Spotlight: California San Francisco Office Market $60 14% $56 13% $52 12% $48 11% The Golden state is a study in economic contrasts. $44 10% The bigger they are, the harder they fall. That old adage is apt to describe the impact of the Great Recession on the nation’s most-populous state, California. Although Gov. Jerry Brown, campaigning for his fourth and final term as governor, has touted a robust “California comeback” following the recession, the reality is that the relatively slow growth of its economy and continuing high unemployment rate are indicative of a state that’s not fully out of the woods. $40 9% $36 8% By Kurt Stephan Although it’s home to some of the country’s hottest businesses and priciest areas to live, California also has one of the worst unemployment rates in the U.S. and a poverty rate, 16 percent, well above the national average. The state is a place of extreme geographic and economic contrasts. And all other issues aside, California is weathering a collective crisis out of its control: an extended drought that, while impacting certain industries and regions more than others, is a worry to all. The state’s gross domestic product (GDP), $2.2 trillion in 2013, makes it the eighth-largest economy in the world, so even a slow-growing California has enormous global impact. The state’s real GDP grew by 2 percent in 2013, on par with its neighboring states and 20 percent greater than the national rate of 1.8 percent. The above-average growth pales, however, when the state with the country’s second-highest GDP, Texas, is growing at nearly double California’s rate — 3.7 percent. The third-quarter 2014 UCLA Anderson Forecast projects the sluggish economic growth and decline in unemployment to continue through 2016. The forecast predicts that state unemployment will drop to 5.7 percent by the end of 2016. More encouragingly, it estimates that California’s personal income will grow at a faster rate than the nation’s: 4.4 percent in 2015 and 4.6 percent in 2016. 7% $32 2010 2011 2012 Direct gross rental rate (per square foot) 2013 Q3 2014 Direct vacancy rate Source: Cushman & Wakefield San Francisco office market The San Francisco-Oakland-Fremont metro area enjoys a much healthier employment picture than most of the state, recording 5 percent unemployment in this past October. That, in combination with the thriving tech sector, has created a red-hot San Francisco office market. According to Cushman & Wakefield, overall vacancy dropped to 8.3 percent in third-quarter ’14, a 1 percent year-over-year decline. In the same period, direct asking rents increased 10.9 percent, to $59.12 per square foot per year. The companies behind recent office-market transactions and future developments read like a who’s who of leading Web businesses. Among other major deals in third-quarter ’14, Uber Technologies leased a 423,000-square-foot Class-A space on Third Street and Google leased a 265,000-square-foot building at One Market Plaza. Many large downtown projects under construction are set to come online this year for tenants such as Salesforce.com, Dropbox and LinkedIn. What the locals say “Low inventory is affecting the multifamily marketplace right now. For example, today there are only 82 available properties in San Diego County, compared to 400-plus normally. This lack of inventory not only constrains purchase-money transactions, but without a lot of exchange options, existing owners are inclined to hold instead of sell, which is further constricting inventory. It all adds up to create a highly competitive environment.” Scot Cunningham Vice president sales manager multifamily division AmericanWest Bank Reprinted from Scotsman Guide Commercial Edition and ScotsmanGuide.com, February 2015 All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media. 3 Cities to Watch Focus: Drought Three years of subpar annual rainfall have thrown the state into drought conditions, with 2013 recording the least rain since California’s statehood in 1850. California has historically been drought-prone, with stretches from 1928 to 1934 and 1987 to 1992 being particularly severe. The current drought is wreaking havoc in the heart of California’s rich agricultural belt, the San Joaquin Valley, which in normal years is a $17 billion annual industry that makes up less than 1 percent of U.S. farmland but produces a quarter of the country’s food supply. The Center for Watershed Sciences at the University of California, Davis, estimates a total economic cost of $2.2 billion in 2014 because of the drought in the valley, resulting in 17,100 lost jobs. Despite these losses, the Business Forecasting Center at the University of the Pacific projects that the drought will not stop the San Joaquin Valley’s economic recovery, which is moving more slowly than elsewhere in the state. A critical question remains, however: How long will the drought last? Scientists warn that in the past 1,000 years, California has endured several of what they call “megadroughts,” the worst of which lasted 240 years. San Diego Point Loma Nazarene University forecasts that San Diego will lead California in economic expansion in 2015, citing biotech, technology and environmental science as hot industries that will help drive growth to the tune of 35,000 new jobs for the year. The city is also pushing to make its downtown more accessible to attract visitors and businesses through a $31.1 million makeover of its waterfront area. Irvine Rated the best city for young families in Southern California by NerdWallet.com, this Los Angeles metro area is a strong performer economically. The Santa Ana-Anaheim-Irvine area’s unemployment rate was 5 percent in October 2014 — well below the state and national rates. To augment its already-strong technology base, Irvine will see the launch of a start-up incubator by the San Diego-based company EvoNexus this year. Unemployment Rates 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% California U.S. Source: U.S. Department of Labor Unemployment California remains troubled by high unemployment. Its jobless rate of 7.3 percent this past October was a point and a half above the national rate, and fifth-worst among all states. The gap is narrowing, however. In 2011 and 2012, California’s unemployment rate was nearly three percentage points higher than the U.S. rate. California also had the nation’s greatest month-over-month increase in jobs this past October, with 41,500 jobs added. Sacramento Forbes Magazine ranked the state’s capital No. 14 on its list of America’s coolest cities for its entertainment and dining options, cultural mix and more. Development abounds in the metro area, including a proposed 16-story multi-use tower adjacent to the future downtown arena being built for the Sacramento Kings basketball team and an outlet mall in Elk Grove, but the latter is facing legal challenges. The University of the Pacific’s Business Forecasting Center expects the jobless rate to dip below 7 percent in second-quarter 2015. Sources: Business Forecasting Center, Cushman & Wakefield, Forbes Magazine, The Los Angeles Times, The Nation, NerdWallet.com, Orange County Register, Sacramento Business Journal, The Sacramento Bee, San Diego Union-Tribune, San Jose Mercury News, University of the Pacific, U.S. Bureau of Economic Analysis, U.S. Department of Labor Kurt Stephan was editor of Scotsman Guide Commercial Edition. For questions on this article, e-mail [email protected]. Reprinted from Scotsman Guide Commercial Edition and ScotsmanGuide.com, February 2015 All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media.