The region is economically healthy, but housing is becoming a major hurdle for future prosperity
The Bay Area has experienced a healthy amount of economic prosperity in 2018, helping California place second nationally over a span of the last five years for real output and eighth overall for employment growth. The numbers, recently released in the Economic Outlook report by the Los Angeles-based Beacon Economics, looked at ways in which rapid employment growth in the region played a factor in the severe lack of housing supply in the Bay Area. This strain on housing, the report stated, placed the region in economic jeopardy given its impact on the cost of living and quality of life in the region broadly. Coupled with other region-wide economic challenges, the Bay Area economy will continue to experience a two-faced growth leading into 2019.
Employment growth rates can be seen most dramatically within the tech sector in San Francisco and the healthcare and leisure/hospitality sector primarily in the East Bay, according to Beacon Economics’ report. Healthcare has seen a 29 percent growth over a 10-year-period in the East Bay, while leisure/hospitality employment rates have expanded by 30 percent over the same time period.
“I think that you’re dealing with a market that’s becoming rapidly labor force-strained. That’s important, because when you don’t have a lot of room for expansion in terms of jobs. That can have at some level a diminishing effect on demand for commercial real estate.”
“Tech and healthcare are the big winners,” Thornberg said. “Beyond that, you don’t see a lot. Tech continues to thrive and grow, and it’s pushing other sectors out of the economy, or at least preventing them from growing.”
California employment grew at an average 2.1 percent between 2017 and 2018, compared to just over 1.5 percent nationally. In the Bay Area, San Jose, San Francisco and Oakland have risen 3.8 percent, 2.1 percent and 1.8 percent, respectively.
Commercial real estate is a factor in economic growth, as well. The Bay Area has seen an increase in construction permits issued, which could potentially diminish the value and demand for Class B or Class C buildings as new product comes online.
“What typically ends up happening is there’s a demand for new stuff and demand at the high end of the market to continue to be positive, but on the other side, maybe older stuff is going to have a little bit of trouble competing with new things coming online,” Thornberg said.
While construction permits for commercial real estate have been increasing, residential real estate development has fallen short of the need. Though this is the case, the region has seen an increase of residential housing permits issued, hovering around 9,000 across the region. Of that figure, nearly 7,000, or about 78 percent, came from Alameda and Contra Costa counties.
The housing shortage persists, however, given the growth of the population.
“(Workers) drive housing costs that are driving them out,” Thornberg said. “You have a lack of housing, and that means people can’t move there, so [unemployment is] going to stay low. The only way unemployment is going to start to rise is if A) the economy starts to slow down overall, and I don’t see that in the cards right now, or equivalently B) if someone builds a whole bunch of new housing, and again, I think that’s highly unrealistic.”
There is also the potential for economic shift as workers gravitate toward more affordable living in the Bay Area or just beyond the region, where some employers are forced to move due to competition.
“You look at some of these mid-level companies that just can’t compete for workers in that overheated environment, and they’re moving out to Sacramento,” Thornberg said.
California Senate Bill 35 was passed in an attempt to supplement the housing problem in the state. It is intended to track the progress of jurisdictions in Regional Housing Needs Assessment (RHNA) housing allocation on a pro rata basis.
RHNA is a process mandated by the state that identifies the availability and affordability of housing that each jurisdiction must accommodate. In the past two years, however, from 2015 to 2017, six cities in Alameda and Contra Costa counties failed to submit annual progress reports, and all Alameda jurisdictions in APR year 2017 did not meet their housing goals for very low income and low income groups. All except for one Contra Costa jurisdiction – El Cerrito – have missed the mark, as well, and only four cities in San Mateo County and one city in Marin county are on track to fulfill their RHNA allocation.
According to Beacon Economics’ report, four out of 14 jurisdictions have completed 0 percent of housing for very low income and low income groups. Two out of the 14 jurisdictions have completed 1 percent. In fact, construction costs are pushing most housing prices to levels affordable to only above- moderate income families.
Heading into 2019, the Bay Area and the rest of the state of California will continue to see GDP growth, state revenues, rising wages and investment, while interest rates will remain low. However, Beacon Economics’ report also indicates a few negatives in economic outlook, as well. Labor shortages, an increasing federal deficit, policy issues and political uncertainty will play significant roles as they trickle down to the Bay Area, with housing shortages still continuing to be a limitation.
“The economy is healthy,” Thornberg said. “Things are chugging forward…The only major constraint in the Bay Area is housing.”