Pcei Report Hi Res

2008-2009 Report 2008-2009 Report

Pierce County Economic Index • 1

Pierce County Forecasters

Dr. Bruce Mann

Dr. Douglas Goodman

Bruce D. Mann, Ph.D., has been a professor of economics at the University of Puget Sound since 1975. Dr. Mann came to the Tacoma area from Indiana University where he received both his master’s and doctorate degrees in economics. He completed his undergraduate work at Antioch College in Yellow Springs, Ohio. Dr. Mann's research interests include urban and regional economics.

Douglas E. Goodman, Ph.D., has been a professor of economics at the University of Puget Sound since 1977. He came from the University of Illinois where he received his master’s and doctorate degrees. Dr. Goodman's teaching responsibilites focus on monetary economics and econometrics. His research interests are in the areas of finance and applied economics.

Professor of Economics University of Puget Sound

Professor of Economics University of Puget Sound

Publisher: David Graybill Project Manager: Gary Brackett Design: Christina Kitchens Photography: Chip Van Gilder, Joe Andrade, Aiden Bradley, Chamber Staff and the Port of Tacoma Printer: Print NW ©Copyright 2008 Tacoma-Pierce County Chamber. All rights reserved.

Table of Contents

4 | Executive Summary 5 | PCEI Economic Forecast 6-7 | Pierce County Economic Performance 8-9 | Labor Activity & Unemployment 10-11 | Retail Sales Activity 12-13 | Personal Income 14-15 | Housing and Real Estate 16-17 | Port of Tacoma 18-19 | Data Tables 20-21 | Special Thanks & PCEI Sponsors 22 | Manufacturers Directory Consumer Demographics 23 | Save the Date Because of the lag in publication of economic data, each PCEI Report forecasts for a period covering the last two quarters of the current year (2008) and the full calendar year ahead (2009).

Pierce County Economic Index • 3

Executive Summary

The Tacoma-Pierce County economy will most likely avoid the worst of the impacts from globally contracting housing markets, eroding credit markets, spreading worldwide financial crises, falling consumer confidence levels and now, increasing layoffs. The Pierce County economy’s main economic engines – military and health care – will remain fairly strong through this forecast horizon. Other foundational sectors, business services, aerospace support, and trade will be weak, if not anemic. The strong health care and military sectors provided a counter-cyclical support that offset some of the negative national forces. Economic growth bettered expectations by more than a full percentage point gaining 2.8% for 2008. When 2008 ends, the PCEI (Pierce County Economic Index) will reach an all-time high at just over 190 (1980 = 100). Growth in the first quarter of 2009 will be at a virtual standstill. For the year as whole, the PCEI in 2009 will drop by 1.4% from its 2008 record high level. This will be the first year-over-year decline in the PCEI since the mild slowdown of 1991. The recession of 2009 will be the deepest in thirty years. On an annual basis, nonetheless, both 2007 and 2008 will be very solid years for attracting new workers to Pierce County. The 2008 gain of 2.75% means more than 10,500 new workers will join the County’s labor force. The 2009 downturn in economic activity will slow labor force growth dramatically. The weaker second half of 2008 pushed the annual rate of job growth to just 1.2% in 2008, still an increase of 3,500 jobs. Weak job growth will continue into 2009. Net job losses are anticipated for the first half of 2009. Job growth will turn positive in the second half of the year.

The most recent high-water mark for the unemployment rate was eight plus percent in 2002 and 2003. Weaker local job creation combined with strong labor force growth pushed the Pierce County unemployment rate up during 2008. The unemployment rate will move up to 6.3% as 2008. For the year, the Pierce County annual unemployment rate will average 5.9%. The 2009 annual average Pierce County unemployment rate of 6.7% will be eight-tenths of a percentage point above 2008. The 2008 holiday shopping season will be disappointing for area merchants. Retail spending will drop $42 million in local spending compared to the fourth quarter of 2007. For the year as a whole, retail spending will fall 4.3% below the 2007 pace. Improvement will start slowly. For 2009 dollar retail volume will be up by 1.8% over 2008. The 2009 holiday shopping season will be modestly better than in 2008. Even this improvement in spending will not match the inflation rate. This means $105 million more dollars for county merchants. In 2008 income will increase by 7.6% over 2007. This means an additional $2.0 billion dollars of income in 2008 for Pierce County residents than they had in 2007. However, the outlook for 2009 is not as bright. With an economic downturn, Pierce County’s total personal income will move up very modestly, by just 3.9% The population in Pierce County has been increasing faster than personal income. The result is that per capita income growth lags the increase in the total dollars of income. The slide in single-family housing activity that began as expected in late 2006, continued through 2007 and 2008. The Housing Index (measuring the volume – not value - of new or used

