32.3% 2001 Dec-01 Jan-07 20.4% 2007-2009 Sep-10 Oct-15 13.9% 4

Population Growth after Recessions Greater Phoenix Source: ADOA Start of Recovery Population Population 9 years later % Growth 1975 1,377,700 1,606,300 16.6% 1981 1,658,988 2,013,320 21.4% 1991 2,301,825 2,784,725 21.0% 2001 3,360,062 3,968,805 18.1% 2009 4,087,390 4,404,888 5.2% 5

Phoenix-Mesa-Scottsdale Employment Growth (Ranking among all metro areas greater than 1,000,000) Source: Arizona State University, U.S. Bureau of Labor Statistics Year Rank # MSA s 1992 4 19 1993 2 19 1994 1 19 1995 1 20 1996 1 21 1997 2 22 1998 1 23 1999 3 24 2000 7 25 2001 7 26 2002 5 25 2003 3 25 Year Rank # MSA s 2004 3 25 2005 1 26 2006 1 27 2007 10 29 2008 25 29 2009 23 24 2010 23 23 2011 14 25 2012 11 28 2013 9 28 2014 16 31 2015* 14 32 *YTD October 2015 vs. YTD October 2014 6

Greater Phoenix Greater Phoenix has had a significant recovery in both absolute and relative terms. It is only when we compare ourselves to previous Arizona recoveries that we look so bad. 7

12.0% Greater Phoenix Unemployment Rate 1990 2015* Source: Bureau of Economic Analysis Recession Periods 10.0% 8.0% 6.0% 4.0% 2.0% *Data through September 2015. 8

Since the Recovery Greater Phoenix employment has increased 13.8%. By Comparison, for the first 61 months of the previous two recoveries, Greater Phoenix grew 32.3% and 20.4%, respectively. Source: Bureau of Labor Statistics Data through October 2015 9

Since the Recovery the Greater Phoenix population has increased by 5.2%. By Comparison, for the first 5 years of the previous two recoveries, Greater Phoenix population increased by 21.0% and 18.1%, respectively. Source: Arizona Department of Administration 10

Less need for migrants (international and national) chasing jobs. 12

Fewer people mean fewer houses & less commercial construction. 13

The World has Changed Pre-2007 Post-2007 14

MEDIOCRE Unexceptional Run-of-the-mill Second rate Commonplace Middling Sub-par 15

The World has Changed Pre-2007 Post-2007 16

# Permits (000) 125% 105% 85% 65% 45% 25% 5% -15% -35% -55% -75% 27.3% 101.1% 29.5% -34.7% -39.0% Single Family Permits Greater Phoenix 1976 2017* Source: RL Brown & Elliott D. Pollack & company 9.2% -7.3% 67.3% 1976 1978 1980 1982 1984-6.8% 24.7% 2.8% -11.6% -15.9% -20.5% -22.7% 1986 1988 1990 34.2% 29.1% 23.2% 21.1% 4.1% 7.1% 13.5% 3.7% -1.9%-1.7% 27.6% 22.6% 4.2% 7.6% 4.4% 1992 1994 1996 1998 2000 2002 2004 2006-33.3% -26.5% -36.2% -59.6% -0.4% -15.0% 2008 2010 2012 70.7% 10.2% 46.0% -15.2% 2014 2016 20.0% 18.0% *2015, 2016 and 2017 forecast is from as of November 2015. 17

18% Multi-Family Year-End Vacancy Rates Greater Phoenix County 1975 2017* Source: ASU Realty Studies / Berkadia** Recession Periods 15% 12% 9% 6% 3% 0% 6.2% 4.1% 3.3% 2.8% 3.9% 6.1% 6.1% 4.4% 7.7% 6.9% 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 10.6% 10.1% 14.1% 13.0% 13.4% 10.0% 9.5% 8.0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 4.0% 3.8%4.5%4.5%4.8% 5.1% 5.9% 6.8% 8.2% 9.4% 9.6% 7.8% 7.9% 6.8% 10.2% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 12.5% 13.4% 10.8% 7.5% 6.6% 6.3% 6.0% 6.3% 6.2%6.1% 2009 2010 2011 2012 2013 2014 2015 2016 2017 *2015, 2016 & 2017 are forecasts from Elliott D. Pollack & Co. **Data prior to 2005 is from ASU 18

