USC Lusk Center program strikes an optimistic tone for Orange County's economic outlook, despite national concerns
Article by Julie Nakashima
California can rise above the pessimism permeating much of the United States.
Stan Ross, chairman of the board of USC's Lusk Center for Real Estatecolor>, struck that bullish note at a recent executive briefing at the Pacific Club in Newport Beach when he told the gathering of Orange County business and real estate leaders why there is little need for panic.
"There's a lot of negativism out there," Ross said.
He ticked off a lengthy list that included the standoff with Iraq, budget deficits, terrorism, oil prices and North Korea. Also people continue to debate whether there will be a double-dip in the economy or whether it is coming out of a recession.
"As far as I'm concerned, though, we've laid the foundation for recovery," Ross said. "Productivity growth is high, and most of corporate America [has] cleaned up its balance sheet."
Still, the likelihood of a U.S.-led war on Iraq weighed heavily on speakers' minds. Speaking before the conference, Lusk Center Director Stuart Gabrielcolor>, noted that much hinges on how that campaign goes.
"Will we be able to resolve it in a way that looks more like Afghanistan or looks more like the troops landing on Normandy Beach?" Gabriel said.
If it's the latter, and if there's damage not only to Iraqi oil fields but to oil fields around the globe, disrupting supplies, then all bets are off with respect to the recovery.
"Oil prices could move up very, very significantly," he said. "We could find ourselves uttering a word that we haven't used in 10 or 15 years. The word is 'stagflation.'"
This combination of economic stagnation and inflation - in which prices move up at the same time there's an economic recession - would not be a pretty picture, Gabriel said.
Robert Best, president of retail developer Westar Associates, echoed the need for caution.
In the long term, the prognosis for prognosis for retail is Orange County is excellent because it's population-driven, Best said. But in the short term, he sees signs that the market could be in for a bit of a downturn during the next two years. It's not just because of the impending war, he added.
"You've got people who have kept spending by pulling money out of their houses," Best said.
But, a continuing slowdown in jobs could lead to a shakeout of consumer confidence, he added.
"A lot of the retail chains are struggling with profitability," Best said. "The war, obviously, will make it a lot worse, but regardless, I'd err on the side of caution."
Indeed, Ross acknowledged that the uncertainties with respect to Iraq, the economy and other issues make for an uncomfortable feeling.
"But the housing sector is still moving at a rapid rate, even with the uncertainty in the market," Ross said.
The retail sector, however, has dropped off.
Then, too, he noted that President Bush's proposals could have broad implications for real estate, particularly his proposed tax bill and its treatment of stock dividends.
"That would affect the whole capital structure, and, as you know, real estate is a capital-intensive industry. So we're going to wait to see those regulations, but that'll be significant."
Positive Trends
A number of trends bode well for the real estate industry, Ross told the attendees.
"The reality is that, here in California, we have a lot of reasons to feel good," he said, "and we can rise up above all this pessimism."
Among those reasons are one of the most diversified economies in the nation, accounting for more than 12 percent of the total U.S. economy, population and job growth.
"But in addition to that, the demographics and family spending will be a significant driver of real estate activity," Ross said.
The nation's 83 million baby boomers are the biggest spenders through every single cycle.
"Boomers are working hard to delay the aging process," Ross said. "They'll earn more. They'll spend more."
The 60 million echo boomers, meanwhile, "are the ones that make all those credit card payments. They have plastic all over," he said.
Other trends include more on-line technology, more standardization and more sophisticated platforms. Information that never used to be disclosed will be out there, Ross said, ready to be sliced and diced in new ways.
In addition, Ross said, pension funds have finally figured out that real estate is an accepted investment class, distinct and separate from bonds and corporate equity. He expects to see more private and publicly placed debt - and rated debt, even for private companies, thanks to technology.
Private and public equity also will increase, "especially with the president's tax proposal," Ross said. "If that proposal goes through, stand by for more equity transactions."
Noting that the times call for being rather guarded with respect to economic forecasting activity, Gabriel said that the nation lost 2.4 million jobs in the past two years.
"That is the greatest back-to-back job loss that we've seen since the Eisenhower administration," Gabriel said. "Clearly, it's a jobless recovery, if indeed it is a recovery."
He's looking for some acceleration of growth to 3.5 percent this year, with some caveats: The stock market has to trend higher, the consumer sector has to remain moderately strong, both business and consumer confidence need to improve, hiring needs to rebound and business capital spending must trend up.
"Finally," Gabriel said, "we've got to try to extricate ourselves from this Iraq situation with minimal damage to oil infrastructure and to oil production."
According to Gabriel, consumer spending normally is two-thirds of gross domestic product. In the last year, however, it's been four-fifths of GDP, or 80 percent of the U.S. economy.
Another caution flag that's raising concern, therefore, is that consumer sentiment is at a nine-year low. Gabriel noted that the economy in 1990 was chugging along with fairly bullish consumer sentiment until the Gulf War pushed consumer sentiment off a cliff.
"So the question foremost in our minds is what happens to the already nine-year low in consumer sentiment when the bombs start falling again?" he said. "And, of course, that depends very, very significantly on what that campaign looks like."
Focus on Orange County
The Jan. 19 Lusk Centercolor> program was titled "Orange County and the Nation," and William Halford, president of office properties for The Irvine Co., gave a snapshot of the Orange County office market.
"It's not been a lot of fun in the office sector over the last 18 months to two years," Halford said, "but Orange County is doing quite a bit better than other parts of California and substantially better than other parts of the country."
The county added 43,000 jobs in 2000 for a "phenomenal" 3 percent growth rate. During that period, Halford said, "You saw office building development and major rent growth and value enhancement in existing properties."
In 2001, the rate of the county's job growth settled down to about 1 percent, or 15,000 jobs, and in 2002 it went "slightly negative" to about 6,000 jobs.
"That kind of falloff has a dramatic impact on what happens in the office market," Halford said.
The decline in job growth from 2000 to 2002 forced Orange County's net office absorption onto the negative side of the ledger.
"We're still not out of the recession, but we're beginning to recover net absorption in Orange County," Halford said, noting that the county posted slightly less than 1 million square feet of positive absorption last year.
However, he pointed out that three or four transactions, all located in the southern part of the county from the Airport Area to Irvine Spectrum, represented 75 percent of the absorption.
"The positive news is that we had absorption, and we certainly are pleased about that," Halford said. "The not-so-positive news is that it wasn't broadly based and probably doesn't spell a full recovery going forward."
According to Halford, the Orange County vacancy rate is 16 percent, compared with 14 percent for Los Angeles and 11 percent for San Diego. Orange County had a little different adjustment, he added, "because [it] had a slight overbuilt condition, which most other regions in California did not.
"Most of that gap has been taken up in Orange County, and my sense is we're beginning to make that recovery at a little bit healthier rate than the other regions."