CED – 17th Annual North State Economic Forecast Conference
The CED brought us another wonderful forecast conference for Northern California. It is always funny to me that Northern California is used so loosely when I would consider Northern California to be everything north of Sacramento. Redding is a large economic engine in the Northern California area and there is little discussion even at this conference. Either way, the discussions and presentations were once again well done and informative.
Robert Eyler, PH.D. presented an outlook on the national, regional and local economy. Every year he does a great job with providing supporting data and graphs to base his opinions. He anticipates two additional rate hikes from the Feds and a slow evolution of Trump. Feds are worried about inflation. Trump’s trade policy is still unknown and evolving to a possible trade war, which will increase prices. We are in the eighth year of recovery per Robert Eyler and we are not booming. The reason for this steady recovery is there has not been a “supply side bump”. We are in a healthy “demand driven recovery”. I much agree with Robert Eyler and have seen this play out in our local economy of Shasta County. He did provide a leading indicator which is the auto industry. Stating that consumer confidence is coming back with an increase in auto sales, and we are already seeing sub-prime financing for autos. There are still strong cash reserves at the Banks, which Robert doesn’t see going down anytime soon with the rise in interest rates and strong regulations. Overall he sees slow growth and still low-interest rates into 2018.
Regarding Trump, he thinks we will see some partial or complete repeal in the next twelve months of the ACA. This will impact medical office market on the local level. Definitely infrastructure spending and the debt will rise. The biggest concern is a trade war, which will reduce port activity and raise prices. Unfortunately, the off-shore manufacturing probably won’t come back and companies are moving toward automation to reduce costs and solve the ever-increasing minimum wage issue.
Bill Watkins, PH.D. spoke next and had similar projections for the coming years. He did touch on a very interesting breakdown of California. California is broken up into two parts, not north and south, but inland versus coastal. It is amazing to see the wealth in the Bay Area and other coastal areas compared to the other parts of California. Many people have no idea of the poverty and economic struggles with other parts of California.
The one interesting statement that Bill Watkins, PH. D. made was “40%-50% of all venture capital in the world is in the Bay Area/Silicon Valley”. Just think of that fact, close to half of the world’s venture capital is only three hours from our doorsteps. This increase in demand and investment activity is starting to move further inland into California, but very, very slowly.
His other significant point in his presentation is that “Education” is not the key to economic growth. Dr. Watkins stated three things that help communities prosper; (1) Public Safety, (2) Healthcare, and (3) Amenities. He might be right and the City of Redding is a prime example. We lack public safety and we continue to work hard to improve healthcare locally. There are many great amenities in our area, but we need to focus on number one, Public Safety.
Todd Mirell for Union Bank spoke next on the outlook of the Real Estate market. The broken record is the “Trump Wildcard”. It appears everyone is concerned with how Trump will perform or act in office, which will impact the markets. Trade war is most likely, per Todd, and possible repeal of the ACA. This repeal could contribute to 250 million square feet of vacant medical space. Interest rates will increase and compress returns for real estate; however, buyers will not be fazed by the lower rate of return and values will not decline. I beg to differ on this subject and feel this will depend on the local market. My prediction is that rents will start to increase due to the increase in demand and lack of supply. With the increase in rents, the values of real estate will see slow growth even with the increase in cap rates typically caused by interest rate increase.
Todd did touch on the reform of the Dodd Frank. This will improve financing for construction debt and allow fewer reserves required. Fannie and Freddie continue to provide strong financing for multi-family. There will be a million new renters in the next five years and in California, the vacancy is 3.75% with cap rates at 4.75%. In addition, 12% of the renters are non-citizen. Trump's immigration stance could be a real concern for the markets and/or products that support this 12% with a possible mass vacancy. From his presentation, the outlook for industrial is strong and retail is good if they offer an experience to the consumer. The interesting comment for California real estate is the future of the building industry with Title 24. It appears that by 2024 the new buildings will need to be net zero energy. It will be interesting to see how this affects the market for existing real estate and rental rates of new buildings, which would drive conversion more than government regulations.
Overall the conference provides interesting speakers and data regarding the outlook of our area. They did provide the annual local scorecard that can be found at this link; http://www.cedcal.com It doesn’t appear that Redding is improving from years past.
About Ryan Haedrich
In 2006 Ryan Haedrich joined Haedrich & Co., Inc. after working for three years in the commercial lending industry. He is a graduate of the California Bankers Association Commercial Lending School. Ryan is knowledgeable about all areas of commercial financing, commercial appraisal reviews, and title and escrow. He is an alumnus of University of California, Santa Barbara and received a B.A. in Business/Economics with an emphasis in accounting. Go Gauchos! Ryan holds the Certified Commercial Investment Member designation (CCIM), which recognizes him as an expert in the commercial and investment real estate industry. Aside from exceeding clients' expectations in commercial real estate, he loves to spend time with his wife and two little boys, which is most important.