4,500,000 Apartments Births 26 year lag 1955-2038 Source: U.S. Census Bureau 2015 4,000,000 3,500,000 3,000,000 2,500,000 Baby Boomers Gen X Millennials 2,000,000 19

The World has Changed Pre-2007 Post-2007 20

JUST ALMOST DO IT. 21

What has changed? 22

Why has growth been slow? (1) Recovery from the financial crisis of 2007/2008 (2) Lack of accelerator to income- --Women entering workforce in 70s and 80s --Absence of a quadrupling stock market in the 90s --People not using their house as a credit card ( 96-05) (3) Underlying demographics (4) Increased regulation and high corporate taxes 23

Labor Force Participation Rate (16 years and over) 1950 2015* Source: Bureau of Labor Statistics Recession Periods 68.0% 66.0% 64.0% 62.0% 60.0% 58.0% 56.0% *Seasonally adjusted data through October 2015. 24

S&P 500 1980-2015* Source: Standard & Poor's (S&P); Moody's Analytics (ECCA) Converted Recession Periods 2,200 2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 *Data through November 23, 2015 25

Mortgage Equity Withdrawal as a share of Disposable Income U.S.: 1971 2015* Source: Bureau of Economic Analysis Recession Periods 8.0% 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% *Data through second quarter 2015 26

(000s) 3,500 U.S. Population by Age Net Change 2015 2020 Source: U.S. Census Bureau 3,286 2,000 757 884 1,316 1,014 1,591 1,967 2,016 1,908 678 500 108 64-1,000-134 -929-391 -744-24 -429-1,799-2,500 27

Movers (in millions) Distribution of Movers in U.S. by Type* 1990-2014 Source: U.S. Census Bureau 20.0 18.9 15.0 1.4 1.3 1.4 1.2 1.4 1.3 1.2 0.8 7.1 7.1 6.9 6.7 5.7 6.5 6.4 6.4 1.4 7.5 1.7 8.4 17.2 1.8 1.6 1.3 1.9 1.3 1.3 7.8 7.8 7.6 7.3 7.4 5.7 1.2 11.5 1.1 1.1 1.0 1.1 12.2 1.2 1.0 1.1 10.0 4.9 4.7 4.7 4.3 4.8 5.1 4.8 4.7 5.0 7.9 7.9 7.9 8.2 7.9 8.0 8.0 7.9 8.4 8.8 7.6 8.1 7.7 7.8 7.8 8.0 7.4 6.3 6.4 6.2 5.9 6.8 7.0 6.4 0.0 Diffeferent county, same state Different county, different state From Abroad *Excludes movers in the same county 28

For the U.S. as a Whole 2002 2006 2010 2014 Total Movers down 25.6% Movers from abroad down (26%) Movers from other states down (34%) Movers from other counties in the state, down (18%) Source: U.S. Census Bureau Note: Does not include in-state movers 29

Arizona Capture Rate (from abroad and between states) 2002 2006 = 3.7% 2010 2014 = 3.3% Note: Does not include in-state movers 30

SB 1070 31

There is Good News. 32

Single-family 33

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Greater Phoenix Single Family Permits Source: R.L. Brown Year Permits % chg 2004 60,872 27.6% 2005 63,570 4.4% 2006 42,423-33.3% 2007 31,172-26.5% 2008 12,582-59.6% 2009 7,862-37.5% 2010 6,822-13.2% 2011 6,794-0.4% 2012 11,615 71.0% 2013 12,785 10.1% 2014 10,840-15.2% 2015* 13,547 46.4% *Data through October 2015. 35

