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Santa Barbara News-Press: Forecast: California recovery a mixed bag: Santa Barbara County’s economy will be stronger in 2014

November 01, 2013

Forecast: California recovery a mixed bag: Santa Barbara County’s economy will be stronger in 2014

Many of the area’s top business professionals and local government and elected officials attended the invitation-only event at Fess Parker’s Doubletree Resort. (MIKE ELIASON/NEWS-PRESS)
Santa Barbara, California – Published 11/1/2013
Santa Barbara News-Press
Forecast: California recovery a mixed bag: Santa Barbara County’s economy will be stronger in 2014
By Steve Sinovic, News-Press Staff Writer

The sixth annual Radius Real Estate & Economic Forecast on Thursday drew a “who’s who” of the South Coast business community to hear noted columnist Dan Walters speak about the prospects for California’s economic recovery in the coming year.

Mr. Walters’ keynote address to 350 attendees at Fess Parker’s Doubletree Resort covered the inconsistent nature of the recovery and how political wrangling at the state capital impacts current and future growth.

The Sacramento-based political journalist isn’t quite convinced that California will ever recover all the jobs it lost during the recession.

“We’re still struggling,” said Mr. Walters of an economy that is still “very localized” in its degrees of recovery.

While temporary tax hikes and spending cuts to right the ship of state have “balanced” the budget for the time being, California still has an onerous regulatory environment and high taxes that derail its competitive advantage.

“We’re not just competing with other states for investment capital, but other countries as well,” said Mr. Walters about an economic development landscape that has changed dramatically in just five years.

“Silicon Valley is the Detroit of its time and things are quite prosperous for now,” he said of a region where the tech sector is leading the charge.

“But we know what happened to Detroit eventually,” cautioned Mr. Walters, who criticized the way the state is funded, which he believes is not conducive to meaningful expansion by business and industry.

Income taxes now account for about 60 percent of the state’s general revenue, while sales taxes have dropped to about 30 percent. Relatively few very affluent Californians pay most of the income taxes and their taxable incomes vary greatly, depending on how stocks and other capital markets are faring.

The effect is to make the state’s revenue more volatile, as several boom-and-bust cycles attest, explained Mr. Walters.

The state will become ever-more dependent on income taxes paid by a handful of wealthy Californians, if they don’t move out of the state or devise strategies to avoid income taxes.

A bedrock principle of sound tax policy is a low rate applied to a broad base, said Mr. Walters.

California has very high sales and income tax rates applied to ever-narrower bases, a recipe for continued fiscal angst, he said.

Many policy makers also are unrealistic, believing there is an ascendant industry on the horizon and the economy “will somehow heal itself” in time, which is a risky assumption, said Mr. Walters.

A presenter at numerous high-profile events, South Coast economist Mark Schniepp next took the stage to deliver his take on the local, regional and national economies. Mr. Schniepp titled his presentation “The Outlook for 2014: Returning to Normal … Sort of.”

Right off the bat, he said he believes the recent government shutdown will have minimal effect on gross domestic product in the current quarter.

“Consumer confidence went down a little bit in October, but it didn’t fall off a cliff,” said Mr. Schniepp.

The Dow Jones Index has hit record highs lately and there has been “positive” job creation for 35 months. However, he didn’t provide the context that the majority of those 7.5 million new jobs are part-time, low paying and don’t always include benefits.

Closer to home, California’s 8.9 percent unemployment rate 50 months after the recession officially ended begs the question of “Why employers can’t hire faster?” said Mr. Schniepp.

Unlike the three previous recessions, the California labor force has 5.1 million more people 16 to 24 years old, which slows the pace of employment gains.

Business investments in equipment and software also mean many tasks can now be automated.

At the same time, many job candidates can’t cut the mustard.

“Employers cannot absorb entrants to the job market because they simply don’t have the requisite skills,” he said.

“It’s like we are training for the 20th century, not the 21st century,” said Mr. Schniepp, who would like to see a greater emphasis on math, science and technology in the schools.

“Computer science, engineering, Web hosting, pharmaceutical marketing – this is where the smart money is – not by getting a communications degree.”

In the year ahead, Mr. Schniepp forecasts that “construction comes back a little bit” to accommodate new household formation, especially among the 25- to 44-year-olds.

Mr. Schniepp sees 5,000 new entry-level homes being built in Santa Barbara County in the next five years, mostly in North County, but he wasn’t specific about the type of housing needed.

Harkening back to Mr. Walters’ earlier discussion of “two Californias,” Mr. Schniepp said Santa Barbara County has added 7,700 jobs in the past five years, but 18,000 more people say they are working, which makes him assume they are self-employed or independent contractors.

“The years 2014 and 2015 will continue the streak” of an improving Santa Barbara economy, with the unemployment rate tapering down and more job growth occurring, along with higher home prices, interest rates and inflation, “but not at runaway” levels.

A rising stock market is a positive trend as well as a growing world economy through 2016.

Looking at the historical data, “the law of averages says the U.S. isn’t due for another recession until 2018,” Mr. Schniepp said.

Commercial real estate was also a topic explored at Thursday’s event. Panelists from event presenter Radius Commercial Real Estate & Investments gave their outlooks for the office, multi-family and retail markets.

“We’re really a Shangri-la for owners of investment properties,” said broker Steve Golis, adding that a vacancy rate of less than 1 percent makes the rental market highly lucrative.

“It’s the most sought-after class of commercial real estate now” along the South Coast, said Mr. Golis of multi-family properties. “A lot of buyers would be overbidding if we had more inventory.”

Paul Gamberdella, another Radius broker, highlighted some of the major lease renewals of recent months, most notably in Goleta by Raytheon, Medtronic and Allergan. The companies lease about 40 percent of the city’s total office space.

Also in Goleta, the Target store proposal wending its way through the initial planning review stages has attracted great interest. The retailer is moving at a snail’s pace as it comes under scrutiny from local and county officials, said Mr. Gamberdella.

With all the oversight and delays, Mr. Gamberdella says the prospect of Target opening “is 50/50 at best.

“It will be 3-5 years before my wife is shopping there,” said Mr. Gamberdella.

The Santa Barbara downtown core is hot, with Sonos, an audio equipment maker, leasing 100,000 square feet in multiple downtown buildings and buying property, Mr. Gamberdella said.

Ditto for Funk Zone retail in the 100 block of Anacapa Street, which is fetching State Street-level leasing rates.

Broker Brad Frohling weighed in on notable transactions in 2013 and some more on the horizon.

They include the $20 million purchase by Citrix of its office building at 7414 Hollister Ave.; a $13 million sale at 1017 State St., which is slated to be a bakery; and the sale of 614 Chapala St. for $6.2 million to Sonos. Current tenant Sami’s Camera apparently will be relocating.

Mr. Frohling said an unnamed hotel in Santa Barbara is now in escrow. It would be the fourth major sale of a hotel property this year and the transaction may close in the fourth quarter.

Many of the area’s top business professionals and local government and elected officials attended the invitation-only event at Fess Parker’s Doubletree Resort.

See also Noozhawk: Radius Real Estate & Economic Forecast Points to Recovery — Slowly but Surely

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