Financial, Real Estate & Creative 2012 SONOMA COUNTY. Industries Insider

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1 Financial, Real Estate & Creative 2012 SONOMA COUNTY Industries Insider

2012 Financial, Real Estate & Creative Industries Insider The Sonoma County Economic Development Board (EDB), in partnership with the Sonoma County Workforce Investment Board, is pleased to present

Highlights of the 2012 Financial, Real Estate & Creative Industries Insider include: Financial services, real estate, insurance and the creative cluster will generally benefit as the county s economy

2 2012 Financial, Real Estate & Creative Industries Insider The Sonoma County Economic Development Board (EDB), in partnership with the Sonoma County Workforce Investment Board, is pleased to present the 2012 Financial, Real Estate & Creative Industries Insider for Sonoma County. Our research partner, Moody s Analytics, provided the research for this report. Highlights of the 2012 Financial, Real Estate & Creative Industries Insider include: Financial services, real estate, insurance and the creative cluster will generally benefit as the county s economy slowly transitions from recovery to expansion. However, long-term growth will be modest relative to the high rate of growth during the tech boom a decade ago, and the period prior to the recent recession. Despite the weakening job market, the unemployment rate has dipped below 9.5% still above the U.S. rate but more than a percentage point below the statewide average even as the labor force has grown in recent months. The creative cluster maintains the brightest long-term outlook, given its inherent strengths and its position in the larger California economy. Sonoma County's climate, quality of life, proximity to Bay Area urban centers, nearby technology centers and universities, and abundant recreational opportunities all support a positive long-term outlook. Total employment fell in the second half of 2011 wiping out all of the jobs gained since the beginning of Nondurables manufacturing and state higher education jobs have been the primary sources of weakness. Thank you for your interest in the Economic Development Board s research. For additional information, questions, comments, or suggestions please contact us at (707) or visit. Sincerely, Ben Stone Executive Director 2011 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 does not guarantee its accuracy or completeness. Use of data from an outside source does not represent an endorsement of any product or service by the EDB, its members or affiliates. This publication can be made available in alternative formats such as Braille, large print, audiotape, or computer disk. Please direct requests to (707) and allow 72 hours for your request to be processed. This report was prepared by Lauren M. Ward.

3 Sonoma County: Financial, Real Estate & Creative Industries Recent Performance Consumer credit conditions in the county are improving. Total delinquency rates for all types of credit remain below state level and have slipped below the U.S. average for the first time since the first quarter of Tech Will Lift Income Levels in Sonoma County Per capita income, thousands of dollars Housing is mixed. After reaching a recent peak at the beginning of 2010, house prices have trended downward. The median existing single-family house price ended 2011 lower than the trough reached in the first half of 2009, according to the California Association of Realtors. House sales have fared better with monthly and year-over-year sales increasing recently. Issuance of construction permits has edged upward modestly since the beginning of 2011 but has recovered less than 10% of the peak-to-trough decline experienced from 2006 to Macro Drivers The U.S. economy grew in 2011 by 1.7% less than half the rate forecast at the beginning of the year. Economic growth was dragged down by surging commodity prices, political discourse in Washington DC, and global disruptions resulting from Japan s earthquake and tsunami. During the fourth quarter, however, solid holiday and vehicle sales, sturdy business investment, and even modest improvement in construction allowed the economy to strengthen and real GDP growth to rise to 2.8%, the strongest pace since the second quarter of With the recovery strengthening, real GDP is expected to grow to 2.6% in The pace will accelerate further to 3.3% in 2013 as the economy transitions into expansion. The likelihood of the baseline forecast to play out was enhanced by the recent agreement to extend the payroll tax cut beyond its scheduled end at the beginning of March to the end of Failure by Congress to do so would have added to the drags from fiscal policy already incorporated into the forecast for this year. Among the drags are the phaseouts of the last remnants of the 2009 federal stimulus package and new austerity measures agreed to last summer as part of the debt ceiling negotiations. The labor market also brightened during the fourth quarter. Private monthly job gains surpassed 200,000 a month, and the unemployment rate fell to a nearly three-year low of 8.3% F 13F 14F 15F U.S. California Sonoma Sources: BLS, Federal Reserve County Sonoma County will remain an attractive location for financial services in the long run. Population growth over the next several years will remain well above the pace reached during the period of weak growth in the middle of the last decade, when high house prices detered would-be residents and spurred existing residents to move. In addition, per capita income will grow amid a strengthening recovery and a continued rebound in high-value-added tech-producing industries. Per capita incomes will remain above the U.S. average but will converge further with the state s. New Tech Drives Silicon Valley Investments Venture capital placements, % change earlier, 4qtr MA Other Media Software Sources: PWC/VE/NVCA MoneyTree Survey, Moody s Analystics The outlook for venture capital investments, the lifeblood for several components of the county's creative cluster, is generally positive. Venture capital placements in Silicon Valley, including Sonoma County, trended upward in 2011, edging closer to their 2008 peak. Investments in software and media drove most of the growth while electronics and medical devices contributed a smaller quantity of growth. The upward trend in tech investment bodes well for increased demand for office space, which will help to nudge down office vacancy rates. 3

