Economic Forecast 2001
Is the party over? As 2001 begins, economists and investment experts around the country warn of downturns, slowdowns, soft landings and—let’s say it—recession. Many local tech stocks have tanked, consumer confidence is dropping, fuel prices are sky high, and investment capital is hard to come by. So what does this mean for the local economy?
“To me, it looks like we’re going into a slowdown,” says Alan Gin, associate professor of economics at the University of San Diego. Gin compiles the index of leading economic indicators for San Diego County. “The one component of my index down
the sharpest is consumer confidence,” he says. “I attribute that to high gas prices, high electricity prices, high housing costs and a volatile stock market that hammered a lot of San Diego’s tech companies.”
Although Christmas sales weren’t lacking, Gin says he thinks sales of high-end items, like cars and houses, will be down. The job market is also losing steam. “I’ve been getting anecdotal reports that things are slowing down, that they aren’t as good as they once were—that’s the sense we have,” he says. “I don’t think we’ll slow down so much that we’ll have major job losses or a recession, though.”
Others share Gin’s opinion. Kelly Cunningham, research director at the San Diego Regional Chamber of Commerce, says overall the economy actually looks healthy as far as individual industries and employment growth. The region’s leading industries—telecommunications, computers, software, biotechnology —all look strong, he says.
“We’re projecting, based on the expected soft landing of the nation’s economy, that we’ll have had 6.4 percent GRP [gross regional product—essentially the value of all we produce] growth in 2000,” says Cunningham. “In 2001, we expect that to slow
to 3.5 percent.”
It may sound like a big drop, but 3.5 percent growth is still considered a healthy rate, especially with an economy as robust as San Diego’s. Cunningham says the area’s GRP for last year was $110 billion—based on that figure, if we were a country, San Diego County would be the 37th largest in the world. “It’s certainly a more moderate growth rate, but considering some of the issues we’re dealing with—housing, cost of living, fuel prices—a bit of slower growth might not be a bad thing.”
unningham and Gin are guardedly optimistic about the local economy, but market watchers are less sanguine. “We think it’s going to be a rough year for the high-tech sector,” says Gregory Linus Weiss, editor of Investment Quality Trends, a La Jolla–based stock market newsletter. “Price-to-earnings ratios are extraordinarily high, because expectations are so high. All the good news has already been factored into the prices of stock.”
Weiss says the traditional, old-economy stocks are the ones that will give investors a tangible return on their investment in 2001. “We’ve had almost 15 years of a bull market, and the market giveth and taketh away,” he says. “We’ve seen some of that in 2000, and I think there will be more bloodletting before the market represents real value.”
There’s also a marked weariness among local investors, especially for dot-coms. “We had a big bubble burst there, and a lot of people ended up losing quite a bit of money,” says Gin. “Because investors are now much more leery of Internet companies, those types of local businesses aren’t going to do as well.”
And those types of businesses aren’t going to find funding as easily as they could a year ago. Layoffs at dot-coms are hitting record numbers nationally, and it’s been difficult for Internet companies to raise capital, locally and elsewhere.
“It’s been hard, and it’s going to be even harder this year,” says Rob Maxwell, chief technical officer and founder of NetGram, a hybrid messaging service that converts e-mail to postal mail for the end user, using the Internet to transport documents long distances. Last year Maxwell also worked as vice president of engineering for StoreRunner.com. He says Cardiff-based NetGram secured an angel round of financing this past summer
and this month will probably begin looking for its next infusion of cash.
“It was a bit easier for us to get funding because we have a fresh idea and a patent on our product and process,” Maxwell says. “I think venture capital activity in San Diego has increased since I came here in 1996, although I think venture capitalists are already being more picky about the investments they make. We’re seeing a flight to quality.”
NetGram is holding back on any plans for an IPO because the climate for public offerings is much less favorable than it has been in the past, especially for Internet companies, says Maxwell. “I think we’re back in the situation that traditional companies are in—they have to prove themselves before they can go public.”
Leon Reinhart, president and CEO of First National Bank in San Diego, agrees. He says capital has dried up for dot-coms. “I think in San Diego, access to capital for high-tech and biotech companies is also tougher than it was last year. In a down economy, people won’t put that much money out as venture capital, and these industries are very high risk.”
Banks will be more cautious about lending in 2001 as well, Reinhart says. He believes the country could see a drop in interest rates of 100 basis points during the year, a quarter point at a time. “Banks are going to be more strict about the terms and conditions under which they lend out, especially for commercial accounts,” he says. “I don’t think you’ll be seeing any more of these 110 percent home-equity loans, and I think it’s going to be more difficult to get automobile financing, especially for those who have dings on their credit track record.”