homes for sale or sold) rate of decline will slow as the year closes. Negative pressures on the local single-family market will start to ease up as 2009 progresses. The 2009 Housing Index will be back to its 2002 level. Multi-family housing activity often moves just opposite to what happens in the single-family market. Not surprisingly, then, the Pierce County apartment market has been fairly strong over the past few years. During this forecast horizon, one new feature will impact the multi-family market. The supply of units will increase. The increase in demand will not be as strong as the supply side increases. Thus, the multi-family market will soften a little, although it will still remain in a very healthy condition. Commercial space vacancy rates should continue moving up with rent increases moderating during this forecast horizon. The weak local economy will dampen demand for retail space in particular. Over the forecast horizon the industrial market will become a bit weaker. The increasing supply will not be matched by demand. Overall, container volume for major U.S. container ports as a whole is expected to decline 6.5% in 2008 compared with 2007. However, the severity of the impact has been less for the Port of Tacoma than for any other U.S. West Coast container port. As of September, YTD (year to date) volume for the Port of Tacoma had declined 2.3%, while the average volume for the U.S. West Coast had declined 7.5%. Overall, the Port of Tacoma will be well positioned for future growth as the U.S. economy regains momentum in late 2010 and 2011.

Pierce County Economic Forecast

A NEW SET OF ECONOMIC FORCES HIT THE LOCAL AREA Contracting housing markets, eroding credit markets, spreading worldwide financial crises, falling consumer confidence levels and now, increasing layoffs all are contributing to turbulent times for the world’s globally inter-linked economies. While the Tacoma-Pierce County economy will most likely avoid the worst of the impacts from these events, the local economy will suffer. On “the glass is half full” side, two of Pierce County economy’s main economic engines – military and health care – will remain fairly strong through this forecast horizon. The “half empty” side of the outlook is that the other foundational sectors, business services, aerospace support, and trade, will be weak, if not anemic. If not a recession, the U.S. economy is in the midst of a significant economic slowdown. The slowing national economy will put downward pressure on the local economy. Whatever stimulative monetary and fiscal policies come from the federal level, the impacts are not likely to provide much fuel to power the local economy during this forecast horizon. In addition, some unique local forces will add downward pressure. Soft economies throughout the world will dampen international trade flows. The Boeing strike will generate negative ripple effects throughout the region as local suppliers see orders cancelled, delayed and reduced. Local area incomes will not increase much, depressing consumer confidence and curtailing spending. Restructuring and staff reductions at Weyerhaeuser will adversely affect the county. It was Washington Mutual that made national headlines, but everyone

in the financial and real estate industries will continue to experience problems. Employment growth in the financial and manufacturing industries will be almost non-existent during this forecast horizon. Finally, the sharp declines in asset values will continue to erode retail spending as households rebuild portfolio value. High gas prices over the summer had both good and bad impacts on the Pierce County economy. On the one hand, “staycations” kept households and their spending in the Puget Sound region, providing a boost. On the other hand, visitors cancelled trips to the Northwest, hurting local hotels, restaurants and shops. Relative to the nation, the negative impacts were less severe here, as this sector is a smaller (but growing) component of the economy. In the same vein, higher prices for home heating fuels will exact only a moderate toll on the local area’s economies – a plus due to locally mild winters and preponderance of hydro power. Energy prices may moderate over this forecast horizon, but it is not likely they will return to pre-2008 levels. Additional problems may come from the relocation announcements by some major employers. Russell Investments may choose to move out of the Tacoma urban core. DaVita’s need for more space may also lead them to look outside the area. Given the large amount of attractively priced space throughout the region, competition will be intense. Since both are major employers, these possibilities create uncertainty in the already weak real estate industry. Finally, governments will face significant budget issues. Tax revenues will decline. Demands for services will increase. Since state and local governments are required to balance their budgets, the most likely scenario will be spending cuts and small

tax increases. Both will add downward pressure on the Pierce County economy.

PIERCE COUNTY ECONOMIC PERFORMANCE The Pierce County economy continued moving upward during the last half of 2007, although not as robustly as expected. In part this was due to contracting construction activity. Housing inventories started to accumulate, industrial space inventory growth slowed new developments and some public sector projects hit snags. The growth of military spending moderated, as troop levels stabilized. And, as expected, trade flows through the port did not rise as much as in the past. For the year, the PCEI, an overall measure of inflation-adjusted economic activity, moved up by just one and a third percent, about one-half a percent less than expected. The strong in-migration and job creation that started late in 2007 produced solid gains for the local area. Downward pressures from the national economy did not hit the local area with much force. In the first quarter of 2008 local economic growth started to accelerate. Upward momentum built during the second

Pierce County Economic Index • 5

Pierce County Economic Index

and third quarters and Pierce County’s economic growth was stronger than expected. The economy improved by almost 3.5% during the second and third quarters of 2008, besting last year’s forecast of 2.25%. Fourth quarter economic growth in 2008 will slow modestly. The PCEI will move up by two and a quarter percent. The current financial crises will have only moderate effects on the Pierce County economy in 2008. However, cautious consumer spending, especially due to the housing market weakness and asset value erosion, will moderate growth. A strengthening dollar will offset some of

the softness in trade that will come from our trading partners’ weaker economies. Continued spending by the military and an expanding health care sector will provide some boost to the area. For the year as a whole then, 2008 will be good. The fuel price increases and financial crises did not hit the local economy as fast or as hard as they did other areas of the country. The strong health care and military sectors provided a counter-cyclical support that offset some of the negative national forces. Economic growth bettered expectations by more than a full percentage point, with the PCEI gaining 2.8% for the year. When 2008 ends, the PCEI will reach an all-time high at just over 190 (1980 = 100). By the first quarter of 2009 the effects of the national economic weakness will begin to take a toll on the Pierce County