4 Moody s Analytics Financial, Real Estate & Creative Industries Real Estate The housing market in Sonoma County will reach its muchanticipated final bottom in House prices have moved downward since the expiration of federal and state incentives for home purchases in the middle of Helping to improve the outlook for the job market is the slow growth of the labor force, which is likely to remain soft in coming months. This suggests that even with only a modest pace of job growth, the unemployment rate will fall further and more quickly. An unemployment rate below 8% by the end of 2012 and just over 7% by the end of 2013 now appears possible. Following an agreement with all state attorneys general, lenders will resume filings of foreclosures, which were idled for most of last year. The jump in filings will cause the county s foreclosure filing and activity rates, which remain above the U.S. averages but below the statewide rates, to rise briefly in the first half of 2012 before approaching prerecession levels by the end of This will cause house prices in the county to drop modestly through the middle of the year on par with the U.S. but by less than half the statewide decline in prices. From peak to trough, house prices will have de-clined by almost 50%, according to the Case-Shiller index forecast equal to the California decline but more than 10 percentage points than the average U.S. price drop. Economic recovery in Sonoma County and the U.S. will be most vulnerable during the first two quarters, after which growth will accelerate. The largest near-term risk to the forecast is the European debt crisis, which has already pulled several European nations back into recession. A smaller but still-sizable risk is an extended drop in U.S. house prices. In addition, a deeply divided U.S. government could still produce another episode of paralyzing gridlock and partisan bickering ahead of the November elections. Financial Services Depository financial institutions will face some international challenges in the near term. The largest U.S. banks have some exposure to the threat of European sovereign debt defaults. The risk could cause banks to contract their lending within the U.S. in order to increase their reserve holdings to withstand a worsening of conditions. Longer term, efforts to comply with increased capital requirements by 2019 under the international Basel III accords could diminish the amount of lending for U.S. banks of all sizes. The issuance of residential construction permits will begin to strengthen as house prices near bottom and pent-up demand for housing is unleashed. The pace of permitting will accelerate in 2012 and will peak by the end of 2014 at approximately half the previous peak level reached at the end of The looming, albeit measured, recovery in residential construction will help to boost construction employment, which has only recovered a tiny portion of its nearly 40% peak-to-trough drop in payrolls. An outlook for interest rate stability is in-tact. The Federal Reserve is maintaining a loose monetary policy and forecast that the federal funds rate will remain at its current level until well into However, an unexpected surge in economic growth with an accompanying surge in inflation would spur the Fed to raise rates well before then. Outside of tech, office markets will en-counter some headwinds in After reco-vering approximately a third of the jobs lost during the recession, office-using employment in the metro area has edged downward since the second quarter of Following the re-location of State Farm s regional division to Bakersfield last year, the county will experience the downsizing of the State Compensation Insurance Fund s regional office, including 60 layoffs as part of a statewide reorganization. Although slightly lower than a year earlier, the metro area s office vacancy rate remains above 20% and has edged upward in recent quarters, according to Keegan & Coppin Co. Improving loan portfolios and increasing profits will allow Sonoma County-based banks to emerge further from under the cloud of troubled commercial loan portfolios. Of the two still-existing county-based banks that received TARP funds at the end of 2008 and early 2009, Summit Bank fully repaid its $8.5 million injection last August while Exchange has yet to repay its $43 million injection. The third Sonoma County recipient of TARP funds, Sonoma Valley Bank, was closed by regulators in Industrial markets will face some smaller headwinds. The industrial vacancy rate has risen since the second quarter of 2011 and now exceeds 12%, according to Keegan & Coppin. Weakness in demand for manufacturing space has been confined to the production of nondurables. Higher prices for wine grapes harvested in the fall and dwindling inventories of unsold wines from earlier harvests bode well for renewed demand for existing space from wineries. Increasing vacancies and the lack of demand the last industrial construction permit in the county was issued in 2009, according to the Construction Industry Research Board will not support new con-struction in the near term. Local household and business balance sheets will slowly improve in Business and personal bankruptcy filings on a per capita basis in the county stopped rising in A widening recovery will push down business and personal filings in 2012; a more pro-nounced pace of job gains by 2013 will push filings down further. Delinquency rates of all types of consumer and mortgage loans will also move downward. 4

