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HomeMy WebLinkAboutSection I - Economic OutlookSection I Background Materials ECONOMIC OUTLOOK Central Coast Economic Forecast 2018 Beacon Economics5777 W Century Blvd, Ste 895 Los Angeles, CA 90045 (310) 571-3399 Beaconecon.com THE CENTRAL COAST ECONOMIC FORECAST THANKS OUR SPONSORS PLATINUM SPONSORS 2018 Board of Directors ECONOMIC FORECAST CONTENT PROVIDED BY BEACON ECONOMICS, © 2018, BEACONECON.COM | DESIGN BY AMF MEDIA GROUP Officers JIM DUNNING, CHAIRPERSON DIRECTOR OF ECONOMIC DEVELOPMENT AND TECHNOLOGY TRANSFER CAL POLY JEFF THOMA, VICE CHAIR VICE PRESIDENT THOMA ELECTRIC, INC. STEVEN L. HARDING, TREASURER CHAIRMAN, COMMUNITY LEADERSHIP GROUPS RABOBANK, N.A. MATT TURRENTINE, SECRETARY PRINCIPAL GRAPEVINE CAPITAL PARTNERS Board Michael Bradley California Mid-State Fair Maggie Cox AMF Media Group Chuck Davison Visit SLO CAL Michael Manchak Economic Vitality Corp. of SLO County Steve McCarty McCarty Davis Commercial Real Estate Michelle McCovey-Good Taylor & Syfan Consulting Engineers, Inc. Pat Mullen Pacific Gas & Electric Co. Ziyad Naccasha Carmel & Naccasha, LLP, Attorneys at Law Anthony Palazzo Cal Poly Bruce Ray Cannon Anita Robinson 1st Capital Bank Ed Stettler Zurn Wilkins Emeritus Jim Brabeck Farm Supply Company Carrol Pruett Rabobank, N.A. centralcoasteconomicforecast.com ADVISORY SPONSORS LEAD SPONSORS BUSINESS ASSOCIATE SPONSORS ASSOCIATE SPONSORS United States Forecast California Forecast San Luis Obispo Forecast Diablo Canyon Employment Business Activity Agriculture Residential Real Estate Commercial Real Estate Demographics 2018 CENTRAL COAST ECONOMIC FORECAST TABLE OF CONTENTS This publication was prepared by: Beacon Economics, LCC Christopher Thornberg Founding Partner 5777 W. Century Blvd., Suite 895 Los Angeles, California 90045 310.571.3399 Chris@BeaconEcon.com Robert Kleinhenz Economist/Executive Director of Research 5777 W. Century Blvd., Suite 895 Los Angeles, California 90045 424.646.4652 Robert@BeaconEcon.com For further information about this publication please contact: Victoria Pike Bond Director of Communications 415.457.6030 Victoria@BeaconEcon.com Rick Smith Director of Business Development 858.997.1834 Rick@BeaconEcon.com Or visit our website at www.BeaconEcon.com 2018 CENTRAL COAST ECONOMIC FORECAST 2018 CENTRAL COAST ECONOMIC FORECAST 4 10 16 24 26 34 40 48 56 70 4 5 The United States is currently in the midst of the second longest expansion in the nation’s history at 111 months and counting. In July of next year, we will officially be in the midst of the longest expansion on record. Will we make it? Odds are almost certain we will. Far from losing steam, the U.S. economy has been on a solid upswing lately. But as always, a deeper look at the data suggests that there are issues to keep an eye on. All in all, we remain pessimistically optimistic. Or perhaps optimistically pessimistic. Consider some recent statistics. U.S. GDP growth in the second quarter came in above 4%, the best reading since 2014 and driven by strong growth in business and consumer spending. Industrial production is up 4% from one year ago—another recent best. Employment growth over the last 3 months has totaled over 200,000 jobs added per month even with unemployment below 4%. More importantly, the job openings rate is at 4.2%, suggesting that employers would hire even more workers, if they could find them. United States Forecast Control Your Enthusiasm 2018 CCEF FORECAST - UNITED STATES FORECAST 2018 CCEF FORECAST - UNITED STATES FORECAST by Christopher Thornberg, Beacon Economics LLC 6 7 The recent GDP release came with (as is usual every couple of years) a revision of the last few years of data on the basis of better data and improved techniques. While the revision didn’t change much in terms of the estimation of economic output, it did change the estimated flow of income. In particular, the Bureau of Economic Analysis increased their estimate of proprietor incomes (earnings for the self-employed) substantially. This had the impact of completely erasing the decline in consumer savings rates we have been fretting about in recent reports. Combine this with the low rate of consumer debt increases, and it is clear the overall financial health of U.S. households is as good as it has ever been. As positive as all this news is, don’t be fooled into believing the U.S. economy has truly achieved a new pace of growth. Scratch away at the surface and there are any number of reasons to conclude that the current growth surge is, at best, temporary. At worst, the seeds of the next recession are possibly being sown in these current numbers. REAL GROSS DOMESTIC PRODUCT Percent Change from Preceding period, April 2008 to April 2018 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC Jul 20080 2 4 6 12 Percent (Seasonally Adjusted)8 10 May 2009Mar 2010Jan 2011Nov 2011Sep 2012Jul 2013May 2014Mar 2015Jan 2016Nov 2016Sep 2017May 2018Unemployment Rate Job Openings Rate UNEMPLOYMENT RATE AND TOTAL NONFARM Job Openings Rate, July 2008 to May 2018 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLCApr 2008-10.0 -8.0 -6.0 -4.0 2.0 6.0 Percent Change (Seasonally Adjusted Annual Rate)-2.0 0.0 4.0 Dec 2008Aug 2009Apr 2010Dec 2010Aug 2011Apr 2012Dec 2012Aug 2013Apr 2014Dec 2014Aug 2015Apr 2016Dec 2016Aug 2017Apr 2018Jan 20020.0 2.0 4.0 6.0 12.0 Personal Saving (%, Seasonally Adjusted Annual Rate)8.0 10.0 Dec 2002Nov 2003Oct 2004Sep 2005Aug 2006Jul 2007Jun 2008May 2009Apr 2010Mar 2011Feb 2012Jan 201314.0 Dec 2013Nov 2014Oct 2015Sep 2016Aug 2017First, we need to take a bit of a gut check on the recent numbers. The 4.1% growth rate in the second quarter was certainly impressive. But most of that growth came from a surge in consumer spending— an anticipated surge given the weak first quarter for consumer spending growth. In other words, it was a reversion to the trend, not a permanent jump. Business spending was solid, but similar to the last few years. Housing remains weak, as does state and local spending. The consensus outlook suggests growth will come in at a far more reasonable 3% for the balance of the year, with an average growth rate of 3% for the entire year. PERSONAL SAVINGS RATE January 2002 to August 2017 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC 2018 CCEF FORECAST - UNITED STATES FORECAST 2018 CCEF FORECAST - UNITED STATES FORECAST 8 9 This 3% pace of growth isn’t bad relative to the 2% to 2.5% pace seen since the end of the Great Recession. But even here, it is important to recognize that this modest bump is being driven by a surge in government borrowing rather than any true shift in fundamentals. The tax plan passed at the end of last year was not the major overhaul of a broken tax system that the United States desperately needs. Rather, it was a nothing more than a fiscal stimulus plan, something that would typically be used in times of economic trouble—not in the midst of a record tight labor market. The problem with any fiscal debt driven stimulus is that you are borrowing from the future to accelerate the ‘now’. And like most stimulants, the buzz you get feels good in the short run, but diminishes over time unless you continue to increase the dosage. Then there is always the inevitable crash, when you finally have to get off of the stimulant completely. When that crash will occur for the economy is unclear, but the current path is guaranteeing that when that day comes, it will be ugly. 2018 CCEF FORECAST - UNITED STATES FORECAST 2018 CCEF FORECAST - UNITED STATES FORECAST -1,600 -1,400 -1,200 -1,000 -200 Net Saving ($, Billions, Seasonally Adjusted)-800 -600 -400 0.0 Jan 2008Dec 2008Nov 2009Oct 2010Sep 2011Aug 2012Jul 2013Jun 2014May 2015Apr 2016 Mar 2017NET FEDERAL GOVERNMENT SAVING January 2008 to March 2017 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC 80 85 105 Indexed, 2012=100 (Seasonally Adjusted)90 95 100 110 Jul 2008Jun 2009May 2010Apr 2011Mar 2012Feb 2013Jan 2014Dec 2014Nov 2015Oct 2016Sep 2017INDUSTRIAL PRODUCTION: MANUFACTURING July 2008 to September 2017 Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC Second, are the international trade battles currently in play. While the problems with the European Union seem to be on hold for the moment, the U.S. disputes with China are growing worse with both sides continuing to ratchet up the tariffs being levered on the other. Much has been made of the effects on U.S. exporters to China, particularly those that export agricultural products. But the U.S. imports almost four times as much from China as it exports to them. And what we do import are critical components of U.S. supply chains. As solid as industrial production looks from a growth perspective, recent data suggests overall production is starting to plateau. This isn’t to say that some of this isn’t good pain—the Chinese have been flouting international norms on trade, intellectual property rights, and foreign investment for years and that needs to end. The U.S. does need to push back, but to do so negotiations must start with a clear and logical set of goals. War for war’s sake is never a good plan. Unfortunately, the current administration appears to have no clear path forward, and with other troubles brewing, including possible legal problems, it seems unlikely that it will be able to develop a coherent and effective plan any time soon. And let’s not forget that NAFTA—by far the most important trade group for the U.S.—is also under threat. Lastly, there is the Federal Reserve. Inflation has heated up as of late with the CPI getting close to 3%, the fastest since 2011. Beacon Economics, however, still doesn’t believe there is a real chance of higher permanent inflation. M2 growth remains below 4%, and bank lending is tepid. But with employment costs and import prices on the untick, the Fed will surely continue to tighten regardless of the impact on the yield curve. This too will place stress on the economy. Add it up and the rest of this year looks solid, but expect slower growth next year. Additionally, the long term stressors of heavy Federal borrowing, rising interest rates, and ongoing political chaos, make it clear that while there is no reason to expect a recession anytime soon, we should remain more vigilant than ever in watching for the unanticipated shock. The nation’s capacity to absorb a blow to its economy is substantially diminished and it won’t take much to end the current expansion. 10 11 2018 CCEF FORECAST - CALIFORNIA FORECAST 2018 CCEF FORECAST - CALIFORNIA FORECAST California Forecast OK for Now... With two quarters down and sights turning toward the last part of the year, it is apparent that the California economic engine continues to hum along, much like the nation as a whole. Job gains have been steady and the state’s leading industries have expanded despite ongoing concerns on the international trade front. Still, good news notwithstanding, anxieties linger about California’s extremely tight housing market and the resulting affordability challenges it presents, and the long term consequences of slow growth in the state’s labor force. 