of Beacon Economics. We see an economy that is really starting to surge forward,

Transcription

1 The Leading Source for Legal News & Information THE EAST BAY ECONOMIC ROUNDUP WINTER 2012 Wendel Rosen, Grubb & Ellis, Mechanics Bank and The Swig Company recently sponsored a review of economic and real estate trends in the East Bay called Oops...Economic Forecast Correction. Three prominent economists discussed why we have not yet recovered and what the future holds. Here is a report, which chronicles many of the facts, statistics and opinions they shared in their presentations. STATE AND REGIONAL ECONOMY IMPROVING, ECONOMISTS SAY: All Indicators Point Toward Continued Recovery, With No Signs of a Feared Double Dip Recession The U.S., California and East Bay economies are on the right track, with no evidence of recession on the horizon. That s the consensus of three local economists who spoke to East Bay business leaders at an invitation-only event cosponsored by Wendel Rosen in November. California is not collapsing. Quite the opposite, said Christopher Thornberg, chief economist for the California State Controller s Office and founding partner of Beacon Economics. We see an economy that is really starting to surge forward, and the Bay Area all by itself is leading the charge. The strengths of San Francisco and San Jose are spilling over into the East Bay now. Ultimately I am very, very hopeful. IN THIS ISSUE 1 State and Regional Economy Improving, Economists Say 5 The East Bay: A Distinct, Powerful Regional Asset 5 Real Estate Trends for a Changing Economy The rhetoric and media reports may be grim, but the economy has been growing for nine straight quarters, albeit slowly, said Thornberg. One of the reasons we continue to feel we are in a recession is that this recovery has been really lousy. (continued on page 2) wendel.com

2 (continued from page 1) According to Thornberg, the U.S. continues to suffer an output gap the difference between what we could be producing and what we are producing. So while the country, state and region have not grown fast enough in those nine quarters to make up for all lost jobs and productivity, all indicators are pointing in the right direction. In the U.S., California and the East Bay, all the numbers point not to a downturn, but to an economy that is actually starting to pick up some speed, Thornberg said. While acknowledging that the national deficit is a worry, there is still room to borrow, Thornberg noted. And though consumer confidence is low and a good deal of the economy is driven by consumer demand, it is not a data point worth much focus. Consumer confidence is a nonindicator, but more a reflection of what people heard on NPR or CNBC that morning, Thornberg said. A better indicator is consumer credit delinquencies, which are falling. We are seeing record low credit card debt, Thornberg said. This is not an overleveraged American household. Other positive signs include a weak U.S. dollar, which makes our exports cheaper abroad, and lower West Texas Intermediate oil prices, which help both consumers and businesses. In the state and East Bay region, taxable sales are rising. Exports from state production are up 25 percent over last year. Locally, hotels are seeing increased occupancy rates, and while the gains may be minor compared to the We are the envy of most regions across the globe. Karen Engel, Executive Director, East Bay Economic Development Alliance number of jobs lost over the recession, the East Bay gained 3,300 jobs over the course of last year. In addition, while office rents in Oakland are stable, they are beginning to rise in San Francisco and San Jose, and that will be good for the Oakland commercial market. Additionally, the Port of Oakland remains extremely busy, and the Bay Area is well positioned as a gateway to the Asian economy, noted Brian Pretti, Senior Vice President of Mechanics Bank. As Asia gains financial power, we benefit, he said. The last three homes the bank sold from trusts were bought for all-cash offers by Chinese nationals who had never seen the property, but bought it off the Internet. How much more good news do you people need? joked Thornberg. In residential real estate, housing prices have stabilized, as have rental rates. Foreclosures in the East Bay are settling down, Thornberg said. There will be no big second wave of foreclosures. The percentage of mortgages in serious delinquency is falling at a rapid pace. Foreclosures, while personally painful, are the best medicine for a mar- (continued on page 3) 2

