Commercial
Building Bolsters Cities
Retail, Office Projects Cushion Residential Hit In Phoenix,
Other Areas
Wall Street
Journal Article
Note: Biltmore Bette was interviewed by the writer of WSJ
during her visit to Phoenix. Unfortunately they took a
different turn when ready to publish and concentrated more
on commercial instead of both residential and commercial
PHOENIX -- The temperature is above 100 degrees, yet
construction crews are busy at work on just about every
corner of this city's downtown.
The convention center is being expanded, a light-rail system
is coming and several hotels are sprouting up alongside new
offices and retail space.
The convention center is being expanded, a light-rail system
is coming and several hotels are sprouting up alongside new
offices and retail space.
"I really don't see construction slowing down in the
foreseeable future," said Troy Hoberg, director of business
development at Hunt Construction Group Inc., which built the
$400 million downtown stadium for the Arizona Cardinals and
is now working on the $600 million convention-center
expansion. "We've been so busy we're having trouble finding
enough workers."
The volume of commercial construction in Phoenix may help
shed some light on a question that has puzzled regional
economists: Why do some cities mired in a housing bust
continue to enjoy strong economic growth? In Phoenix, the
answer appears to be that commercial construction is helping
to cushion the fall.
Phoenix led the nation's major employment markets in job
growth during 2005 and 2006. But job growth slowed in the
second quarter of 2007 to a 1.2% annualized rate, dipping
below the national average of 1.3%.
Mark Zandi, chief economist at Moody's Economy.com, said the
anemic job growth was primarily related to the collapse of
the city's housing market. But employment could have fared
much worse in a city where analysts estimate one in three
jobs was tied to the housing market a few years ago.
"Phoenix has a lot of other sources of growth, and that will
tide it over," he said.
Indeed, the city's rapidly increasing population has long
been an engine of economic growth. Phoenix is the
fifth-largest city in the U.S. by population, with 1.5
million people and a median age of 33. Such demographics
continue to attract employers to the region, and as a
result, the unemployment rate dropped to 2.7% in May, its
lowest level since 1999.
The influx of people and jobs has helped the city double the
size of its economy in the past decade to an estimated $176
billion in gross metropolitan output for 2007, a 6.8%
increase over last year, according to Global Insight
Economics.
The residential-housing boom that was fueled in part by
rapid population growth has given way to a growing market
for commercial construction projects. Even though home sales
in Phoenix dropped nearly 30% last year, an estimated $2.3
billion in commercial projects are planned for downtown
Phoenix alone, an unprecedented amount.
Phoenix isn't alone. Commercial-construction activity has
"been very strong for most of this year in most regions of
the country," said Ken Simonson, chief economist at the
Associated General Contractors of America. He said the
notable exceptions are Michigan, Ohio and some parts of
Indiana, which have been hurt by the problems in the auto
industry.
The Census Bureau's latest report on construction outlays
found that the value of private, nonresidential construction
spending jumped 17% in June to $346.6 billion compared with
a year earlier, led by hotels, office buildings, utilities
and educational institutions. Residential construction,
meanwhile, continued to contract.
To be sure, commercial construction can't offset all of the
downdraft from weak housing. The residential market is much
larger than the commercial market, and it plays a bigger
role in the U.S. economy. When people buy new homes, they
also tend to buy furniture, appliances and home electronics,
boosting consumer spending. Commercial-construction activity
doesn't have a significant impact on consumer spending,
though new commercial projects add value to communities over
the long term and attract new businesses, which add to the
tax base.
Moreover, it isn't clear that commercial construction will
continue to expand at the current pace given the increasing
skittishness of banks and other lenders to extend loans to
anything related to real estate. Even though most of the
problems in the credit markets are related to rising
defaults and foreclosures on residential mortgages, some
bankers are pulling back on all types of loans, a trend that
could threaten the national economy.
If the pullback in credit spreads to commercial real estate
in a significant way, the economy in Phoenix and other
places could lose one of its last major growth supports. Of
course, with so many projects under way and years away from
completion, the commercial market can't change direction as
quickly as residential construction did. But the credit
pullback is a threat if banks stop funding construction.
Cities such as Phoenix, Houston and Las Vegas, however,
which continue to see strong growth in population,
employment and business, have created a huge demand for
commercial construction.
"We have unprecedented public infrastructure being built,"
said Barry Broome, president of the Greater Phoenix Economic
Council. "Hospitals are expanding at a staggering rate."
Indeed, commercial developers are so busy they are
complaining about labor shortages. Mark Minter, the
executive director of the Arizona Builders Alliance, said
contractors are beginning to turn down work because they
can't find enough skilled workers "all up and down the
employment ladder."
Not only are plumbers and electricians in short supply but
also managers to oversee the work. Hunt Construction has
offered its older managers stock options and higher pay in
an effort to keep them from retiring. "It's becoming
difficult to replace them with the younger generation," said
Mr. Hoberg. "There aren't enough young guys in the
pipeline."
The skilled construction workers now in high demand aren't
the same ones who were employed during the housing boom.
While some construction jobs -- such as painting and
occasionally plumbing or electric work -- are transferable
from residential to commercial construction, most jobs
aren't.
"Most people in single-family construction can't work on a
high-rise," said Alan Torvie, vice president of construction
for Red Development LLC, whose company is working on one of
downtown Phoenix's most high-profile projects, the $1
billion mixed-use development known as CityScape.
And now that Phoenix is building up -- rather than out --
there is a huge demand for cranes and for the tower-crane
operators who run them.
That has been a boon for 43-year-old tower-crane operator
Todd Witzens. During the housing boom, Mr. Witzens was
sidelined because few high-rise construction projects were
going up. But now he has his pick of jobs.
"People are calling me up all the time," he said, trying to
lure him with higher wages, insurance packages, parking
passes and tickets to professional sporting events. "They're
desperate to get someone."
By KELLY EVANS
August 13, 2007
Wall Street Journal
Write to Kelly Evans at kelly.evans@wsj.com
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