With this inaugural edition of the East Bay Quarterly Forecast, EDAB is pleased to provide up-to-date, forward-looking analysis of the East Bay economy for decision-makers and others interested in the East Bay. We are extremely fortunate that Christopher Thornberg, Senior Economist at the UCLA Anderson Forecast, will be lending his expertise in regional economies as well as the nationally recognized power of the Anderson Forecast’s econometric models to prepare these quarterly reports.
Over the next year, readers of the report will learn much about the East Bay economy that has previously been obscured by reports covering the entire Bay Area. We will learn more about the East Bay’s unique economic identity compared to the rest of the Bay Area, the state and the nation.
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Summary: Is no news good news?
While the data indicate that the diversification in the East Bay's more traditional economy have buffered it from the steep declines in employment seen in other parts of the Bay Area, the flip side is that a general East Bay recovery will be largely dependent on the same factors driving a recovery in the Northern California region overall, a return to national business investment. This sector of the economy will recover when corporate profits return or when the current stock of business assets becomes obsolete—in short the recovery is expected to be sluggish in the near term.
Sharp increases in East Bay unemployment reflect the cooling off of an overheated labor market, not a protracted downturn in the economy as experienced by the Southern California region in the early nineties. Venture capital is down significantly, but now approximates pre-bubble levels. Similarly the East Bay stock index decline of 20% over the past three months is more reflective of the performance of the stock market in general than a reflection of the relative performance of the East Bay’s largest employers - several of which have done well despite the market.
Understandably high tech and business services have led the employment decline among the East Bay’s weakest business sectors. This is also reflected in the high vacancy rates in commercial properties. We should expect East Bay sub-regions more dependent on telecommunications and semiconductors to follow the slower recovery path anticipated for the technology-heavy South Bay. Also, East Bay employment tied to technology jobs in other parts of the Bay Area will lag economic recovery even longer than is normal in early stage recovery.
On the other hand, the East Bay has seen continued demand for housing leading to record high prices and high volumes. Not surprisingly, employment in the finance, insurance and real estate sector has benefited from this demand. The demand has also triggered sharp increases in residential building permits throughout the East Bay auguring well for this portion of the construction industry.
Also positive, and unlike San Francisco and San Jose, East Bay weekly manufacturing hours have been holding steady and weekly earnings in manufacturing have increased significantly - nearly approaching the level of San Jose.
Perhaps the best news is that, contrary to recent economic predictions of a ‘double dip’ recession, the East Bay Quarterly Forecast does not see recession as likely under the present circumstances. The UCLA Anderson Forecast, authors of this report and the first to predict the recession starting in March 2001, recognize that excess capacity continues to restrain corporate investment and that the stock market continues to be weak. Labor issues affecting the West Coast docks and a potential war with Iraq are worrisome but are seen as manageable. More serious are the possibility of debt induced inflation and the resulting economic turmoil as well as a significant drop in consumer spending. Nevertheless, the sudden massive underlying changes that would be characteristic of a second recession do not seem to be present.
The National Outlook
In the most recent quarterly national forecast released by the UCLA Anderson Forecast, project director Edward Leamer puts the fears of a "double-dip" recession to rest. Instead, the forecast calls for sluggish growth until business investment returns to normal. Continuing a theme that has resonated through his last several reports, Dr. Leamer reminds readers that the recent recession was unique in that business sectors and not consumers caused it. Prior recessions have been consumer driven, but this time around consumers have continued to spend and invest, in part due to low interest rates.
In a report entitled "Waiting Patiently for that 1999 Tech Equipment to Become Obsolete," Leamer says that the recovery will be sluggish until businesses—still recovering from Internet rush losses and loaded down with equipment purchased during the tech boom—begin to replace equipment and re-invest in software. It could take a while, as excess capacity is forecast to be a hindrance to growth for at least another year, he says. Leamer believes that there is little evidence to suggest a second recession (or double-dip) could occur, with two caveats. First, consumers are currently carrying inadequate savings and high debt loads and a consumer switch from spending to saving could cause a second dip. Also, Leamer notes that the Fed's insistence on maintaining unusually low interest rates are driving home and car purchases now, but could end up reducing similar purchases in the coming years (as tomorrow's sales take place today).