6% Greater Phoenix Population Annual Percent Change 1975 2016* Source: AZ Dept. of Administration, EDPCo Recession Periods 4% 2% 0% 2.7% 2.1% 1975 1977 3.7% 4.2% 4.7% 3.9% 3.3% 3.1% 3.0% 4.3% 5.1% 4.4% 4.2% 2.9% 2.8% 2.5% 2.4% 1.3% 1979 1981 1983 1985 1987 1989 1991 4.6% 4.3% 4.3% 4.3% 4.2%4.2% 3.5% 3.8% 3.6% 2.6% 2.7% 3.1% 3.8% 3.7% Pre-2008 Avg. 3.5% 3.0% 1.9% 1993 1995 1997 1999 2001 2003 2005 2007 2009 0.5% 0.6% 0.3% 1.8% 1.5%1.5% 1.6% 1.1% *2015 & 2016 forecasts from Elliott D. Pollack & Co. as of July 2015. 2011 2013 2015 36

Arizona Domestic Migration Ranking 2000-2014 Source: U.S. Census Bureau 2 2 2 2 2 2 3 4 3 5 3 6 3 11 11 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 37

Arizona International Migration Ranking 2000-2014 Source: U.S. Census Bureau 10 8 8 7 9 7 8 7 8 8 SB 1070 passed in 2010 18 17 17 17 17 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 38

The World has Changed Pre-2007 Post-2007 38a

What is keeping potential buyers out of the housing market? Parade of horribles: (1) Negative Equity (2) Foreclosures (3) Short Sales (4) Millennials (5) Student Loans (6) FHA Loan Limit (7) Tougher Loan Standards 39

45.0% 40.0% U.S. and Greater Phoenix Negative Equity Share 2010 2015 Source: CoreLogic 41.9% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 24.9% 22.5% 22.3% 14.9% 25.6% 10.9% 19.5% 8.7% 15.4% 5.0% 0.0% 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Q2 2015 Q2 U.S. Greater Phoenix Greater Phoenix data prior to 2012 Q2 not available. 40

120,000 110,000 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 U.S. Foreclosure Lag 2002 2022 Source: CoreLogic Sept. 2015 Recession Periods Completed Foreclosures 7-Year Lag (Fannie/Freddie) 41

Greater Phoenix Short Sales January 2011 September 2015 Source: ASU 2,500 2,000 1,936 1,500 1,000 500 195-42

Millennials/Living at Home There are approximately 1.5 million more 25-34 year olds living with their parents than 2002. 43

When you delay marriage you delay children. That delays housing. That delays demand for housing stuff. 44

Total Student Loan Debt Has Tripled! 45

Total Student Loan Balances Billions of Dollars Source: Federal Reserve Bank of New York Consumer Credit Panel / Equifax Year TOTAL 2004 $347.1 2005 $392.8 2006 $478.8 2007 $541.3 2008 $633.3 2009 $714.4 2010 $803.5 2011 $866.3 2012 $959.9 2013 $1,071.0 2014 $1,155.5 45a

Expenses that Delayed Saving for a Down Payment or Home Purchase - 2014 By Age Source: National Association of Realtors 2014 All Buyers 34 and younger 34 to 49 50 to 59 60 to 68 69 to 89 Student Loans 46% 54% 23% 11% 7% 1% Credit Card Debt 50% 35% 41% 37% 21% 12% Car Loan 38% 30% 25% 16% 9% 5% Child Care Expenses 17% 10% 19% 5% 4% 2% Health Care Costs 12% 7% 11% 14% 13% 15% Other 8% 15% 24% 42% 58% 68% 46

740 Average Borrowers Credit Scores on All New FHA Loans 2007 2015* Source: U.S. Dept. of HUD/FHA Recession Periods 720 700 680 700 683 660 640 632 620 600 *Data through third quarter 2015 47a

800 780 760 740 720 Average Borrowers Credit Scores on All New Fannie Mae Loans 2004 2015* Source: Fannie Mae 716 762 Recession Periods 747 700 680 660 640 *Data through third quarter 2015 47b

