Retail, Office Projects
Cushion Residential Hit

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.

"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."

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