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 economy led the greater Bay Area region in terms of growth in the first half of 2018, and has continued to do so into the second half of the year. Robust growth in the local labor market reflects solid gains in the Information and Education and Health Services sectors. Moreover, the Construction sector is well poised to post sizeable numbers into the near future as the South Bay is currently experiencing an explosion in non-residential building activity.
South Bay Labor Market Leads Bay Area
From August 2017 to August 2018, the unemployment rate in the South Bay region decreased by 0.7 percentage points, falling from 3.3% to 2.6%. This decline reflects an increase in total nonfarm payroll, which grew by 3.8%, or 42,000 positions, to reach a total of 1.1 million jobs in the region. In comparison, total nonfarm employment in San Francisco and the East Bay grew by 2.1% and 1.8%, respectively; California as a whole grew by 2.1%.
Year-over-year, the Manufacturing sector experienced significant growth, adding 7,800 positions, a 4.7% expansion, while the Information sector continued to post strong gains, growing by 6.6% or 5,800 jobs. The Educational Services sector experienced the largest percentage gain (8.8%) in the region with an addition of 4,100 jobs year-over-year. Leisure and Hospitality added 1,500 jobs, the net result of a 4,000 job increase in the Accommodation & Food subsector and a 2,500 job loss in the Arts & Entertainment subsector (the latter experienced the greatest job loss in the region).
Considering the high cost and limited supply of housing in the South Bay, it will be interesting to watch how growth in household employment will be affected in the future; it is already slowing in the region along with the rest of the state. Impressive job gains alone will not mitigate the impact of low housing supply and low affordability. The question is, where will workers live?
Beacon Economics is forecasting the South Bay’s unemployment rate to end the year at 2.8% with little change expected next year. Nonfarm job growth for the rest of 2018 will come in just over 3.5%, dropping below that threshold in 2019.
No Cool Down in Sight for Commercial Real Estate
Riding on the back of a sustained and dynamic construction boom, the South Bay’s vacancy rate for Office properties increased 0.8 percentage points to 17.6% from the second quarter of 2017 to the second quarter of 2018. An effect of rising demand, the cost of rent for Office space in the region also increased 4.5% to an already high average of $44.33 per square foot. It may seem counterintuitive for vacancy rates and rental costs to both be increasing by these magnitudes, but it is a testament to the dynamism of the regional office market in the area.
Since the first quarter of 2014, the value of building permits issued for Office properties reached a grand total of $3.1 billion in the South Bay – and developers have delivered 13.4 million square feet of stock. That is more office space than the Los Angeles, San Francisco, and East Bay regions combined. The Office construction boom showed signs of slowdown in the second quarter of this year, when the total value of permits issued fell to $68 million from $277 million in the first quarter. This slowdown is likely temporary, however, considering the millions of square feet that are still under development.
Notably, year-over-year growth in the average cost of rent for Office space in the South Bay (4.5% as of the second quarter of 2018) is among the fastest in the state, even outpacing the San Francisco metropolitan area (4.2%). Over the same annual period, the average cost of rent for Retail properties increased 3.0% to $36.95 per square foot, while the average cost of rent for Warehouse/Distribution properties increased by 4.3% to $8.32 per square foot.
** The South Bay refers to the San Jose-Sunnyvale-Santa Clara Metropolitan Area, covering Santa Clara and San Benito Counties.