economy. Growth in the first quarter of the year will be at a virtual standstill. The PCEI will move up by just over one-tenth of a percent relative to the first quarter of 2008. Concerned consumers, cautious employers and a depressed housing market will keep spending and income growth in check. The impacts from local layoffs, the Boeing strike, bank consolidations and closures and lower stock values will spread through the entire Puget Sound area, not sparing Pierce County. Local construction spending will remain at a reduced level, as some developers turn cautious and others find financing difficult to secure. The buoyancy provided by the health care and military sectors will barely counter national and regional forces. The second quarter of 2009 will see the start of negative growth for the local economy. Deteriorating regional conditions will combine with a national downturn to offset any local economic strength. The PCEI will fall by 1.5% in the second quarter. The decline will worsen in the third quarter, when the PCEI will fall by 2.5%. While the economy will still be contracting in the fourth quarter, the downward slide will moderate. The PCEI will move down by one and three quarters percent in the fourth quarter. By the “two consecutive quarters of decline” characterization, the local economy will be in a recession as 2009 comes to a close. For the year as whole, the PCEI in 2009 will drop by 1.4% from its 2008 record high level. This will be the first yearover-year decline in the PCEI since the mild slowdown of 1991, when the index fell by just one-half of one percent. The recession of 2009 will be the deepest in thirty years.

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Pierce County Economic Index • 7

Labor Activity and Unemployment

Labor Force As expected last year, labor force growth in Pierce County continued strong through the middle of 2008. The increase in workers to the area in 2007 exceeded the forecast by more than one percent, with the civilian labor force moving up by almost three and a quarter percent during the year. Strong in-migration rates brought new workers to the area, as local economic conditions bested other economies in the region. The magnetism of a good economy continued to pull migrants into the area during 2008. Attractive housing opportunities proved to be a lure for new and existing households. Amenity enhancements, such as town center developments, improved shopping districts and good transit options increased the appeal of the smaller urban locations throughout the county. Annualized civilian labor force growth continued in excess of three percent during the first three quarters of the year: 3.25% in the first quarter, just over 3.4% in the second and 3.1% in the third. Labor force growth will slow significantly to just one and a quarter percent during the fourth quarter of 2008. Weak housing markets throughout the region will inhibit households’ ability to sell homes and move to Pierce County. Concern over economic conditions will discourage some from coming or encourage others to move out in search of better opportunities. On an annual basis, nonetheless, both 2007 and 2008 will be very solid years for attracting new workers to Pierce County. The annual gain in workers during 2007 was 3.2%, which translates into just over 12,000 new workers. The 2008 gain of 2.75% means more than 10,500 new workers will join the County’s labor force. The 2009 downturn in economic activity will slow labor force growth dramatically.

Tight housing finance conditions will keep in-migration rates depressed. And, bad employment news coming from Weyerhaeuser and Boeing will reduce incentives to move to, or stay in, the area. The labor force will grow by about 1% in the first quarter of 2009, then by one-half a percent in the second quarter, followed by 1.7% in the third and ending the year with an increase of three-quarters of a percent. For the year, the labor force will increase by just 0.6%, or just 2,400 new workers.

Employment Even though the overall performance of the 2007 Pierce County economy was not as strong as forecast, job growth exceeded expectations. For the year as a whole, 3.6% more jobs became available in the county, well above the forecast increase of 1.7%. In part this resulted from the past investments in infrastructure and productivity improvements. Also, the strong job growth reflects the particular nature of the local economy, with health care and the military creating new employment positions. In addition, job growth was helped by the developments in many of the smaller urban centers such as DuPont, Bonney Lake and Sumner. This strong growth was consistent throughout the year, with gains of 3.3% in each of the first three quarters and 4.3% in the fourth quarter. During the year almost 10,000 new job opportunities appeared in the county.

uncertainty hit local employers. The number of third quarter jobs was just three-quarters of one percent above the 2007 level. In the fourth quarter of the year job growth will turn negative, with a decline of just over one percent from the year before. The weaker second half of the year pushed the annual rate of job growth to just 1.2% in 2008, still an increase of 3,500 jobs. Weak job growth will continue into 2009. Employers will avoid adding payroll expense until market uncertainties dissipate. Layoffs will keep net job creation down. Trade-related and construction industry employment will be especially weak during the year. The tourism sector will see below average growth as travel to the area declines and regional competition for travelers intensifies. Net job losses are anticipated for the first half of 2009. During the first quarter, the annualized rate of decline will be just over one percent. The number of jobs in the second quarter will fall at just under a one percent annual rate. Job growth will turn positive in the second half of the year. Employment will rise by just under one percent in the third quarter, and then job growth will improve to 1.5% during the fourth quarter. For the whole year, though, the employment will remain basically unchanged from 2008 (up by a scant 0.1%).

