Famous quotes from the fantasy fave “Game of Thrones” bookended the 2019 Spring Economic Forecast of California State University-Fullerton’s Mihaylo College of Business and Economics.
“The night is dark and full of terrors,” Mira Farka, CSUF economics professor and co-director of the Woods Center for Economic Analysis and Forecasting, told the audience of 250 at the Irvine Marriott.
With the U.S. expansion closing in on a record 120 months this May, plenty are speculating the end may be near.
Farka and Woods Center Co-Director Anil Puri said the U.S. economy, and Orange County by extension, staved off the gloom and doom of late 2018.
“Winter may be coming, but it is not here thus far, and the long summer has yet to run its course,” Puri prosed.
Job growth, often considered the leading indicator of the health of the county, should slow from 2% last year to 1.6% this year and 1.4% in 2020, the Fullerton economists predicted.
CSUF’s report is one of two major economic forecasts relied on by local businesses. The other forecast is a semi-annual prediction made by Chapman University, which last December predicted 1.7% job growth this year. The school will give its mid-year update in June.
While job growth looks to be slowing, optimism is also on the horizon.
“There’s room to grow jobs,” Puri said, pointing to a relatively low job participation rate in Orange County.
This key data point hasn’t recuperated since hitting a peak of 54.8% in 2007. Last year, Orange County’s participation rate was 50.5%, while the U.S.’s was 63% as of March.
“A 1% improvement in the county’s labor force adds approximately 15,000 people to the workforce,” the report said. “So, if the participation rate were to get to the pre-recession level, more than 60,000 workers could be added to the labor pool. At the current clip, this should take an additional couple of years, potentially extending the life of this expansion.”
No to Winter
The credit goes to a suddenly dovish Federal Reserve Bank which isn’t expected to increase rates this year.
Four rate hikes last year—to a range of 2.25% to 2.50%—spurred a stock market sell-off and even led to a rare inverted yield curve on three-month Treasury bills compared to 10-year bonds, often but not always a harbinger of recessions.
Now with interest rates moderating, corporate earnings still robust and the stock market trading at record levels as of earlier this month, the endless summer looks to continue.
The CSUF economists see U.S. GDP growing 2.5% this year followed by 2.1% in 2020.
Chapman last fall predicted 2.6% for this year.
“Slow growth does not mean an impending recession,” the report said. “With the exception of the yield curve and the excessively low unemployment rate [suggesting tightness in the labor market], none of the other leading indicators are flashing warning signs.
“This expansion will likely keel over one day, but not this year or the next,” the report said, citing another “Game of Thrones” famous quote.
“What do we say to the God of death?”
“Not today!”
The OC C-Suite Shortage
The U.S. predictions are enviable when compared to other parts of the world, such as 2019 forecasts of 0.7% for the European Union, 0.8% for Japan or 1.2% for the U.K., according to their governments.
The picture brightens when looking at the 70% component of that GDP figure for U.S. consumers, who now boast their best balance sheet in nearly two decades.
That’s because many Americans are working. Orange County’s average jobless rate last year was 2.9%.
“The outlook among business here has moderated some, but is still very positive,” Puri said.
He cited the diversity of the best-growing sectors here, which include leisure and hospitality, construction, professional and business services and education and health services.
Irvine-based McDermott & Bull co-founder and Chief Executive Rod McDermott has seen the shortage in C-suite and middle manager ranks as his clients “are hiring.”
“The biggest problem here is finding talent,” said McDermott, whose executive search firm recruits employees from the high-paying sectors of aviation and aerospace, real estate and construction and banking.
The CRE Bellwether
In a broad sense, OC real estate, especially the commercial sector, is a bellwether of regional economic activity, sector strength or weakness and emerging or fading trends.
Robert Osbrink, leading a panel of longtime OC real estate executives at the spring forecast, optimistically pointed to the coworking expansion here, led by New York-based WeWork (see story, page 1).
“They took 65,000 square feet at The Boardwalk [a newly built, mid-rise complex in Irvine’s airport corridor] and it’s already 63% occupied,” Osbrink said.
Real estate execs tell the Business Journal that beverage giant PepsiCo Inc. is using The Boardwalk location of WeWork as its new regional base of operations.
Osbrink, a 40-year veteran of local commercial real estate whose resume includes overseeing early development of the Irvine Spectrum and a 20-year run at brokerage Grubb & Ellis where he became co-chief executive, said the flexibility the shared-space providers offer businesses in OC’s growing new economy ecosystem is a positive.
On the tenant side, Newmark Knight Frank’s Greg May sees a healthy change in the tenant mix compared to a decade ago.
“No more big leases to subprime lenders, to the point where some would say we were the scene of the crime,” said May, regional managing director in the real estate brokerage’s Newport Beach office.
May pointed to the $200 million retail investment Irvine Co. recently made at the Irvine Spectrum Center, which included bringing in stores that were new to the county, and a growing trend of erstwhile online-only retailers establishing brick-and-mortar presences.
“Retail is far from dead,” May said. “Some of these are just showrooms more or less, but they’ve recognized shoppers need that touch and feel and interaction.”
Moderating Home Prices
Even with the Fed on pause and new home supply trending down, the economists see the region’s lofty home prices moderating a bit. While median OC home prices rose 6.4% in 2017 and 4.3% last year, they should rise by 1.5% to 2.5% this year and next, the CSUF economists said.
On the residential development side, the news is more sobering, with CSUF’s forecast calling for 7,500 new units this year, down from 8,200 in 2018 and 9,500 in 2017.
“There’s a push in Sacramento to start to look at this undersupply of housing,” said Barry Grossman, a senior investment strategist at the Newport Beach office of Wells Fargo Private Bank. “There’s huge pent-up demand [among millennials] that’s coming forward in the next five to 10 years.”
When asked how that squares with the large numbers of folks leaving, Grossman said, “We are seeing net domestic out-migration from Orange County [and all of California] but it tends to be in the sub-$70,000 income category.”
Where to build?
“Orange County should be becoming an infill area,” Osbrink said, urging rezoning of languishing retail and office properties.
As for a business exodus from highly-taxed, highly-regulated California, panelists said OC isn’t quite yet Winterfell.
“CEOs we deal with are all about how we retain our best employees,” May said. “I don’t see a lot of companies leaving. The CEOs like to live at the beach.”
