Economy Beset by Real Estate Bust. ARIZONA

THIS always has been known as the land of wide open spaces. Today, some of the widest and most open in Tucson, Ariz., are to be found in real estate. Consider these vacancy rates:

Industrial, 40.9 percent.

Office, 25.4 percent.

Shopping mall, 14.2 percent.

Apartments, 11.7 percent.

Ironically, just a few years ago, the area was in the middle of a spectacular construction boom. But because of an overzealous building trend in more recent years and the elimination of real estate tax shelters in 1986, the economy here is now in a slump.

``There isn't a major developer in Tucson who isn't broke,'' says University of Arizona business school professor Eric Bleck.

These days construction-related bankruptcies here have multiplied. Arizona had the fifth largest increase in bankruptcy filings among United States bankruptcy districts last year. In 1988, 13,726 Arizona businesses and individuals filed for bankruptcy, up from 11,467 in 1987 and 8,906 in 1986. This January showed a 15 percent increase in filings over last year, says Kevin O'Brien, clerk of federal bankruptcy court. Of the Chapter 11 filings, for businesses that want to keep their creditors at bay while they try to reorganize their debts, Mr. O'Brien says ``roughly 25 percent'' were construction related.

As recently as 1986, Inc. Magazine, for the third straight year, ranked Arizona first among the ``hottest'' states for stimulating entrepreneurial activity and economic expansion. Since then, what seemed like a frontier economy has become more dependent on the public sector. Earlier this month, the Arizona Daily Star wrote, ``Southern Arizona in 1988 depended on government and other tax-supported employers to keep the economy afloat.'' According to the paper, the five biggest employers in southern Arizona last year were Fort Huachuca, a US Army base; the University of Arizona; the state; Davis-Monthan Air Force Base; and the Tucson school district.

Ranked sixth is Hughes Aircraft Company, which laid off 1,000 employees in 1988. International Business Machines Corporation and Magma Copper Company are the only other private-sector employers in the top 10. IBM will completely phase out its manufacturing operations in Tucson by the end of 1989, taking 2,800 jobs out of the area.

All of this is a sea change from the 1982-86 period. That was when Tucson was a one-industry town. The industry: construction growth. But according to Mr. Bleck, the crucial flaw behind the growth was that it had been ``created by investor demand, not user demand.''

Investor demand was created by the search for tax shelters. In 1981, Congress amended the federal tax law to make real estate one of the last shelters for US investors, and Arizona became a developer's paradise. It had attractive weather, a friendly business climate, and above all, limitless supplies of cheap land.

The roller-coaster ride began in 1982. Syndicators and joint venturers poured billions of dollars into the state. Over a four-year period, construction employment shot up 74.5 percent. It seemed that anyone with funds could not resist the bonanza. Cash-rich Arizona Public Service, a utility, for example, bought the state's biggest thrift, MeraBank, for $426 million, an estimated double its book value.

The result was overbuilding. By 1986, every category of construction was over capacity. That same year, Congress eliminated real estate tax shelters and the ``value of practically every income-producing property in the Arizona market declined, because there were no longer tax benefits,'' according to a newsletter published by the University of Arizona's College of Business and Public Administration. At that point, MeraBank's originations of loans dropped and delinquencies shot up. As a result, MeraBank lost $35 million last year.

What does the future hold? Kip Cassino, associate editor at the Tucson Business Journal, calls it ``one of those shallow depressions ... in an economy that has very shallow roots.'' He predicts that, once the market absorbs the overbuilding, it will go through another boom-bust cycle.

Meanwhile, Arizona continues to be a haven for retirees. In five southern Arizona counties, 137,943 people are social-security beneficiaries. Their benefits total $65,251,000. That should help keep the economy going until the next building cycle.