ndustry Financial, Real Estate & Creative Industries 2010

Transcription

1 EDB Sonoma County Economic Development Board ndustry Financial, Real Estate & Creative Industries 21 E c o n o m i c D e v e l o p m e n t B o a r d 4 1 C o l l e g e A v e n u e S u i t e D S a n t a R o s a C A

2 Financial, Real Estate & Creative Industries Insider April The Sonoma County Economic Development Board (EDB), in partnership with the Sonoma County Workforce Investment Board (WIB), is pleased to bring you the 21 Financial, Real Estate & Creative Industries Report. Our research partner, Moody s Economy.com, produced this report for the EDB. Highlights from this report include: Sonoma County's economy is emerging from its deep recession. Payroll employment provides one indicator of this newfound stability. Employment has remained level through the second half of 29, following a loss of just under 17, jobs from the end of 27 through the middle of last year a decline of 9%. The housing market in Sonoma County may retrench briefly before strengthening later this year. The cause would be a resurgence in foreclosures as borrowers with mortgages under temporary modification fail once again to make payments. Banks in Sonoma County must still overcome fallout from the residential and commercial real estate downturn. As of February 21, none of the Sonoma County banks have repaid any of the $6.1 million in capital injections received from TARP funds. Financial services, real estate, insurance, and the creative cluster can all count on improving conditions beyond 21. Thank you for your continued interest in the Economic Development Board s research. As always, if you have questions or suggestions, please feel free to contact us at (77) Sincerely, Ben Stone Executive Director 21 Sonoma County Economic Development Board. The Economic Development Board (EDB) believes all data contained within this report to be accurate and the most current available, but the EDB does not guarantee that this report is accurate or complete. This publication can be made available in alternative formats, such as Braille, large print, audiotape, or computer disk. Requests can be made by b calling (77) Please allow 72 hours for your request to be processed.

3 Recent Trends. Sonoma County's economy is emerging from its deep recession. Payroll employment provides one indicator of this newfound stability. Employment has remained level through the second half of 29, following a loss of just under 17, jobs from the end of 27 through the middle of last year a decline of 9%. Rising temporary employment reflects improving business confidence in current and future conditions. Employment is still falling in the hard-hit construction and retailing industries, indicating that some labor weakness remains. Consumer credit delinquency rates have edged down slightly, reflecting improvements in household finances. The tentative nature of the economy, however, is illustrated by home sales, which have fallen in recent months following a modest rebound earlier last year, when affordability was at a record-high level. Financial Services. Broad U.S. financial markets have improved. Banks are freely lending to one another once again, as indicated by a narrowing of the so-called TED spread, the difference between the three-month Libor rate and rates on relatively risk-free Treasuries. But this is just a first step as small to midsize banks still generally maintain tight lending standards for consumers and businesses. Short-term interest rates, however, are likely to remain low for some time. With little prospect for rising inflation this year, the federal funds rate is expected to remain near zero through much, if not all, of this year. Banks in Sonoma County must still overcome fallout from the residential and commercial real estate downturn. Local banks in Sonoma County have seen the value of their nonperforming loans rise or have increased their loan loss reserves to accommodate write-offs. To date, none of the county banks have repaid any of the $6.1 million in capital injections received from TARP funds. As a result, these midsize banks will be limited in expanding their lending to local businesses until the quality of their loan portfolios improves. Financial services will also be tempered by troubled local household and business balance sheets. The number of business and personal bankruptcy filings in the county rose in 29 and are projected to continue rising through at least the middle of 211, longer for personal filings. Return of Inflation Will End Low Interest Rate Environment Source: Moody s Economy.com Federal funds rate, % CPI, less energy and food % change yr ago E 11E 12E measured by the core consumer price index has allowed the Fed to keep interest rates low in order to keep borrowing costs low for businesses and to try to stimulate lending during the recession and the recovery. Projections for a stronger pace of economic growth in the second half of this year followed by even more rapid growth next year will trigger Consumer Credit Remains a Concern in Sonoma County Sonoma County credit delinquency rates, % Sources: Equifax, Moody s Economy.com Consumer Mortgage Auto Credit quality will improve modestly in Sonoma County in 21. Auto and home mortgage delinquencies have already shown some improvements in recent quarters but both remain above prerecession and employment stress that is still hurting the county. Once job gains outpace job losses, the environment for credit quality will improve, allowing delinquencies to fall further. However, the weak pace of economic growth in 21 will keep delinquencies from falling to prerecession levels until Moody s Economy.com help@economy.com April 21

