Bay Area:

2021’s Economic Recovery is About Location, Jobs, Housing

Although the Bay Area’s economic recovery will kick into high gear during the first-half of 2021, certain localities within the nine-county region are still playing catch-up in their respective job markets and industries compared to others that are faring much better as of late 2020.

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

Beacon Economics (consulting firm) and UC Riverside
Presented throughout December by Beacon Economics and the UC Riverside School of Business’s Center for Economic Forecasting and Development:

The Bay Area’s economic recovery is poised to kick into high gear in the first-half of 2021 and play “catch up” to other regions across the nation after localized business restrictions and a variety of social-distancing lockdowns persisted last year. U.S. gross domestic product (GDP) will most likely register 5 to 6 percent in the fourth quarter of 2020 and 4 to 5 percent in the first quarter of 2021. This represents a slower pace of growth than previously forecasted due to the resurgence of the spread of COVID-19 in late 2020. However, perhaps most important to the Bay Area’s ongoing recovery has been recent highly positive developments on the COVID-19 vaccine front. It is possible the spread of the novel coronavirus could likely be under control by sometime in the second quarter of 2021. “The economy is not shattered, has already seen a remarkable bounce in economic activity, and is heading into 2021 with a good degree of economic momentum,” the forecast report states.

What are some additional reasons the Bay Area’s economic momentum going into 2021 looks better than previously expected? “As of September, the U.S. economy was only 4 percent below its long-run growth trend — a much faster rate of recovery than most prognosticators have been anticipating throughout the COVID-19 crisis,” states the forecast report. “While U.S. consumer spending drove the bulk of third-quarter 2020 economic growth, there was solid expansion in every part of the economy with the exception of non-residential structures and government sectors. This same pattern is evident in industrial production, durable goods orders, retail sales, and other statistics, with record increases following the record declines.”

However, some Bay Area employment sectors are still in serious distress, including leisure and hospitality, restaurants, tourism, arts, entertainment, and many service-related industries. It means almost certainly that some businesses in these industries will not reopen. “While the wave of business closures should be met with an equally impressive wave of new business openings, any government assistance strategies should be specifically devised to support the hardest hit sectors and workers,” the forecast report states.

Within the Bay Area, the greater Oakland region experienced the largest local increase in state job growth in November 2020. This is probably due to the Oakland area playing catch-up compared to Silicon Valley and San Francisco, which didn’t experience the same amount of job losses during the COVID-19 recession earlier in 2020. Company payroll employment expanded by 8,400 jobs in the Oakland region in November, while San Jose (5,200), San Francisco (2,000), and the San Rafael (1,000) regions also saw payrolls increase. From November 2019 to November 2020, the Oakland region (-9.5 percent) has seen the steepest payroll job declines in the San Francisco/Bay Area region, followed by Napa (-9.4 percent), San Francisco (-9.3 percent), Vallejo (-9.2 percent), Santa Rosa (-9 percent), San Rafael (-8.3 percent), and San Jose (-6 percent).

Several months into the recovery, the Bay Area labor market has a considerable ways to go before recovering from the historic job losses of March and April of 2020. The San Francisco-area unemployment rate fell to 6.9 percent recently, lower than the Oakland region’s 8.3 percent and California’s 9.3 percent (but higher than the Silicon Valley-area’s 6.3 percent). Additionally, the unemployment rate in San Francisco remains well above the stunningly low 2 percent estimate in late 2019. Stagnant from April to September, the San Francisco region’s labor force (pool of older teenagers and adults who are willing and able to work) increased by a sizable 31,000 in October, only 12,000 shy of February 2020’s pre-pandemic peak (a positive sign of labor force optimism). In Silicon Valley, the recent falling unemployment rate was aided by a contracting labor force — but in October the area’s labor force expanded significantly, increasing by 41,000. This brought the Silicon Valley region’s labor force to 1.3 percent above February’s localized peak level. And although the Oakland area’s falling unemployment rate in the early months of the recovery was aided by a contracting labor force, recently the region’s labor force expanded significantly, adding 38,000 workers back into the labor pool (with a labor force now only 1 percent below pre-pandemic levels). These recent trends in “who” is willing and able to work bode well for the larger Bay Area economy in early 2021.