Recent revisions by the Bureau of Economic Analysis have substantially downgraded the performance of the US economy in 2001. The recession, while still mild compared to past downturns, now looks to have shaved a total of about .6% off the national economy during the first three quarters of the year. Similarly the surge in growth recorded in the first quarter of 2002 has been trimmed back to a respectable, but not unusual, 4.9% SAAR. This increase was mainly due to manufacturers moving to restock inventories that had been depleted in the wake of the September 11th economic fire sale.
More disturbing was a lack of any signs of rapid recovery in the first half of 2002. The second quarter of 2002 saw an expansion of only about 1% SAAR. Unemployment remained close to 6% through this period and national employment remained flat at 134 million, over 2.5 million fewer jobs than at the peak reached in late 2000. The term “jobless recovery” -- long forgotten since its inception in the early nineties -- moved back into common usage in the business press. The pattern of recovery then is very similar to what we are experiencing now. Industrial employment in the US did not start to increase until nearly a year after the 1990-91 economic downturn finished, and total employment did not reach the pre-recession levels until a full two years after that recession ended. It seems as if the ‘new’ economy is not one in which business cycles are gone, but rather one in which employment remains stagnant during economic recoveries.
Capacity utilization, a good measure of industrial activity, bottomed out in late 2001 and has started to increase slowly but remains far below the peak reached in mid-2000. Again, this is reminiscent of the recovery from the 1991 downturn, although capacity levels are far below where they were in mid-2000 and moved downward in August of this year. This difference is largely due not to a weak recovery but the investment bubble that fueled so much growth in the late nineties and created substantial excess capacity in manufacturing. More on this shortly. Other recent indicators have showed what some analysts have described as disturbing signs. Average weekly hours of manufacturing have remained largely flat and building permits are also down since earlier this year. These are both considered to be good indicators of the future direction of the economy.
Yet while some economic indicators are weak, there certainly is no clear indication that we may have a ‘double-dip’ recession, despite the clamoring in much of the business press. Recessions are caused by rapid changes in the economy driven by some massive underlying change such as a technology bust or an energy crisis. Sluggish growth, what we are experiencing now, is vastly different from a recession, and sluggish growth by itself does not create a recession. In short, we are very much in a standard recovery, and there is little reason to believe that a second downturn is around the corner because there is not rapid change in the fundamentals in the economy. Nor does the stock market play much of a role. The stock market reflects future profits, not current economic activity. Wall Street, after playing the optimist for so many years, is suddenly playing the pessimist. And as Paul Samuelson once famously quipped “the stock market has correctly predicted 9 out of the last 5 recessions”.
Recently, there have been some positive signs in the economy. In the past four months the nation as a whole has added nearly 150,000 jobs. At the same time unemployment has fallen by about .3 percentage points. Note that the fall in unemployment rates is typically slower than the increase in employment in recoveries because job growth often spurs the entry of many new workers into the labor pool, and this time is no exception. New durable goods orders hit levels over the past two months not seen since late 2000. And maybe most importantly the ratio of corporate and proprietor profit to non-residential investment has dropped to a level in line with historical averages. Most of this adjustment has been on the investment side, but profits have been stable for the last 3 quarters.
Remember that the initial driver of last year’s economic downturn was the IT investment bubble. Pulling the economy forward in the late 90’s were the massive amounts of business investment in information technology and in the investment in the machines, buildings and infrastructure that built information technology. However the siren call of all this new technology—massive productivity gains and increased profits—never materialized, and businesses eventually had to reduce spending until profits could catch up. US businesses are investing $40 billion less in non-residential structures and equipment on a quarterly basis than they were two years ago. While the firming up of business profits implies that investment will now stabilize, there is still an excessive amount of capacity within the economy that will remain a drag on this portion of the economy for some time. We can expect a return to high growth when investment returns, and this will occur when the current excess capacity is used up either through the gradual expansion of economic output or through the technological obsolescence of existing capital. When will this take place? Soon, we hope.