4 More encouraging, delinquency rates of all types of consumer loans have peaked and will move downward in 21 and 211. Delinquency rates for mortgages, however, will remain elevated for much longer than other types of credit. The county's mortgage delinquency rate remains below the California average but has now been in excess of the national average for a full year. Sonoma County remains attractive for financial services in the long run. Demographic trends have improved, with population growth of approximately 1% for a second consecutive year in 29, according to the California Department of Finance. Per capita income will likely stabilize this year, and it remains well above the statewide average. Personal income has the potential to rise rapidly beginning in 212 or possibly earlier amid a rebound in high valueadded tech-producing industries located in the county. Real Estate. The housing market in Sonoma County may retrench briefly before strengthening later this year. The cause would be a resurgence in foreclosures as borrowers with mortgages under temporary modification fail once again to make payments. Foreclosures usually result in a lower sales price, which would have a dampening effect on the broader housing market. Already, the pace of home sales has slowed again from early 29, and the median sales price is projected to fall by another approximately 4% by the third quarter from the end of 29 through the middle of the year, according to the Case-Shiller Home Price Index, as a result of the expected weakening of mortgage credit quality. However, the decline is a fraction of the earlier 45% price decline since 26 and is less than the drop projected in hard-hit housing markets elsewhere in the Bay Area and Central Valley. Residential construction will not revive until 211 at the earliest. Issuance of residential construction permits remains at depressed levels and is not projected to begin increasing until next year. As a result, construction employment in Sonoma County will remain low throughout this year after a loss of more than 4, jobs since their most recent peak in 26 a decline of 29%. Moody s Economy.com help@economy.com April 21 The outlook for offce space demand in Sonoma County remains limited in the near term. According to Keegan & Coppin Company, Inc., the offce vacancy rate has risen by more than 4 percentage points since early 28 to a very high 25% rate. The rise in vacancies has been spurred by the most recent round of building in 28 as well as still-weak demand for offce space. Demand will begin to improve slowly this year as offceusing employment begins to expand. It is expected to accelerate at a more sustainable rate in 211. However, it will take a while for a suffcient amount of current space to be absorbed before much new construction is once again planned in the county. The industrial vacancy rate also is very high at about 15%. Many of the county's manufacturers particularly electronic instrument makers cut production and payrolls during the recession. Cisco Systems, Inc. permanently shut down its optical networking facility in the county last summer. Correspondingly, industrial building permit issuance in the county declined for the third consecutive year in 29. Sonoma County's industrial real estate market faces some upside risk in the form of improving U.S. fixed investment in computers and peripheral equipment ahead of overall fixed investment. Strong growth in Asia provides additional upside potential in the near term. Sales to Japan have helped to boost sales for Medtronic's Santa Rosa-based vascular unit in recent quarters. Increased availability of space in the county is a plus for tech companies seeking to expand production. The retail space market appears to have stabilized, although it is still suffering. The vacancy rate stabilized in the second half of last year, but the 9% rate is triple that of three years ago. Losses in retail employment through the end of 29 indicate that demand for commercial and retail space could weaken further. As with other components of nonresidential real estate, commercial construction permits fell last year, so at least a little new supply will be entering the market in the coming year. Insurance. Conditions are improving for the insurance industry. After large losses in 28, investment portfolios of the U.S. insurance industry fared better last year. This helped to offset the loss of demand for insurance due to rising unemployment. 3

5 House Prices Will Weaken Slightly in 21 Before Strengthening U.S. Case-Shiller Home Price Index, % change yr ago Sonoma County California Sources: Fiserv, Moody's Economy.com E 11E 12E of 21 before strengthening. An increase in foreclosures will drive down prices moderately after the gains of last year. However, the additional price declines will be small especially compared with other hous Sonoma County Tech Firms Receive Increased Investments Silicon Valley venture capital investments, % change yr ago Computer networking and equipment Source: Pricewaterhouse Coopers MoneyTree Survey Total Renewed investments in some Silicon Valley technologies principally networking equipment provide some upside risk for Sonoma County in the near term. While the number of communications equipment today, many of the remaining companies have deep linkages with companies in Silicon Valley. Interest in networking equipment remained relatively strong during the recession and its aftermath amid strong interest by companies in cutting travel costs and increasing the productivity of workers. - Another weight on the insurance industry has been a rising rate of fraudulent claims. This can be expected during times of rising unemployment and financial duress. The depth of the recession has amplified this trend. For example, the California Department of Insurance reports suspected fraudulent vehicle arson claims rose 25% in 28, the most recent data available. Improving economic conditions over the coming two years will allow companies to consider expanding policies to additional customers and perhaps new service centers. The deep recession has reduced the size of the industry in Sonoma County. Employment at the county's insurers fell by 17 workers to the middle of 29 from a year earlier a decline of 8%. The county's largest single employer in the industry is State Farm Insurance, with approximately 475 workers. Creative Cluster. Employment in Sonoma County's creative cluster of industries, which includes creative arts, technology services, and related professional services, contracted through the middle of 29. Accounting, architecture and engineering were among the hardest-hit components of the cluster in terms of job losses amid cost-cutting by businesses. Motion picture and video industries were the sole component of the cluster to register an increase in payrolls from a year earlier boosted by improving credit and advertising conditions for film and television studios. Employment within the cluster's components of science and engineering; architecture and design; management and finance; education; and arts, music and entertainment amounts to 7% of total county employment. This is slightly under California's share but above the U.S. average. The environment for venture capital investment, the lifeblood for several components of the economy's creative cluster, will improve moderately in 21 on the strength of improving financial markets and U.S. economic conditions. Venture capital placements rose during the second half of last year, although they remain below their 28 peak. Computer networking and equipment industries were among the Bay Area tech industries with rising venture capital placements last year. This provides some upside potential for existing 4 Moody s Economy.com help@economy.com April 21

