Chapman University economist and President Emeritus Jim Doti and his colleagues are expecting to see falling Orange County home prices this year along with slower local job growth.
A relatively mild recession is likely to hit the whole country in 2023, they predict.
Amid the cloudy prognosis, Doti is asked what is his greatest concern for OC, as he looks into the future. The answer comes back immediately:
“My biggest worry, and it’s very frustrating, is that we’re not attracting high-paying jobs,” Doti told the Business Journal on Dec. 15, two days after presenting his team’s annual economic forecast for this year at the Musco Center for the Arts on the Chapman campus.
While noting the county’s top-notch college and university graduates, Doti also sees the possibility of a “brain drain if job opportunities aren’t available here.”
“My greatest concern is the long run, not so much the short run,” he says.
Doti and his team keep urging OC businesses to create more “Advanced Industry” jobs, primarily next-generation tech- and healthcare-focused positions that pay better than hospitality and many other types of employment.
Walt Disney Co. is the county’s largest employer; the operator of the Disneyland Resort employs nearly 34,000 in OC, which represents about 2% of the county’s total 1.7 million job base.
The area’s largest tech-focused company, Irvine medical device maker Edwards Lifesciences Corp. (NYSE: EW), has a local employee base that’s approaching 5,000 people. The area’s largest software maker, Blizzard Entertainment, counts a local worker base a little more than half that size.
“Orange County ranked 22nd in Advanced Industry job creation—even lower than San Diego’s rank of 16, a county with socioeconomic characteristics similar to Orange County,” the economists said in their nationwide comparison.
Leading the pack in that jobs category: the Austin-Round Rock area of Texas. The Nashville, Tenn., metropolitan region leads the country in percentage growth in Advanced Industry establishments.
Doti says there’s a need to “market” Orange County more successfully than in the past.
OC is expected to achieve only a half-percent of job growth for the full year 2023, the Chapman economists said, down from an estimated 4.6% this year.
That projection still puts OC slightly ahead of California, which is forecast to see job growth of 0.3% in 2023 after an estimated 4.7% in 2022, as measured by total payroll employment.
Chapman’s economists emphasize that “over the last four years, Orange County has generated fewer jobs than California” and lags in job creation.
The Orange County unemployment rate rose to 3% in November from a revised 2.8% in October.
OC-based businesses across a spectrum of industries expect several challenges ahead as the area deals with a mild recession in mid- to-late 2023 (see story, page 27).
Recession “is generally associated with higher unemployment and lower rates of job growth,” Doti said.
The Chapman researchers forecast the U.S. economy will contract 0.4% over the full year 2023, as measured by the real gross domestic product, versus an estimated 2% growth in 2022. They expect the recession to show up in mid-to-late 2023.
Inflation as measured by the consumer price index is expected to slow to 5.8%, after reaching dizzying heights in 2022.
Locally, Orange County’s pricey housing market will capture plenty of attention in 2023.
Orange County home prices are expected to drop on average 7.3% this year, after the median price peaked slightly above $1 million earlier last April.
The median home price for an OC home will drop to $933,000 around mid-2023, according to the Chapman University annual forecast released last month.
While that is welcome news for would-be buyers already hit with higher mortgage rates (30-year rates now are well above 6%), it’s a sour note for sellers, many of whom could opt to keep their homes off the market until conditions improve.
Residential housing permits in OC are forecast to drop by 21% for the full-year 2023, according to the 45th annual forecast from the Chapman researchers.
The research team led by President Emeritus Jim Doti includes Fadel Lawandy, director of the Hoag Center for Real Estate and Finance, and director of the Janes Financial Center and Clinical Associate Professor of Real Estate and Finance; and professor Raymond Sfeir, director of the Anderson Center for Economic Research, and the A. Gary Anderson Chair of Economic Analysis.
Statistical measures have shown the Chapman forecast to have a long track record of being among the most accurate of the blue chip forecasts in projecting GDP and other significant economic variables.
The team cites housing purchase affordability in OC as a major detriment to the area’s economic health.
“The spike in mortgage rates has caused monthly P&I (principal and interest) payments for a median-priced home in the county to double in only two years from $2,600 at the end of 2020 to $5,200 by the end of 2022,” the economists said.
“As unaffordable as Orange County housing is, it’s become much worse in just a relatively short period of time—another major long-run problem,” according to Doti.
Renters will also feel higher costs, but not as acute.
“The supply coming on the markets in apartments is greater,” Doti said.
The local population “for the last couple of years has actually declined. So, demand is dropping while supply is increasing. There was a big, big increase during COVID on rents. I think that they will be experiencing downward pressure for a few years,” he said.
Restaurant Industry Preps for Another Year of Change
Orange County’s vibrant restaurant sector, home to numerous national chains such as In-N-Out Burger, Taco Bell Corp. and Chipotle Mexican Grill Inc. (NYSE: CMG), and still dealing with the aftereffects of the pandemic, should plan for another year of challenges, says one local tech exec.
“Many are predicting an economic downturn in 2023,” says Tony Smith, CEO and co-founder of enterprise management software company Restaurant365 in Irvine.
The upside: “While many business sectors begin to brace for uncertainty, the restaurant industry has already learned how to be more efficient with their business operations over the past couple of years,” he said.
Smith, whose company’s technology helps restaurants with a variety of back-office tasks, adds: “They are well-prepared to operate no matter what economic challenges may lie ahead and can focus their efforts on other pressing issues such as recruiting and retention.”
Smith, who keynoted the Business Journal’s Innovator of the Year Awards last year, gave his remarks as part of the company’s 2022 State of the Industry Survey, released late last month. The company has helped over 40,000 quick-service, fast-casual, casual dining, and fine dining restaurants improve their margins and operations with its software; the survey includes info from 10,000 restaurants.
The survey indicated that labor costs increased 9% and food costs increased 10%, on average last year.
Over 90% of surveyed restaurants increased their menu prices in 2022, with the average increase being 8%; while 73% plan on increasing menu prices in 2023, according to the Restaurant365 survey.
For 2023, 75% of survey respondents expect labor costs to increase in 2023 and are planning to focus on recruiting and retention efforts. Also, 38% plan to use additional funds and resources on salary increases and recruitment to combat this ongoing issue, the company said.
—Mark Mueller and Kevin Costelloe