Presented by Beacon Economics
Welcome to The Regional Outlook, a forecast for five of California’s largest regional economies. Each quarter, find updated analysis that goes beyond the state and national level to present a snapshot of employment, home prices, consumer spending, personal income, and other leading economic indicators within key areas of the state. Visit your region of interest and subscribe for email delivery.
The South Bay’s vibrant economy continues to be fueled by the region’s high-powered tech industry, and together with the San Francisco metro area, is leading employment growth statewide. While large numbers of new jobs in highly compensated sectors such as Information and Manufacturing are being created, the South Bay has suffered from an undersupply of new housing for several years running, leading to ever higher housing costs and longer commutes for local workers. Home unaffordability is acute in the region, and in the long term, these conditions are not sustainable. More housing will be needed in order for the South Bay to continue its rapid growth in payroll jobs.
No End Game In Sight for Tech Industry Growth
From April 2018 to April 2019, the unemployment rate in the South Bay decreased by 0.2 percentage points to reach 2.5%. Other than San Francisco’s (MD) 2.1% rate, no other metro area in the state has a lower rate of unemployment. The nearby East Bay’s unemployment rate stands at 3.0% as of April, and the state as a whole has an unemployment rate of 4.3%. Moreover, the high demand for workers in the South Bay is poised to continue. Between April 2018 and April 2019, the local labor force grew by 10,000 workers or 0.9%, a much slower pace than the growth in nonfarm employment, which increased by 29,000 jobs, or 2.6%, to reach 1.1 million payroll jobs. In other words, employers are having to look outside the region to add to their workforces. Over the same annual period, San Francisco (MD) and the East Bay grew their nonfarm job totals by 2.7% and 1.8%, respectfully, which was also more than the growth in each region’s labor force, 1.7% and 0.3%, respectfully.
By employment sector, jobs in Information experienced the largest growth in both percentage (10.3%) and absolute (9,300) terms in the South Bay from April 2018 to April 2019. This is not a new trend as the Information sector was also the largest growing in percentage and absolute terms from April 2017 to April 2018. Hospitality (3.3%), Real Estate (3.2%), and Manufacturing (3.2%) round out the South Bay’s top four sectors for job growth in relative terms over the past year. It is also worth noting that much of the growth in Manufacturing employment in the region came from job gains in computer and related products. Additionally, the Hospitality industry’s gains can be attributed, at least in part, to the region’s population of highly paid tech workers who are spending more of their disposable income at restaurants and on other leisure activities.
Still, some sectors of the South Bay economy have contracted over the past year. In percentage and relative terms, the Other Services sector was the biggest loser at -1.2% or 300 jobs lost from April 2018 to April 2019. Following state and national trends, the Wholesale Trade and Retail sectors, each with job losses of -0.4% year-over-year as of April 2019, round out the three biggest losing sectors in the South Bay economy.
Looking ahead, Beacon Economics is forecasting the South Bay’s unemployment rate to remain in a narrow range around its current reading through 2019. Total nonfarm employment in the region is expected to expand in percentage terms by 2.3% through the end of the year, with job growth slowing further in 2020.
South Bay Home Prices May Have Peaked; Rent Climbs But Growth Decelerates
At $1,130,000, the median price for a single-family home in the South Bay, as of the first quarter of 2019, remains far out of reach for the region’s average household. However, the median home price has fallen by 1.7% from the fourth quarter of 2018, and is down 8.3% on an annual basis from the first quarter of 2018. Within the broader region, this trend is not entirely unique to the South Bay, with San Francisco (MD) experiencing a 1.1% decline in home prices year-over-year as well. By contrast, the East Bay’s median home price rose by 4.2% while the statewide median price increased by 2.1% year-over-year. The decrease in the South Bay’s median home price stems from a number of possible causes including lower affordability, changes in the mix of sales, and possibly federal caps on the deductibility of state and local taxes that went into effect in 2018.
Home sales of existing single-family homes in the South Bay declined by a whopping 18.2% from the first quarter of 2018 to the first quarter of 2019. While this trend is hardly unique to the South Bay – both San Francisco (MD) (-5.9%) and the East Bay (-11.8%) experienced declines in sales during the same one-year period – the drop in the South Bay is the most pronounced.
Rental prices, on the other hand, have increased more in the South Bay than in neighboring regions. From the first quarter of 2018 to the first quarter of 2019, the median apartment rent in the South Bay increased 3.3% to reach $2,804/month, outpacing rent price growth in both San Francisco (MD) (2.6%) and the East Bay (3.1%). However, with the exception of the East Bay, these all represent slower rates of rent price growth than in the year prior. Vacancy rates in the South Bay remained virtually unchanged at 4.1% as of the first quarter of 2019. This steadiness is not unique within the larger Bay Area as the East Bay saw a mere 0.1 percentage point drop in vacancy, while San Francisco (MD)’s vacancy rate increased by just 0.5 percentage points.
** The South Bay refers to the San Jose-Sunnyvale-Santa Clara Metropolitan Area, covering Santa Clara and San Benito Counties.