6 networking companies in Sonoma County. Federal stimulus spending and loan guarantees for new energy technologies do offer some additional upside potential. Macro Drivers. The U.S. economy has moved beyond the Great Recession. U.S. GDP grew 5.9% in the fourth quarter of 29, the largest quarterly increase since 23, largely the result of the federal stimulus and the replenishment of depleted inventories. Improvements related to consumer spending have been more moderate. Consumer confidence has increased in recent months but remains near historic lows. Similarly, nationwide retail sales have increased in three of the last four quarters but remain below 27 and 28 levels. As the effects of the stimulus fade and inventories are rebalanced, GDP growth will slow to less than 2% in the first half of this year before accelerating in the second half and into 211. Growth rates are projected to reach 5% by the end of 211, when the recovery will be fully in motion. The labor market will lag behind improvements in economic output. After reaching 1% in the third quarter of 29, the U.S. unemployment rate edged down slightly at the end of the year as a result of the slowing pace of job losses and the falling size of the labor force. However, the jobless rate is expected to rise above 1% by midyear as an improving labor market attracts previously discouraged job seekers into the labor force. Employment growth is expected to turn positive by the second quarter of this year. The pace of economic recovery in Sonoma County and the U.S. will be assisted by strong growth overseas, particularly in developing Asia. Europe and Japan face weaker outlooks for growth in 21 and 211 bogged down by high unemployment rates and growing national debt. Despite the mixed outlook in global economies, demand for U.S. exports especially technology products has increased in recent quarters, strengthened by the fall in the U.S. dollar through the end of 29. Long-Term Outlook. Financial services, real estate, insurance, and the creative cluster can all count on improving conditions beyond 21. However, long-term growth will be tempered relative to the high rate of growth experienced during the tech boom a decade earlier and the period prior to the recent recession. The reduced rate of growth will be more in line with Sonoma County's projection of moderate population gains in the long term. The creative cluster maintains the brightest long-term outlook, given its inherent strengths and its position in the larger California creative economy. Sonoma County's climate, quality of life, proximity to Bay Area urban centers, proximity to nearby technology centers and universities, and abundant recreational opportunities contribute to the area's ability to attract a highly educated and innovative workforce as well as new investments once the U.S. economy enters into a period of stronger economic growth. Biotechnology and energy-related technology offer particularly good potential for the future. Upside Risks. The relatively small drop in house prices in the first half of this year could give way to larger than expected price gains in the second half of 21 if expected foreclosures are limited and employment gains materialize sooner than forecast. This would bode well for Sonoma County's financial services and real estate industries in that it would help to ease pressure on banks portfolios of troubled loans helping to free up lending for small and medium-sized businesses and revive recently slowing demand for homes. Creative cluster companies would benefit from an even faster-than-expected recovery of overall business investment especially in North America and Europe. Much of the current boost in investment is a result of pentup demand for IT products and services and businesses seeking to increase effciencies of their operations. A more broad-based recovery accompanied by increasing business confidence would help revive demand for business service providers in the county and increase hiring within professional services. Downside Risks. There are many ways, however, in which the pace of national and global economic recoveries could run awry, creating an extended period of weak demand for the county's finance, real estate, insurance and creative industries. Expected deterioration in commercial real estate markets could worsen loan offce markets in Sonoma County, further suppressing demand for new construction. A larger-than-expected increase in foreclosures and extended job losses would worsen credit quality further hindering a recovery in consumer spending. Although the forecast for the U.S. dollar is for little change in relation to other major currencies, an increased pace of outsourcing by cost-conscious tech companies could cause more manufacturing and R&D operations to be sent to lower-cost areas in the U.S. and the world. With projections of stronger U.S. growth in 211 and a subsequent appreciation of the U.S. dollar, companies may interpret the current lull and earlier depreciation as temporary phenomena. Moody s Economy.com help@economy.com April 21 5

7 EDB Sonoma County Economic Development Board With Acknowledgment and Appreciation to Local Key Businesses Supporting Sonoma County Economic Development: Director Executive Sponsor County of Sonoma General Services, Real Estate Division County of Sonoma Board of Supervisors Sonoma County Health Services Sonoma County Transportation & Public Works