3 (continued from page 2) ket and consumers who are underwater with their properties. It doesn t make sense to stay in a house if it s $100,000 underwater. Consumers credit will heal faster than their equity will, Thornberg continued. The market, he said, is just where it needs to be. He added, California s problem is not that housing prices aren t rising, but that housing prices haven t fallen more. Housing is not a good investment. It is as simple as that. You are better living in an apartment and putting your money in other investment vehicles. Get off this idea that your house is an investment, because it is not. wasn t nice but somehow was still popular? That s California in a nutshell right there. Local economist Karen Engel, Executive Director of the East Bay Economic Development Alliance, said there is little evidence that businesses that start in the East Bay move out of state. Additionally, the region is seeing growth How much more good news do you people need? Christopher Thornberg, Chief Economist, California State Controller s Office in the vital sector of PSTS, that is, professional, scientific and technical service jobs. Yes, the East Bay lost one in 10 jobs in the recession, and more jobs than the rest of the state, on average, in the early part of the recession, she noted. Some sectors were hit hard, such as construction and government, and the closure of the NUMMI plant in Fremont slashed the number of local manufacturing jobs. But we are recovering. The East Bay has tremendous assets. We are the envy of most regions across the globe, Engel said. The region benefits from an excellent quality of life, a highly educated workforce, world-class infrastructure and vibrant centers of innovation. Most CEOs feel they are an integral part of the entrepreneurial climate, she said. The East Bay is the only economic region home to three national labs, Lawrence Livermore, Berkeley Labs, and Sandia. The labs are critical assets, she said. The Berkeley lab is looking to expand, creating another 2 million square feet of research facility, doubling in size. She also expects to see growth in the biotech and clean tech sectors. The East Bay is a net job importer. We gain more jobs than we lose. (continued on page 4) The housing market is stalled because homeowners lack equity. There are record low levels of equity in the housing market today, Thornberg said. Addressing concerns that California is not friendly to business and the staggering inflation in items such as the cost of permits, Thornberg said that doesn t seem to have deterred the growth of Silicon Valley and tech darlings such as Twitter and Zynga in San Francisco. I know it s seen as business unfriendly, but remember that pretty girl in high school who 3

4 Today s politicians have no experience with these colliding economic cycles. Brian Pretti, Senior Vice President, Mechanics Bank economic cycle was unlike any the country had experienced, because it involved the collision of a long-term credit cycle with a short-term market cycle. Credit is the oil that makes the economy go. It s a long hard road, so plan accordingly. Government interventions in the economy tend to be very short-term in orientation and outcomes, Pretti said, while we are at a vortex of longsimmering economic cycles. (continued from page 3) Thornberg said that while the poor state of K-12 education is a huge economic worry, the state itself is very close to righting itself financially. One more round of California cuts and we are out of this mess. When talk turned to the stock markets and global markets, Thornberg said consumers need to get over the idea their assets will grow other than through old-fashioned saving. This is not a 7 or 8 or 12 percent return environment. Stop watching the market, Thornberg advised. The market is the 13-year-old daughter of the U.S. economy. It is a drama queen. Pretti had a more pessimistic view of world macroeconomics. This past Are we looking at the potential for a deleveraging cycle ahead? We are. Does it mean the end of the world? No, but it is painful, nonetheless, while we are living through it. Thus, economic rhythms will be more subdued while we heal, Pretti said. Expansion and contraction cycles will be shorter. The chances of having 10-year expansion cycles are slim. Thornberg had a much more sanguine approach to global financial struggles, which he said are plagued with family drama. Europe is kind of like All My Children, with even creepier characters. Greece will not default, and Greece is not Lehman. And, its troubles are not a surprise. Nobody thinks Greece wasn t going to fail. The rest of Europe will infuse money into its economy, just as the Americans did with the TARP (Troubled Asset Relief Program). TARP worked, they saw that, and they will do the same thing, Thornberg said. Does anyone think [French president Nicolas] Sarcozy will let a major French bank fail one year from the elections? (continued on page 7) 4

5 Real Estate Trends for a Changing Economy by Daniel B. Myers Following several very turbulent years, from a legal perspective, we see the following trends in the commercial real estate market in 2012 and beyond: THE EAST BAY: A Distinct, Powerful Regional Asset Economists Christopher Thornberg of Beacon Economics and Karen Engel, Executive Director of the East Bay Economic Development Alliance, have been studying the East Bay as a separate economic region for more than a decade. They see the region as something special that benefits from the economic strengths of San Francisco and Silicon Valley, but with a force and assets all its own. The East Bay was traditionally a manufacturing economy. Those legacy industries closed over time, but many were replaced by so-called advanced manufacturing jobs, and the region has transformed itself. Manufacturing still matters, said Engel. We need to focus on how do we protect that asset. The East Bay has 9.6 percent unemployment, compared with a 10.9 percent state unemployment rate. Locally, there are 1,266,600 individuals in the labor force, but only 1,131,800 jobs. (continued on page 6) Retail Leasing: A slight uptick in retail leasing particularly for opportunistic tenants in quality locations. Re-use of Commercial Buildings: The strong potential for re-use of existing dark buildings under the following scenarios: New owners upgrading buildings to attract new tenants for the same uses as before this type of re-use could raise legal issues if the prior uses were grandfathered under zoning requirements and the spaces have been dark for some time. Existing or new owners attracting new tenants for different uses, which could require rezoning/general plan amendments, and new entitlements, permits and variances. Greater Per Square Foot Density: Higher psf density of users in commercial buildings (particularly in high-tech buildings) this could have ramifications throughout the real estate industry, including affecting building values, demands and layouts, parking requirements, life safety issues and permitting requirements. Climate Change: Although the landscape is not yet fully clear, climate change requirements will have a significant impact on the real estate industry once Senate Bill 375, the Sustainable Community Strategies by Regional Agencies, Cities and Counties and the climate change requirements of the Bay Area Air Quality Management District (BAAQMD) and the San Francisco Bay Conservation and Development Commission (BCDC) are fully developed and implemented. BAAQMD s new CEQA thresholds (which include rules for evaluating a new project s greenhouse gas emissions) are currently on hold due to a successful lawsuit brought by the California Building Industry Association. Redevelopment: With the forced demise of Redevelopment Agencies and the requirement to dispose of RDA properties, there may be new opportunities to acquire land at potentially advantageous prices, although the process governing such sales may not be determined for weeks or months. Daniel Myers, a Partner at Wendel Rosen, represents clients in real estate transactional matters and serves as the leader of the firm s Real Estate Practice Group. 5