2018 Shaping Up to Be a Good Year California continues to land in record territory, with its unemployment rate at 4.2% for the fourth month in a row as of July 2018. At the same time, job growth so far this year has outpaced 2017 by a slim margin, with wage and salary jobs in July increasing by 2.0% or 332,700 jobs compared to one year earlier. Of the 332,700 jobs added in July, Health Care and Leisure and Hospitality each contributed 58,000 positions, or more than one-third of the total, with Construction, Professional Scientific and Technical Services, and Transportation and Warehousing also reporting sizable gains among the private sector industries. This set of industries has consistently made the largest contributions to job gains in the state over the last several years. The Government sector added to its ranks as well, increasing by 33,300 workers with roughly two-thirds of the increase occurring in Local Government and one-third in State Government (the Federal Government trimmed 2,500 jobs). All but one of the state’s major industries experienced job gains in July, with only Mining and Logging seeing a loss of 300 jobs. Industry Jul 2017 (000s, SA*)Jul 2018 (000s, SA*)Yr to Yr Change Yr to Yr % Change Total Nonfarm 16,826.7 17,159.4 332.7 2.0 Health Care 2,280.4 2,338.4 58.0 2.5 Leisure and Hospitality 1,948.6 2,006.6 58.0 3.0 Construction 812.7 851.2 38.5 4.7 Government 2,552.5 2,585.8 33.3 1.3 Prof Sci and Tech 1,234.8 1,267.2 32.4 2.6 Transport/Warehouse 565.1 591.4 26.3 4.7 Admin Support 1,107.9 1,133.0 25.1 2.3 Educational Services 362.3 378.4 16.1 4.4 Information 528.7 544.0 15.3 2.9 Retail Trade 1,692.8 1,706.3 13.5 0.8 Manufacturing 1,309.5 1,317.4 7.9 0.6 Wholesale Trade 723.8 727.2 3.4 0.5 Management 231.9 235.1 3.2 1.4 Finance and Insurance 547.2 548.2 1.0 0.2 Real Estate 283.4 284.1 0.7 0.2 Other Services 563.9 564.4 0.5 0.1 NR/Mining 22.3 22.0 -0.3 -1.3 STEADY JOB GAINS ACROSS CALIFORNIA INDUSTRIES Source: Federal Reserve Bank of St. Louis, Analysis by Beacon Economics, LLC Industry Jul-17 (000s, SA)Jul-18 (000s,SA)Y-T-Y Change Y-T-Y % Change by Robert Kleinhenz, Beacon Economics LLC 12 13 Similarly, headline numbers for California’s Gross State Product and Taxable Receipts reveal continued growth in the statewide economy in the first part of the year. Real Gross State Product advanced by 3.5% year-to-year in the first quarter, the fastest rate of growth since late 2015, while current dollar Taxable Receipts grew by 4.3%. A look at more detailed data shows healthy spending on the part of both house- holds and businesses: Taxable receipts on consumer goods rose 4.8% year-to-year while receipts on busi- ness and industry spending increased by 3.6% over the same period. Both the coastal and inland regions of the state have enjoyed economic and job gains for several years running. Through the first seven months of this year, every metro area in California experienced job growth. Across the large metro areas, job gains in the San Francisco Bay Area reflect the staying power of the tech sector, with the largest absolute and percentage increases occurring in San Jose. In Southern Califor- nia, the Inland Empire has consistently registered the largest percentage gains in jobs for the last couple of years, although Los Angeles County generally reports the largest absolute gains because of its size. Much of the growth in the entire region has come from Health Care, Professional Scientific and Technical Services, Construction, and Logistics. Metro areas in the Cen- tral Valley have also seen employment growth overall, supported by job gains across a variety of sectors. 2018 CCEF FORECAST - CALIFORNIA FORECAST 2018 CCEF FORECAST - CALIFORNIA FORECAST 0.0%Ventura Los Angeles Orange Barkersfield East Bay San Diego Sacramento 0.5%1.0%1.5%2.0%2.5%3.0%3.5%San Francisco Santa Rosa Fresno Inland Empire Stockton San Jose YEAR TO YEAR PERCENTAGE CHANGE IN NONFARM JOBS Largest CA MSAs, July 2018 Source: California Economic Development; Analysis by Beacon Economics, LLC The Housing Market’s Mixed Performance California’s housing market has been a mixed bag so far this year. According to Corelogic, the statewide median home price was $481,100 in the second quarter, up 8.6% year-to-year. The median price is still about 7% below its pre-recession peak despite a string of yearly price gains going back several years. Meanwhile, home sales have been average, at best, and disappointing when considered against the backdrop of the state’s long economic expansion. Home sales fell 0.9% year-to-year in July, and over the first seven months of the year, were 1.4% lower in year-to-date terms. Sluggish sales are symptomatic of the state’s housing market, and due in part to tight lending standards on mortgages and lean supply (unsold inventory is still low at 3.3 months). It is noteworthy, however, that the number of listings over the period spanning February through July was higher than in 2017, with listings in July 2018 alone up 15.2% from one year earlier. More listings should temper price increases going forward and slow the recent declines in affordability, which fell to a 10-year low in the second quarter of this year. New home construction moved up a notch in the first half of this year compared with last year, a development that should also temper, but not halt, price increases. Overall, housing permits rose 9.4% in the first half of 2018 compared to one year earlier, with increases of 7.3% in single-family permits and 11.4% in multi-family permits. The state is on track to add about 130,000 new units this year, still far below its needs, which are closer to 200,000 units annually. As long as home construction lags what the state needs, high housing costs will be a painful thorn in the side of the California economy. 14 15 2018 CCEF FORECAST - CALIFORNIA FORECAST 2018 CCEF FORECAST - CALIFORNIA FORECAST High housing costs impede California’s economic growth over the long-term to the extent that these costs serve as a deterrent to labor force growth. The state’s labor force growth rate has experienced sig- nificant slowing since the fall of 2017, with the year- to-year growth rate at just 0.2% in July 2018. Monthly labor force data are notoriously volatile, so a more consistent picture results from looking at 12-month moving averages of growth. If anything, the lon- ger-term story that emerges is more concerning. Over the last few years, the growth rate of California’s la- bor force followed roughly the same direction as the growth rate of the U.S. labor force – until the second half of 2017, when California’s growth rate began a steady decline even as the U.S. growth rate has accel- erated in recent months. In looking at the future growth trajectory of the Cali- fornia economy, the elephant in the room is the high cost of housing and its impact on labor force growth. State-to-state migration data show an ongoing outmi- gration from California going back many years, which fortunately has been more than offset in most years by positive international migration into the state. This is no accident: The California median home price has consistently been more than double the national me- dian home price for several years. The rental market is no different, with a number of California metro areas ranking among the least affordable rental markets in the nation. As growth in the state’s labor force slows further, it will tighten like a noose on the economy and limit future growth and business development. Long Run Concerns Linger Jan 20130.0% 0.5% 1.0%May 2013Sep 2013Jan 2014May 2014Sep 20141.5%Jan 2015May 2015Sep 2015Jan 2016May 2016Sep 2016Jan 2017May 2017Sep 2017Jan 2018May 2018CA YTY % Change US YTY % Change YEARLY PERCENTAGE CHANGE IN LABOR FORCE California and U.S. 12-Month Moving Average Source: Federal Reserve Bank St. Louis; Analysis by Beacon Economics, LLC 14 15 16 17 Despite a gradual slowing of overall growth in the San Luis Obispo County economy, the labor market continued to expand in 2018. Total nonfarm employment continues to reach record highs, and the unemployment rate has gradually reached new lows. Business activity has been mixed in the most recent data, and hospitality and tourism are becoming a larger part of the local economy. And although the drought ended early last year, it did not translate to higher crop yields compared with 2016. Farm employment held steady in 2017, but there has been a shift in farm labor toward more profitable fruit and nut crops and also a general labor shortage. Housing remains a key concern and will continue to be a headwind for growth absent any major shifts in policy. As was the case last year, total nonfarm employment has gradually cooled as more residents are finding work, and the unemployment rate continues to reach record low levels. A sustained increase in overall payrolls has cut the unemployment rate to 2.8%, well below the State’s 4.1%. For five consecutive years, total nonfarm employment growth decelerated, from 3.7% in 2013 to 1.5% through August 2018. Total nonfarm employment is likely to increase less than 2% for all of 2018, and growth will slow further beyond 2018. Mounting labor shortages and affordability remain key challenges that will only worsen in the coming years. LABOR MARKET PERFORMANCE IN SAN LUIS OBISPO 2013 to 2018 YTD* Source: California Employment Development Department; Analysis by Beacon Economics, LLC *year to date through Aug-18 -1.5 -0.5 3.5 0.5 1.5 2.5 4.5 Annual Growth (%)Household EmploymentNonfarm Employment Overview Labor Force20132014201520162017 2018 YTD*San Luis Obispo Forecast 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST by Justin Niakamal, Beacon Economics LLC 18 19 At the industry level, employment and wages continue to post positive gains. The county’s strong Manufacturing industry has continued to expand with the beverage sector being a principal component of such growth. The county’s Education & Health Care sector (+3.6%) and Leisure & Hospitality sector posted the strongest year-over- year absolute gains, both adding 600 jobs. It was also in these two sectors where there were the largest absolute increases in business starts for 2017. The growth in Leisure & Hospitality reflects the Central Coast county’s growing stature as a pleasant and tourist destination for those in nearby heavily populated regions of the state. Indeed, the county will benefit by playing to its nonfarm industry strengths, especially since their county crop exports declined by over 30% in 2017. Wage gains in 2017 were distributed across many sectors in San Luis Obispo County, with the largest in Information and Professional & Business Services sectors. The Natural Resource & Construction sector is experiencing a resurgence, with employment and wages increasing considerably. The County should expect wages to face upward pressure as the labor market becomes ever tighter. Drought Classification None D0 (Abnormally Dry)D1 (Moderate Drought)D2 (Severe Drought)D3 (Extreme Drought)D4 (Exceptional Drought) Although the drought was declared over in 2017, 2018 is shaping up to be a particularly dry year with some areas of the county already experiencing moderate to severe drought. However, throughout 2017, the strongest gains that did occur the farm industry were from wine grapes and strawberries. San Luis Obispo County can expect to see demand increase for these two crops through the next couple of years, but punitive tariffs slapped on our trading partners remains a concern for the outlook. Indexed crop values confirm that San Luis Obispo growth in agricultural real output continues to win the footrace between neighboring Santa Barbara and Monterey Counties as well as the state of California as a whole. Given the latest data, it may be the case that Monterey County comes at least within an arm of length should San Luis Obispo’s agricultural sector see more unfavorable conditions. Business activity in San Luis Obispo County was mixed in 2017 and through the first half of 2018. Overall local spending activity slowed in 2018, mainly because of a decline in Business and Industry spending. A surge in Building and Construction, however, partially offset the contraction. Although we expect business activity to continue to grow, the region faces several headwinds. One ongoing local concern is the closure of the Diablo Canyon power plant. One ongoing local concern is the closure of the Diablo Canyon power plant. The plant has long been a key part of the local economy, and its closure will undoubtedly impact growth. Proposed settlements to help cushion the blow have recently moved forward. Gov. Brown signed legislation (SB 1090) that mandates that Pacific Gas & Electric, which owns and operates the plant, pay over $85 million to mitigate the plant’s closing. 