First National is one of the few San Diego banks left in the region, which Reinhart sees as a benefit. Locals like to bank with San Diego banks, he says. “We’re getting a flood of customers coming to us as these other local banks, such as Peninsula and Scripps, sell out. It’s been a windfall for us.”
Another local bank, San Diego National Bank, also finds business on the upswing. SDNB is very involved in construction lending, and Robert Horsman, bank president and CEO, says because of the pent-up demand for housing, the bank’s window for lending to builders is several years out. His biggest concerns about business are rising fuel prices—which cut into profitability —and completion of the ballpark. “That’s going to be a tremendous engine for downtown,” he says, “and I’m optimistic that our new mayor and city council will provide the leadership to get it done—but I’m concerned.”
ne marker San Diegans use as an economic barometer is the real estate market. USD’s Gin says new residential construction will be down about 10 percent this year. “I’m looking at about 15,000 residential units authorized by building permits,” he says. “It’ll probably be about the second- or third-highest since 1990, so it’s still pretty good.” In the 1980s, San Diego was averaging about 25,000 units; during the recession of the early 1990s, it was down to about 6,000 or 7,000.
Robert Campbell, a San Diego realtor and author of the forthcoming Cycles of Boom and Bust: How To Predict the Rise and Fall of Real Estate Prices, says the market is close to a turning point. “I follow five indicators to show me what the market is going to do,”
he says. “I would say the best is behind us. New home-building permits are down, and new building drives the economy. That’s a warning all around.
“When an economy goes into a recession, what brings it out is lower interest rates and building permits,” says Campbell. “For the first time in four years, building permits have been negative two months in a row—and this isn’t a number that bounces around a lot.”
Existing home sales are also down, and that’s significant because buyers make the market, not sellers, he says. “It’s all about demand. There are fewer buyers today than there were a year ago.”
But even if the economy in San Diego slows, it’s unlikely housing prices will tumble. Alan Nevin, director of economic research at MarketPoint Realty Advisors in San Diego, says it will be an excellent year to sell a home in 2001 “Mortgage interest rates are going down, and that’s going to offset the problem of higher fuel prices,” he explains. “So I think 2001 will be a near clone of 2000 for the real estate market.”
Commercial real estate rents will increase at a modest rate next year, in the 5-10 percent range—a healthy increase, but not the 15-20 percent seen in the past few years. “There’s still more demand than supply in all areas, and that means it’s still a landlord’s market. But rents have definitely started leveling off,” says Jason Hughes, a principal at tenant-representation company Irving Hughes.
The hottest areas for leasing office space are Del Mar Heights, Sorrento Mesa and the UTC neighborhood, but downtown has also become very popular. “The problem with downtown is that there hasn’t been a new building built there in 10 years,” says Hughes. “Building a high-rise is a much greater financial commitment than a low-rise.” Although several high-rises are now slated to be built downtown, the new office space won’t be available for at least three years.
In UTC and Del Mar Heights in 2000, rents averaged $2.80-$3.25 a square foot; in 2001, tenants can expect to pay $3-$3.50 a square foot. In Sorrento Mesa, rents will be in the mid-to-high $2 range. For the best building space downtown, tenants will pay between $2.15 and $2.75 a square foot. As commuters get tired of the grinding drive from the South Bay to Sorrento Valley for work, Hughes says there will be heightened interest in putting the offices near the workers—particularly in the South Bay.
But the big story in the commercial market is the Teledyne Ryan project at Lindbergh Field—850,000 square feet, multiple buildings, great views and unique office space—which came on the market at the end of 2000. “Some of it is office space; some space is former airplane hangars,” Hughes says. “It’s right next to the harbor with plenty of parking and great transportation access. I think it’s a sleeper right now, but it will have all kinds of activity in 2001.”
And there’s more positive news. The San Diego Convention & Visitors Bureau is optimistic about the outlook for 2001. The organization forecasts sustained, stable growth in 2001 with increases of 1 or 2 percent above the spending and occupancy levels achieved in 2000. Total visitor spending is expected to reach $5.2 billion, up from a projected all-time high of $5 billion in 2000. The number of overnight visitors is also expected to increase, from 14.9 million in 2000 to 15 million in 2001.
Despite the economic slowdown, San Diego’s hotel market has continued to be strong, both in occupancy levels and average daily room rates. Occupancy levels are expected to remain what they were in 2000, at 73 percent, with average daily room rates growing a modest 3.7 percent, from $107 to $111.
The $216 million expansion of the San Diego Convention Center is scheduled for completion this fall, and at press time, 53 conventions or trade shows had been booked there for the year. That represents nearly 600,000 room nights, an attendance of 312,000 people and an annual economic impact of $296.4 million —a significant number, recession