6 The Wendel Report The East Bay Economic Round-Up Winter 2012 ing to climate change. Finally, the elimination of redevelopment agencies is a particular concern for our region. Most immediate, she said, the state budget crisis and K-12 education cuts make it difficult for employers to find and recruit talented employees. But the region has tremendous assets, in particular, three national research labs, Lawrence Livermore, Lawrence Berkeley, and Sandia Lab in Livermore. Berkeley Lab is doubling in size, adding 2 million square feet of offices and labs, and the Lawrence Livermore and Sandia labs are creating a Livermore Valley Open Campus, which will add 5,000 jobs to the local economy. The East Bay (continued from page 5) The hardest hit employment sectors in the recession were construction, government and manufacturing, respectively. Construction alone lost 40 percent of the jobs in the sector. Much of the manufacturing losses were due to the closure of the NUMMI plant in Fremont, which employed 4,700 workers. However, the region has gained jobs in educational services, the PSTS (professional, scientific and technical services) sector and health care. We are deeply and well diversified, Engel said of the regional economy. Our strongest sectors for growth are PSTS, which accounts for more than 80,000 jobs, and advanced manufacturing, which accounts for 43,605 jobs. Alameda County, in particular, benefits from venture capital funding, second only to Santa Clara County in areas such as industrial (clean) energy, semiconductors and electronics instrumentation. The health care sector accounts for the largest number of jobs in the region, followed by retail, educational services, and food. Food is a good chunk of our economy at 8.2 percent. We have moved past the decline of the legacy industries, and seen growth in niche and specialty foods, Engel said. The region could do better at capturing jobs that come when local companies expand. We ranked the second lowest [in the Bay Area] in the number of jobs at companies that have been here more than 10 years. Only San Francisco is lower, she said. Engel said local business leaders do have concerns, including the broader U.S. economy, potential cuts in federal funding for research and development, and the state budget stalemate. Additionally, the region is threatened by education funding cuts at every level, cuts for basic infrastructure, and the costs of respond- 6 Thanks to an excellent infrastructure, the Port of Oakland continues to add to the local economy, and leads Los Angeles in exports. Geographically, the bulk of the region s employment growth is based in the existing employment centers of downtown Oakland, the Hacienda Business Park in Pleasanton and the Bishop Ranch Business Park in San Ramon. The percentage of jobs near transit, however, has declined over time. Most of the jobs near public transit are in downtown Oakland. Engel sees the East Bay as a vibrant economic asset. Wages here tend to be a multiple of the average regional wage. The region s emphasis in pharmaceuticals and medical devices will serve us well as the Baby Boomer generation ages. We are in the sectors we want to be in, and those are highly concentrated and doing well, she said.

7 THE EAST BAY ECONOMIC ROUND-UP WINTER 2012 To receive electronic versions of The Wendel Report and other real estate articles, please contact (continued from page 4) OAKLAND: 1111 Broadway, 24th Floor, Oakland, CA (phone) (fax) CENTRAL VALLEY: 1500 J Street, Modesto, CA (phone) (fax) wendel.com Wendel, Rosen, Black & Dean LLP, 2012 Printed on 100% PCW Recycled Paper C While Italy is also in some financial trouble, having the third highest country debt, behind the U.S. and Japan, Italy is the rich man of Europe who pretends to be poor by showing up at the grocery store in a T-shirt and ratty jeans. We do have a problem with income inequality, Thornberg said. We need to invest more in education to offset that, but we are not. 7