1 The bill will also fully fund the $350 million employee retention program. Additionally, Congress via the Department of Energy is looking to find money to support local communities where nuclear power plants are being decommissioned.2 In other words, San Luis Obispo County could get additional funding once Diablo Canyon decommissioning begins. As the situation develops, Beacon Economics will be keeping a close eye on the closure and will continue to assess how it will affect the local economy. Left (October 2018) Right (October 2017) Source: United States Drought Monitor 1California governor signs Diablo Canyon settlement bill. Cal Coast Times. Accessed October 23, 2018. Retrieved from https://calcoasttimes.com/2018/09/20/california-governor-signs-diablo-canyon-settlement-bill/ 2Leslie, K. (2018, September 17). Congress looking for money for cities hit by nuclear plant closures — including Diablo Canyon. San Luis Obispo Tribune. Accessed October 23, 2018. Retrieved from https://www.sanlu- isobispo.com/news/local/article218563600.html 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST -40 -20 0 20 40 20 21 San Francisco San Mateo Santa Clara Alameda Marin Los Angeles Kings Orange San Diego Sonoma Napa San Luis Obispo Contra Costa Ventura Riverside Tulare Solano Monterey San Benito San Bernardino Santa Barbara San Francisco San Mateo Santa Clara Alameda Marin Los Angeles Kings Orange San Diego Sonoma Napa San Luis Obispo Contra Costa Ventura Riverside Tulare Solano Monterey San Benito San Bernardino Santa Barbara Beacon Economics expects San Luis Obispo County to continue on-trend through 2018 and into the next couple of years. Growth in the labor market will continue, albeit at a slower pace than in previous years, through the rest of 2018 and at least through 2019. Business activity is expected to trend up as well. To be sure, headwinds exist, but there are a few upsides to look forward to. Consumer sentiment remains at or near historic highs, tight labor markets have yielded increases in wages, and the Tax Cuts and Jobs Act should provide a moderate boost to business investment. Although the estimated impact of the tax cut varies, the consensus is an increase in consumption by both businesses and consumers. SAN LUIS OBISPO COUNTY TAXABLE SALES Q1-05 to Q4-20 Source: Analysis by Beacon Economics, LLC 1,250 500 750 1,000 1,500 250Taxable Sales ($ Millions, SA & Smoothed)Taxable Sales ForecastQ1-05Q1-08Q1-11Q1-14Q1-17Q1-200 Local businesses stand to gain from the new provisions of the legislation. One area of opportunity is expensing. The tax law enables businesses to fully expense the cost of business property, inventory included. There is also 100% bonus depreciation, which is scheduled to remain effective until 2023. This will allow a business owner to deduct a large amount of an asset’s cost in a single year rather than depreciating it over several years. Before the law, the bonus depreciation amount was 50%. In other words, half of the cost of an asset could be deducted in the first year, with the residual deducted over several years. The law increases the bonus depreciation amount to 100%. Additionally, for the first time, bonus depreciation may be used for purchases of used as well as new property.3 Because of the tax overhaul, we expect taxable sales to increase 3% to 4% in the short term as businesses take advantage of the provisions. The County’s real estate market has advanced over the past year but could be doing better considering the region’s economic growth. At this point in the business cycle, housing is unlikely to experience a major structural shift. Mortgage rates are not expected to rise substantially over the near term, but the impact of incrementally rising rates coupled with tight lending standards leads us to believe that home sales are not likely to deviate from the narrow range of recent years. As a result, it is hard to see how the housing market will gain much momentum in terms of sales. The Federal Reserve has shown no sign of scaling back its pursuits of a neutral policy rate, with one additional rate hike anticipated this year and three in 2019. The result will be to increase borrowing costs for would-be homeowners as the less accommodative monetary policy boosts mortgage rates. Although the Fed has far more influence over short-term yields, long-term rates have recently ticked up. From October 19, 2017, to October 11, 2018, mortgage rates rose a full percentage point – 3.9% to 4.9%. The increase in mortgage rates will result in less purchasing power for would-be homeowners and will likely cause a bit of cooling in prices at the upper end of the market. HOME PRICE PERCENT CHANGE FROM PREVIOUS PEAK Select California Counties, as of Q2-18 Source: DataQuick, Bureau of Labor Statistics; Analysis by Beacon Economics, LLC Percent (%), SA -20 0 20 40 60 Percent (%), SA 80 Real Home Prices*Nominal Home Prices 39.3 30.8 30.1 7.7 2.6 -11.9 -13.4 -13.6 -17.3 65.9 70.9 -37.1 -33.3 -31.6 -30.7 -39.4 -28.7 -28.5 -23.9 -21.4 -20.6 -20.0 -19.1 60.1 26.5 33.8 5.1 6.2 8.7 8.9 10.2 4.8 2.7 -2.3 -9.7 -9.6 -8.1 -3.1 -17.2 -11.5 -11.0 -22.4 3Fishman, S. How the Tax Cuts and Jobs Act Affects Businesses. www.nolo.com. Accessed October 23, 2018. Retrieved from https://www.nolo.com/legal-encyclopedia/how-the-new-republican-tax-bill-affects-businesses. html. 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 22 23 Inventories for homes have been low from a historical standpoint, and home prices have outpaced local income growth. Permitting activity for residential units has been tepid; through the first half of 2018 there were 316 residential construction permits issued in first half of 2018, down 52% from the first half of 2017. In other words, new construction will have little impact on local real estate market inventories in the near term. Limited inventories of homes for sale have driven price appreciation and kept sales activity in check. The cooling of home resales will also create moderation in price appreciation for both new and existing homes on the market. Through the first half of 2018, sales of existing single-family homes increased 1.4% from the first half of 2017. Sales for existing single-family homes rose 5.6% year to year, although the increase was due to an above-average surge in sales in the second quarter of 2018. New home sales advanced nicely through the first half of the year, with a 6.3% increase from the first half of 2017, but new home sales are a very small segment of the overall market and growth tends to fluctuate because of the small number of transactions. Lastly, condo sales were down 7.9% year to year in the first half of 2018 and, similar to new homes, account only for a small share of overall market transactions. Despite a mixed outlook for the local real estate market, local fundamentals remain intact. The chart above shows the ratio of inflation-adjusted home prices to inflation-adjusted per capita personal income, which includes income that is received from all sources. This ratio is a good way to visualize how far removed housing costs can be from Limited construction activity in the current year will have little effect on the upward trend in the median price of a home. Absent any significant policy changes, we expect sales activity to remain between 3,200 and 3,600 in the near term and price appreciation to advance at a slower rate of 5% to 6%. Both major gubernatorial candidates, Gavin Newsom and John Cox, have campaigned on making housing in California more affordable by increasing construction, but such changes are unlikely to occur in the near term. Beacon will monitor the situation and adjust its outlook accordingly as new policy changes are implemented. REAL HOME PRICE TO INCOME RATIO County of San Luis Obispo, Q1-80 to Q2-18 Source: DataQuick, California Department of Finance, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics; Analysis by Beacon Economics, LLC 12 3 6 9 15 Real Home Price / Real Per Capita Personal IncomeQ1-80 Q1-86 Q1-92 Q1-98 Q1-04 Q1-10 Q1-16 local incomes. An index close to 9 is roughly normal for San Luis Obispo County. By comparison, the United States index has hovered below 7 for the last decade. During the early part of the housing bubble in the 2000s, price appreciation accelerated by double digits. At that time, the price-to-income ratio ballooned nearly 70% to just below 16 at the height of the expansion and before a much-needed correction brought the market back to a reality driven by fundamentals and not speculation. Today, although prices have surpassed their nominal prerecession peak, when adjusted for inflation and local incomes, housing doesn’t appear to be out of touch with reality the way it was in 2006. As of the second quarter of 2018, the median nominal price of an existing single-family house in San Luis Obispo County was 2.7% above its prerecession peak; but adjusted for inflation, home prices in the County are still 20.6% below their prerecession peak. SAN LUIS OBISPO COUNTY REAL ESTATE Q1-05 to Q4-20 Source: Forecast by Beacon Economics 500 900 600 700 800 1,000 Sales (SA & Smoothed)ForecastExisting Home Sales Median Prices ($, SA)600,000 700,000 500,000 400,000 300,000 ForecastMedian Prices Q1-05 Q1-08 Q1-11 Q1-14 Q1-17 Q1-20 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST 2018 CCEF FORECAST - SAN LUIS OBISPO FORECAST Diablo Canyon 24 25 Located near Avila Beach in San Luis Obispo County, California’s last nuclear power plant, Diablo Canyon, will not be extending its operating license in 2025. A long-standing fixture of the economy and a growing concern for the California Public Utilities Commission, Diablo Canyon was facing an inevitable exit as cost-efficient renewable energy renders nuclear power economically infeasible 1. Diablo Canyon has roughly a $1 billion impact on the local economy, employing around 1,500 people directly2 Following the success of California Senate Bill 100 – a bill that effectively targets 50% renewable energy by 2026, 60% renewable energy by 2030, and 100% carbon-free energy by 20453 – nuclear power has systematically been phased out. An initial local concern about the Diablo Canyon closure has been that a lot of high-salary earners will be out of a job; in 2014, the mean salary at the PG&E owned plant was $157,0004. Questions have arisen as to how these employees, as well as the surrounding community, will be affected by the closure of Diablo Canyon. However, in September 2018, Governor Brown signed another bill into law, SB 1090, which requires the California Public Utilities Commission to approve an $85 million settlement for community impact mitigation and $395 million towards PG&E’s employee retention program. The bill also contains language voicing caution regarding the 2013 closure of the San Onofre nuclear plant. Acting preemptively, language in Section 3 of the bill asserts that the electricity that is to replace the electricity generated by Diablo Canyon shall not cause an increase in the emissions of greenhouse gasses5. Also, a bill signed into law by President Donald Trump in September, HR 5895, targets situations such as the closure of Diablo Canyon and helps procure funds for community impact mitigation6. 