Year Single Family Permits Blue Chip Forecast Source: R.L. Brown, Greater Phoenix Blue Chip Permits % Change 2014 10,840-15.2% 2015* 15,880 46% 2016* 19,300 22% 2017* 22,900 19% *2015, 2016 & 2017 are forecasts from third quarter Greater Phoenix Blue Chip. 48

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Lot Inventory 50

(000s) 220.0 200.0 180.0 160.0 140.0 Greater Phoenix Construction Employment Annual 1970 2014* Source: University of Arizona Recession Periods Peak 179,900 jobs 84,000 Jobs Gap 120.0 100.0 80.0 60.0 Current 95,300 jobs Trough 82,400 jobs 40.0 20.0 0.0 *Data from U of A Q4 2015 forecast 51

Arizona Population: Foreign-Born, Non-Citizen Source: American Community Survey Recession Periods 600,000 6.1% 550,000 9.8% -8.5% SB 1070 passed in 2010 500,000 6.0% 3.6% -6.4% 450,000 9.2% 400,000 9.5% -13.8% -2.4% -1.9% 2.3% -1.9% 350,000 300,000 52

Positions Builders are Having Trouble Filling Carpenters Framers 68.0% 67.0% Masons 53.0% Electricians Painters Plumbers Roofers 46.0% 46.0% 45.0% 40.0% Source: National Association of Home Builders, June 2015 53

Who do we hire if there is a construction labor shortage? 54

The World has Changed Pre-2007 Post-2007 55

Millions U.S. Population by Age Ages 18-40 Source: U.S. Census Bureau, Population as of July 1, 2014 4.8 Largest Age Cohort 4.7 4.7 4.6 4.4 4.3 4.4 4.5 4.6 4.5 4.4 4.4 4.3 4.4 Average Age of First-time Homebuyer 4.3 4.3 4.3 4.2 4.0 4.2 4.3 4.2 4.1 4.0 4.0 Average Age of Repeat Homebuyer 3.9 3.9 3.9 3.8 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 56

Multi-Family 57

4,500,000 Apartments Births 26 year lag 1955-2038 Source: U.S. Census Bureau 2015 4,000,000 3,500,000 3,000,000 2,500,000 Baby Boomers Gen X Millennials 2,000,000 58

4,500,000 Retirement Home Cycle Births 65 year lag 1994-2076 Source: U.S. Census Bureau 4,000,000 3,500,000 2015 3,000,000 2,500,000 Baby Boomers Gen X Millennials 2,000,000 59

18% Multi-Family Year-End Vacancy Rates Greater Phoenix County 1975 2017* Source: ASU Realty Studies / Berkadia** Recession Periods 15% 12% 9% 6% 3% 0% 6.2% 4.1% 3.3% 2.8% 3.9% 6.1% 6.1% 4.4% 7.7% 6.9% 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 10.6% 10.1% 14.1% 13.0% 13.4% 10.0% 9.5% 8.0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 4.0% 3.8%4.5%4.5%4.8% 5.1% 5.9% 6.8% 8.2% 9.4% 9.6% 7.8% 7.9% 6.8% 10.2% 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 12.5% 13.4% 10.8% 7.5% 6.6% 6.3% 6.0% 6.3% 6.2%6.1% 2009 2010 2011 2012 2013 2014 2015 2016 2017 *2015, 2016 & 2017 are forecasts from Elliott D. Pollack & Co. **Data prior to 2005 is from ASU 60

Multi-Family Housing Market Source: PMHS and Berkadia Absorption Completions 2007 (3,121) 3,800 2008 (4,466) 5,900 2009 9,100 6,231 2010 11,619 200 2011 7,729 303 2012 2,950 910 2013 3,660 2,390 2014 6,750 4,970 61

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Multi-Family Pipeline Source: CB Richard Ellis Year Potential New Supply 2015 6,621 2016 5,503 2017 10,159 63

