The Myth of Phoenix Rising from the Ashes

Regular readers of this blog know that I live in Phoenix and have tried from time to time to portray the devastation that the recession has wreaked on this city. An article yesterday on Bloomberg does as good a job and probably better than I have in numerous posts of conveying the chaos. Here is a sense of the scope of the problems:

Delinquencies in the Phoenix area on loans backed by office, industrial, retail and apartment properties have risen more than five-fold since March, according to data compiled by Bloomberg. The Phoenix region has the second-worst U.S. delinquency rate, behind Detroit’s 10 percent. In Phoenix, the economic recovery looks a lot like a recession.

“A commercial recovery in markets that are heavily dependent on construction will be slow, which means the overall recovery will lag the nation as a whole,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “These are more volatile markets and getting back to normal could take years.”

Phoenix and other southern and western cities such as Atlanta, Houston and Dallas grew because they offered an affordable lifestyle to middle-class Americans, said Edward Glaeser, an economics professor at Harvard University in Cambridge, Massachusetts. That growth has slowed.

As the article points out, after suffering as much as any other state from the downturn in residential real estate, the state is just beginning to suffer from a catastrophic decline in commercial real estate. The second hit to the economy is just now barrelling down the road and it’s likely to be as severe if not more so than the housing crisis.

Phoenix has basically seen its business model destroyed. A city and state that were built on extensive population increases to create jobs has seen the cycle brought to a virtual halt. Phoenix had grown used to adding at least 125,000 new residents a year. Now it claims to be adding 25,000 a year and truth be told that’s probably an exaggeration. Add to that the loss of Hispanic citizens — both legal and illegal — and the numbers are probably grimmer.

Nevertheless, there persists in this town a belief that prosperity is just around the corner. People will start coming again once things settle down and the old growth formula will work again. I can’t tell you in strong enough terms how pervasive is this attitude. It abounds among homeowners, real estate investors and the business community in general. Why not, it’s worked for fifty years or more.

I suspect that this town represents the Sunbelt writ large. From Florida, to Atlanta, to Texas to Southern California and all points in between, the past is probably considered a good predictor of what a return to normal will represent.

Still, I can’t shake the feeling that this time it might be different. The new generations don’t seem to me to be so inclined to move away from family and friends. The charm of Phoenix and many of its sister cities has dimmed as growth turned them into crowded, polluted metropolises and the promise of new jobs and a new start on life just isn’t existent any longer.

One has to wonder if these cities that were built on the prospect of endless growth might now be staring at a future that the Clevelands and Pittsburghs of the country have already faced. Like many of the Rustbelt cities, the Sunbelt communities bet the future on a single industry. Yes they had other sources of employment that were not dependent on real estate but then again so did the “old” cities, but these complimentary industries were dwarfed by the dependence on growth and development.

Phoenix and the others are unlikely to dry up and blow away. That just doesn’t happen to huge population centers. Some might well reinvent themselves and prosper in new and different ways but those will likely be a small minority. In all likelihood the future can be discerned by studying the history of the population centers of the Northeast.

It’s probably worth remembering that the Phoenix rising from the ashes is a myth. I’m not sure that the good citizens of Phoenix are willing to admit to that fact quite yet.

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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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