The Greater Phoenix lodging market is finally turning the corner after aggressive over building that caused plummeting occupancies marketwide over the past four years. Although supply continues to expand in this market, growth in demand is finally starting to out pace that of the supply. Based on the year-to-date results through the 3rd Quarter 2000 (YTD September 2000), this market is projected to finish the year with an occupancy of 63% and an ADR of $101. Looking ahead at 2001, with continued economic expansion of the region and slower supply increase, the Greater Phoenix Lodging Market is well positioned to continue its strong recovery. 

In our recent January 2001 Hotel Investment Sentiment Survey (HISS), hotel investors� impression of Phoenix indicated an equal buy/hold sentiment at 40 percent each following this market�s gradual recovery from an influx of new supply. Fewer than 7 percent of the respondents to HISS now rate Phoenix as a �Sell� market compared to 28 percent in the June 2000 survey. The average capitalization rate now ascribed to Phoenix is 11.3 percent, putting it on equal footing with Miami and ahead of Atlanta (11.5%) and Dallas (12.0%); however, Phoenix still lags Orlando (11.1%) and most cities in California or with �real� downtowns (9.8 to 10.8%). 

Greater Phoenix Economy 

The Greater Phoenix MSA has become one of the strongest metropolitan economies in the nation and has developed into a major marketplace, ranking 15th among all U.S. metropolitan areas.  Evolving from a tourism and research based economy, Phoenix has also become a mecca for high-tech manufacturing centers as well as one expanding in customer service operations, distribution, and professional services. Today, the Greater Phoenix MSA contains an exciting and dynamic economy. The region�s rapid growth came partly due to the favorable tax incentives for corporations to relocate within the state. Additionally, the region has benefited greatly from the national economic expansion and strong consumer spending. 

Over the last 50 years, Phoenix has recorded positive job growth in all but three of those years.  According to the Regional Financial Associate�s Précis: Metro 2000, the region�s work force is projected to grow at a Compounded Annual Growth Rate (CAGR) of 3.1% (2000 to 2004) to approximately 1.8 million. The unemployment rate as of 3Q 2000 was 2.7%, the lowest in the state and one of the lowest in the nation. Other positive signs for the economy of the Greater Phoenix Region are as follows: 

• Tourism continues to be strong in Phoenix, recording a 5% increase in total visitor volume to over 12 million in 1999.
• The Greater Phoenix Office Market (51 million SF) recorded a 9.7% vacancy rate in the 3Q 2000, down 0.2 percentage point from the previous quarter. 
• The region absorbed approximately 2.4 million square feet of office space year-to-date, largely in the Scottsdale and the Camelback Corridor sub-markets. Additionally, there are approximately 3.8 million SF of office space under construction in the region with the majority of space being constructed in the Downtown South office market (971,000 SF).  
• Phoenix Sky Harbor International Airport continues to exhibit aggressive growth in passenger traffic volume. In 1999, 33.6 million passengers utilized the Sky Harbor Airport, representing a CAGR of 5 percent since 1990. As of YTD 3Q 2000, the total passenger traffic count increased 8.2% over the same period in 1999 to 26.9 million. Construction of a new America West concourse, including 12 to 14 new gates that will expand daily departures from 220 to 300 in 2001, should also add to the region�s total visitor volume. 
• According to the Arizona Software and Internet Association, the number of internet companies and jobs related to this segment of high-tech industry has been growing at approximately 13% per year.

The Greater Phoenix lodging market has shown signs of strong recovery with the marketwide demand growth matching or out-pacing that of the supply in many of the sub-markets. In particular, the areawide full-service hotel segment fared well; reportedly, many of the area�s full-service hotels have been accepting once turned-away group segments to increase occupancy. The table below presents the region�s marketwide occupancy and ADR from 1998 to YTD September 2000: 
 

                                       
As reported by Smith Travel Research, the Greater Phoenix Region experienced room supply increase of 9.7% in 1999, while demand increased at a lower 5.9%. Thus, marketwide occupancy decreased 2.2 percentage points to 62.2% in 1999; during this period, the ADR decreased 1.3% to $98.00. The decrease in market yield is partly due to significant cutback in roomnights initiated by Intel and Motorola, two of the top demand generators within the Greater Phoenix MSA. 

As of YTD September 2000, the market�s supply increase continued with a 5.8% increase over the YTD September 1999 results; the Phoenix East and Scottsdale sub-markets experienced strongest supply increases. However, growth in demand outpaced that of the supply with a 6.9% increase, fully absorbing the new additions within the region. Overall, the region recorded a year-to-date occupancy of 63% and an ADR of $101. 

There are approximately 3,100 additional rooms entering the market in 2000. Looking ahead, the future supply growth is projected to be significantly lower than those of the previous three years.  Some of the larger hotel development projects that will positively influence the region�s appeal as a leisure destination are: 

• The 210-room Four Seasons Resort at Troon North opened in December 1999 on a 40-acre site adjacent to Troon North�s two golf courses. This property, given its location and branding, is expected to focus on the super luxury transient guest that currently patronize the Boulders and other California 5-star resorts;
• The 750-room Westin Kierland Resort, a proposed $180 million resort to be built on a 33-acre land surrounded by the existing 27-hole golf course in northeast Phoenix, broke ground in December 2000 and is projected to open in October 2002;
• Marriott Desert Ridge Resort, a proposed 950-room resort, is to located at Tatum Boulevard and Pinnacle Peak Road in North Phoenix. The proposed resort would be built within a 5,600-acre, mixed-use complex including office, industrial, high-tech manufacturing, healthcare and a major golf component. This hotel is projected to open in Fall 2002; and, 
• Starwood Hotels and Resorts, recently announced plans for a $75 million full-scale renovation and expansion of The Phoenician over the next five years, $29 million of which will be to renovate the 654-guest rooms.

The Greater Phoenix Region is well positioned to forge ahead into the Millennium with a strong start. It seems that all economic indicators of the region are pointing towards continued economic expansion. For the lodging market, the near- to mid-term outlook is favorable with continued growth in demand and slowing supply growth. Overall, there is strong up-side potential for the lodging industry within the Greater Phoenix Region.