Forecaster: Real-estate bubble will burst, traffic will be key concern for SM
Transportation will play a key role in the economic fortunes of Santa Monica, according to a forecast delivered Tuesday by an economist from the UCLAAnderson School of Business.
That’s because many companies are abandoning their offices by the sea for downtown LA locations, and some business travelers appear to be choosing somewhere other than Santa Monica to stay.
The issue? Traffic. “This is obviously a healthy economy. People have jobs,” said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast, a branch of the business school that tracks and predicts financial trends. “The question is the business economy. And the issue is, you can’t move on the damn 405.”
Thornberg gave a 45-minute presentation on the state of the economy to a group of nearly 100 local merchants at the monthly luncheon of the Santa Monica Chamber of Commerce, held in the penthouse of the Four Points Sheraton on Pico Boulevard. He said he expects the economy to continue to improve but said businesses should be wary of the current recovery, which has relied less on the creation of new jobs and more on consumer spending.
While four of the top 10 booming cities in the country are in California — Fresno, San Bernardino/Riverside, San Diego and Sacramento — so are two at the other end of the spectrum. Both San Jose and San Francisco are still reeling from the dot-com bust.
Los Angeles has generally stayed the course. The city lost 3,700 jobs last quarter but posted gains in retail, government and construction sectors, Thornberg said. He added that LA’s troubles are largely external, and he expects the financial, information, education and health sectors to lead the local recovery.
Here in Santa Monica, which was hit hard by the dot-com bust and by a slump in post-production business, Thornberg said the issue of office-space vacancies is probably most important. He said a light-rail line from downtown to the westside likely would be an enormous boost to the local economy.
Gwen Pentecost, a senior analyst at City Hall, agreed the drop-off in office occupancy is a key symptom of the economic downturn. Though Pentecost said recently people have begun to move back, 15.3 percent of office spaces are still vacant.
“We’ve got room to lease out here, certainly, if anyone’s interested,” she said.
Kathy Dodson, president and CEO of the chamber, said the issue over traffic could quickly become one of the most crucial issues in Santa Monica.
“Let’s face it, tourists want to stay at the beach,” she said. “But not having to get on our freeways and drive is going to be a huge incentive.”
As for the real-estate boom, Thornberg said he was only recently convinced the high prices constitute an inflated bubble. The local median house price is now at $700,000, up from $300,000 in 1996. And while prices continue to go “absolutely nuts,” interest rates have stayed low, he said. Thornberg added it’s a trend he does-n’t expect to last long.
“What mortgage rates giveth, so they can taketh away,” he said, adding that current prices are inflated by about 10 percent to 15 percent. Mortgage rates, which once dipped below 5 percent, should rise back to 6.5 percent by the end of 2005, Thornberg said.
“In fact, consumers have been buy-buy-buying along with no slowdown.” — 2202 OLYMPIC BLVD., SANTA MONICA • (310) 829-2563 Thornberg said
“Consumers never slowed down,”
But the bottom line is housing prices and rents will continue to rise locally as the regional population grows by about 1.5 percent each year, thousands of units are bought and sold each month, and the demand for housing increases, Thornberg said.
“Bear in mind, even if you’re antigrowth, they’re still going to come here,” he said.
As for the economy, Thornberg said he expects consumers and government groups, which have led the recovery so far, to hand the baton to businesses. But he warned that an “Internet hangover” has left the labor market funky, the U.S. dollar vastly overvalued and everyone more wary of corporate malfeasance. Thornberg also said the recovery might be hampered by uncertainties over the future of oil revenues and international relationships.
“The economy looks good but there’s some fundamental problems underneath,” he said, projecting a 2.5 percent to 3 percent economic recovery this quarter and the same for next year. Thornberg added that unemployment, currently at about 6 percent, will drop to 5 percent but not to the low of 3 percent, which he said was a symptom of an overheated labor market.
The third quarter of this fiscal year posted an 8.2 percent gain nationwide, the biggest jump in more than a decade, Thornberg said. But that gain was led by consumers who were battling with high unemployment and considerable debt, Thornberg said.
Enticed by “bizarrely low” interest rates, the consumers have taken out loans despite the bad economy, Thornberg said.
“We need to see consumers limit their spending, or there will be a new downturn in 2005-2006,” he added, saying it’s a common misperception that low interest rates mean better deals. In fact, low interest rates are tied to higher prices, and the two generally even each other out, he said.
In the meantime, Thornberg said some jobs have been created, but they’re not showing up on the ledger sheets. He said 350,000 “household” jobs have been created in Southern California in the last three years, largely for subcontractors.
The bottom line is the state needs to readjust its expectations, which were set high during the late 1990s, and limit spending, Thornberg said, adding that the current budget problems are structural and not cyclical.
“There is no quick fix,” he said. “Tough choices are going to have to be made.”
In Santa Monica, Dodson said local merchants have different experiences with the recent uptick.
“Retail sales reflect that this is a better year than last year,” she said after the presentation. “I probably wouldn’t go any further than that.”
Kenny Miller, general manager of Volkswagen Santa Monica, said despite his outfit’s status as the No. 1 in sales and service in the country, he has not experienced the pluses of the recent economic recovery.
“The last couple of months have been the worst that I’ve experienced,” he said, adding that Volkswagen Santa Monica sold 147 cars in October and 122 in November, but that in a good month his dealership will sell 200. “What’s happening to me? What can I do?”
Originally published in the Santa Monica Daily Press print edition on December 3, 2003. Read the original PDF.