Unemployment Solid gains in employment, albeit not quite as robust, continued in the first half of 2008. The annualized rate of job growth was 2.9% in the first quarter of the year. This rate fell to just over 2% in the second quarter of the year. Beginning in the third quarter of 2008, the impacts from a slowing economy, diminished expectations and financial

The most recent high-water mark for the unemployment rate was eight plus percent in 2002 and 2003. This followed the economic slow down of 2001. As job growth outpaced labor force increases, the rate dropped below six percent in 2004, and then fell to a low of 4.75% in 2007. The strong growth in employment

opportunities came from Pierce County employers and from strong regional economies in the Puget Sound region. Weaker local job creation combined with strong labor force growth pushed the Pierce County unemployment rate up during 2008. The rate increased to nearly 5.6% in the first quarter, then moved up slightly to 5.7% in the second quarter, and jumped to 6.1% by the third quarter. The jump in the third quarter was due to the slowing local economy while the labor force continued to show large gains. The unemployment rate will move up to 6.3% as the year ends, primarily due to reduced employment opportunities. For the year 2008, the Pierce County unemployment rate will average 5.9%, up from the 2007 rate of 4.7%.

rate will rise moderately, there should be minimal downward pressure on wages and labor costs under 6% for the past decade. An unemployment level in the 5% to 6% range indicates, for most local economies, a good balance between job growth and increases in the labor force.

Sluggish job growth, both in Pierce County and in the surrounding areas, will keep the local area unemployment rate elevated in 2009. The average unemployment rate in the first quarter will be 6.9%. Then, as labor force growth moderates, the rate will decline in the second quarter to 6.7%. Slower labor force growth and expanding job opportunities will move the rate down in the second half of the year. The rate will fall to 6.6% for the third quarter, and end the year at 6.4%. The 6.7% annual average Pierce County unemployment rate in 2009 will be eight-tenths of a percentage point above 2008. While the unemployment rate will increase, the level of unemployment will be uncharacteristically low for a recessionary period. In prior downturns the rate would reach the eight to ten percent level. The local unemployment should not reach that plateau unless the recession lasts for a protracted period or deepens due to national forces. Since the

Pierce County Economic Index • 9

Retail Sales Activity

As 2007 moved into the second half of the year, retail sales spending slowed substantially. In the first half of the year, dollar sales increased at about a 4.25% rate. Growth slowed to less than one percent during the third (0.6%) and fourth (0.3%) quarters. For the year, retail spending grew by just 2.2% over 2006. Since prices rose at a faster rate, the volume of goods and services moving off local merchants’ shelves (real retail activity) declined by 0.6% in 2007. Pierce County’s relatively slow

2007 economic growth was partly responsible for this sluggish spending. Another contributing factor was the increasing regional competition for retail dollars. Finally, the drop off in new housing purchases also contributed to the sales slowdown. The impacts from a weak housing sector continued to dampen retail spending in the county during 2008. Consumers exercised caution during the first half of the year. Retail dollar volume fell during the first quarter of the year by 5% compared to the year earlier level.

This pattern continued during the second quarter as retail spending was 5.5% below the same period in 2007. High gas prices started to impact retail spending in the summer of 2008. New and used vehicle purchases declined. Also during the summer, financial uncertainty, declining portfolio values and lack of confidence made consumers cautious. Retail spending in the third quarter was off by 4% on a year-overyear basis. Financial concerns will persist and the local housing markets will remain slow during the fourth quarter of 2008. Uncertainty about future conditions and worries about job prospects will also dampen spending as the year comes to a close. The holiday shopping season will be disappointing for area merchants. Rather than up by 4.4% as forecast last year, dollar retail spending will be off by 2.6%, a drop of $42 million in local spending compared to the fourth quarter of 2007. For the year as a whole, retail spending will fall 4.3% below the 2007 pace, well off the 4.4% growth forecast last year,. This means $262.7 million fewer dollars will go to local area merchant’s cash registers than did in 2007. Real retail activity, after adjusting inflation, will be off by 8.5% compared to 2007. Dollar retail spending will start to rebound in early 2009. Eventually households do have to replace and repair what wears out, breaks and depreciates. An improving housing market will mean new spending

for home furnishings, repairs and upgrades. Attractive interest rates and improved liquidity will stimulate purchases of durable goods, such as cars and appliances. Improvement will start slowly. Retail spending moves up by just six-tenths of one percent in the first quarter of 2009. Dollar volume will increase by just over 2% in both the second and third quarters of the year. However, these increases will be less than the rate of inflation, so real retail activity will continue to fall – down 3% in the first quarter, a 1.5% decline in the second and off 0.7% during the third quarter. The 2009 holiday shopping season will be modestly better than in 2008. Fourth quarter retail spending will be up by 2.4% over the 2008 rate, moving spending back to the level reached during the holiday season in 2007. Compared to 2008, Pierce County merchants will see an additional $37 million dollars in their tills. Even this improvement in spending will not match the inflation rate, and real retail activity will fall by a modest 0.4% in the fourth quarter. For the year as a whole, dollar retail volume will be up by 1.8% over 2008. This means $105 million more dollars for county merchants. For the third year in a row, the dollar volume increase will not keep pace with inflation, so real retail activity will be off by 1.5% for the year.