Construction still lags (except for apartment construction) 64

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OFFICE 66

Office Space Year-End Vacancy Rates Greater Phoenix 1986 2017* Source: CBRE Recession Periods 35% 30% 25% 20% 15% 10% 5% 0% 26.7% 26.4% 26.7% 25.4% 24.0% 22.8% 22.7% 18.8% 14.8% 11.7% 9.5% 9.9% 9.5% 9.2% 10.0% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 18.8% 18.3% 16.4% 16.0% 12.6% 11.1% 13.9% 19.1% 24.5% 26.2% 25.5% 23.9% 22.4% 21.1% 18.7% 17.5% 16.9% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 *2015, 2016 & 2017 are forecasts from Greater Phoenix Blue Chip. 67

Greater Phoenix Office Market* Source: CBRE Year Absorption (sf) Chg in Inventory (sf) 2005 3,119,293 7,987 2006 3,245,888 **2,320,302 2007 1,500,704 4,905,374 2008 (603,112) 3,402,646 2009 (667,329) 1,798,415 2010 233,670 2,011,404 2011 1,857,433 3,144,910 2012 2,020,529 973,282 2013 1,721,366 (35,566) 2014 1,969,716 1,107,906 2015*** 2,232,024 1,832,319 *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. ***Data through third quarter 2015 68

INDUSTRIAL 69

20% Industrial Space Vacancy Rates Greater Phoenix 1980 2017* Source: CBRE Recession Periods 15% 10% 5% 16.4% 15.2% 14.8% 14.6% 13.2% 14.0% 13.6% 12.8% 12.8% 11.1% 10.8% 9.4% 9.7% 8.4% 7.4% 8.1% 6.6% 7.0% 7.1% 7.4% 5.7% 10.3% 9.8% 9.7% 8.5% 5.6% 6.7% 8.4% 16.1% 12.5% 14.7% 12.4% 11.4% 10.9% 11.0%11.1% 10.1% 9.4% 1980 1981 1982 1983 1984 1985 1986 1987 1988 0% 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 * 2015, 2016 & 2017 are forecasts from the Greater Phoenix Blue Chip 70

Greater Phoenix Industrial Market Source: CBRE Year Absorption (sf) Chg in Inventory (sf) 2005 13,349,129 7,072,477 2006 6,032,175 7,829,959 2007 8,359,835 13,914,181 2008 629,838 13,467,215 2009 (4,649,352) 4,753,218 2010 4,455,097 2,451,202 2011 7,753,111 2,842,185 2012 7,405,168 3,358,724 2013 8,783,982 8,902,571 2014 6,214,680 6,791,313 2015* 5,639,447 3,329,149 *Data through third quarter 2015 71

RETAIL 72

Greater Phoenix Retail Market Source: CBRE Year Absorption (sf) Chg in Inventory (sf) 2005 6,708,155 6,248,789 2006 5,244,597 4,582,618 2007 9,424,362 11,104,865 2008 3,395,986 6,229,205 2009 (1,117,100) 4,405,985 2010 (75,352) 902,380 2011 (152,647) 24,543 2012 1,879,005 184,932 2013 1,579,202 (325,959) 2014 1,487,313 (49,225) 2015* 979,282 30,539 *Data through third quarter 2015 73

Retail Space Vacancy Rates Greater Phoenix 1985 2017* Source: CBRE** Recession Periods 20% 15% 10% 5% 8.9% 6.6% 14.2% 13.1% 13.5% 11.8% 12.7% 10.0% 11.1% 9.8% 8.7% 7.9% 7.5% 7.4% 7.5% 6.3% 5.5% 5.3%6.6%7.3% 6.1% 6.2% 5.3%5.1% 12.2%12.2% 11.4% 11.0% 10.2% 9.6% 9.3% 8.7% 8.3% 1985 1986 1987 1988 1989 1990 1991 0% 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 * 2015, 2016 & 2017 are forecasts from the Greater Phoenix Blue Chip ** Data prior to 1992 is from Grubb & Ellis 74

Good News Outlook for real estate is improving. 75

The World has Changed Pre-2007 Post-2007 76

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