Orange County:

Leisure Industries Remain a Drag on Economic Recovery in 2021

Orange County’s economy will continue recovering in 2021, although the region’s pace is burdened by its above-average concentration in the leisure, hospitality, and tourism industries. Combined with an otherwise robust labor market before the COVID-19 recession, the bounce-back will be bumpy.

That’s according to the most recent forecast and trends presented by experts from UCLA and UC Irvine. These experts’ opinions spotlight intriguing viewpoints and projections so your credit union can plan appropriately.

UCLA and UC Irvine
Presented on Nov. 9 by the UCLA Anderson Forecast and UC Irvine Merage School of Business’s Center for Real Estate (“2021 Orange County Economic Outlook"):

Compared to other metropolitan regions with high concentrations of leisure, hospitality, and tourism jobs (and also having suffered through natural disasters), Orange County’s economy will perform slightly better than average in 2021. The county’s robust, diverse economy is aiding in its recovery. It is very reliant on these industries but not overly reliant (such as Honolulu or Las Vegas). This relatively diversified industrial base means that its manufacturing, construction, warehousing/transportation and other industries will help drive the entire economy move forward as other industries more reliant on discretionary incomes and household vacations take more time to recover. This projection comes from a nationwide study of metro regions with natural disasters, where industrial/sector diversity in the job base plays a huge role in business and job recovery. In fact, those areas recover twice as quickly from natural disasters such as hurricanes, wildfires, or tornadoes. Orange County has “just enough” diversity to give it a leg up during this recovery, as well as its climate, proximity on the coast, amenities, and weather.

Nonetheless, it will take some time before Orange County’s economy starts outperforming the U.S. economy in the current recovery. While the U.S. economy will make greater strides in 2021 than Orange County, much of this prediction is based on the assumption that Congress passes another financial stimulus/relief bill and that the COVID-19 pandemic is brought under more control from a distributed vaccine. Meanwhile, Orange County’s economy will have to work through its issues in having an above-average concentration in leisure, hospitality, and tourism jobs that were hit hard by the recession. The U.S. economy (which Orange County is a part of) probably won’t come back to its previous peak in January 2020 until first-quarter 2022. Total annualized U.S. gross domestic product (GDP) was $19.3 trillion as of late 2019, and the economy won’t recover to this level until March of 2021. It will probably reach $20.2 trillion by late 2022, which would show 7.7 percent growth over the two-year period from early 2021 to late 2022 (24 months). In context, GDP grew 4.3 percent over the two-year period from early 2018 to late 2019 (24 months).

Assuming the COVID-19 pandemic has a limited effect on the economy and society in 2021 compared to 2020 (and another fiscal stimulus/relief package is passed in Congress relatively soon), Orange County will be one of just several local regions across California continuing its recovery. The state’s unemployment rate will fall from its current 10 – 11 percent range to 8 percent by sometime in early 2021, but then take a more gradual pace downward and not reach 6 percent until third-quarter 2022. This figure will fluctuate depending on re-entrants to the labor force (pool of adults willing and able to work) versus “dropouts.” Total non-farm payroll employment in the state will reach 17.2 million by third-quarter 2022 (up from 15.3 million in April 2020), versus the 17.5 million record high it was experiencing in January 2020.

As the economy recovers from the COVID-19 pandemic, Orange County’s total non-farm payroll employment base is mostly being impacted by its above-average concentration in the leisure, hospitality, and tourism industries. Total non-farm payroll jobs in the county across all industries were still down -10 percent in late September compared to February, but in the combined industries mentioned above it was -29 percent. Orange County is right in the middle of the pack when it comes to metropolitan regions across the nation having large concentrations in these industries that are trying to recover (the region is not suffering as much as Honolulu, New York, Boston, Orlando, and other areas).

Orange County’s leisure, hospitality, and tourism industries probably won’t fully return to their pre-pandemic business activity and employment levels until first-quarter 2023. A large part of Orange County’s entire economic recovery in 2021 depends on how well these particular industries fare going forward. These industries lost more jobs locally than the United States did during the crisis point of the COVID-19 pandemic earlier this year. Because of this, Orange County faces an uphill battle as state restrictions keep many businesses closed. However, as the state and national economies recover, Orange County is still in a better spot than other areas with high concentrations of these industries, such as Honolulu, Orlando, New York, and San Francisco.