Pierce County Economic Index • 11

Personal Income

Total Personal Income Total personal income in Pierce County increased in 2007 by 4.8% over 2006, a bit below the anticipated 5.2%. During 2008 total personal income growth accelerated, as the economy improved. In 2008 income will increase by 7.6% over 2007. This means an additional $2.0 billion dollars of income in 2008 for Pierce County residents than they had in 2007. However, the outlook for 2009 is not as bright. With an economic downturn, Pierce County’s total personal income will move up very modestly, by just 3.9%.

Most of this dollar growth will be due to inflationary effects, not new jobs or improved productivity. Local households will see their incomes increase by $1.2 billion – one of the smallest increases over the past thirty years. Higher prices eroded some of the total personal income gains in 2007. In inflation adjusted terms, total personal income rose by 1.9% over 2006. Real total personal income gained 2.9% in 2008, better than the expected 2.5%. This was the result of the stronger than expected 2008 local economy. Most of this growth will come from higher wages and salaries going to already employed workers, not from any significant increase in the number of workers. In

addition, some of this income growth will be the result of increases in transfer payments (welfare, veterans, and retirees), not labor market earnings. In real (inflation adjusted terms) total personal income will move up by only one-half of one percent in 2009. This will be the smallest annual gain in inflationadjusted personal income in thirty years.

Per Capita Income The population in Pierce County has been increasing faster than personal income. The result is that per capita income growth lags the increase in the total dollars of income. In 2007, per capita income moved up by 3.6%, about one half a percent slower than expected. The better economic condition pushed the rate of per capita income growth in 2008 up to 6.5% -- well ahead of last year’s forecast of 4%. Not unexpectedly the downturn in the economy will significantly erode the growth of per capita income for 2009. The county-wide average income will move up by only 1.3%, increasing by just $500. Both in terms of the growth rate and the dollar amount, 2009 will be the weakest for per capita income growth in thirty years. In 2006, the average income for Pierce County residents was $35,800. In 2007 the average gained $1,300 moving up to $37,100. The increase for 2008 was $2,400, pushing the per capita level to $39,500. The average income of a county resident in 2009 will move up to just over $40,000. Much of the dollar gains will be eroded by higher prices. In inflation adjusted terms, per capita income gained only three-quarters of one percent in 2007. Real per capita income moved up by 1.9% in 2008. In 2009, real per capita income will decline by 1.9%, since the inflation rate will exceed the growth in per capita

income. This will be the biggest drop and only the second decline in Pierce County real per capita income over the past thirty years.

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Pierce County Economic Index • 13

Housing and Real Estate

Single-Family The slide in single-family housing activity that began as expected in late 2006, continued through 2007 and 2008. The decline deepened through the second half of 2008. Sales and new listings of singlefamily homes fell due to both weak local conditions and national mortgage and liquidity problems. While the sub-prime problem in Pierce County was not as severe as in other parts of the county, local lenders, buyers and financial agents all became more cautious as industry-wide problems rippled into the local economy, buyers lost confidence and sellers faced lower prices. Sales activity fell in each quarter of 2007 – down by 4% in the first quarter, 7% in the second, 10% during the third, and by 13% in the fourth quarter. These declines were in line with last year’s outlook. For the year as a whole, the Housing Index in 2007 was 8.7% below the 2006 level. For the year, the Housing Index (measuring the volume – not value - of new or used homes for sale or sold) will register its largest annual decline ever, down by 17.6% from 2007. Single-family sales activity continued its downward move during 2008. The declines got worse, with the Housing Index falling by 17% in the first quarter 2008, then by 21% in the second, and by 18% in the third quarter of the year. The rate of decline will slow as the year closes, with a 14.5% fourth quarter drop in the Index. Negative pressures on the local singlefamily market will start to ease up as 2009 progresses. Financial relief from national initiatives to help lenders and homeowners will bring some buyers back to the market. Current low prices will entice other buyers into the market. Improvements in national and international lending and credit markets will re-establish a flow of funds at reasonable rates for financing. However, adverse local economic conditions

will offset some of these positive developments, especially early in 2009. Single-family sales activity will decline through the first half of 2009. Compared to similar periods in 2008, the Housing Index will be down by 10% in the first quarter and then off by a modest 1.5% in the second. Market improvements will start to have positive impacts by the summer of 2009. Activity in the second half of the year will start moving up slowly – the Housing Index will be up by 0.6% in the third quarter, then by 1.6% in the fourth quarter of 2009. On an annual basis, the weak first half of 2009 will more than offset the improvements of the second half of the year, and the Housing Index will fall by 2.5%. The 2009 Housing Index will be back to its 2002 level.