Home and apartment rents in the greater San Francisco and San Jose regions have declined the most of any other region throughout the state. As of Sept. 30, year-over-year monthly rental prices dropped -10 percent in the San Francisco area and -5 percent in the San Jose region. For California, the average was -3 percent (compared to -3 percent in Los Angeles, -2 percent in Orange County, -1 percent in San Diego, but 2 percent growth in Sacramento and 2.5 percent growth in the Inland Empire). Even with rental price declines in the Bay Area for apartments and homes, the latest average rent was between $2,000 to $3,000 per month depending on the locality (as of third-quarter 2020). “Contrary to news reports suggesting a surge in apartment vacancies, they rose just 0.6 percent, with the largest increases in the civic center/downtown San Francisco area (2 percent), South Of Market or “SoMa” (1.4 percent), and Central San Mateo (0.7 percent) submarkets,” states the forecast report. “Whether rents will continue to fall depends largely on whether tech employees embrace telecommuting after COVID-19 is controlled.”

Much has been made in the news media of telecommuting workers who have “fled” expensive cities in the Bay Area for cheaper locales, but this is an unrealistic perspective. Indeed, rents have fallen in a number of California’s highest-cost cities, including certain localities in the Bay Area. This is a sign that demand for rental apartments and homes in the city has fallen. This has led many to imagine a new landscape in which cities become diminished centers of economic activity as workers seek cheaper housing in more remote locations (while they telecommute to work). “Such proclamations are unrealistic,” the forecast report states. “Yes, housing and commercial rents are more expensive in cities. But this is not a new phenomenon. If firms and workers considered only costs when they picked locations, they would not have chosen to locate to cities. Yet firms and workers do locate to expensive cities, and many prefer them to cheaper small towns and rural locations.”

Despite the high living cost of many cities within the Bay Area, they generate great benefits for firms and workers in what are known as “agglomeration economies” (the benefits of clustering). “Apple and Google could have built cheaper campuses where land costs are lower, and the same is true for Universal Studios,” states the forecast report. “But they would lose the benefits that led them to locate in the Silicon Valley and Los Angeles in the first place. In the Silicon Valley, Apple has access to the largest hub of tech workers in the nation. If it needs to add 10,000 tech employees in a given year, it needn’t engage in expensive national recruitment drives the way it would if it were located in Akron, OH, where land costs are cheaper.”

Another benefit of locating in the Silicon Valley is that tech firms have access to specialized tech services, such as venture capital firms and intellectual property lawyers. “Workers also benefit from living near employment networking opportunities and having access to local consumption offerings,” the forecast report states. “The advantages of cities did not disappear with the advent of the telephone, fax machines and email, and they will not disappear with better forms of video conferencing (due to COVID-19). In short, speculation about the demise of cities is greatly exaggerated. We expect cities to return to their former glory once the worst of the COVID-19 pandemic is behind us.”

Housing market data tell a wildly different story in many areas of the Bay Area compared to the economic slowdown in the broader economy. According to the California Association of Realtors, sales of existing homes in San Francisco increased 90 percent in September from a year earlier, a remarkable data point suggesting pent-up demand. The increase in sales corresponded with an increase in house prices, with the median price of existing family homes in September at nearly $1.7 million, up 8.1 percent from last year. Interestingly, across the Bay Area, San Francisco County had the largest jump in home sales but the smallest increase in median price. At almost $1.8 million in September 2020, the median price of existing single-family homes in San Mateo County was up 21 percent from the same period a year earlier (the largest increase across the nine-county Bay Area region). Sales of existing homes in Santa Clara County rose 36 percent from a year ago, and the increase in sales has corresponded with an increase in house prices (with the median price of existing family homes in September reaching $1.4 million in this area, up 14.5 percent from last year).