The chance of a double dip depends not on investors, however, but domestic consumers and international investors. As mentioned, the current downturn was driven by the investment-without-profit bubble of the late nineties. This is actually quite unusual. As Ed Leamer, Director of the UCLA Anderson Forecast, has stated the downturn of 2001 was the first true business cycle. Past downturns have always been led by consumers. There was another imbalance in place inside the economy at the same time that has not yet corrected itself—the savings/external account imbalance. Consumers stopped saving in the late 1990’s, and net private savings rates in the US became negative. At the same time the current account deficit grew to new heights.
This rampant consumption continued right through the 2001 recession and played an important role in minimizing the overall impact of the investment bust on the general economy. Indeed we may label the US buyer as the ‘teflon-consumer’ over recent years given that they did not react negatively to the September 11th terrorist attacks (not a surprise), or to increasing unemployment (some surprise) or even to a collapsing stock market (a big surprise)—at least so far. At least part of the reason for this was the aggressive rate cutting by Greenspan that kept people buying cars and buying houses right through the current downturn. In other words the actions of the Fed have made the present too cheap to worry about the future. Another portion of the explanation lies with employers who started laying people off only late into the downturn. This labor hoarding was likely a function of the very low unemployment that made employers value good workers like never before.
International investors seem similarly nonplussed and have been willing to continue funding our substantial trade deficit. The gap widened to over 4% of GDP in the second quarter of this year. This has led to two major risks inside the economy. First, this level of deficit puts stress on the US dollar. If international investors decide that the profit problems in the US economy are too much to bear, a major movement of capital will quickly devalue the dollar and lead to inflation in the US economy, as well as additional turmoil inside the economy as sectors reliant on imports of inputs (particularly oil) suddenly find their cost of business going up.
The second risk comes from what might occur if a rapid drop in consumption occurs. Consumers needed to start saving more (read - buying less), but slowly, to minimize the impact on the overall economy. While the first drop in the stock market did not seem to impact consumer's buying habits, this last drop may. Also there is a downside to such aggressive rate cutting by the Fed. Consumers have taken on massive amounts of debt, and will be very sensitive to any kind of rate increases. Yet on the other side it is unlikely that the Fed can stimulate the economy further through additional rate cuts. In other words Greenspan has played all his high cards and now has to wait out the hand. Consumers’ houses and garages are about as full of new cars and furniture as they can get and they running out of steam necessary to keep the economic train moving forward.
The forecast for now is sluggish growth until business investment kicks in to make up for a saturated consumer market, but not a double dip. This could change. Uncertainty regarding the potential for war with Iraq, for example, could both create substantial problems where none exist now. Rapidly rising oil prices, a problem in the past, could again push the economy over the edge. As always, the key is to watch the fundamentals. In this case it's retail sales and the US dollar. If either of these starts to fall rapidly we may be in for a rough time.
The last issue is the port strikes in the Western US. The President recently enacted the Taft-Hartley act in order to put the docks back to work, but this is only an 80-day cooling off period and as of the time of the writing of this report it does not seem unlikely that the strike will continue when the act expires in January. Speculation abounds as to what the impact of the strike was on the fragile US economy. Some estimates place the total cost at over $1 billion per day. For the most part these claims are wildly overblown. The economy has a flexibility to deal with issues that surprises even many economists. And we have to keep things in perspective. For one thing, while 42% of trade by ship comes through West Coast ports, bear in mind that this represents only 15% of total goods trade in the US. In other words 85% of goods trade is still moving in and out of the nation efficiently by airplane, truck, wire and other routes, even with West Coast ports closed, and this ignores service trade completely. There is slack in the system at many points. Some of the backlogged traffic is already being diverted to secondary routes through Canada, Mexico or East coast ports, and through airfreight.
