By NADRA KAREEM and LINDA COBURN Staff Reporters The threat of a national recession is looming over Valley businesses. Nearly 40 percent of the 125 businesses surveyed in the San Fernando Valley Economic Report cited the current economic downturn as their most pressing concern. This is remarkable, considering that last year no business surveyed cited the economy as being of particular importance to them. “That wasn’t even on the radar,” economist Daniel Blake said during his discussion of the report at the 2008 San Fernando Valley Economic Summit, held May 8 in Universal City. Whether the country is indeed in the midst of a recession was discussed throughout the summit, presented by the Economic Alliance of the San Fernando Valley and California State University, Northridge. “The Fed chairman said even last week, ‘we are not in a recession,” said Los Angeles Mayor Antonio Villaraigosa, who gave a welcome during the event. “Warren Buffet says we are.” The mayor said that the financial crisis gripping the nation gives the City of Los Angeles the opportunity to change how it conducts business. The newest shift the city has made in the business realm is the May 8 launch of its new Web site, Los Angeles Business Solutions. The site is being billed as a one-stop shop for meeting the needs of new businesses. With a URL of business.lacity.org, the site provides information on real estate development, contracting and partnership opportunities and business incentives, to name a few. Changing the way the city does business also includes engaging in smart growth, according to the mayor. This means creating pockets throughout the city where people can shop, work and live. On the downside, however, a shift in business protocol also means layoffs. Mayor Villaraigosa has proposed eliminating the city of 767 staff positions. This is the first time the city has had a reduction in force since the early 1980s, the Mayor said. In contrast, many Valley businesses will expand the number of jobs. Nearly 40 percent of businesses surveyed in the San Fernando Valley Economic Report expect to increase the number of jobs they have available in the next 12 months. Moreover, about the same percentage of businesses expect to expand their facilities this year. Also remarkable is that nearly 50 percent of businesses surveyed expect to pay workers more in the near future. At this year’s summit, Blake, director of CSUN’s San Fernando Valley Economic Research Center, relied heavily on the survey findings rather than giving a full-on forecast. That’s because new security measures introduced by the California Economic Development Department and the Bureau of Labor Statistics prevented summit researchers from obtaining the necessary data from local, county and state sources to develop a comprehensive economic forecast. The survey, however, was comprehensive in that it represented businesses in the aerospace, biotech, business services, entertainment, health services, manufacturing and wholesale trade industries. According to Blake, these industries are important because they are capable of growing in spite of the economic downturn. They have what is known as a “multiplier effect,” which means that, if activity fluctuates in any one of them, other industries such as retail, trade, real estate and finance could be affected. The good news for the Valley is that the survey found that the overwhelming majority of these businesses have no plans to leave the area; although, a significant number , 19 percent , are considering moving away in the next two years. Also of concern is that 10 percent of businesses reported having no strong ties to their Valley locales, which makes them vulnerable to moving elsewhere. During the summit, Blake also presented 2006 Census data about the San Fernando Valley. That is the most recent year for which information is available. In 2006, the Valley had an unemployment rate of 5.1 percent, a figure lower than the State of California’s rate of 6.6 percent and the national unemployment rate of 6.4 percent. Blake cited rising unemployment rates all around as a sign of a pending recession. “You need more than rising unemployment to really set off a recession, but all the pre conditions are there,” he said. Economist Richard A. Weiss, chief investment officer and executive vice president of City National Asset Management, described the nation’s financial woes in another way. “The U.S. economy is ill right now. It has the flu,” he said. Weiss cited declining corporate profits and widening credit spreads as signs that a recession is imminent. “Wait until credit spreads widen to the double digits,” he said. Then, there will be no doubt that the economy is in recession, implied Weiss, who also discussed interest rates, consumer confidence and other factors to make his case. It’s difficult to say whether Valley workers will be prepared to weather a recession. A considerable number of them 34.3 percent work in management and professional occupations. But the Valley falls short to the state as a whole, which counts 34.7 percent of workers in these fields. The national rate is 34 percent. In terms of higher education, Valley residents outshine both the state and the nation. Nearly 30 percent of Valley residents have at least a bachelor’s degree. In comparison, the State of California reports 29 percent of residents having such a degree, and the nation counts 27 percent of residents having a bachelor’s or higher. The cost of living in the Valley would be a concern if the nation were to find itself in a full-fledged recession. That’s because it’s more costly to live in the Valley than it is in the state as a whole and the country in general. Here, 48.4 percent of residents own homes that cost greater than 35 percent of their income. Compare this to the state in which 41.6 percent of residents are in the same predicament and the country, in which 27.9 percent of residents are. Renters here fare no better. In the Valley, 47.4 percent of residents have rents that amount to more than 35 percent of their income. In the state, this figure is 43 percent, and, in the nation, the figure is 37.6 percent. As for single-family residential real estate, prices have plummeted, but buyers are either still wary and waiting to see where the bottom is; or they simply cannot qualify for mortgage financing. When it comes to the non-residential sectors of the real estate market, the common thread is that owners are in denial and buyers are sitting on the sidelines. This means asking prices are still artificially high and few transactions are happening when it comes to multi-family, industrial, office and retail properties. Multi-Family The San Fernando Valley is home to 12.8 percent of the total number of apartment units in L.A. County, states the CB Richard Ellis report on the multi-housing market. It’s still not enough: currently the county’s vacancy rate is just a hair over 3 percent and the 11,155 new units coming online in 2008 will tease the vacancy rate up less than 1 percent by the end of the year. Taking a look ahead for the next two years, the CBRE report shows that the 173,082 new units being constructed in the San Fernando, Santa Clarita and Antelope valleys would put some pressure on rental increases. Retail The 11.2 million square feet of shiny new retail space currently under construction in the Valley will be absorbed quickly, according to the NAI Capital retail market report, but much of that will be migration from older properties, meaning vacancy rates could get as high as 4.5 percent. Prices for retail properties are holding steady, with cap rates ranging from 5 percent to 6.5 percent. The third quarter of 2008 should be when retail sales start to gather momentum again, predicted Leyner. Industrial/Office The good news is that industrial real estate, despite a slight increase in vacancy rates (to 2.8 percent), and a slight decrease in rents (to $0.68 triple net), is holding its own, said George Stavaris, senior vice president of Grubb & Ellis. The bad news is that the office market has taken a serious turn for the worse, with vacancy rates rising into the double digits and negative net absorption of 315,000 square feet in the first quarter of 2008.
Downturn Casts Shadow on Summit