5 Moody s Analytics Financial, Real Estate & Creative Industries The retail space market will fare better than residential and industrial markets in Retail vacancy rates declined throughout 2011, according to Keegan & Coppin. The vacancy rates finished the year at below 7%, a decline of more than 2 percentage points since peaking above 9% at the end of Increasing retail employment and improving consumer balance sheets will support further strengthening of demand for retail space in the near term. This bodes well for the issuance of retail construction permits, which have remained close to the bottom reached during the recession. Insurance Insurers operating in Sonoma County will face rising costs and new regulations in the near term, particularly for providers of health insurance. Under the federal healthcare reform law, insurance companies are already limited in their ability to rescind coverage, place limits on lifetime coverage, and deny coverage to children based on pre-existing conditions. Beginning in 2011, insurance companies were required to spend at least 85% of premiums on insurance policies for large employers and 80% of individual and small-business policies on healthcare services and quality improvement. By 2014, insurance companies will be completely barred from discriminating based on pre-existing conditions or gender or from placing annual limits on insurance coverage. In light of tighter profit margins, all types of insurers are reducing operating costs. In 2011, State Farm Insurance one of the county s largest private sector employers transferred its Rohnert Park operation to Bakersfield as part of a statewide consolidation resulting in the loss of nearly 500 jobs. The downsizing of the State Compensation Insurance Fund will continue this trend in Creative Cluster The outlook for Sonoma County's creative cluster of industries, which includes creative arts, technology services, and related professional services, is modestly bright. The cluster's components of science and engineering, architecture and design, management and finance, education, and arts, music and entertainment rose to 7% of total county employment over the past year. This remains below the California average of 9% but is slightly above the U.S. share. Total job growth in the cluster slowed to 3% in 2011, less than half the rate of growth in 2010 as the county transitioned from recession to recovery. Weighing on growth last year were declines in business services such as consulting and legal services. Accounting contributed the most to job gains. In 2012, job growth within the cluster will slow further as providers of business services face continued weak demand Modest Inflation Will Keep Interest Rates Low 09 Federal Funds Rate, R Sources: BLS, Federal Reserve, Moody s Analytics Core CPI, % Change (L) Excess capacity will keep interest rates low for lenders and borrowers in the near term. The Federal Reserve kept its federal funds rate at a low level last year despite a brief runup in surging commodity prices that spilled over briefly into measures of core inflation. With capacity utilization and labor markets at below prerecession and full employment levels, respectively, the Fed has ample room to keep interest rates low despite modest improvements in the economy. However, a quicker transition into expansion would cause the Fed to raise rates more quickly. Financial Services Are a Drag for the County Finance and insurance employment, % change yr ago, 3-mo MA 2% 0% -2% -4% -6% -8% -10% -12% -14% U.S. California Sonoma County Sources: BLS, Moody s Analytics Financial services will remain a sizable weight for Sonoma County in the near term. The downsizing of the State Compensation Insurance Fund operation in Santa Rosa in 2012 will follow the relocation of State Farm s Rohnert Park office to Bakersfield last year. Both moves are part of statewide consolidations as firms seek to curb costs in a demanding economic climate. Further loan portfolio improvements in banks based in the county will help to boost lending in Sonoma County to firms and residents and contributions to local charities that have slowed in recent years. 5

