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GDP: Growth Picks Up in California and the U.S.

California experienced its strongest quarterly growth in more than a year in the third quarter, achieving an impressive 3.75 percent growth rate. This pushed California’s gross state product to $2.28 trillion, up from $2.26 trillion, and accounted for 14.5 percent of the nation’s total growth.

Nationwide, surging consumer and business spending, along with increased export activity, spurred third-quarter U.S. growth of 3.2 percent year over year.

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EMPLOYMENT: Steady Growth; Science and Tech Jobs in the Lead

As 2016 drew to a close, California’s labor market continued to enjoy steady growth. In November, the state’s unemployment rate fell to 5.3 percent, a drop of 0.6 percentage points over the previous 12 months, and nonfarm employment increased 2.3 percent on a year-over-year basis. ­­

Growth was uneven, however, as some sectors notched strong gains and others dropped sharply.

Technology is the major engine of the state’s economic growth. Professional and business services was the state’s fastest-growing jobs sector. Seven of every 10 jobs added in the professional and business services sector last year were science- or technology-related.

The information sector, which also has a strong tech component, accounted for an estimated 2.5 percent of yearly growth – with a strong 17.5 percent jump from the second quarter to the third quarter.

At the other extreme, employment connected to natural resources extraction and manufacturing declined. The largest job losses were in natural resources and mining, which fell 11.6 percent year over year.

Manufacturing job losses in the same period were more modest, with roughly 8,000 jobs (0.6 percent) going away. Despite the personnel downsizing, manufacturing output rose. This is likely a consequence of ongoing automation, which makes the industry more competitive but displaces workers in the process.

As the state’s tightening labor market triggers wage hikes, payroll growth continues to boost consumer spending and the overall California economy. Halfway through 2016, taxable sales were up 2.3 percent year to year. Drivers included a 5.1 percent increase in spending at hotels and restaurants and a 4.1 increase in spending on autos and transportation.

In contrast to the immediate post-recession years, economic gains are being well distributed geographically. The San Jose area, home to much of California’s booming technology industry, continues to be the leader in employment gains. There, the number of jobs increased 3.3 percent year to year, or by 35,000 new jobs. The second largest contributor to the state’s employment growth was San Francisco, which grew by 2.5 percent and added nearly 52,000 new jobs.

At 2.4 percent year over year, Orange County added jobs at a modestly faster rate than California as a whole, and increased its payrolls by nearly 38,000. Remarkably, however, the area’s unemployment rate fell to 3.7 percent in November, meaning that Orange County is now effectively enjoying full employment.

The growth rate for Los Angeles was just 1.8 percent, but the city’s absolute employment gains of 103,500 were twice that of San Francisco, the second largest metro area in terms of job creation.

For 2017, expect California to continue to move in the right direction. Improving labor conditions will fuel wage gains and attract job seekers. The next 12 months should see job gains in the 2.2 to 2.7 percent range.

Housing will be a constraint, however. Higher interest rates and rising rents make finding affordable housing for new workers more difficult. This may temper job growth in major metropolitan areas.

A source of uncertainty going forward is the volatility of the state’s revenue stream. November’s election extended tax increases on California’s highest income earners, effectively increasing budget reliance on collections from those with annual incomes of $200,000 and up.

They make up less than 6 percent of the state’s taxpayers but generate more than 70 percent of the state’s income tax revenues. Those revenues are fundamentally pro-cyclical, going up in boom years and declining in bad, which increases the unpredictability of the state’s revenue stream.

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COMMERCIAL REAL ESTATE: On Track for a Post-Recession High

The picture for commercial real estate (office, retail and industrial) in California as 2017 gets underway is one of heightened activity, with vacancy rates that have generally been falling and lease rates that have generally been rising for the last four years, based on statistics from real estate data provider Reis, Inc. It is also marked by continued increases in construction activity, based on permitting activity reported by the Construction Industry Research Board.

Between third quarter 2015 and third quarter 2016, there was a 1.1 percent, or 8.64 million square foot, net increase in occupied office and retail space overall in California’s major metropolitan areas, Reis, Inc. data showed. This has come despite a slight overall downtick in retail (-0.2 percent year to year), which has faced challenges with the gradual movement away from brick-and-mortar establishments and toward ecommerce.

On the other hand, occupation of office stock increased by 1.7 percent year to year. While Reis tracks industrial data annually rather than quarterly, projections for 2016 have industrial properties in higher demand as well, with a 0.8 percent increase in occupied stock.