Multi-Family Multi-family housing activity often moves just opposite to what happens in the single-family market. As singlefamily activity slows, households turn to the apartment market. When financing is not available or houses are not affordable, households stay in, or move into, multi-family units. Not surprisingly, then, the Pierce County apartment market has been fairly strong over the past few years. By the fourth quarter of 2007 the vacancy rate was 4.5%, below the 5% normal measure of a good market. The Pierce County vacancy rate remained below 5% into 2008 – 4.4% in the first quarter, 4.6% in the second and 4.3% during the third quarter of the year. Over this same time period rents have been increasing at a moderate rate. During this forecast horizon, one new feature will impact the multi-family market. The supply of units will increase. To some extent this will be the result of new construction. What

will be new, however, will be the shift of units from the condominium side of the market to the apartment side. This influx of new-to-the-market units will help keep rents in check and increase the vacancy rates modestly. On the demand side of the market, the number of households searching for apartment units will continue to increase, both because of a slowing economy and the inability to finance home purchases. However, the increase in demand will not be as strong as the supply side increases. Thus, the multi-family market will soften a little, although it will still remain in a very healthy condition.

Commercial The commercial office market remained fairly stable during 2007. While the vacancy rate rose somewhat during the first half of the year, the rate moved back down to just under 7% in the third quarter and then up to 7.3% during the fourth quarter of the year. Absorption rates were good during the second half of the year, and the number of new square feet coming to market was moderate. Class A space, especially in the urban centers, remained the tightest segment. The vacancy rate moved up a bit to about 7.7% during the first half of 2008. Rents held steady across geographic and quality segments of the market. Absorption by medical care providers was particularly strong during the first half of the year. Geographically, the west side of Tacoma and University Place were the strongest markets. While vacancy rates moved up in the third quarter to 8.6%, the Pierce County rates were among the lowest in the region. Rents also moved up by about 6% to 10%, depending on quality and location. Class A space in downtown Tacoma continued to be a very tight market segment. Vacancy rates should continue moving up with rent increases moderating

during this forecast horizon. The weak local economy will dampen demand for retail space in particular. The market for medical space should continue to be the strongest sector, especially as new facilities in Gig Harbor and the Puyallup area come on line. With an increasing amount of vacant space throughout the region, especially in King County, competition for tenants will make this a “renters’ market” over this forecast period.

space needs for manufacturing and distribution will not grow much. The biggest user, IKEA, already has met its space need. If the Microchip Technology site is redeveloped and brought to market, this will add another significant amount of space. The increasing supply will not be matched by demand, so vacancies should move up with no upward pressure on lease or rental rates.

Industrial A large amount of new space came to market during the third quarter of 2007. This kept the vacancy rate at 10.7%, one of the higher rates in recent periods, but down from the second quarter. Absorption of space started to improve during the second half of the year. Vacancies fell a bit during the fourth quarter, ending the year in the 9% to 11% range. During the first half of 2008 a fairly large amount of new space came to market. However, increases in demand kept the vacancy rate fairly steady at around 10%. The weakest areas, also the areas with largest new supplies of space, were around the Port of Tacoma and Fife areas. The Lakewood sub-market continued to register the lowest rates in the region. Much of the available space in the Fife area was leased up by the third quarter of 2008, and this sub-market area experienced fairly tight conditions (vacancy at 2.5%). In other market areas vacancy rates increased over the first half of the year. Mainly this was due to a large of amount of new space coming to market in the Sumner, port and Frederickson areas. Over the forecast horizon the industrial market will become a bit weaker. The

Pierce County Economic Index • 15

Port of Tacoma

Prepared by Josh Adams, Business & Economic Analyst Economic & Industry Trends The slowdown in the U.S. economy has produced a ripple effect throughout much of the world. As U.S. consumers continue to cut back on discretionary spending amid a worsening financial crisis, imports from Asia and other parts of the world have seen a substantial decline. This decline in imports is expected to continue through the holiday season, a time of year which under more normal conditions is known for its increase in shipping activity, and well into 2009. Over the first half of 2008 a strong export market helped to mitigate the declining container trade as the weakened U.S. dollar made U.S. exports more attractive to consumers in other countries. However, in the last couple of months this trend has subsided as the U.S. dollar has increased in value and as Asian and European economies have in general lost momentum in the wake of a likely U.S. recession. Overall, container volume for major U.S. container ports as a whole is expected to decline 6.5% in 2008 compared with 2007 as both foreign and domestic consumers cut spending, retailers more carefully manage inventories and shippers reevaluate their supply chain decisions. Also contributing to the decline in trade is high oil prices. While the price of oil has taken a sharp and welcome decline in recent months, it is expected to remain high over the mid to long-term and will therefore be a determining factor in supply chain management decisions. From an industry perspective, the current economic downturn and higher fuel costs will impact U.S. container ports as import and inland point cargo shrinks and as over-capacity on various trade routes leads to route changes, reduction

in frequency of port calls and other cost cutting measures. Also, competition among ports for carrier business will continue to intensify as port origin/ destination combinations are reassessed and as new port developments in British Columbia and on the East & Gulf Coasts take advantage of shorter Trans-Pacific transit times and all-water East Coast routes via the Panama Canal. The Port of Tacoma, like all other ports, has been impacted by the above mentioned economic factors and industry trends. However, the severity of the impact has been less for the Port of Tacoma than for any other U.S. West Coast container port. As of September, YTD (year to date) volume for the Port of Tacoma had declined 2.3%, while the average volume for the U.S. West Coast had declined 7.5%. This is due in large part to aggressive and focused efforts by the Port to retain existing customer business as well as secure new customers.