To visualize just how much the COVID-19 recession is impacting Orange County, the region is No. 5 nationwide in top metropolitan areas having the largest concentration of employees working in leisure, hospitality, and tourism. The average for the United States is 10.8 percent while Orange County is 13.6 percent (the highest are New Orleans, Honolulu, Orlando, and Las Vegas). These combined industries in Orange County accounted for $13 billion in GDP (gross domestic product) in 2019.

As of October, the United States’ combined leisure, hospitality, and tourism employment base had recovered to a slight -1 percent decline from its original pre-pandemic February threshold, but Orange County was still -10 percent below. This was mostly due to social distancing and business restriction health policies. From February to May 2020, Orange County was -30 percent down compared to -22 percent for these industries in the United States. Orange County’s jobs recovery in this area is better than eight other metropolitan regions across the nation in the top-20 regions for these industries, but still worse than 11 other metros that are faring better. For context, from 2014 – 2019 these combined industries were growing noticeably faster in Orange County than the entire nation.

Orange County’s restaurant businesses are doing better than recreation and lodging (hotels) establishments. While the combined jobs level at local arts, entertainment, and recreation businesses is still down -44 percent from its pre-pandemic starting point (and down -41 percent for lodging/hotels), this same measurement is only down between -18 percent and -26 percent for restaurants depending on whether the establishment is limited-service eating versus full-service.

Orange County’s entire economy — and especially the leisure, hospitality, and tourism industries — is also getting hit by the pandemic’s shutdown on airline travel, both domestically and internationally. Airline travel through Los Angeles Airport (LAX) collapsed 80 percent during the crisis point of the pandemic earlier this year compared to late 2019 and has barely recovered since then. The combined annualized 12-month window of arrivals and departures was nearly 95 million in late 2019 and 88 million in early 2020, but this measurement fell to 8 million in April and has only recovered to 16 million as of September. Simultaneously, international tourist spending in the United States plunged by -79 percent, with about 15 percent of this spend happening in Southern California annually (or about $35 billion in the greater Orange County region). It’s estimated that airline travel restrictions will make this $35 billion figure drop to $10 billion in the 12-month window since the pandemic hit the economy, a - 57 percent drop.

Orange County’s economy suffered greater losses from the COVID-19 pandemic recession than the entire nation, and its recovery continues lagging that of the United States. Putting aside the leisure, hospitality, and tourism industries, total non-farm payroll jobs were down 16 percent in April while in the United States this figure was down 14 percent (and today it’s approximately 10 percent versus approximately 6 percent, respectively). While part of Orange County’s suffering comes from those industries mentioned above, the other reason is the county’s economy was one of the most vibrant metropolitan regions in the nation in 2019. Going into 2019 and 2020, it was increasingly difficult for the local economy to grow due to a lack of workers to fill open job positions, as well as the fact that home-construction zoning and environmental conditions were not as favorable to construct the amount of housing stock a growing population and labor force need (homes for purchase, not rentals).

All eyes in the local commercial real estate arena are focused on Orange County’s retail marketplace first, with others coming secondary. The local industrial-space sector remains robust as e-commerce remains a strong point within the economic recovery. The market for office space has become a victim of the pandemic and the economy, but over the long term it is expected to hold up relatively well considering current remote-work circumstances. Many companies still have office space rentals and/or building plans going into 2021 as they are cautiously optimistic about employees returning to work with a potential COVID-19 vaccine being distributed — although time will tell. However, it’s retail space where the issue lie. There is barely, if any, retail construction happening locally, and retail vacancy rates have shot up significantly. Yet retail developers and planners are still optimistic over the long term as the COVID-19 climate becomes more favorable for outdoor/indoor shopping and other leisure experiences that drive the local economy.