It must also be remembered that much of the cargo that does come through the ports is comprised largely of consumer products, roughly 70% according to customs district trade data from the Census, with the number one import by value being automobiles. Backlogs of retail goods are not as critical for the overall economy as backlogs of intermediate goods because consumer items have many substitutes — unlike business inputs. And consumers are more able to wait for their desired product to arrive, In the meantime stores will be able to find other goods to stock their shelves while waiting for the ports to reopen. One thing that is often missed during these types of situations is that bad times for some firms often imply good times for others. The airlines are enjoying a desperately needed influx of cash. Domestic firms that compete with foreign suppliers, particularly those from Asia, will suddenly find their products in high demand. And our trading partners to the south and east will also benefit at the expense of those that lie to the west.
This is certainly not to say that the port closures will have no cost to the nation. There certainly has been some disturbance to the flow of intermediate goods to factories particularly here on the West coast. This could cause some businesses to be shut down and workers to be laid off if they are unable to procure another supplier for the necessary parts located in places in which trade is still unhindered, or establish another route to bring those parts in. The issue hinges critically on the length of time the ports stay closed. A short closure will have little net effect on the economy since enough excess capacity exists in the system to allow firms to catch-up on production. But as a port closure extends in time this ability to catch-up will be diminished, and we may start to absorb some real costs. We will have more on this topic in January when we know the results of the 80-day cooling off period.
The forecast for the nation remains slow growth. We don’t expect to see anything above 2% growth for the rest of 2002, with growth reaching close to 3% by the second quarter of next year. We predict that national non-residential investment, so important for the Bay Area economy, will remain sluggish as well until the second quarter of next year. Unemployment will remain at levels between 5.5% and 6% as well.
A Selection of UCLA Anderson Forecast Predictions for California and the Nation
Actual values in blue, forecasted values in red. All data SAAR as applicable.
The California Situation
UCLA Anderson Forecast's Senior Economist Tom Lieser, a long-time prognosticator of the California economy, warns that the state's "initially mild downturn has now become a prolonged slump." In his quarterly report titled, "California: Long on Technology, Short on Revenues," Lieser notes that non-farm employment has shown no evidence of recovery through August. (Though the fourth quarter of this year is expected to be a growth quarter, 2002 will still be negative for the year.) To this point, the majority of gains made in the state economy have come in the public sector, fueled by class-size reductions that led to the hiring of many new teachers. The private sector has had two bright spots: a robust housing sector driven primarily by low interest rates and growth in international trade. Despite 2002's negative numbers, Lieser projects improved employment in 2003 (1.5%) and with even greater gains in 2004 (2.4%). In many ways, improvement is foreseen because growth has been so slow— it can only get better, said Lieser. For example, he notes that personal income is not capable of being dragged down by the stock market much more than it already has been and soon will reflect new gains in the labor market. Lieser also emphasizes the continued employment gap between Northern and Southern California. As a region, the Southland has a better mix of industry, he said, and is experiencing a lower unemployment rate than the North, which is still suffering a decline in employment.
California has fared somewhat better than the rest of the United States, with increases in unemployment smaller than the nation has experienced overall. This is driven by the fact that Northern and Southern California have largely diverged over the course of the past year. The five Bay Area counties that were at the heart of the dotcom industry have all seen increases in unemployment rates larger than the nation as a whole, between a low of 2.5 percentage points for Contra Costa to a whopping increase of 5.9 percentage points for Santa Clara. Yet the entire Northern region seems to be handling the rapid increases in unemployment well.
Property prices, widely expected to come crashing down, have remained stubbornly high. The area is benefiting from the fact that many of the unemployed are young, highly educated professionals, the fact that the IT industry is down but by no means out, and the fact that the supply chains for many of the dotcoms were small, minimizing the overall economic turmoil of the failures. Furthermore while overall rates have risen rapidly, in absolute terms unemployment still remains comparatively low in the Bay Area, with unemployment in San Francisco and the East Bay area still below the overall state average. Thus all in all it seems highly unlikely that the Northern economy will suffer the type of protracted downturn faced by the Southern part of the state in the early nineties that was driven by the rapid and permanent departure of the Aerospace and Defense industries from the region. The large increases in unemployment reflect a cooling off of an overheated labor market, not a true regional depression.