Cargo Activity By year-end 2008, the Port’s container business is forecasted to decline 2.9 percent, following a 6.9% decline in 2007, as the Port continues to feel the effect of a weakened US and global

economy. In January 2008, the Port added one new service, softening the impact of the decline in volume from the previous year. Despite the current downward shift, from 2002 to 2006 the Port enjoyed 40% growth in its container business. The Port of Tacoma is home to the two premium carriers serving the Alaska market – Totem Ocean Trailer Express (TOTE) and Horizon Lines. Horizon also provides a weekly service to Hawaii. In 2008, the Port will see its first annual decline in domestic container volume in 5 years, with a year-over-year drop of 3.4%. Over the 5-year period prior to 2008, this business saw average annual growth of 1.5%. The Alaska/Hawaii business accounts for about 25% of the Port’s total container volume, and has a significant economic impact on the local community as most of this cargo is stored in the Puget Sound area prior to shipment. The Port’s breakbulk business will reach approximately 120,000 short tons in 2008, down 3.0% from 2007. This is following a decline in 2007 of 3.9% over 2006. Breakbulk consists of items too large or awkward for efficient shipment in containers. Military shipments are a significant part of this business, and the relationship between Fort Lewis and

the Port of Tacoma is important for the military, Port and local community. Nonmilitary breakbulk cargo consists of heavy machinery/equipment and steel. While Tacoma is home to the state’s largest auto port, business saw a decline in 2008. The Port will handle approximately 170,000 units, down 3.0% from 2007. This is following upon 3 years of consecutive growth where the Port’s auto business grew 28.7%. Grain exports are projected to reach 6.5 million short tons this year, an increase of 10% from last year. A major contributor to this export growth was the weakening of the U.S. dollar in relation to other currencies throughout much of 2008, which helped to fuel an increase in global demand for imported agricultural commodities.

announcement of NYK coming to the Port mid-year 2012. The Port is working hard to plan and build the facilities and infrastructure required for the future. This is seen not only in the development of the East Blair Peninsula, but also in a planned wharf extension for one of the Port’s existing customers and road and rail infrastructure investments throughout the port. Overall, the Port of Tacoma will be well positioned for future growth as the U.S. economy regains momentum in late 2010 and 2011.

Looking ahead in the short-term, 2009 is forecast to see a further drop in volume for the Ports container service, as the effects of economic recession continue to be felt and the Port’s customers reevaluate their services, vessel rotations and ports of call. For 2009, overall container growth will decline a further 6.4% from 2008 levels, due mostly to decline in transpacific trade. The Port’s Auto and Breakbulk lines of business are expected to remain flat with 2008 levels and grain is projected to decline by about 6% as international demand for U.S. exports remains soft. Over the mid to long-term, the Port continues to have the assets that are in short supply – land next to deep water with efficient inland connections. Commencement Bay is deep and port waterways are able to handle the largest containerships in the world. Most existing terminals can be densified and land is available for new terminals. This was demonstrated back in July 2007 with the

Pierce County Economic Index • 17

Data Tables

2008-2009 PCEI Summary and Forecast Note: Data used to construct the charts, graphs and tables ∙ Pierce County, Washington

Year

Quarter

PCEI Index 1985=100

2002 2002 2002 2002 2003 2003 2003 2003 2004 2004 2004 2004 2005 2005 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 Forecast 2008 Forecast 2009 Forecast 2009 Forecast 2009 Forecast 2009 Forecast

Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4

166.476 166.836 167.165 167.615 167.735 168.286 168.913 168.265 168.479 169.662 171.289 173.905 175.893 177.701 179.468 180.682 181.073 182.226 183.143 183.529 184.453 184.342 184.780 186.138 188.482 190.610 191.297 190.296 188.749 187.699 186.600 186.967

NonAgricultural Employment (x1000)

Percent Unemployment Rate

Taxable Retail Sales (millions of $)

*Housing Activity Index 1990=100

238.47 243.27 245.90 246.77 244.17 248.20 249.23 251.20 248.23 255.20 255.60 260.23 257.27 263.47 265.20 269.13 266.70 272.13 272.33 275.60 275.67 281.53 281.47 287.57 283.73 287.40 283.57 284.55 280.66 284.72 286.00 289.00

8.80 8.30 7.67 7.43 8.50 8.37 8.27 7.60 8.10 7.17 6.53 6.17 6.63 6.00 5.67 5.20 5.43 5.20 5.13 4.63 5.10 4.60 4.73 4.53 5.57 5.73 6.13 6.28 6.89 6.70 6.64 6.41

990.52 1099.81 1171.09 1223.73 1050.97 1168.21 1231.57 1295.69 1134.75 1249.02 1304.51 1409.78 1228.79 1363.43 1464.91 1511.46 1332.30 1481.41 1544.78 1596.35 1411.88 1518.67 1553.89 1601.37 1340.92 1434.08 1488.94 1559.19 1349.46 1463.73 1518.95 1596.47

166.68 165.96 172.05 175.72 183.63 190.05 193.50 196.10 192.07 196.33 198.86 204.95 213.52 220.88 230.83 237.71 236.50 237.22 231.89 227.54 226.25 220.37 207.81 197.51 188.29 174.21 170.44 168.87 169.42 171.64 171.54 171.54

Key local economic variables for Pierce County, Washington as of November, 2008. Quarterly Data figures from First Quarter 2002 through Second Quarter 2008 are actual data. Forecast of quarterly figures are from Third Quarter 2008 through Fourth Quarter 2009.