1Climatenexus. (2017, December 22). Retrieved October 23, 2018, from https://www.sanluisobispo.com/news/local/article218563600.html 2The Tribune. (2018, September 19). Retrieved October 25, 2018, from https://www.sanluisobispo.com/news/local/article218698490.html 3Senate Bill No. 100 (2018) 4The Tribune. (2016, July 1). Retrieved October 23, 2018, from https://www.sanluisobispo.com/news/local/article87330307.html 5Senate Bill No. 1090 (2018) 6The Tribune (2018, September 17). Retrieved October 23, 2018, from https://www.sanluisobispo.com/news/local/article218563600.html 2018 CCEF FORECAST - DIABLO CANYON 2018 CCEF FORECAST - DIABLO CANYON 26 27 Jan-90 Jan-95 Jan-00 Jan-05 Jan-10 Jan-15 Jan-20 LOCAL LABOR MARKET PERFORMANCE San Luis Obispo County, Jan-90 to Sep-18 Source: California Employment Development Department; Analysis by Beacon Economics, LLC 70 110 80 90 100 120 Nonfarm Employment (000s, SA)Median PriceSales Unemployemt (%,SA)8 10 6 4 2 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT Employment Overview Growth in San Luis Obispo County’s labor market slowed from 2017 levels. The County’s nonfarm payrolls grew 1.3% (1,500 jobs) from September 2017 to September 2018, down from 2.1% over the same period a year earlier. Private-sector payrolls expanded 1.6% over the period, trailing the statewide pace of 2.1% and down from 2.5% one year ago. This puts the County behind private-sector job growth in Monterey County (3.2%) but well ahead of Santa Barbara County (0.3%) and Ventura County (0.8%). Sustained gains in payroll jobs have helped drive the unemployment rate down to 2.8% — well below the 4.1% mark in the State overall and the lowest rate for the County on record. The low unemployment rate in the region reflects the tight labor market: The labor force remained unchanged from the last year, and as a result, private payrolls grew in part by attracting workers from nearby counties. With the lack of labor force expansion, it will be difficult for the County to maintain economic growth unless it continues to draw workers from beyond its boundaries. Although the labor market in San Luis Obispo County will continue to grow, the region faces challenges going forward. Low affordability of housing, from rental units for workers to homes that cater to middle- and upper-middle-income households, remains an ever- present issue. Builders often face challenging hurdles to development. Local companies are also finding it difficult to offer wages comparable to those in the Bay Area and Southern California. As a result, San Luis Obispo County struggles to attract highly skilled talent and new graduates of Cal Poly San Luis Obispo who are recruited by companies elsewhere. These factors are making it difficult for firms to get both high- and low-skilled workers they need to expand. by Brian Vanderplas, Beacon Economics LLC 28 29 Industry Level Growth Despite the region’s tightening labor market, growth trends span a variety of sectors in San Luis Obispo County. • Leisure and Hospitality was responsible for the largest absolute number of new jobs. From September 2017 to September 2018, the sector increased payrolls 3.4% (600 jobs), just behind the 3.5% growth in the State over the period. These continued gains should not come as a surprise given the region’s growing status as a premier tourist destination. In addition, the City of Paso Robles is exploring constructing a large-scale conference center at the Paso Robles Event Center. 3 • The County’s Education and Health Care sector is also continuing to expand at a robust pace. From September 2017 to September 2018, the sector increased payrolls 3.6% (600 jobs). A significant portion of the growth in this industry can be attributed to San Luis Obispo County’s population, which has a higher average age than the State’s and relatively more health care needs: 19.4% of the County’s population is over 65, compared with 13.9% of the State population. This number increased 3.1 percentage points from 16.3% in 2011, part of a broader national trend. 1 Finucane, S., Leslie, K., & Sneed, D. (June 22, 2016). What Diablo Canyon’s closure will mean for SLO County’s economy. Retrieved from https://www.sanluisobispo.com/news/local/article85204657.html 2 Leslie, K. (Aug. 21, 2018). Bill to guarantee $85 million Diablo Canyon closure settlement heads to governor. Retrieved from https://www.sanluisobispo.com/news/local/article217058095.html 3 Pratt, T. (June 21, 2018). San Luis Obispo County may get a $26 million convention center. Retrieved from http://www.kcbx.org/post/san-luis-obispo-county-may-get-26-million-convention-center#stream/0 In the coming years, the region will face another significant challenge: the closing of the Diablo Canyon nuclear power plant. Although the facility will not officially close until 2025, the shutdown will bring sweeping changes to San Luis Obispo County’s economy. The plant employs nearly 1,500 workers with an average annual salary above $150,000, according to 2014 figures.1 It is important to note, however, that all these jobs will not be lost immediately; the plant will employ a significant contingent of engineers and other workers during the plant’s decommissioning phase. But it will ultimately take a strong collaboration between the private and public sectors to create development strategies to foster growth in other sectors of San Luis Obispo County’s economy. A bill guaranteeing $85 million to help mitigate the impact of the Diablo Canyon nuclear plant closure was recently passed by the state Assembly, which should help shore up local coffers in the coming years.2 • The Natural Resource and Construction sector also had a strong year, building on its gains from 2016 and 2017. From September 2017 to September 2018, the sector expanded 3.6% (300 jobs), a slowdown from the 5.4% growth over the same period a year earlier. Sustained construction activity is fueling these gains. From the first half of 2017 to the first half of 2018, sales tax revenue from Building and Construction increased 5.1% in the County, outpacing the 3.5% increase in the State overall. • Manufacturing also continues to be a strong source of new jobs in San Luis Obispo County; payrolls expanded 3.8% (300 jobs) over the year, a slowdown from the 5.7% growth over the same period a year earlier. In contrast, Manufacturing payroll levels remained level in the State overall from September 2017 to September 2018. The types of new jobs reflect how closely the Manufacturing sector is linked to the region’s farms and vineyards. According to the Quarterly Census of Employment and Wages from the Bureau of Labor Statistics, beverage manufacturing (which includes wineries) is the largest Manufacturing subsector in San Luis Obispo County, accounting for nearly 1 in 4 positions. Employment levels at beverage firms were also up significantly, increasing 14.2% (289 jobs) from the first quarter of 2017 to the first quarter of 2018. • Although payrolls in most San Luis Obispo County industries expanded over the year, jobs declined in some sectors, with Retail Trade shedding 300 and Professional and Business Services losing 200 positions. 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT 30 31 City-Level Growth At the city level, San Luis Obispo County has had widespread growth. From the third quarter of 2016 to the third quarter of 2017, the City of San Luis Obispo gained the highest number of jobs, increasing payrolls 2.6% (1,350 jobs). In percentage terms, Paso Robles led the way, increasing payrolls 4.9% (861 jobs). Other coastal communities were a mixed bag last year, with payrolls increasing 4.0% in Arroyo Grande (357 jobs) and 0.2% in Grover Beach (eight jobs), while payrolls fell 0.5% in Pismo Beach Bay (22 jobs) and 0.5% in Morro Bay (20 jobs). The more inland regions of the County also posted gains, with payrolls increasing 3.1% in the County’s Unincorporated Areas (551 jobs) and 1.2% in Atascadero (110 jobs).4 City Employment YoY Change (#)YoY Change (%) San Luis Obispo 54,132 1,350 2.6 Paso Robles 18,449 861 4.9 Unincorporated 18,556 551 3.1 Arroyo Grande 9,319 357 4.0 Atascadero 9,337 110 1.2 Grover Beach 3,475 8 0.2 Morro Bay 3,693 -20 -0.5 Pismo Beach 4,066 -22 -0.5 SAN LUIS OBISPO COUNTY EMPLOYMENT BY CITY Source: California Employment Development Department; Analysis by Beacon Economics, LLC From 2012 to 2016, the unemployment rate in San Luis Obispo County averaged 5.5%, according to the American Community Survey from the U.S. Census Bureau, though this rate varied across the County.5 Atascadero (4.2%), Grover Beach (4.2%), Pismo Beach (4.5%), Arroyo Grande (4.7%) and San Luis Obispo (4.9%) had unemployment rates well below the County’s, but Morro Bay (6.2%) and Paso Robles (5.9%) sustained higher unemployment. Still, the unemployment rates across San Luis Obispo’s cities were lower than the statewide rate of 8.7% over the five- year period. Business Formation Consistent with gains in region’s labor market, business formation in San Luis Obispo County continued in 2017. According to the Quarterly Census of Employment and Wages, the number of establishments grew overall and across a broad range of sectors. More than 162 businesses were begun in 2017, representing a 1.9% increase from 2016 and a slowdown from the 2.2% growth from 2015 to 2016. The 1.9% increase trails the State’s, where establishments increased 3.0% over the period. • At the industry level, the Health Care sector posted the largest gains in 2017, adding 52 firms. 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT Industry Sep-18 YoY Change (#)YoY Change (%) Total Nonfarm 118.9 1.5 1.3 Farm 5.2 -0.2 -3.3 Government 24.2 0.0 0.2 Leisure and Hospitality 19.7 0.6 3.4 Education/Health 16.2 0.6 3.6 Retail Trade 14.0 -0.3 -2.4 Professional/Business 10.5 -0.2 -2.2 NR/Construction 7.9 0.3 3.6 Manufacturing 7.6 0.3 3.8 Other Services 6.2 0.0 -0.3 Transport,Warehouse,Util.3.9 0.0 0.1 Wholesale Trade 3.0 0.2 7.0 Finance and Insurance 2.3 0.0 -0.2 Real Estate 2.0 0.1 5.1 Information 1.4 0.0 -0.4 SAN LUIS OBISPO COUNTY EMPLOYMENT BY INDUSTRY Source: California Employment Development Department; Analysis by Beacon Economics, LLC 4City-level employment data are based upon the latest available period, the third quarter of 2017. 5City-level unemployment rate data are based upon the latest available period, from 2012 to 2016. 32 33 • Other sectors posting sizable gains for the year included Accommodation & Food (21 firms), Finance & Insurance (17), Professional, Scientific, and Technical Services (16) and Logistics (13). These figures should not come as a surprise given the continued growth in Construction and Leisure and Hospitality over the year. • In percentage terms, Logistics (13.6%), Management (9.6%) and Finance & Insurance (4.4%) led the way. • In addition, Unclassified Firms6 accounted for 52 of the new companies in the region in 2017. These firms will be classified in the coming quarters, providing a clearer picture of business formation. Wages Although private employment growth in San Luis Obispo County is outpacing the State’s, overall wages have increased more slowly. From 2016 to 2017, wages in San Luis Obispo County grew an average of 3.3%, to $45,796, trailing the 4.6% growth in the State overall. County wage growth trailed Monterey County (3.7%) and Santa Barbara County (3.6%) but was well ahead of Ventura County (1.5%). • Average annual wages increased across most industries in San Luis Obispo County in 2017. More importantly, with a historically low unemployment rate and a shortage of workers, there should be upward pressure on wages over the coming year. • The Information sector posted the largest year-over-year gain, with average annual wages increasing just over 10.9% from 2016 to 2017. • Professional and Business Services also had a strong year. From 2016 to 2017, wages grew 9.5% in Administrative Support, 8.4% in Professional, Scientific and Technical Services and 7.6% in Management. These sectors incorporate many skill sets and indicate wage gains are being felt across a wide range of income brackets. • Other sectors posting meaningful gains in 2017 were some of San Luis Obispo County’s fastest-growing in 2017 and 2018: Construction (4.5%), Health Care (3.5%) and Accommodations & Food (3.1%). More importantly, these sectors also represent a significant share of the County’s overall workforce and so these wage gains are being felt across the bulk of households in the region. 2018 CCEF FORECAST - EMPLOYMENT 2018 CCEF FORECAST - EMPLOYMENT AVERAGE ANNUAL WAGES Selected Metropolitan Areas and California, 1990 to 2017 Source: U.S. Bureau of Labor Statistics; Analysis by Beacon Economics, LLC 60 30 40 50 70 Dollars (000s)1990 1993 1996 1999 2002 2005 Monterey County Santa Barbara County San Luis Obispo County California 20 Ventura County 2008 2011 2014 2017 6 Firms awaiting a NAICS industry classification from the U.S. Bureau of Labor Statistics 34 35 Top-level indictors of business activity in San Luis Obispo County suggest that 2017 and 2018 were a mixed bag. Local spending slowed in 2018, increasing just 0.4% from the first half of 2017 to the first half of 2018. The driving force behind this slowdown was a decline in Business and Industry spending. This was partially offset, however, by increased spending on Building and Construction, which grew significantly over the period. Despite this year’s slow start, 2017 was a strong year for the region, with economic output in San Luis Obispo County increasing 1.7% in real terms from 2016. Although this growth trailed the State’s (3.0%), San Luis Obispo led the Central Coast in 2017. Several sectors had strong years, with Administrative Support growing 10.8% and Professional, Scientific and Technical Services expanding 10.5%, with each contributing significantly to the County’s overall growth. Tourism also had a strong year in 2017, with a record number of travelers at San Luis Obispo County Regional Airport. Moreover, 2018 is shaping up to be an even stronger year for the airport; traffic through August was up 21.2% over the same period in 2017. Although we expect that business activity will continue to grow, the region faces several challenges. Most pressing is a lack of affordable housing, which will limit growth. Although construction activity has picked up recently, the housing stock has still not grown enough to meet the long-run needs of the County’s growing population and employment base. Another challenge is the pending closure of the Diablo Canyon nuclear power plant. Indeed, because the plant generates over $1 billion in estimated economic activity each year, the County will need to focus on developing and expanding other industries1. 