San Diego could thrive from pain

Wars. Promiscuous printing of money. Could San Diego cash in next year?

Local output of goods and services led the state and nation this year.

Local output of goods and services led the state and nation this year.

Output plunged in the Great Recession but has bounced back.

Output plunged in the Great Recession but has bounced back.

The world is a mess. San Diego might make money off that mess next year. Repeat: might.

Japan has gone into recession. Europe will likely follow. Wars are mushrooming all over: Middle East. Ukraine. Ghettos.

Economically, the United States has the least run-down house in a bad neighborhood. The Federal Reserve, our central bank, is keeping our economy afloat by printing money promiscuously. Despite the disaster of 2008–2009, Washington, D.C., is preparing to inflate housing again with lower buyer requirements. Profits of American corporations are doing well, but mainly because of financial engineering: with interest rates so low, companies borrow money cheaply and buy back their own stock, artificially inflating their earnings per share. They also juggle their books, stashing money abroad to avoid United States taxes and bolster earnings.

The stock market has roared upward since early 2009 because of the ocean of cheap money. Wall Street rejoices. The Federal Reserve keeps printing money, purportedly fearing deflation. But that money doesn’t get to Main Street, which is still hurting. In America, the top one-tenth of 1 percent now has as much wealth as the bottom 90 percent. So how could San Diego cash in next year? Well, government (mostly military) is 25 percent of the economy. Real estate — sales, rental, construction, mortgage activity — is another 20 percent.

Marney Cox

Marney Cox

The Pentagon has announced cutbacks. But the Marines and Navy — San Diego’s economic gravy train — won’t get derailed. “We’re headed back toward conflict,” says Marney Cox, chief economist for the San Diego Association of Governments. “With a new Republican Congress, there is an opportunity for additional defense programs.” The boost that San Diego gets from the military — troops, civilian employees, manufacturing — “at worst will be a stabilizer and most likely a growth sector” next year.

In recent years, the military concentrated much more of its activity in the western part of the U.S. There was a lot of construction at Camp Pendleton and elsewhere, “and that helped mitigate impacts on the construction industry and the sequestration slowdown,” says Cox.

Kelly Cunningham

Kelly Cunningham

And real estate? The Federal National Mortgage Association (Fannie Mae) and Federal Home Loan Mortgage Corporation (Freddie Mac), which together guarantee 90 percent of new mortgages, are loosening up lending standards, lowering the minimum down payment on a mortgage to 3 percent. That will help housing. But Fannie and Freddie almost went under in the 2008 calamity. Excessively easy home-lending standards were a major cause of the crisis. Looking at that 3 percent figure, Kelly Cunningham, economist for the National University System Institute for Policy Research, harrumphs, “We went through a bubble before, and now they are doing everything they can to reinflate that bubble.”

San Diego median home prices are close to $500,000, among the highest and least affordable in the nation. Prices were rising at 10 percent a year and above and now are rising at half that. Zillow.com thinks San Diego home prices will rise only 1.7 percent in 2015. Both Cox and Cunningham think prices can continue rising at a very moderate rate, but Cunningham is worried about that bubble bursting again.

For many years, San Diego had a surfeit of condos downtown. But some of the bigger projects shifted from condos to apartments. The high vacancy rate is finally coming down. “Now we have the ability to get something done downtown,” says Cox. “Now we have a neighborhood.”

San Diegans’ household incomes are a good deal higher than the nation’s but much lower than those in the Bay Area. Yet population continues to increase — not at the 3 percent annual rate of decades ago, but at 1 percent, which, at least, is double the rate of a few years ago. How can people afford homes? “Multi-generations are living together; you see multifamily homes and smaller-square-footage homes to overcome the affordability issue,” says Cox.

Residential real estate has rebounded from 2005–2006, when the bubble burst, but commercial real estate (such as hotels and office buildings) “hasn’t come back,” says Cunningham.

The San Diego unemployment rate has dropped from a peak of almost 11 percent in July of 2010 to below 6 percent. However, says Cunningham, “It is a two-tiered jobs growth. There are some solid, high-paying tech jobs but low-paying service jobs. There is not a big middle as in manufacturing and construction.” Indeed, tech (such as biotech, telecommunications, software) and aerospace represent about 11 percent of the county’s employment but 24 percent of payrolls. “The average tech pay is $115,000 versus $56,000 for all industries,” says Cunningham.

But, notes Cox, “The emerging technology industries are not growing fast enough to help San Diego out of the biggest impact from the Great Recession [late 2007–early 2009].” Venture capital, which gamey investors put into new companies, is running at about $1 billion a year. “Coming out of prior recessions, it was $2 billion a year.”

