San Diego Economic and Financial Update Recap

858.259.4900-San-Diego-Commercial-Appraiser-Economic-UpdateOn Thursday, Eric Schneider, MAI attended the Burnham-Moores Economic and Financial Update Conference, an event held by USD each summer where presenters discuss current and future economic conditions, both nationally and in San Diego. The speakers included Mark Fleming, PhD, chief economist of CoreLogic and Alan Gin, PhD, associate professor of economics, University of San Diego. Presented below are some highlights of the meeting.

The Housing Market – Returning to “normal”

Mark Fleming presented on the continuing recovery of the housing market, and based on his research the housing market is not as bad as one would think. Though existing home sales are down, sale prices are continuing to increase because of the fact that there are less distressed properties being sold. Additionally, Mr. Fleming stated that houses are still relatively affordable compared to historical data, and issues such as student debt are not necessarily a factor as the debt burden for education has remained unchanged due better repayment terms.

That said, Mr. Fleming forecasted that there will less home sale activity in the future, one of the reasons being the expected increase in interest rates. Homeowners who financed purchases with a low interest rate are predicted to stay in their homes longer because there is no incentive to move and buy another property at a higher interest rate. This increase in rates will also lead to a decline in refinancing.

The National Economy – Forecasted to growth, but weakly

Alan Gin stated that while the GDP growth rate has been positive for the last 4 years, it has been relatively sluggish. Historically the average growth rate was 3.5% (prior to the great recession), but the current growth rate has averaged around 2%. The main reason for this lack of growth is that there is less consumption compared to years past.

The decline in consumption is primarily due to a lack of employment. Although the U.S. has experienced positive employment growth over the last 52 months (of the 8.8 million jobs lost in the recession, 9.1 million jobs have been created), the real unemployment rate remains an issue. The U-3 employment rate (which includes those seeking full-time employment) is around 6.1%, but the U-6 employment rate (which includes marginally attached workers, discouraged workers, and those working part-time for economic reasons) is closer to 12.1%. During the recession, businesses streamlined their operations to become more productive with their smaller existing workforce. Additionally, they are increasingly using temporary and part-time workers as they become more efficient. In turn, businesses are becoming more profitable, but they are slow to hire.

The San Diego Economy – Looking positive, but still facing challenges

Overall, Mr. Gin stated that the local economy is “great” with about 30,000 jobs being added each year. The top four job growth sectors include professional/technical services (lawyers, research and development, etc.), leisure/hospitality (tourism), construction, and health care. These are important sectors as these types of jobs are typically high-paying.

Despite improving economic conditions, there are some of the challenges that San Diego faces. The first is that there is a high cost to do business in San Diego. Aside from government regulations and taxes, high property costs equate to having higher wages in order to attract workers. In addition, there is competition from other states to have San Diego companies relocate. Specifically, states such as Texas have paid millions of dollars through their Enterprise Fund to have San Diego companies like Websense move. A third challenge is that there is a lack of single family development in San Diego. As we learned from Bisnow’s Multifamily Summit, there is an increase in multifamily development and a focus on urban, mixed-use projects. According to Mr. Gin, the issue is that there are typically fewer jobs created for multifamily development than single family development; it takes fewer workers to develop a 10-unit apartment project than 10 houses.

Summary

The economy, both nationally and locally, is continuing to improve. However, there are several factors that prevent growth similar to previous years. While both presenters forecasted positive economic conditions, the projected gains will not be dramatically significant. This is similar to the commercial real estate data reported in our mid-year market updates; growth is expected for the five main property types, but no significant increases in value are projected in the near future.

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