1http://www.sanluisobispo.com/news/local/article85204657.html 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY Business Activity Overview by Brian Vanderplas, Beacon Economics LLC 36 37 Sales tax revenue in San Luis Obispo County increased a modest 0.4% from the first half of 2017 to the first half of 2018. Sales tax growth in San Luis Obispo County trails the other Central Coast counties (Monterey, Santa Barbara and Ventura) and is well behind the 3.6% statewide pace. But consumer and business spending has been volatile in recent years. This year’s slower pace of growth compared with the State’s comes on the heels of a more robust 3.7% increase from 2016 to 2017, outpacing the State’s 3.5% increase over the period. Consumer and Business Spending SALES TAX Selected Counties, Q2-11 to Q2-18 Source: HdL; Analysis by Beacon Economics, LLC 130 100 110 120 140 County (Index, Q2-11 = 100)Q2-11 Q2-12 Q2-13 Q2-14 Q2-15 Q2-16 Q2-17 Q2-18 Monterey County Santa Cruz San Luis Obispo California • The main force behind the slowdown in consumer and business spending was a decrease in business-to- business spending. Sales tax from Business and Industry fell 22.2% from the first half of 2017 to the first half of 2018. • Despite the decrease in Business and Industry spending, businesses are continuing to invest in the County, notably on construction projects. From the first half of 2017 to the first half of 2018, sales tax from Building and Construction grew 10.1%, adding to the 10.5% increase from 2016 to 2017. This mirrors the continued gains in Construction sector payrolls the County has enjoyed over the last year. • Consumer-driven sectors were mixed. With gasoline prices beginning to stabilize, sales tax revenue at Fuel and Services Stations rose 8.5% from the first half of 2017 to the first half of 2018, building on the 7.4% increase from 2016 to 2017. • Sales tax revenue from Restaurants and Hotels (1.0%) and Food and Drug Stores (0.3%) also rose steadily in the first half of 2018. But sales taxes collected from Autos and Transportation (-2.5%) and General Consumer Goods (-0.3%) declined during the first half of 2018. Category 2018 YTD YoY Change (%) Building and Construction 2,685 10.10 Fuel and Service Stations 2,649 8.50 Restaurants and Hotels 3,729 1.00 Food and Drugs 1,477 0.30 General Consumer Goods 4,681 -0.30 Autos and Transportation 3,742 -2.50 Business and Industry 3,240 -22.20 San Luis Obispo County 25,706 0.40 Santa Barbara County 34,352 2.00 Ventura County 68,538 1.80 Monterey County 32,859 1.20 California Total 3,357,209 3.60 SAN LUIS OBISPO COUNTY SALES TAX BY INDUSTRY Source: HdL Companies; Analysis by Beacon Economics, LLC • Taxable sales grew across most of the County in 2017. Arroyo Grande led the way, with taxable sales increasing 7.5% from 2016 to 2017. Taxable sales in the County’s largest city, San Luis Obispo, grew a more modest 4.6% from 2016 to 2017. Other cities with sizable growth over the period were Morro Bay (6.1%), Paso Robles (5.7%) and Atascadero (5.7%). The only cities whose tax base failed to grow was Grover Beach (-1.6%) and Pismo Beach (-0.3%), but taxable sales grew in both these cities from 2015 to 2017. • Although we expect taxable sales to continue to grow, consumer spending will increase more modestly in the County compared with the State as population growth lags other parts of California. As such, the County must rely on continued growth in business activity and tourism. 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY 38 39 Economic activity in San Luis Obispo County grew 1.7% from 2016 to 2017, outpacing growth in Monterey (1.1%), Santa Barbara (1.6%) and Ventura (-0.4%) counties. The Central Coast trailed the State overall, where economic activity grew 3.0% over the period. Since 2007, economic activity in San Luis Obispo County has expanded 13.6% in real terms, compared with the 19.4% increase in California. Production REAL GDP GROWTH Selected Regions and California, 2007 to 2017 Source: U.S. Bureau of Economic Analysis; Analysis by Beacon Economics, LLC 115 100 105 110 120 Index (2007 = 100)2007 2009 2011 2013 2015 2017 Monterey County Santa Barbara County San Luis Obispo County California 95 Ventura County • At the industry level growth continues to be volatile, with a handful of sectors boosting production levels sizably while others sustained declines. The Administrative Support sector posted the largest gains in percentage terms in recent years, with output levels growing 10.8% from 2016 to 2017. This marks a rebound for the 12.8% decline in output from 2015 to 2016. • San Luis Obispo County’s high-skilled industries also contributed to the region’s production growth in 2017. From 2016 to 2017, the County’s Professional, Scientific and Technical Services sector expanded 10.5%, Management 8.0% and Information 5.5%. Industry 2017 ($ Millions)1-Year Change (%)3-Year Change (%) Real Estate 2,315 -0.1 3.2 Prof., Sci., and Tech. Services 729 10.5 8.8 Government 1927 1.2 2.8 Construction 851 1.1 6.1 Retail trade 1204 3.4 3.8 Information 400 5.5 10.5 Accommodation & Food Services 671 3.2 3.5 NR/Mining 368 -5.4 6.8 Health Care 951 5.0 1.6 Transportation & Utilities 1279 -1.1 1.1 Other services 330 0.0 1.9 Wholesale trade 401 -0.3 0.8 Management 54 8.0 0.6 Arts, Entertainment, & Recreation 79 -6.0 0.0 Educational services 36 -2.7 0.0 Administrative Support 309 10.8 0.0 Finance and Insurance 281 5.6 -1.7 Manufacturing 907 -1.2 -2.6 SAN LUIS OBISPO COUNTY REAL GDP BY INDUSTRY Source: U.S. Bureau of Economic Analysis; Analysis by Beacon Economics, LLC • Looking at a longer time frame, Information (10.5%) and Professional, Scientific and Technical Services (8.8%) were the two fastest-growing sectors in the County over the last three years. These high-skilled sectors will be pivotal to the County’s growth pattern, and continued expansion will be necessary to attract talent from the Bay Area and Southern California. But, as mentioned, local companies are finding it difficult to offer wages comparable to those in the Bay Area. Other sectors posting sizable 2017 gains in output were Finance and Insurance (5.6%), Health Care (5.0%) and Retail Trade (3.4%). • A handful of sectors had pullbacks in production in 2017. Declines were most pronounced in the Education Services sector, which fell 2.7%. Utilities (-1.8%) and Manufacturing (-1.2%) also declined. Although the region faces a number of headwinds, we expect it will continue to grow at a stable pace over the next year. 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY 40 41 As the region draws more visitors each year, hospitality and tourism are becoming a bigger part of the County economy. This is evident in the record year for San Luis Obispo County Regional Airport in 2017. A record-breaking 407,646 passengers traveled through the airport in 2017, a 23.4% increaser over 2016 levels, making the airport the fifth-fastest-growing airport in the nation. 2Moreover, 2018 is shaping up to be another record year. Through the first eight months of 2018, passenger traffic was up 21.2% over 2017’s record-setting levels. 3 The County is an easy-to-reach destination from the dense population centers in the Bay Area and in Southern California just a few hours away. Moreover, the County’s variety of amenities and activities ensures that many tourists will visit the region more than once. • Through August 2018, average daily room rates in San Luis Obispo County were 2.0% higher than during the same period in 2017. Room rates rose most steeply in San Luis Obispo (4.1%) and along the Northern Coast (1.9%), while rates in Paso Robles (0.8%) and Pismo Beach (0.55%) grew more modestly. Hospitality & Tourism • Occupancy rates were also a mixed bag in 2018, falling 0.3 percentage point, to 73.1%. Occupancy along the Northern Coast grew 0.8 percentage point, to 63.0%, and occupancy rates in Pismo Beach grew 0.3 percentage point, to 73.7%. In contrast, occupancy rates in San Luis Obispo fell 1.4 percentage point to 77.7%, and occupancy rates in Paso Robles fell 0.5 percentage point, to 73.9%. • With average daily rates growing and occupancy rates falling, revenue per available room grew only 1.6% in 2018. Despite this modest growth, increases were spread across the county. The Northern Coast led the way, with revenue per available growing 3.3%, followed by San Luis Obispo (2.2%), Pismo Beach (1.0%) and Paso Robles (0.1%). • Perhaps more important, when more leisure travelers are drawn to the region, they spend at local attractions, restaurants and stores. This is evident in the 3.4% increase in Leisure and Hospitality employment from September 2017 to September 2018 and the continued increases in spending at Restaurants and Hotels. The region is also looking to be a bigger draw for business travelers, with the City of Paso Robles exploring constructing a large-scale conference center at the Paso Robles Event Center.4 2San Luis Obispo Airport ranked seventh-fastest growing airport in North America. (Sept. 24, 2018). Retrieved from https://pasoroblesdailynews.com/san-luis-obispo-airport-ranked-seventh-fastest-growing-airport-in- north-america/87022/ 3San Luis Obispo County Regional Airport – Airport Statistics 4Pratt, T. (June 21, 2018). San Luis Obispo County may get a $26 million convention center. Retrieved from http://www.kcbx.org/post/san-luis-obispo-county-may-get-26-million-convention-center#stream/0 40 41 2018 CCEF FORECAST - BUSINESS ACTIVITY 2018 CCEF FORECAST - BUSINESS ACTIVITY The performance of the Agriculture sector in San Luis Obispo County has been mixed. The official end of the drought in April 2017 did not boost crop yield or value that year relative to 2016. Real output from the agricultural sector and crop exports were also disappointing in 2017. Even so, farm employment increased decently as the drought ended. Moreover, there had been a shift toward higher-value crops, such as wine grapes and strawberries, that pay higher wages. So far, 2018 has had drier weather than the post-drought period of 2017. Conservation efforts are going to be permanent in San Luis Obispo County and in California as a whole. Although California’s drought ended in April 2017, 1wetter weather in the remainder of that year did not translate to higher crop yield compared with 2016, when the drought was in full effect. Gross crop output was flat in 2017. The gross value of San Luis Obispo County’s agricultural industry totaled $924.7 million in 2017, down 0.5% from 2016.2 The Animal sector (5.6%) was the only category whose gross value increased in 2017. Gross values in other categories tapered off modestly: Field Crops (-0.6%), Nursery (-4.8%), Fruit and Nut (-0.3%) and Vegetable (-0.9%). In fact, after the drought, San Luis Obispo County had wet weather in late 2017,3 which complicated the timing for planting vegetable crops, resulting in a 17.6% decline in vegetable crop yield (in harvested acreage) over 2016. San Luis Obispo County’s inflation-adjusted output (gross metropolitan product) from its agricultural sector declined modestly in 2017. But the percentage decline was less severe than it was statewide. Farm employment held steady in 2017, but there was a shift in farm labor toward more profitable fruit and nut crops and a labor shortage in general. Despite the challenges of the drought recovery, wide fluctuations in weather and labor shortages, the County’s agricultural producers remained key contributors to the regional and State economies in 2017.One Year Percent Chnage in Crop Yield100% 80% 60% 40% 20% 0% -20% -40% -60% -60%-20%-40%0%20%40%60%80%100% One Year Percent Change in Crop Value CHANGE IN CROP VALUE AND CROP YIELD San Luis Obispo County, 2016 vs. 2017 Source: San Luis Obispo County Department of Agriculture; Analysis by Beacon Economics, LLC Nursery Products Cattle & Calves Field Crops Fruit & Nut Crops Vegetable Crops Overview Agriculture 2018 CCEF FORECAST - AGRICULTURE 2018 CCEF FORECAST - AGRICULTURE 1Office of Gov. Edmund G. Brown Jr. (2017, April 7). Governor Brown Lifts Drought Emergency, Retains Prohibition on Wasteful Practices. Retrieved Oct. 8, 2018, from https://www.gov.ca.gov/2017/04/07/ news19748/ 2Note that 2016’s gross value was revised upward from $914.7 million to $929.9 million in the 2017 crop report. 