While COVID-19 has created a tremendous challenge for Orange County businesses, our community has shown remarkable resilience in the face of the disruption. We see some good trends developing.
On a broad scale, many companies have turned a corner. About 42% of Orange County firms said there are a few areas they’ve had to adjust to, but they’re confident they can make these changes to stay profitable and competitive, according to a recent survey Umpqua Bank conducted of 1,200 small and medium sized enterprises nationwide. Another 20% said the pandemic has given them a competitive advantage.
Of course, the backdrop businesses face has been challenging to say the least. The region is like most others in terms of industries extremely hard hit, such as airline and aircraft suppliers, hotels, restaurants and entertainment. All have seen a deep retraction of revenues.
For our borrowers that own hotels, for example, revenues plummeted to 20% of their normal levels after the shutdown in March. The closure of Disneyland has contributed to the downdraft on the sector, straining tour companies, booking agencies, and restaurants. The ripple effect has been painful for many employees and their families.
Office real estate is also challenged. At Umpqua Bank, like so many companies, we have been running our operations virtually, and we’re not sure how much space we’re going to need once the threat of the virus subsides. Many businesses are like us, thinking that they might need less square footage in a post-pandemic world. People will come back to the office, but there will be a lasting impact from the work-at-home model. It’s the same for other companies: I frequently pass Broadcom’s large offices in Irvine, and it’s still not busy with on-site employees.
This retrenchment is reflected in the labor statistics for Orange County. The unemployment rate for the Anaheim-Santa Ana-Irvine area was at 9.9% in August, according the latest numbers available from the Bureau of Labor Statistics. While that’s down from a high of 14.7% in May, it’s still way above the 3% level from the same period a year earlier. The dozen major sectors reported by the BLS for the region all had drops in employment year over year.
Thriving Sectors
Yet for all of this disruption, there’s a new normal taking shape, and there’s plenty to be optimistic about. We see some industries doing quite well, such as the logistics space, which includes those companies that handle the movement of consumer goods, and their storage and transportation. Revenue streams for these companies have either held up, or grown, sometimes significantly. One of our OC customers, which sells packaging materials to a large discount retailer, is seeing record orders as a result of the shift towards e-commerce.
Companies in the Amazon ecosystem are also booming. Many of these customers of ours are seeing orders increase four to five times of where they were pre-pandemic, suggesting a continued and permanent shift to the way goods are bought and sold with people working remotely.
The work-at-home economy has also been a boon for many of the county’s technology companies, those that supply networking and internet security, and those engaged in the business of providing platforms for e-commerce. Both have benefit of people working at home trend. We’re also seeing some strong areas in construction. There’s still a supply shortage in housing in the county, so multifamily is holding up well, as are the engineering firms that supports this type of construction.
Companies Reposition
In this environment, it’s also notable to see OC companies act. What else would they do? As part of their adaptation, some are cutting costs: 46% have reduced salaries, 36% have reduced benefits, and 69% have reduced spending on marketing and promotions, according to our survey.
They’re also making strategic pivots. Nearly six in 10 firms have made significant changes to lines of products or services. And 57% have or are likely to digitize new areas of the customer experience. We are seeing this especially with our smaller commercial customers who had been resistant to transitioning away from paper-based processing of invoices and making payments. Now they’re adopting business online banking, integrated payables, and electronic data interchange, or EDI. The pandemic is forcing companies to become more streamlined.
At the same time, companies are being careful with their money. Most of them took advantage of the low interest rates in advance of the pandemic to refinance. Merger-and-acquisition activity is about half as it was at this time last year, in part due to lower interest for marginal companies. Smaller middle-market companies that have average growth and margin profiles will not get the kind of valuation from acquisitive firms and private equity. That said, strong companies are still in very high demand, perhaps even higher than 2019. Dealmakers still want to find good enterprises, which will get a lot of attention.
We’re also seeing weaker loan demand. Companies are making sure they’re bolstering their liquidity and that they have a buffer in the event that this pandemic plays out longer than they thought it would. So we’re seeing deposit accounts swell, as companies want to hold onto cash. About seven in 10 firms reported keeping more cash on hand, or very or somewhat likely to do so. Part of that is fear-driven, as companies want a cushion, and that’s not a bad thing in this environment until we see how things develop.
Meanwhile, there are some other bright spots for the future of business Orange County. One is that it will remain a desirable place to live and work, keeping real estate prices firm. The coastal region has been through numerous business cycles, with housing prices holding up. It’s still one of the most desirable places to live in the country, and employers will need to factor that into future workforce allocations.
Let’s also not forget how the OC is a vibrant economy supported by a highly educated workforce compared with other regions. That demographic is why in part it has responded so well to the current pandemic, with more people able to make the adjustment by working at home rather than losing a job. About 56% of OC firms have already allowed or were very or somewhat likely to allow more employees to work from home, our survey said.
Hard-hit sectors will eventually rebound. For example, while the office market faces a lot of uncertainty, fears of the extent of its contraction are likely overblown. There will be fallout of course, but companies will still need office space. And the high-rises and campuses aren’t going away. There will be new uses for some of these sites. For those real estate owners that need to reinvent, more housing could be an answer to help balance out the county’s shortage for living space.
In short, looking forward is what OC companies do. On that note, about 60% said they were very or somewhat likely to increase their total workforce by summer of 2021. And 53% said the same for increasing wages. So while our economy is in flux, new opportunities present themselves, as businesses readjust, reposition, and reinvent. These days might be challenging, but the future is still bright.
Editor’s Note: Richard Cabrera, who is based in Newport Beach, is head of commercial & corporate banking for Umpqua Bank where he leads corporate bank, debt capital markets, M&A advisory and international banking divisions in California, Nevada, Oregon, Idaho and Washington. He’s been an OC banker since 1996, including stints at BofA and California Bank & Trust.