However, with a slowdown in housing permits, the Oakland region will continue to face challenges in growing its housing supply. This is a key variable in addressing the affordability crisis that has become a hot-button issue across the state. Nonetheless, the impact of COVID-19 on new housing in the Oakland area has been much less detrimental than in the San Francisco and Silicon Valley areas. Although Alameda County reported 2,058 multifamily permits filed through August 2020, more suburban Contra Costa County reported only 852. This represents a year-over-year change of -19 percent in Alameda County versus 105 percent growth in Contra Costa County. In contrast with these divergent snapshots (in multi-family), the situation for single-family permits is virtually identical in the two counties, with Contra Costa County reporting 814 permits and Alameda County reporting 846 (representing year-over-year decreases of -22 and -24 percent, respectively).

A slowdown in home permits due to the COVID-19 recession in 2020 suggests that San Francisco will continue to face challenges in growing its housing supply. Only 2,043 multi-family housing permits had been filed through August, just over half of the 3,995 permits filed by the same point the year before. Single-family permits showed a similar trend, with only 55 filed thus far in 2020 compared to 99 the year before. Additionally, only 648 apartment units were completed in San Francisco through September, a 42 percent decrease from the previous year and the lowest year-to-date number since 2012. With net absorption also in the negative thus far this year, all of these indicators point to a housing market in flux and trying to seek equilibrium under a temporary “new normal.”

Slowing economic growth, more rigid public health mandates, and fading support from the first widespread congressional economic stimulus/relief package in 2020 present headwinds for the Bay Area’s near-term recovery. But with the distribution of vaccines imminent, the outlook for 2021 is strong. Additionally, much has been made of telecommuting workers who have left San Francisco’s expensive housing and rental markets for cheaper locales in the Bay Area or even further out, leading many to imagine a new landscape in which cities become diminished centers of economic activity as telecommuting workers seek cheaper housing in more remote locations. “But if firms and workers considered only costs when they picked locations, they would not have chosen to locate in cities,” the forecast report states. “This is because, despite the high costs of many cities, they generate great benefits for firms and workers. These advantages did not disappear with the advent of the telephone, fax machines, or email, and they will not disappear with better forms of videoconferencing. In short, speculation about the demise of urban centers is greatly exaggerated.”

You can view more local employment and labor force trends from mid- to late 2020, which give context for going into the first-half of 2021. For the San Francisco region, click here. For the Silicon Valley region (“South Bay”), click here. For the Oakland region (“East Bay”), click here. See what job industries are under-pacing versus out-pacing others when it comes to recovering from the COVID-19 recession that hit the economy in spring of 2020, including breakdowns of percentage losses, percentage growth, and lower-paying versus higher-paying jobs.

You can view the entire California outlook for 2021 from Beacon Economics. Just click here to see more trends and projections for the entire state in 2021 (pages 15 – 23).

Caltrans’ County-Level Economic Forecast
Released in December 2020 by Caltrans (the California Department of Transportation):

You can view Caltrans’ economic, demographic, housing, population, job, inflation, and industry breakdown forecasts for each county. Click on the following to view local trends and projections from 2021 – 2025: San Francisco, San Mateo, Santa Clara, Alameda, Contra Costa, Solano, Napa, Sonoma, and Marin. Or you can click here to view any county in California.

Bay Area Small Business Activity
Updated routinely by Homebase, a provider of real-time digital tools for small businesses:

Small business activity across the Bay Area was down at varying amounts compared to pre-COVID levels as of late November of 2020. In the greater San Francisco area, activity was down -29 to -37 percent depending on the measurement analyzed. In the greater San Jose region, activity was down -20 to -22 percent. Both regions were down between -53 to -74 percent in April 2020 before starting to recover. Measurements include the volume of hours worked by employees, the number of businesses open, and the number of employees actually working. You can click here to learn more and pick your region.

Bay Area: Demographics, Labor, Education & Economic Resources

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