3Holden, L. (2018, July 10). Wine grapes are still SLO County’s most valuable crop — with a record $267 million year. The Tribune. Retrieved Oct. 8, 2018, from https://www.sanluisobispo.com/news/local/arti- cle214629835.html42 43 by Hoyu Chong, Beacon Economics LLC Industry Performance Both inflation-adjusted real output (gross metropolitan product) in the agricultural sector and crop exports decreased in 2017 from 2016. • Output in the agricultural sector4 was $408 million in 2017, down 5.9% from 2016, as measured in inflation- adjusted dollars. • The decrease was less severe than the statewide agricultural sector’s year-over-year decline of 9.0%. • From 2008 to 2017, San Luis Obispo County’s real agricultural output more than doubled, outpacing that in Monterey County (92.7%), Santa Barbara County (86.8%) and the State (46.4%). • Crop exports totaled $65.9 million in 2017, down 34% nominally compared to 2016. Crop exports fell to levels not seen since 2009. AGRICULTURAL SECTOR GROSS VALUE AND OUTPUT San Luis Obispo County, 2008 to 2017 Source: San Luis Obispo County Department of Agriculture and Bureau of Economic Analysis, Analysis by Beacon Economics, LLC $300 $400 $500 $600 $1,000 Gross Crop Value(Nominal, Millions of USD)$700 $800 $900 $1,100 2008 Agricultural Sector Real Output(Inflation Adjusted, Millions of USD)$0 $100 $200 $150 $200 $250 $300 $500 $350 $400 $450 $550 $0 $50 $100 2009 2010 2011 2012 2013 2014 2015 2016 2017 Animal Nursery Vegetable Field Fruit and Nut Real Output (in 2017 Dollars) AGRICULTURAL SECTOR REAL OUTPUT (INDEXED TO 2008 LEVELS) Source: Bureau of Economic Analysis, Analysis by Beacon Economics, LLC 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 100.0 120.0 140.0 220.0 160.0 180.0 200.0 240.0 Agricultural Sector Real Output(Base Year =2008)Monterey County Santa Barbara County San Luis Obispo County California SAN LUIS OBISPO COUNTY CROP EXPORTS Source: International Trade Administration; Analysis by Beacon Economics, LLC 2009 2010 2011 2012 2013 2014 2015 2016 2017 -30% -20% -10% 30% 0% 10% 20% 40%Percentage ChangeCrop Export ($ Millions)Percentage Change Export Value (Millions of USD)$0 $20 $100 $40 $60 $80 $120 -40% The Fruit and Nut category had the highest gross value ($566.6 million) again in 2017. • Wine grapes and strawberries accounted for almost 90% of fruit and nut gross value. • Significant growth in gross value came from wine grapes (10.2%), English walnuts (11.1%), and miscellaneous fruit and nut crops (18.1%). • But the increase in English walnuts’ value was due to a 30% increase in price per harvested ton; yield actually decreased 14.7% year over year. • After a tremendous year in 2016, avocados sustained a 38.8% drop in gross value and a 51.8% drop in yield (harvested tons) in 2017. 2018 CCEF FORECAST - AGRICULTURE 2018 CCEF FORECAST - AGRICULTURE 4Inflation-adjusted gross metropolitan product from the agriculture, forestry, fishing and hunting industries. 44 45 Cattle and calves herds totaled 43,100 heads 2017, a modest 2.6% increase over 2016. • But by weight, this was a 12.2% decrease year over year. • Also, the number of heads sold was less than half of 10 years ago (98,000). • Even though the drought ended, cattle will take time to bounce back in numbers. The Vegetable Crop category had the largest drop in yield (-17.6%) of all agricultural products in 2017. • The vegetable crops’ aggregated value decreased less than 1% from 2016, mostly through a significant increase in crop value per unit. * For example, although yields for cauliflower (-15.9%) and celery (-19.0%) were significantly lower in 2017, the respective crop gross values actually increased 21.2% and 36.7% because of a 44.1% and 68.8% price surge per ton, respectively. • Winter rain was the main contributor to the reduced vegetable crop yields. • Another factor was the continuing labor shortage. Labor-intensive crops — vegetable crops such as broccoli (-30.9%), head lettuce (-28.7%), edible pod peas (-48.4%) and citrus fruits such as lemons (-10.8%) — had the largest drops in yields in 2017 relative to 2016. SAN LUIS OBISPO COUNTY FARM EMPLOYMENT 2007 to 2017 Source: California Employment Development Department; Analysis by Beacon Economics, LLC 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 0 1,000 5,000 2,000 3,000 4,000 6,000 2007 Farm employment in 2017 was 9.3% higher than in 2016 but is expected to come in lower in 2018. Although there is a general worker shortage in agriculture, the shortage in vegetable crops may be due to a shift to wine grapes and strawberries, which pay higher wages5 and also are the two crops with the highest gross values in San Luis Obispo County. • Given that farm work is low-paying and mostly done by immigrants, San Luis Obispo County and California as a whole are expected to face continuous labor shortages in the agricultural sector amid high housing costs and the federal administration’s unwelcoming stance toward immigrants. • Particularly in San Luis Obispo County, the chronic undersupply of workers is made worse by insufficient housing.6 Industry Outlook After the Drought Although the drought officially ended in April 2017, California has once again had dry weather in 2018. • As of Oct. 2, 2018, much of Southern, Central Coast and Central California was experiencing moderate to severe drought, with Imperial County in extreme drought. Southwest San Luis Obispo County is in severe drought, and the rest of the County is having either abnormally dry weather or moderate drought.7 • Abnormal dryness or drought is affecting 93% of the state’s population, 34.6 million people.8 • Conservation efforts are going to be a permanent condition in California. The next drought is not a question of if, but when. CALIFORNIA DROUGHT AS OF OCTOBER 2, 2018 Source: U.S. Drought Monitor, National Drought Mitigation Center and National Oceanic and Atmospheric Administration; Analysis by Beacon Economics, LLC 30% 40% 50% 90% 60% 70% 80% 100% 20% 10% 0%Percent of State Land Area10/15/132/15/146/15/1410/15/142/15/156/15/152/15/166/15/1610/15/162/15/176/15/1710/15/172/15/186/15/1810/15/152018 CCEF FORECAST - AGRICULTURE 2018 CCEF FORECAST - AGRICULTURE 5Johnson, P. (2018, July 12). Wine grape values hit record high, labor shortage hurts vegetables in 2017 SLO crop report. New Times San Luis Obispo. Retrieved Oct. 8, 2018, from https://www.newtimesslo.com/ sanluisobispo/wine-grape-values-hit-record-high-labor-shortage-hurts-vegetables-in-2017-slo-crop-report/Content?oid=5637096 6Vaughan, M. (2018, Aug. 23). Thousands of farmworkers live in SLO County. But there isn’t enough housing for them. The Tribune. Retrieved Oct. 8, 2018, from https://www.sanluisobispo.com/news/local/arti- cle217116560.html 7Miskus, D. (2018, Oct. 2). Summary of Drought for California as of October 2, 2018. National Integrated Drought Information System, U.S. Drought Portal. Retrieved Oct. 8, 2018, from https://www.drought.gov/ drought/states/california#regional_summary_full 8Ibid. No Drought Abnormally Dry Extreme DroughtSevere Drought Exceptional DroughtModerate Drought Week of 46 47 1Total sales less sales from foreclosure. 2Home sales historically peak in the first two quarters of the year. 3Based on data from California Association of Realtors (retrieved from https://www.car.org/en/aboutus/mediacenter/newsreleases/2017releases/2qtr2017affordability and https://www.car.org/marketdata/data/haitra- ditional). For comparison, the median home price increased 6.6% in the period. 48 49 Single-Family Housing Market After being flat for four consecutive quarters, traditional home sales1 (existing single-family homes, new single-family homes and condominiums combined) grew 4.2% year over year in the second quarter of 2018. • Yet this fell short of the 6.3% year-over-year increase in the second quarter of 2017. • Overall, San Luis Obispo County finished the first half of 20182 with similar numbers of homes sold compared with the first half of 2017, which is the result of slightly lower condominium sales countered by slightly higher single-family home sales. • Sales of existing single-family homes in the second quarter of 2018 were 5.6% higher than a year earlier.3 • In the second quarter of 2018, the monthly mortgage payment of a home sold for the median price, including taxes and insurance, was $3,280, a 15.9% increase from the same period a year earlier. • Declining affordability, reflected in this substantial increase in monthly mortgage payments, is expected to dampen home sales in the near future. EXISTING SINGLE-FAMILY HOME PRICE AND SALES San Luis Obispo County, Q1-2013 to Q2-2018 Source:DataQuick/CoreLogic; Analysis by Beacon Economics, LLC 300 400 500 900 600 700 800 1000 Sales of SFR (Seasonally Adjusted)Median PriceSales Median SFR Price$630,000 $700,000 200 100 $560,000 $490,000 $420,000 $350,000 $280,000 $210,000 $140,000 $70,000 $00 Residential Real Estate 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE The housing market in San Luis Obispo County has shown signs of slowing in 2018. Price appreciation continues, but with smaller percentage gains compared with recent years’. Sales are little changed from a year ago, and although inventory is comparable to that of a year ago, the median number of days on market has increased significantly. Similarly, apartment rent increases have subsided significantly from their 2015 and 2016 highs despite extremely low vacancy rates. Finally, the number of residential construction permits has lagged 2017’s significantly. This is a disappointing trend in an extremely tight local home buying and rental market. Market Overview by Hoyu Chong, Beacon Economics LLC 50 51 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE Q1-08Monterey County Santa Barbara County San Luis Obispo County Ventura County MEDIAN EXISTING SINGLE-FAMILY HOME PRICE Central Coast Counties, Q1-2008 to Q2-2018 Source: DataQuick/CoreLogic; Analysis by Beacon Economics, LLC $600,000 $700,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Q2-08Q3-08Q4-08Q1-09Q2-09Q3-09Q4-09Q1-10Q2-10Q3-10Q4-10Q1-11Q2-11Q3-11Q4-11Q1-12Q2-12Q3-12Q4-12Q1-13Q2-13Q3-13Q4-13Q1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15Q4-15Q1-16Q2-16Q3-16Q4-16Q1-17Q2-17Q3-17Q4-17Q1-18Q2-18EXISTING SINGLE-FAMILY HOME PRICES (SEASONALLY ADJUSTED) By County, Q2-2018 Source: DataQuick/CoreLogic; Analysis by Beacon Economics, LLC Year-over-year price appreciation (+7.8%) has cooled somewhat from the previous few years but is ahead of nearby counties’: Monterey (+6.7%), Ventura (+5.2%) and Santa Barbara (-6.5%). • Santa Barbara County’s decreased home prices are likely a result of wildfires and mudslides, which hurt demand.4 • Because of San Luis Obispo County’s vast open spaces and coastal mountain range, as many as one-third of homes are highly vulnerable to wildfire damage.5 • San Luis Obispo County price appreciation will likely slow further, exacerbated by wildfire threats. SAN LUIS OBISPO COUNTY EXISTING SINGLE-FAMILY HOME REAL ESTATE, BY CITY (SEASONALLY ADJUSTED) Source: DataQuick/CoreLogic; Analysis by Beacon Economics, LLC *Median prices have been rounded to the nearest thousand ** Year to Date as of end of second quarter Existing Single-Family Home Median Prices* City Q2-2017 Q2-2018 Percent Change Arroyo Grande $743,000 $713,000 -4% Atascadero $475,000 $542,000 +14.2% Grover Beach $515,000 $582,000 +13% Paso Robles $477,000 $466,000 -2.2% San Luis Obispo $742,000 $792,000 +6.7% San Luis Obispo County $554,000 $597,000 +7.8% Existing Single-Family Home Year-to-Date** Sales City 2017 Year-to-Date 2018 Year-to-Date Percent Change Arroyo Grande 171 181 +5.6% Atascadero 230 218 -5.4% Grover Beach 87 53 -39.4% Paso Robles 410 393 -4.1% San Luis Obispo 198 179 -9.5% Unincorporated/Other San Luis Obispo County 651 735 +12.9% San Luis Obispo County 1747 1759 +0.7% Cities with lower median existing single-family home prices than the County’s recorded greater home price appreciation year-over-year than the County. • Atascadero (+14.2%) and Grover Beach (+13.0%), where the median existing single-family home prices are lower than the County median, recorded the highest year-over-year home appreciation in the second quarter of 2018. • Among the major cities, only Arroyo Grande had higher home sales in the first half of 2018 than the first half of 2017. San Luis Obispo County’s housing inventory remains tight. In August 2018, unsold housing inventory stood at 3.8 months countywide, similar to that in Santa Barbara County (4.0 months) and Monterey County (4.1 months). • The County’s unsold housing inventory is also comparable to that from August 2017 (3.9 months).6 • On the other hand, the median time on market has increased significantly, from 23.0 days in July 2017 to 31.0 days in July 2018, a larger jump than in other counties in the Central Coast.7 4Lambert, L. (2018, May 29). Home Prices Aren’t Soaring Everywhere: These Are the 10 Metros Where They’re Falling the Most. Realtor.com. Accessed Sept. 27, 2018, from https://www.realtor.com/news/trends/10- metros-home-prices-falling-fastest/ 5Vaughan, M. and Finch II, M. (2018, Aug. 6). A third of SLO County homes are at high risk of wildfire damage. And it’s not getter better. San Luis Obispo Tribune. Accessed Oct. 1, 2018, from https://www.sanluiso- bispo.com/latest-news/article216181505.html. 6 California Association of Realtors (2018, Sept. 17). August home sales and price report. Retrieved from https://www.car.org/en/aboutus/mediacenter/newsreleases/2018releases/augusthomesales 7 Ibid Central Coast California San Luis Obispo $597,000 +7.8% Santa Barbara $505,000 -6.5% Monterey $582,000 +6.7% Southern California Los Angeles $624,000 +8.6% Orange $775,000 +5.3% San Diego $607,000 +5.8% Inland Empire $345,000 +6.3% Ventura $636,000 +5.2% Northern California San Francisco $1,381,000 +10.2% East Bay $734,000 +12.3% San Jose $1,209,000 +20.2% Sacramento $353,000 +10.8% Other Northern California $493,000 +6.2% State of California $481,000 +8.6% County Median PriceQ2-2018 ($)1-Year Percent Change APARTMENT VACANCY RATE Central Coast Counties, Q1-2014 to Q2-2018 Source: Axiometrics; Analysis by Beacon Economics, LLC 4.0% 2.5% 3.0% 3.5% 4.5% 2.0%Monthly Effective Rent ($)Seasonally AdjustedQ1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15Q4-15Q1-16Q2-16Q3-16Q4-16Q1-17Q2-17Q3-17Q4-17Q1-18Q2-180.5% 1.0% 1.5% 0.0% Monterey County Santa Barbara County San Luis Obispo County Ventura County 52 53 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE Compared with the single-family home market, the condominium market in San Luis Obispo County has cooled so far in 2018. • Sales of condominiums dipped 9% in the first half of 2018 compared with the first half of 2017. This trend is also reflected in Monterey (-13%), Santa Barbara (-11%) and Ventura (-6%) counties. • Unlike the single-family home market, where price appreciation continues at a steady pace, the median price of condominiums shows greater fluctuations. • In the second quarter of 2018, the year-over-year median condominium price decreased 1.2% from the second quarter of 2017. • San Luis Obispo County has a lower median condominium price than in Monterey, Santa Barbara and Ventura counties. Apartment rents are lower in San Luis Obispo County than in Monterey, Santa Barbara and Ventura counties. • Effective monthly rent8 in San Luis Obispo County averaged $1,467 in the second quarter of 2018, up 3.4% from the same period a year earlier. • -Rent increases have subsided significantly from their 2015 and 2016 highs, where year-over-year increases were around 10%. • The Central Coast region has had persistently low vacancy rates, reflecting the particularly strong demand for and severe lack of supply of rental housing. • San Luis Obispo County’s apartment vacancy rate is lower than in Monterey (2.4%), Santa Barbara (3.3%) and Ventura (3.5%) counties. The County vacancy rate has averaged less than 1% in the last two years, reflecting an extreme need to bring more apartment units online. APARTMENT MONTHLY EFFECTIVE RENT Central Coast Counties, Q1-2014 to Q2-2018 Source: Axiometrics; Analysis by Beacon Economics, LLC $1,800 $1,200 $1,400 $1,600 $2,000 $1,000Monthly Effective Rent ($)Seasonally AdjustedQ1-14Q2-14Q3-14Q4-14Q1-15Q2-15Q3-15Q4-15Q1-16Q2-16Q3-16Q4-16Q1-17Q2-17Q3-17Q4-17Q1-18Q2-18Monterey County Santa Barbara County San Luis Obispo County Ventura County 8 Asking (market) rent less concessions and discounts. Effective rent is also known as net rent. 54 55 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE 2018 CCEF FORECAST - RESIDENTIAL REAL ESTATE Permitting has been disappointing so far in 2018. Just 316 residential construction permits were issued in the first half of 2018, down 52% from the first half of 2017. • 234 single-family permits were issued in the first half of 2018, down 35% from a year earlier. • Only 82 multifamily permits were issued in the first half of 2018, down 73%. This is troubling news given the extremely low apartment vacancy rate. • Almost half (47%) of the single-family construction permits were issued in the unincorporated areas of the County. Yet this is a 48% decrease from the same period in 2017. o San Luis Obispo, the County’s largest city, had the largest number of single-family construction permits issued (43). • New Cal Poly San Luis Obispo dormitories opened in September, providing housing for about 1,475 first-year students,9 or almost one-third of the 2018 freshman class.10 o This new student housing may help ease the low apartment vacancy rate in the City of San Luis Obispo but does little to alleviate the very tight rental market that pervades the County as a whole. San Luis Obispo’s permitting activity is low not just compared with one year ago but also compared with the State and elsewhere in the Central Coast. • Statewide, 12% more residential construction permits were issued in the first six months of 2018 than the same period in 2017. Residential permits were up 43% in Monterey County and down 29% in Santa Barbara County during the same period. • The drop in residential permits in San Luis Obispo County was similar to that in Ventura County (-48%). • At the city level, only San Luis Obispo had more permits issued for both single- and multifamily in the first half of 2018 than in the first half of 2017. • Pismo Beach was the only other city in San Luis Obispo County with any multifamily construction permits issued in the first half of 2018. Construction Activity *Note Single and Multifamily construction permits are non-seasonally adjusted. The total depicted is moving average of total residential new construction permits. San Luis Obispo County New Construction Permits Issued by City Single-Family New Permits City 2017 Year-to-Date 2018 Year-to-Date Percent Change Arroyo Grande 41 12 -70.7% Atascadero 30 10 -66.7% Grover Beach 7 8 14.3% Morro Bay 9 33 266.7% Paso Robles 10 13 30.0% Pismo Beach 24 4 -83.3% San Luis Obispo 24 43 79.2% Unincorporated/Other San Luis Obispo County 215 111 -48.4% San Luis Obispo County 360 234 -35.0% Multi-Family New Permits City 2017 Year-to-Date 2018 Year-to-Date Percent Change Pismo Beach 128 2 -98.4% San Luis Obispo 51 65 27.5% Unincorporated/Other San Luis Obispo County 125 15 -88.0% San Luis Obispo County 304 82 -73.0% RESIDENTIAL CONSTRUCTION PERMITS ISSUED San Luis Obispo County, Q1-2008 to Q2-2018 Source: Construction Industry Research Board; Analysis by Beacon Economics, LLC 400 100 200 300 500 0Number of Units Permitted (Quarterly)MF + SF Total (Moving Average)Multi-Family Single-FamilyQ1-08Q3-08Q1-09Q3-09Q1-10Q3-10Q1-11Q3-11Q1-12Q3-12Q1-13Q3-13Q1-14Q3-14Q1-15Q3-15Q1-16Q3-16Q1-17Q3-17Q1-18SAN LUIS OBISPO COUNTY CONSTRUCTION PERMITS ISSUED BY CITY Source: Construction Industry Research Board; Analysis by Beacon Economics, LLC *Note: Year-to-date as of end of second quarter. Figures represent actual permits issued not seasonally adjusted. 9 Source: University Housing, Cal Poly San Luis Obispo. Accessed Sept. 28, 2018, from http://www.housing.calpoly.edu/student-housing/residence-halls-and-apartments/ytt 10 Based on a total of 4,486 enrolled freshmen in fall 2018. Source: Preliminary New Freshman Profile Fall 2018, Cal Poly San Luis Obispo. Accessed Oct. 3, 2018, from https://admissions.calpoly.edu/prospective/ profile.html 56 57 The Residential Market - A Brief Overview As housing costs continue to rise, housing affordability has become one of the major issues facing San Luis Obispo County. As you can imagine, there are many opinions on how to address the problem and those discussions often come with associated and heated politics. A number of differences between the City of San Luis Obispo and North County markets are discussed below. San Luis Obispo The average price for a home in the City of San Luis Obispo is approximately $450 per square foot. This is an increase from $410 last year. In addition, the homes that have been selling are larger—now averaging over two thousand square feet. Construction time for a new single family residence has pushed out from 6 to 9 months. All in all, this translates to approximately $937,000 for the average (median $800,500) new home is San Luis Obispo. There were approximately 258 units sold through the third quarter of 2018. Needless to say, not everyone can afford these prices and many residents commute from more affordable areas such as Santa Maria, South San Luis Obispo County, and North County. North County In the North County the residential market sales volume has decreased to 916 single family units from 978 units last year. Average prices have increased from $534,500 to $575,000 ($521,250 median price) for a 1,900 sq. ft. house—approximately $302 per sq. ft. In short, compared to last year, in the North County, as in San Luis Obispo, home sales are more expensive, larger, and the overall number of sales has decreased slightly. Housing Related Projects in the City of San Luis Obispo There is noticeable construction within the City of San Luis Obispo and in immediate surrounding areas. Noted projects at or near completion include: • The Avivo Townhome project is in its final phase west of Sacramento Street. • Sierra Meadows and Toscano, off Prado Road, are actively moving through their phases for single-family detached homes. • Wingate Homes, Righetti Ranch, the Jones Property, and West Creek – all located in the Orcutt Area Specific Plan – are proceeding through construction. • Chinatown is partially completed. 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Commercial Real Estate Key Issues: by Steve McCarty and Steve Davis, McCarty Davis Commercial Real Estate Confidence in Commercial Real Estate Increased Construction Costs Rising Interest Rates, Recession Worries? 58 59 • Garden Street Terraces are moving toward completion. • 22 Chorro Street, with 27 residential units and approximately 2,000 sq. ft. of commercial space, is under construction. • The Yard, 43 residential units throughout 8 new buildings on the former Waste Management site, is under construction. Upcoming projects still include: • Avila Ranch, on Buckley south of the County Airport, has been approved for 720 units. • San Luis Ranch, the former Dalidio project, has been approved for 580 homes plus hotel and commercial space. • The Junction, 69 residential units and approximately 3,000 sq. ft. of commercial space on Santa Barbara Street by Miners is on the books. • Numerous other projects are also working their way through the planning and design pipeline. Housing unit sales from 2008 through 2018 in San Luis Obispo and North County are illustrated in the summary table below. 