“Retailing still hasn’t recovered from the Great Recession,” says Cunningham, although there has been some increase of late. “This goes back to the two-tiered economy.” Buying by the super-upscale set is going gangbusters, but with middle incomes falling, adjusted for inflation, “people are not spending.”

Some do their buying on the internet. This factor is hurting shopping centers. “For a long time, the strip-mall side of retailing was really in bad shape. Now they are filling back up with different types of businesses — exercise studios, boxing and yoga establishments, for example,” says Cox.

Jerry Morrison

Jerry Morrison

Tourism has edged back, but only recently inched above its pre–Great Recession level, says hotel expert Jerry Morrison. San Francisco, Los Angeles, and Orange County have done much better. That will continue, he says.

This year, the San Diego economy grew by an inflation-adjusted 2.2 percent, beating California’s 2.1 percent and the nation’s 2 percent, says Cunningham. Cox is bullish for 2015: he thinks San Diego County can add “in the neighborhood of 30,000 jobs or more.” That would mean 2015 could keep pace with or do better than this year.

But Cunningham says the local growth rate will drop below 2 percent in 2015, as the United States also slows. “This whole thing with printing money, zero percent interest rates, big deficits — the chickens are coming home to roost,” and San Diego will feel the pain that the nation will suffer, he says.

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Abandoned malls are rotting away unused. The trend is up. On-line buying will increase, but we will soon hit a block wall in package delivery--especially by air.

Twister: One mall that failed is Horton Plaza downtown. Much of it has been ripped down; the City picked up the tab. Yet when the U-T talks of public-private (corporate welfare) successes, it cites Horton Plaza. Best, Don Bauder

If you want to see malls on the ropes, just wait until Sears Holdings files BK. It is widely expected on Wall Street that the company will not benefit enough from Christmas sales this year to stay afloat. Notice how many malls "across the fruited plain" have a Sears store as an anchor? Oh, and how about J C Penney? They're also in a battle to survive, and also anchor plenty of malls. Malls need anchors, and there are fewer and fewer big operators who can fill that role.

Visduh: You are absolutely right. I do not believe Sears will make it, and I doubt Penney will. These definitely are anchors for many shopping centers. Sears and Penney could still operate in bankruptcy, but they would close many stores. In fact, they will close stores with or without going into the tank.

Strip malls won't suffer from the big retailers collapsing. The big centers will be hit -- and also have to worry about online sales. Best, Don Bauder

Maybe we could get a pool going to predict the first SD County mall to close up for good. Does good ol' College Grove even qualify as a mall now? Or the one in Chula Vista? UTC is getting a massive facelift and rejuvenation, with the nearby affluence keeping it going. Plaza Camino Real (sometimes called Carlsbad Mall) is undergoing a modernization and reduction that will take the roof off the mall and make what was an air conditioned space into open air! I've not heard of anything happening to Grossmont Center or Parkway Plaza or Plaza Bonita (or Fashion Valley or Mission Valley Center). North County Fair (oh, excuse me, Westfield North County) just got a Target on three levels. All are shrinking and aging, with the old concept of the anchors pulling in the small shops, and having people from far and wide flocking in no longer working well.

Visduh: Possibly the first to go down will be Horton Plaza. Already, a big chunk of it is being razed and anchor tenants are long gone. Grossmont Center has gone downscale, but Parkway Plaza is doing OK, I understand.

The centers' woes are not just a result of online shopping and large anchors like Sears on their death beds. This is a reflection of the vast wealth and income gap, which is worsening every day, thanks greatly to Federal Reserve easy money. The middle class is going away. That used to be the backbone of so many centers. Best, Don Bauder

The emergence and popularity of the big-box operators has really cut into mall activity, more I'd estimate than on-line buying, thus far. But everything that can hurt the mall is running in the wrong direction today. They always were a rather artificial sort of operation, trying to duplicate the old central business district without having many of the features those had. Sad that malls killed the central business districts of many cities (I think of Escondido) and now are dying themselves.

Visduh: There is no question that big-box operators have cut into mall activity. Specifically, Wal-Mart is actually an enemy of the economy. Among other things, It is the U.S. outlet for Chinese-made products.

Worse, its employees are grossly underpaid. The company tells its employees how to take advantage of government entitlements to be able to exist. So when you buy a product at a Walmart store, you are not paying as little as you think. You are also shelling out tax money to pay for those entitlements for the company's employees. Best, Don Bauder

Some of the second or third tier shopping centers will have problems. But Walmart & Target are looking for locations to locate stores.

rshimizu12: Grossmont Center has both a Walmart and a Target. It used to have Bullock's and Buffum's. That tells a story. Best, Don Bauder

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