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 labor market’s recovery has been the state’s quickest since April’s historic declines, although industry-level job recoveries have varied. Despite the proliferation of work-from-home policies among the tech world’s largest employers, the South Bay apartment rental market has fared better than San Francisco’s.
South Bay Labor Market Has Had State’s Strongest Recovery
The South Bay economy added 74,000 jobs from May to October 2020, with October’s month-over-month gain of 13,000 payrolls the largest since June. As a result, the region has recovered nearly 50% of the 151,000 jobs that were lost in March and April. In this regard, the South Bay leads California’s major metro regions, all of which have yet to regain more than half of their lost jobs. The South Bay unemployment rate fell to 6.3% in October, down 6.0 percentage points from the high of 12.0% in April. Although the region’s falling unemployment rate was aided in the early months of the recovery by a contracting labor force, in October the South Bay’s labor force expanded significantly, increasing by 41,000. This brought the region’s labor force 1.3% above February’s peak level.
At the industry level, the Accommodation and Food Services Industry led October’s job gains, adding 4,200 payroll jobs from the prior month. The Other Services (2,900), Construction (1,800), and Retail Trade (1,500) sectors also recorded robust monthly employment gains. Also adding jobs in October were two of the South Bay’s largest-employing industries, Manufacturing and Professional, Scientific, and Technical Services, which together accounted for 30% of the region’s employment before the pandemic. As a result, the Professional, Scientific, and Technical Services sector has regained all the jobs lost from March and April. Not all industries added jobs, however. The South Bay’s third-largest-employing industry, Health Care, shed jobs in October (-500), the first instance since May. The Education (-1,900), Government (-300), and Management (-300) sectors posted the next largest monthly declines.
Half of the jobs lost since the start of the pandemic have been regained, more than in California’s other major metros, but the path of recovery at the industry level has varied. From February to April, employment in lower-paying industries fell 19.2%, compared with 6.6% in higher-paying industries. But what followed was a much stronger recovery in lower-paying industries, whose jobs increased 16.1% from April to October, much stronger than the 1.7% growth in higher-paying industries. Although this trend is apparent in most of California’s major metros, the recovery of lower-paying jobs has been considerably stronger in the South Bay.
Varied Impacts in South Bay Apartment Rental Markets
Given San Francisco’s dramatic rent drops during the pandemic, one might expect a similar situation in the South Bay apartment market. But the latest REIS data suggest that the fall in the South Bay has been much less dramatic. The average rent per unit in the San Jose rental market was $2,755 in September 2019, and a year later the average rent had fallen to $2,614, only a 5.1% decrease in the world’s leading tech economy.
Some submarkets, such as the Mountain View/Los Altos and the Northeast San Jose areas, had particularly large rent drops (10.2% and 7.0% respectively), but many others have had much smaller decreases from a year ago. Cupertino, for example, had only a 3.7% decrease, and South San Jose’s decline was only 1.5%. The Central San Jose neighborhood is the only one reported to have had a positive change: 1.7%. Moreover, apartment vacancies in the South Bay have remained largely unchanged from last year. Though Northeast San Jose’s vacancy rate fell from 5.1% to 3.9%, every other submarket changed +/- 0.3%, a numerically insignificant amount.
The single-family housing market tells a similar story of a minimal economic punch. According to the California Association of Realtors, sales of existing homes in Santa Clara County rose 36% from a year ago. 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, up 14.5% from last year. This was a lower increase than in San Mateo and Alameda counties, where the median rose 20.6% and 15.4% respectively. Historically low mortgage rates, resulting from concerns in the financial markets about the economic impact of the pandemic, and persistent low inventory has added upward pressure in response to the surge in demand. In addition, most of the improvement has occurred at the upper-end of the housing market, reflecting the resilience of jobs in financial, professional, and technical services.
With a slowdown in housing permits, the South Bay will continue to face challenges in growing its supply, a key variable in addressing the affordability crisis that has become a hot-button issue across the state. Only 1,815 multifamily permits were issued through August in Santa Clara County, a 31.6% decrease from a year earlier. Single-family permits showed a similar trend, with only 879 filed thus far compared with 1,200 at this point in 2019, a 26.8% decrease. Moreover, data from REIS show that only 795 apartment units have been completed this year, the lowest year-to-date total since 2012.
Overall, the South Bay economy has outperformed many of California’s largest metros. And although the recovery has not been as rapid as the downturn, the pace of growth has been faster than in previous cycles. With the recent surge in new COVID-19 cases, near-term headwinds exist in the form of more rigid public health mandates and fading support from the federal stimulus. But with vaccines available soon, the outlook for 2021 is strong and the South Bay is set to continue leading the pack.
** The South Bay refers to the San Jose-Sunnyvale-Santa Clara Metropolitan Area, covering Santa Clara and San Benito Counties.