Housing values, which are down 36 percent from their peak of late 2005, may not recover for a couple of decades.
If you're dreaming of a return to the good old days — San Diego's bubble years of the late 1990s and the early part of this decade — dismiss the idea. Ain’t gonna happen. The San Diego economy may do a little bit better in 2011 than it did last year, but you may not even notice the improvement.
The unemployment rate is going to remain around 10 percent, probably higher. There won’t be a return to 4 percent for a long, long time. Both employment and population growth will be meager this year. Housing values, which are down 36 percent from their bubble peak of late 2005, may not recover for a couple of decades. Retail sales aren’t plummeting as they were in 2008 and 2009, but they will only crawl upward. Tourism is already improving a bit, but a return to the halcyon years is a long way off. Venture capital won’t be pouring into high-tech and biotech firms as in the past. The retailing and real estate weaknesses will drag down tax receipts, pushing the City of San Diego deeper into technical insolvency.
At the end of last year, the federal government and the Federal Reserve announced plans to pump trillions of more dollars into the United States economy. Economists rushed to raise their estimate of 2011 national growth from 2.5 percent to 2.6 percent or 3 percent and even above, partly because of strong Christmas retail sales. In San Diego, economists bumped up their forecasts slightly. Liquidity reigns.
But some forecasters urge sobriety: “We are borrowing and will have to pay it back,” says Marney Cox, chief economist for the San Diego Association of Governments. “We are robbing future growth. The weak 2011 has been postponed for a year.”
San Diego County jobs will grow by only 6000 to 12,000 this year, says Cox. That is puny. Alan Gin, economist at the University of San Diego, sees 10,000 to 15,000 new jobs. Kelly Cunningham, economist for the National University System Institute for Policy Research, sees a mere 10,000 jobs growth in the private sector. He sees job losses in state and local government, which to some extent may be offset by strength in federal jobs, mainly in the military.
Cunningham points out that in the disaster years of 2008 and 2009, San Diego County personal income dropped by 1.1 percent, but that was better than the national decline of 1.8 percent. The major reason was a fat increase in federal payrolls in San Diego. Without those, San Diego’s personal-income plunge would have been among the worst in the nation. However, if there is a federal pay freeze this year, San Diego County could get clipped by $190.3 million.
Cunningham believes that direct military/defense spending accounted for 16.2 percent of the San Diego economy last year. That’s not as high as it used to be, but it tends to be a predictable, sustainable source of growth.
However, “The San Diego unemployment rate is not likely to come down,” says Cunningham. “It will remain in the 10 percent range.” His biggest fear is “a huge meltdown” in state government finances, with the federal government not coming to the rescue. Such a calamity could wallop state and municipal government employment.
Cox, Cunningham, and Gin agree that health care will be the strongest area of local jobs growth, followed by business and professional services.
“The biggest jobs problem is in the narrowness,” says Cox. When the local economy began recovering from the early 1990s recession, “There was a broad range of growth — information, biotech, manufacturing. High tech came galloping to our rescue between 1995 and 2000.” Venture capital poured in. The initial-public-offering market was not just hot; it was insane. Local tech stocks would triple in their first day of trading. Now, venture capital is almost as weak as it has been in more than a decade, and initial public offerings are expected to improve only modestly.
“We will see a loosening up — more venture capital in 2011,” says Gin, and that will help tech firms, but he sees no flood. Biotech, software, and the new green technologies should do well, says Cunningham.
Residential real estate is not in for a recovery. There is an industry overhang, mortgage rates are rising (despite the Fed’s attempts to pound them down), and foreclosures pile up. Cox thinks home values will drop another 5 to 10 percent. “It could be two decades before we get back to inflation-adjusted levels of the peak,” he says, and it will “be three or four years before we see major increases in building permits.”
Cunningham is more pessimistic. Inflation-adjusted San Diego County home prices “may never reach previous highs without an unprecedented and unexpected rise of area household incomes,” he says. In the bubble years, San Diego’s median home price was 7 times median household income. Now it’s back to 4.2, but even though half of households can afford a home now, up from a pitiful 7 percent in the bubble years, San Diego homes are still less affordable than in most major markets.
The commercial real estate market remains in the doldrums. “There is too much retail space,” says Cox. “Consumers won’t be spending as before, not using credit cards as much and not tapping home equity. Marginal shopping centers will have to do something else with their property — it could be something connected to services.”
Taxable retail sales, which plunged 8.8 percent in 2008 and 12.8 percent the next year, inched up 0.5 percent in 2010 and will go up 2.5 percent this year, says Cunningham, conceding that the increase is not imposing.
San Diego has another problem: California. “I anticipate state taxes will be going up — if not on consumers, on businesses,” says Cunningham. “More taxes and regulation will cause unemployment to rise, businesses to leave. We are discouraging productive people, dampening job prospects.”
The county’s population will rise by only 30,000 this year, or by less than 1 percent, says Cunningham. “It will mostly be babies,” he says. “There are still more people moving away from San Diego than moving in,” partly for the same reasons businesses are deserting.
San Diego’s tourism this year should be a little better than last year, says Jerry Morrison, La Jolla–based hotel guru. “But there are still too many unemployed, still too many uncertainties about markets.” According to Smith Travel Research, hotel occupancy through November averaged 68 percent, up from 64.2 percent in the same period of last year. But five years ago, occupancy was pushing 76 percent. Through November, the average room rate dropped to $123.32 from $126.81. That’s a far cry from $138 in the first quarter of 2008. It’s supply and demand, says Morrison: San Diego is overbuilt, but visitors aren’t streaming in. “Travelers will go where the price is right, irrespective of the [hotel] brand,” says Morrison. “They want free breakfasts, free internet, and free parking.” A number of San Diego hotels have failed economically, although they are still operating — taken over by the lender or a new buyer who got the facility at a deep discount. Those hotels are likely to continue struggling this year. ■