Annual Data are actual data from 2002 to 2007 for Total Personal Income. The forecast of annual figures for Total Personal Income are from 2008 through 2009.

*Housing Activity Index: A volume of new or used homes for sale or sold. A value of 166.68 means the number of homes for sale or sold is 66.68% above the 1990 average of the number of homes for sale or sold.

Annual Data are actual data from 2002 through 2007 for the Port of Tacoma Containerized Cargo. The forecast of annual figures for the Port of Tacoma Containerized Cargo is from 2008-2013.

TEUs = Twenty-Foot Equivalent Units. This is a standard measure of containers, which come in a variety of lengths that are converted to this standard for data compatibility. The short ton (ST) is a unit of weight equal to 2,000 lb. (around 907.18474 kg).

The Pierce County Economic Index (PCEI) is sponsored by BCRA, Brown & Brown Insurance of Washington, Colliers International, Puget Sound Energy, Regence BlueShield, Tacoma Public Utilities and Venture Bank. The Tacoma-Pierce County Chamber presents the PCEI Report annually at the Horizons Economic Forecast Event.

Pierce County Economic Index • 19

Special Thanks

The 2008 Pierce County Economic Index (PCEI) Report was presented to the community at the Horizons 2009 economic forecast event. Complementing the conference were presentations by several individuals and a sharing of expertise and information by others. A special thanks to the event’s keynote speaker, Dr. Martin Regalia, Vice President for Economic and Tax Policy and Chief Economist, U.S. Chamber of Commerce. Dr. Regalia appears on national television news and debate programs, testifies before Congressional committees, authors articles and publications on a variety of

economic topics, and speaks to many groups across the country. Our special thanks to Dr. Regalia for his enjoyable delivery of a complex and challenging topic at a complex and challenging time. A complementary workshop featured insights by professionals in our community. The workshop: “Money & Credit,” offered insights on the current credit crunch and international money availability. It was moderated by Bruce Marley, Venture Bank with panelists: Jason Bloom, Washington Association of Mortgage Professionals/Washington State Mortgage Broker Commission/ Elliot Bay Mortgage; Kerry Keely, Evergreen Business Capital; Erik

Ristuben, Russell Investments. A new feature of the Horizons event this year was the production and distribution of real estate 2020 reports by the professionals at Colliers International. The following reports and the individuals that produced them are: • Eric Cederstrand, Tom Brown - Downtown Tacoma Tax Incentives • Connie Boyle - Retail and the Expanding Lacey Market • Kim Marvik and Hillary Bridge Gig Harbor’s Transformation into a City • John Powers, Sr. Managing Director - 2020 “Green” Forecast Report Also, a special thanks to “the Tokens improv!” (www.tokensimprov.com) for their outstanding improvisations in support of the Chamber’s premier event. A very special thanks is extended to University of Puget Sound, for their active support of Dr. Bruce Mann and Dr. Douglas Goodman, authors of the PCEI. The University of Puget Sound is an independent predominantly residential undergraduate liberal arts college with selected graduate programs building effectively on a liberal arts foundation. The University, as a community of learning, maintains a strong commitment to teaching excellence, scholarly engagement, and fruitful student-faculty interaction.

PCEI Sponsors

Pierce County Economic Index • 21

Industry Publications

Manufacturers Directory What’s your market? Is it Washington State? Puget Sound? Pierce County? The Chamber can provide you with a directory of manufacturers scoped to your needs. The Chamber offers a CD that includes data in a searchable format by company, product codes and location. Information includes address, phone and fax numbers, as well as email and website if available. Plus, an online demonstration can be arranged before you purchase. You can choose to use this service for just one year for a low price, or opt for a renewable subscription for an annual fee. For more information or for a copy of the Manufacturers Directory, call Gary Brackett, 253-627-2175, [email protected].

Consumer Demographics Did you ever wonder about the potential customers surrounding your place of business? Would the customer base in another location match your product line? Is your competitor’s geographical customer base different than yours? What are their buying habits? The Chamber can develop consumer demographic information by various radii, drive times or geographical areas, track trends and chart projections for several comparable areas. As a service to our members, the Chamber offers this information in a downloadable format in various templates. The results can be emailed to you. Call Gary Brackett, [email protected] for a phone consultation at 253.627.2175 about site location analysis and market research.

Save the Date

December 10, 2009 7 a.m. to 10 a.m. Greater Tacoma Convention & Trade Center Please plan to join us. Pierce County Economic Index • 23

950 Pacific Avenue, Suite 300 PO Box 1933 Tacoma, WA 98401 p | 253.627.2175 f | 253.597.7305

www.tacomachamber.org