Orange County’s residential real estate market (“existing home” sales and prices) have recovered more than halfway from the COVID-19 recession but still have some ground to make up. However, new builds show a different trend. In the Anaheim-Los Beach-Los Angeles metropolitan area, annualized housing starts (builds) averaged 25,000 from 2015 – 2019 but fell to about 17,000 in mid-2020. This is not too bad given the circumstances (all supply-side constrained, not demand side). Additionally, the region has experienced a huge rise in existing home-sale listings after the initial crisis months of the pandemic passed (dropping an annualized -60 percent in March and floundering until shooting back up into the positive by 25 percent in September). This shows that sellers are coming back onto the market to meet buyer demand. However, compared to years past, local existing annualized home sales have stooped to monthly levels not experienced since 2008 due to 1) a lack of inventory on the market and 2) shy “would be” sellers waiting for the COVID-19 pandemic to settle down.

The possible bankruptcy decisions of some large businesses and retail chains with site locations or headquarters in Orange County and the greater Southern California region are an example of a larger phenomenon taking place in the world of corporate restructuring due to the COVID-19 recession. Due to societal health changes, social distancing, and shopping behaviors controlled by the pandemic, a spike in chapter 11 bankruptcies (corporate restructure) took place in the summertime and early autumn, but now the figures have dropped substantially (compared to staying elevated for several months during the aftermath period of the Great Recession from 2008 – 2010). Today’s chapter 11 bankruptcies are very different. It used to take an average of 457 days for a company to petition and get a chapter 11 bankruptcy legally confirmed by a court in 2000 — a number that has dropped to 103 days on average by 2020. Bankruptcy lawyers have gotten better at getting restructure-firms through the bankruptcy process over the past 20 years.

Pre-packaged chapter 11 bankruptcies have gained in popularity over recent years, where creditor/financial support is cooperatively pre-arranged and approved by stakeholders before the bankruptcy happens. Today, pre-packaged bankruptcies are an option for creditors and investment funds that are looking to strategically “purchase debtors out of bankruptcy.” Every creditor and investment fund operating in this space is looking for opportunities to buy distressed companies, which means a large amount of new capital is ready to be deployed to struggling companies to put that capital to work (a major difference between today and the financial crisis of 2008). Today’s availability of cash to be deployed into “good deals” is overwhelming compared to 2008 and 2009.

The mindset of corporate and bankruptcy leaders after the COVID-19 recession earlier this year is that this fallout was similar to a natural disaster, where the economy can recover relatively soon (over several months) — not a systemically financial risky proposition that will take years to remedy like in 2008. However, one downside is many firms that were financially overleveraged before the pandemic hit the economy are even more over-leveraged today as many creditors, property landlords, and bankruptcy court judges willingly allow companies in the retail, hospitality, leisure, restaurant, and health-fitness industries to essentially “kick the can down the road” and deal with the brunt of their financial debt sometime in 2021 when the economy is seemingly on healthier recovery footing. Companies are discussing how to weather through COVID-19, not how to get their pre-pandemic highly leveraged financial books in order.

Given the above, lenders and creditors want to arrive at a more certain outcome before making debt calls and are giving business borrowers/debtors more runway than originally thought. What will retail, hospitality, restaurant, leisure and consumer demand be post-pandemic? Nobody exactly knows right now, although they know it will be somewhat different. If physical, onsite shopping and service-related demand never fully comes back and is somewhat replaced over the long term by more socially remote experiences, many of these companies “kicking the can down the road” will find it much harder to service their debt from 2021 to 2022.

California ranks No. 1 in a “top 10” list of states that are home to large companies which received $500 million or more from congressional relief passed earlier this year under the Paycheck Protection Program (PPP) and still filed for bankruptcy as of today. California is home to 43 of these companies, according to a report in The Wall Street Journal. However, beyond the PPP storyline, the number of business-loan credit defaults are approximately 25 percent higher coming out of this year’s COVID-19 recession than the number of defaults spurned by the Great Recession of 2007 – 2009. However, the number of bankruptcies today are only half (50 percent lower) than the previous recession. Many property landlords are giving concessions and hoping that retail and restaurant businesses will survive going into 2021 and beyond. There are most likely more creditor extensions and concessions coming as the economy heads into early 2021.

You can view the entire archived forecast presentation video on-demand. Just click here!

Orange County: Demographics, Labor, Education & Economic Resources

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