Southern California, in contrast, has fared remarkably well, with the notable exception of Los Angeles County. Ventura, Riverside-San Bernardino, and San Diego have all actually added jobs to their economies over the past year, and have seen only small increases in unemployment. Lack of exposure to high-tech sectors, a new manufacturing sector that is highly integrated with Mexico, and the fact that the region was still in recovery from the downturn of the early nineties have all contributed to this resiliency.
While California overall fared better than the US during this downturn, it has many outstanding problems that have yet to be fixed, and the prospects for recovery remain less clear than for other parts of the nation. Unemployment in the state dropped in August, but this occurred not because of an increase in jobs but rather because of a decrease in the civilian labor force that was proportionally larger than the decrease in employment. It seems likely that recovery in the state will lag behind recovery in the rest of the US, and depend crucially on the return of business investment. The outstanding budget deficit remains a problem as the State government grapples with the issue of how to bring revenues and expenditures back into line without resorting to raising taxes substantially. All this uncertainty, combined with a number of non-business-friendly bills passed in Sacramento recently led to California being ranked as one of the worst places to do business in the US by a recent poll. Nevertheless we are bullish on the future of the State. The proper ingredients for growth are all in place; extensive international linkages, a dynamic and educated workforce, leading edge technology and an excellent standard of living. We believe that once business investment returns the State will again see strong growth on all fronts, and many of these problems will seem less of an issue.
Even though we are bullish in the long-run, the short term forecast for California remains poor. We expect to see little employment growth through the final two quarters of the year, and real personal income to stay flat at best. Expect a recovery in the first half of 2003. Excess capacity especially in the commercial office arena will keep non-residential investment weak for most of next year.
The Outlook for the East Bay
The East Bay region of Northern California is often overlooked due to its higher-profile neighbors, and the fact that it is an economy that is more diversified both in terms of industry as well as occupationally. While this diversification has meant that the area didn’t cash in as much as its neighbors during the dot.com bubble, it also meant that it came through the investment crash with fewer problems than San Jose or San Francisco. But it certainly was not unscathed. As a bedroom community for many commuters it was bound to feel the secondary effects of a downturn. As a neighboring economic community many of its businesses were tied economically to firms in these hard hit areas. And finally the East Bay area was the outlet for the overly hot real estate market, and saw large amounts of investment in office space. As a result it is currently experiencing a severe glut in commercial and residential office space that may leave the construction industry in the area weak for a number of years. While employment in the rest of the US is beginning to grow again, employment in the East Bay remains flat. Expect the economy to pick up speed again when business investment in the nation as a whole also picks up.
Business Activity
The UCLA Anderson Forecast has created a weighted stock index for the East Bay region that includes the largest 45 publicly traded companies in the area. These companies combined employed roughly 95,000 people in 2001. This index is intended to give the Wall Street perspective as to the health of the companies that play such an important role in the local economy. While this is the first unveiling of the index, it could not have come at a worse time. The index has declined by a total of 20% over the past 3 months. Rather than being a function of the health of these companies, this decline is the remainder of the market correction from the market bubble of the late nineties as well as a general reflection of the pessimism of Wall Street about the health of the overall economy. The fact that the drop in the index was led by blue chip companies such as Pacific Gas and Electric and Pacific Bell and solid retail companies such as Albertson’s is indicative of this. There are some bright spots. Documentum, PeopleSoft, Sybase, Nextel Communications, Read-Rite, and AT&T Corp all saw their price increase during this massive decline.
Bankruptcies in the Bay Area overall hit a peak rate of about 2000 per month during the first three months of the recent economic downturn. Note that this number includes both personal and corporate filings. About one third of these filings took place specifically in the East Bay region. After continuing at a more normal pace through late 2001, early this year they started to increase again. This second wave peaked in May at over 1900. This two wave effect is not unusual, since the first round was due directly to the investment collapse while the second was due to the ill-health of the overall economy. The good news is that the number dropped dramatically in June, a sign that businesses in the area are finding more secure footing in a stable, if not growing, economy. Of course next on the list of business failures will be property companies trying to deal with falling rental rates and growing vacancies. The recent increase in deed transfers to loan holders typically precedes a wave of formal actions.