6 Moody s Analytics Financial, Real Estate & Creative Industries Long-Term Outlook Financial services, real estate, insurance and the creative cluster will generally benefit as the county s economy slowly transitions from recovery to expansion. However, long-term growth will be modest relative to the high rate of growth during the tech boom a decade ago and the period prior to the recent recession. The slower 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 economy. Sonoma County's climate, quality of life, proximity to Bay Area urban centers, nearby technology centers and universities, and abundant recreational opportunities all support a positive long-term outlook. These factors will contribute to the area's ability to attract a highly educated and innovative workforce, as well as new investments, once the U.S. economy transitions from recovery into expansion. Life science and energy-related technologies offer particularly good potential for the future. Downside Risks The moderate drop in house prices expected in 2012 could give way to extended price declines if foreclosures are greater than forecast and near-term employment gains continue their anemic trend from the second half of This would bode ill for the county's financial services and real estate industries because it would further exacerbate banks already-troubled loan portfolios, seizing up lending for small- and me-dium-size businesses and reinforcing expecta-tions of further price declines. The county's industrial real estate market faces downside risk in the form of outsourcing of tech production. Recession or severe slow-downs in European economies have lowered wages and other manufacturing costs in the euro zone. Eastern Europe in particular has a large amount of skilled workers, thus increasing the region s attractiveness to producers of medical devices. A tax on medical devices in 2013 as part of the federal healthcare reforms could drive more outsourcing. Upside Risks Strong growth in developing Asia China and India in particular represents a major upside risk for the county s finance, insurance, real estate and creative cluster industries. As more citizens of developing economies enter the middle class and as firms in these countries seek IT and other capital equipment, demand for the tech products designed in Sonoma County will rise. This will boost demand for new tech-related office space in addition to further bolstering the strongest component of Sonoma County s creative cluster. Strengthening of the county s high-value and high-profile wine industry after several challenging years is an upside risk for industrial real estate and tech companies catering to internetbased retail. Increased production in order to replace depleted inventories will boost demand for new space for the manufacture and storage of wines. As more states remove the last remaining restrictions on the interstate shipment of wine and other alcoholic beverages, demand will increase for firms that create and manage web-based wine retail and shipping operations. 6

7 With acknowledgement and appreciation to local key businesses supporting Sonoma County Economic Development: Director Executive A CO U Y SO OM NT N Sponsors C A L IF O R N IA RE PU B L IC Economic Development Board 401 College Avenue, Suite D Santa Rosa, CA (707) A G R I C U LT U R E INDUSTRY R E C R E AT I O N Sonoma County Health Services County of Sonoma Board of Supervisors

Financial, Real Estate & Creative Industries Insider SONOMA COUNTY

Financial, Real Estate & Creative Industries Insider 2011 SONOMA COUNTY Financial, Real Estate & Creative Industries Insider March 2011 The Sonoma County Economic Development Board (EDB), in partnership