Through the first three quarters of 2016, the value of planned office construction almost doubled compared to the same period a year earlier, and investment in new nonresidential structures is on track to reach a post-recession high in 2017.

Permitting levels for the office and retail segments rose year to date by 93 percent and 36 percent, respectively. But the industrial segment fell by 17 percent as both California manufacturing and logistics have faced headwinds in the form of a strong dollar and weaker-than-expected growth in global trading partners.

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Los Angeles

Permitting activity across the sum of the three segments (office, industrial and retail) in Los Angeles County rose by 30.0 percent year to date through the first three quarters of 2016, with a total gain of 175.8 million, with all three segments trending upwards. The most active permitting has been in industrial properties, which has seen an increase of 54.7 percent in permit values.

Year-to-date permit values are higher for office and retail properties as well, which have seen 13.3 percent and 26.9 percent growth through the first three quarters of 2016. Geographically, the South Bay, West Los Angeles and downtown submarkets are experiencing elevated development.

One of the most anticipated projects, Inglewood’s City of Champions Stadium, broke ground in 2016, and is expected to be completed in 2019. The stadium development will include 2,500 residential units, a 300-room hotel and 1.5 million square feet of commercial space.

Orange County

The Orange County planned and proposed development pipeline now includes 7.2 million square feet of office space and 2.3 million square feet of retail space, according to Reis, Inc. Strong development continues to be driven by rising rental costs per square foot in both categories, with office rents increasing 4.7 percent on a year-to-year basis through the third quarter of 2016.

Some highly anticipated projects in the works include the LT Platinum Center in Anaheim, the redeveloped Laguna Hills Mall (to be renamed Five Lagunas) and the Westgate Center, also to be located in Anaheim. Close to Angel Stadium, the Platinum Center is expected to include 140 units of multifamily housing, a 200-room hotel and more than 400,000 square feet of commercial space.

San Diego County

San Diego County’s industrial properties remain the most expensive in Southern California, due in part to the area’s importance to U.S.-Mexico trade, but also because San Diego manufacturing activity continues to grow, with employment in the sector at its highest level since 2002 (averaging 106,400 new jobs through the first 11 months of 2016, higher than any year since 2002).

Despite San Diego’s expensive industrial properties, vacancies continue to tighten, decreasing by 0.2 percentage points year over year in the third quarter of 2016. This will likely trigger further development moving forward, and proposed and planned development is currently estimated at 1.9 million square feet of space. Much of the proposed activity is in Carlsbad and the city of San Diego.

A number of large mixed-use waterfront projects are in the works, including Manchester Pacific Gateway and Seaport San Diego. The Manchester Pacific Gateway is currently planned to occupy 13.7 acres and include 1,678,000 square feet of commercial space, 1,390 hotel rooms, a museum and the regional headquarters for the U.S. Navy. Seaport San Diego will include 2.2 million square feet of commercial space, 1,075 hotel rooms and a 480-foot observation tower.

Inland Empire

With $276 million in permitted construction through the first nine months of 2016, the Inland Empire’s retail development has been stronger than any metro area in the southern half of the state, with the exception of Los Angeles, based on Construction Industry Review Board data. In a shift away from recent construction trends, where northwest regions of the county have claimed 40 percent of retail construction since 2015, development appears to be shifting south.

The largest projects, such as the Venue at Perris and Murrieta Market, will be built in southern Riverside County. Additional growth will be spurred by the recently approved Alberhill Villages project in Lake Elsinore over the next 20 to 30 years. The project is a massive development with more than 8,000 residential units, nearly 4 million square feet of commercial space and 63 acres for a college or university campus.

Permitting for industrial properties increased modestly through the first three quarters of 2016, with the total valued at nearly $470 million. The region’s growing logistics industry is a driving force for major development projects in the area, including the World Logistics Center, which is expected to increase the region’s industrial stock by 41 million square feet. While the project received approval in late 2015, construction has stalled due to litigation and environmental impact concerns.

Over the long run, a number of projects in the Inland Empire are scheduled for completion over the course of 2017, with 1.5 million square feet on track to come on the market. Furthermore, 125.2 million square feet of permitting and proposed industrial space is scheduled to come on line in the next few years, which is expected to ease pressure on tight industrial vacancy rates in Southern California overall.