Venture capital funding in the East Bay is also considerably down from its peak, with only slightly over $200 million in new funding in the second quarter of this year. Most of this funding went to three sectors, software, biotech and networking equipment.
Indicators of Business Activity
Source: UCLA Anderson Forecast
Source: U.S. Bankruptcy Court, Northern District of California
Source: U.S. Bankruptcy Court, Northern District of California
Source: Moneytree, NVCA, UCLA Anderson Forecast
Source: Moneytree, NVCA, UCLA Anderson Forecast
Employment
There is little doubt that employment in the East Bay region has suffered with the meltdown of the information technology industry. Unemployment rose 3 percentage points over the course of the recession, substantially higher than the overall US or California average. Nevertheless, the region showed the value of its highly diversified economy and actually suffered less than either of the other two major economic centers. Initial job losses were heavier among the commuter community as indicated by the larger job losses among household employment. Despite all this it should also be kept in mind that unemployment in the East Bay never exceeded 6% despite the rapid increase. This is indicative of the fact that much of the increases seen were more the result of the cooling off of an overheated labor market rather than a true recessionary increase. Of course on the other side this implies that there will not be a rapid return to low unemployment rates in the region.
Recent months have seen employment remain flat, and unemployment has dropped a slight amount. This trend mimics national trends of sluggish employment growth. On the other hand, the overall manufacturing sector in the East Bay, more diversified than the other major economic Bay Area regions is showing overall strength. The average weekly hours worked in manufacturing has remained at 43, not showing the drop as seen in San Jose or San Francisco. Earnings in manufacturing also continue to rise and now nearly equal those received by workers in San Jose.
In terms of individual sectors, high-tech manufacturing and business services—which led both the regional economic boom as well as the recent downturn—have both taken a turn for the worse. After losing 20,000 jobs during the 2001 downturn it seemed as if employment in these sectors had stabilized early this year. But the last two months have seen the loss of an additional 2,000 jobs. This all comes back to the fundamental profit problems that drove this particular downturn in the national economy. Profits, particularly corporate, still remain weak and until they begin to firm up there will not be a return to the heavy level of investment seen in the late nineties. Until that time, high tech employment in the nation and in the East Bay area will remain weak. Most other sectors only reflect the overall softness in the economy, with Finance, Insurance and Real Estate being one of the few bright spots, having added 3,000 jobs over the past 18 months. Employment in the construction industry is weak (see below) while retail employment has been stable. Non-educational local and state government has added 7,000 jobs to the region over the past 3 years, but the state budget situation implies that this growth will certainly not continue, and in fact we may see some of the newly created jobs disappear. Indeed the budget problems for the State remain an outstanding issue whose impact on the economy is yet to be fully realized.
Employment: All data seasonally adjusted unless otherwise indicated
Source: California EDD and The UCLA Anderson Forecast
Real Estate Sales and Investment
While the Bay Area economy has been doing poorly over the past year and a half, you would not recognize that from the market for real estate. Both Contra Costa and Alameda counties have seen record high housing prices this summer, with median prices hitting $600,000 and $450,000 respectively, as well as a market that has seen a high volume of sales. This is not a ‘recession’ market in any sense, which is typically characterized by slowly falling prices and very low volume of sales. This is not a localized phenomenon. San Mateo and Santa Clara have also seen prices rise back to their peak levels of 18 months ago, and are also experiencing a very high rate of sales.
The trends in the Bay area are similar to what has been seen all over the US. A falling stock market, record low interest rates and the lack of a boom-bust cycle in residential real estate over the past business cycle have all worked to make housing look like a better investment than ever. Yet caution is in order. Houses, like stocks, have a fundamental value that is based upon the flows of revenues that come from the asset. For stocks the flow is profits. When profits failed to materialize from the heavy investments being made in the late nineties, the asset prices had to fall in order to bring price in line with earnings. With houses the revenue flow that justifies the asset price is rent. Rental prices for residential housing rose very sharply through the late nineties in the Bay Area, averaging a truly astonishing 8% per year from 1997 to 2001. As such the increase in housing prices was somewhat based on legitimate changes in fundamentals. However in recent months rental prices for property have steadily flattened, increasing only 2.5%. Rapidly growing housing prices without a change in the underlying flow should set off the same alarms that high stock prices without corporate profits in the late nineties should have. The thing to remember is that asset prices are forward looking while rental streams are due to current supply and demand condition. If rent remains flat when the economy starts to grow again, a bubble may in fact be forming.
The construction side of the residential market is also robust. The number of building permits for single family homes is up sharply in both counties. The per unit value of these permits in Alameda are slightly below $300,000, down from their peak last year, likely reflecting the reduced income of many individuals in the area. In Contra Costa the average value of a permit remains around $230,000. Multi-unit housing permits are down, however. This may be in anticipation of changing rules regarding liability for builders.
The market for commercial and industrial real estate is, not surprisingly, not doing as well. Office vacancy rates of over 20% in Silicon Valley, and 15% in both San Francisco and the East Bay area has put the financial squeeze on commercial real estate developers. The situation in the industrial market is just as bad. Industrial vacancies in Oakland are 9%, but the availability rate is at 12% implying that more vacancies are in the process of opening up. Compare these numbers to the traditionally weak LA market which is currently running a 3.5% vacancy rate and a 7.1% availability rate and you get a feeling for just how bad the problem is. Locally Fremont and Newark are seeing the largest vacancy rates, but Union City, Richmond, Emeryville and Hayward are all experiencing rapid increases in availability rates—properties still under lease but that are up for being sublet. Berkeley and the unincorporated area of San Lorenzo appear to be the only stable markets in the area. Until employment returns to the area, there is going to continue to be substantial over-capacity in the commercial real estate markets, and continued weak numbers on the construction side of the equation. On the other hand, it’s a buyer’s market out there for businesses looking for new space. Rates per square foot are falling fast, and a smart manager may be able to lock in on low long-term rates.
Real Estate Sales and Investment
Existing Home Prices and Sales
Source: California EDD Association of Realtors
Construction Permits
All data smoothed
Source: Construction Industry Research Board
Commercial and Industrial Property
Source: CB Richard Ellis, UCLA Anderson Forecast
Trade and Transport
Oakland airport, like other air centers, saw a substantial decline in passenger traffic in the wake of the September 11th attacks. Unlike many other airports, traffic at Oakland has actually recovered and exceeded where it was in August of last year, setting new records. This is largely due to the fact that it is an important hub for Southwest Airlines, one of the few airlines doing well in these difficult times for the industry. Local employment is down in the industry due to problems in the airline industry, particularly with the closure of United Airline's maintenance facility in the region. Unfortunately this traffic has not helped hotels in the region which remain at about a 60% occupancy rate (seasonally adjusted) despite nightly rates that are $20 below what they were in early 2001. There was good news at the Port of Oakland prior to the recent strike. The port saw three continuous months of traffic above 150,000 TEU’s, a rate not seen since mid 2000. In retrospect it seems that some of this increased traffic may be attributed to firms trying to increase stocks of necessary supplies prior to the now-realized potential for a port closure. Airline freight was up to 130 million pounds in May (seasonally adjusted), up 13% over last May. You can expect this to continue to increase rapidly as firms try to find alternative routes for their supplies and goods because of uncertainty around the ports.
Trade and Transport
Source: Port of Oakland, UCLA Anderson Forecast
Source: PKF Consulting, UCLA Anderson Forecast
Forecast for Taxable Sales
Taxable sales in Alameda for the third quarter 2001 are down nearly 10% from their peak reached in 2000 according to the most recent available data from the Board of Equalization. Contra Costa County has had a slightly more stable tax base overall, neither seeing the large surge nor the rapid decline in 2001. The UCLA Anderson Forecast predicts that 4th quarter taxable sales will be up slightly, a relatively poor performance for a holiday season. We also predict a very poor 1st quarter, with total sales not hitting $8 billion, or off by 15% from the peak. However the second quarter looks stronger.
Taxable Sales
Forecasted values in red
Source: California BOE, UCLA Anderson Forecast