3rd Quarter 2018 Annual Data 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 San Luis Obispo ****** # Units Sold 159 163 191 215 273 282 259 283 337 275 258 Median Price $635,000 $569,000 $550,000 $535,000 $535,000 $618,500 $654,500 $667,000 $661,000 $700,000 $800,500 North County # Units Sold 638 702 698 892 991 1045 1032 1138 923 976 919 Median Price $390,000 $340,000 $296,000 $270,000 $305,000 $355,000 $375,500 $404,500 $422,421 $483,000 $521,250 RESIDENTIAL UNIT SALES DATA Source: MLS Data; Compiled by McCarty Davis Commercial Real Estate Commercial Markets Key activities and trends in San Luis Obispo County’s commercial real estate are outlined in the following sections and broken out by regions and individual market segments. City of San Luis Obispo Office Office vacancy has inched slightly downward from 5.4% in 2017 to 4.2% this year. Base inventory is approximately 2,969,200 sq. ft. Approximately 35,900 sq.ft. of inventory was added this last year. Leasing activity has been vibrant. Office space, which has been the slowest market segment to absorb, has been filling up. The reduction in vacancy has reduced the number of office space options for tenants. Second generation spaces are leasing at lower rates than new construction. However, spaces over 5,000 sq. ft. are difficult to find and tenants have been turning to new construction to meet their needs. The Broad Street corridor from Tank Farm Road to the East Airport area has been the focus of new commercial activity with a mix of user types. Harris’ new legal offices have just been added at a prominent Broad Street location. Meathead Movers are moving their offices to a new building across from the airport. At 892 Aerovista, approximately 36,000 sq. ft of office space has just been completed and fully occupied, filled mainly by medical and financial tenants. The Airport Business Center has been absorbing to the point where its ownership has triggered construction of the next phase of development. New market base rents for these assets are approximately $2.25 per sq. ft NNN (with some dollars being given for Tenant Improvements). Given land costs, fees, and increasing construction costs, any new office buildings coming on to the market will be $2.00+ per sq. ft., NNN. In addition to the cost of shell construction, TI costs for office build-outs have moved up to the $100+/sq. ft range. Medical users have been a big part of the new absorption and activity. Two large medical users account for over 60% of the occupancy at 892 Aerovista. Most recently, the older 30,500 sq. ft. medical campus on California Boulevard sold for $5,683,750 ($186.35 per sq. ft.) and will be given new life through updating. Additional square footage will be built there as well. Larger medical providers are continuing with strategic additions and consolidations with their various clinics. Generally, office sale prices in the San Luis Obispo area in the $300 - $400+ /sq. ft. range. A nicely finished, first floor suite (1,379 sq. ft.) at 805 Aerovista sold this spring for $515,000, or $373/sq. ft. On the larger side (18,447 sq. ft.), 3701 South Higuera St. sold for $5,600,000, which translates to $304 per sq. ft. 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 60 61 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Retail Retail vacancy in the City of San Luis Obispo remains relatively low (5.0%), and has increased a percentage point over last year. Hardly any new stock has been added and the present retail inventory base is approximately 4,189,400 sq. ft. When the retail vacancy data is parsed, it is interesting to note that the larger vacant spaces, formerly housing the likes of Gotthshalks’s and Staples, have created the bulk of the vacancy, while smaller square footages, 5,000 sq. ft. and under, have, for the most part, been faring well. There is turnover in these spaces, but new tenants generally follow within a reasonable time frame. The larger brick and mortar vacancy issues with national and regional tenants are the fall-out of changing consumer trends and continued growth in online retail sales. The former Sears and Forever 21 have been broken up and are currently being renovated into a greater number of new users with smaller footprints. Downtown SLO Downtown San Luis Obispo is an iconic location for both tourists and locals. The demand for ownership of downtown assets remains robust and larger properties, when they become available, create strong interest. This last year the Naman properties went on the market and there were immediately multiple buyers. The mid-downtown, multi- building asset of approximately 19,300 sq. ft., reportedly sold for $13,125,000 or approximately $680 per sq. ft. of usable area. By way of comparison, a 12,930 sq. ft. building in the same block, 736 Higuera, sold for $5,199,600, or approximately $402 per sq. ft. There remains a vitality to downtown San Luis Obispo as other community’s downtowns have experienced increasing vacancies and diminution of their former cache. Industrial It is difficult for users to find industrial space in San Luis Obispo. The vacancy has declined slightly from an already previous low of 1.4%, and for 2018, stands at 1.28%. Very little inventory has been added to the market, approximately 70,700 sq. ft., and there is not much in the pipeline so we anticipate another year of low vacancy. Lockheed has informed their landlord that they will be vacating the 80,000 sq.ft. they currently occupy and demand for the space has been strong. The standing inventory of industrial space has just tipped over the 4,000,000 sq. ft. mark. Space availability over 15,000 sq. ft. is virtually absent from the market. Rents are about the same as last year with quoted industrial rents in the $.80 – $1.25 per sq. ft. NNN range depending on the size of the space. The East Airport area of San Luis Obispo has seen the strongest concentration of industrial growth in the past few years. Parcel sales in that area have demonstrated values over $20 per sq. ft. Upated 3rd Qtr 2018 Indus trial / Warehouse Retail Func tioning Office Functioning 2002 2.8%1.9%9.9% 2003 3.8%2.4%8.4% 2004 6.4%2.2%5.4% 2005 4.0%1.7%3.2% 2006 4.3%1.8%4.7% 2007 2.3%1.4%3.5% 2008 5.4%3.0%6.1% 2009 6.1%5.6%9.7% 2010 9.1%5.1%12.6% 2011 8.7%3.4%11.6% 2012 4.5%3.7%8.6% 2013 1.9%1.8%6.5% 2014 3.1%2.7%7.5% 2015 2.3%1.3%5.3% 2016 1.6%5.6%3.8% 2017 1.4%4.0%5.4% 2018 1.3%5.0%4.2% COMMERCIAL VACANCY RATES San Luis Obispo City Metropolitan Area Source: McCarty Davis Commercial Real Estate 62 63 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Office This segment of the market has had the largest vacancy swings over the last 10 years and has been the weakest segment for the region. Office vacancy, just short of doubling, has moved upward from 7.8% to 13.5% in 2018. There is now approximately 59,528 sq. ft. of standing inventory on the market; this is on a base of approximately 442,000 sq. ft. and again, minimal office inventory has been added. Small office buildings are selling for between $200 and $300 per sq. ft. Community Health Centers is constructing new medical offices in Templeton of approximately 26,000 sq. ft. As they occupy the new facility they will transition from their current offices, vacating medical space that will need to be filled. Given current conversations, there appear to be a number of medical groups interested in occupying the space. Industrial Paso Robles’ industrial space, although close to holding constant, is showing slight improvement with a 5.1% vacancy rate for 2018, down from 5.8% in 2017. There is approximately 180,200 sq. ft. of space currently available. Base inventory has grown slightly to approximately 3,530,000 sq. ft. for 2018. An interesting aspect of the market is that available space has been absorbed quickly. The former Paris Precision building of approximately 200,000 sq. ft. went vacant, was purchased, broken down into multiple sections, and mostly leased out within the year. The majority of the new inventory-added vacancies that have been absorbed have been related to viticulture as wineries and support industries continue to expand. Land values for small, finished parcels in east Paso Robles are still in the $5.00 to $10.00/sq. ft. range. The City of Paso Robles sold two parcels comprising 1.4 acres, both positioned for redevelopment/better futures. One on Riverside Drive (acre +), and a small ancillary parcel near downtown, sold for $1,525,000 to a local businessman/investor. At just land values alone, this works out to approximately $25 per sq. ft. Paso Robles and North County Updated 3rd Qtr 2018 Industrial / Warehouse Retail Functioning Office Functioning 2003 9.4%1.9%1.2% 2004 10.7%< 1%1.8% 2005 3.5%< 1%1.2% 2006 5.0%< 1%5.2% 2007 2.8%< 1%5.6% 2008 7.5%2.2%7.7% 2009 8.6%2.7%13.9% 2009 13.2%4.1%24.1% 2010 8.0%4.5%17.5% 2011 7.7%3.5%18.4% 2012 6.5%4.8%18.3% 2013 5.7%3.3%6.6% 2014 3.6%2.6%14.3% 2015 1.1%2.8%7.5% 2016 9.3%2.1%9.2% 2017 5.8%1.1%7.8% 2018 5.1%2.6%13.5% COMMERCIAL VACANCY RATES Paso Robles Metropolitan Area Source: McCarty Davis Commercial Real Estate Retail Given the smaller population base of Paso Robles, as compared to South County, retail has been a strong suit over the years. It currently has a base of approximately 4,650,000 sq. ft. Not much retail inventory has been added since last year, similar to prior years. The retail vacancy rate was very low in 2017 (1.1%) and has ticked up to 2.63% in 2018. The approximate 122,092 sq. ft. of vacancy is comprised mostly of small spaces. As noted in the San Luis Obispo segment, retail is continuing to evolve and bigger units are trending to go dark. The 47,000 sq. ft. Orchard Supply Hardware on Theater Drive has posted closing signs. 64 65 Hotels in San Luis Obispo and North County The many hospitality projects that were entitled are now moving through the building phase and signs of their construction are apparent. A number of hospitality properties have sold this last year. Among the most notable are: 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Row Crops This past year approximately 230 acres of row crops sold in South County for $6,500,000. In the break-out of farmable and non-farmable ground, farmable ground was valued at approximately $51,500 per acre. Vineyard Sales North County had a number of key vineyard sales this last year: 3330 Pleasant Road $8,500,000 149 ac Four Palms Vineyards $16,838,500 98.2 ac Shandon Valley Vineyards $20,656,000 204 ac Shell Creek Road $36,700,000 68 ac In breaking down sales, the general guidelines are as follows: East Side Paso Robles runs in the low $40,000s to $50,000/ac. A recent outlier in Shandon reported $74,000/ac. West Side sales have been at $50,000/ac and up. There was recently a West Side sale at $100,000/ac for a small vineyard. Break-outs for actual farmable ground can be very complex as there is often a residential component included as part of the vineyard asset. San Simeon Quality Inn - San Simeon $5,000,000 Paso Robles Courtyard Marriott $15,000,000 456 Embarcadero - Morro Bay $10,000,000 Commercial Investments Already low capitalization rates, commonly called “Caps” or “Cap Rates”, have been similar to last year. Historically, higher valuations have been centered around San Luis Obispo with values softening as they radiate outward, like concentric circles. Now, with the difficulty of finding investment properties, the cap rates have become similar over geographic areas. Determining a cap rate has become more of an art than science. Exchange monies have led to further exchanges. Transactions have occurred across the board: apartments, self- storage, office, retail, hotels, mobile home parks, viticulture—and each with their own metrics for valuation. With greater variability by product type, it is becoming more difficult to assign a cap rate predominately by location. Examples of commercial buildings: 1704 Spring St.4,800 sq. ft. $1,050,000 approximate 5.3 cap 4120 Horizon 8,600 sq. ft. $1,650,000 approximate 6.1 cap 445 Higuera St.7,000 sq. ft. $2,200,000 approximate 6.5 cap 7 Archer St.8,304 sq.ft $3,085,000 approximate 5.8 cap (imputed) 2238 Broad St. 9,938 sq. ft $3,500,000 approximate 4.8 cap 3195 McMillian 14,152 sq. ft. $2,900,000 approximate 6 cap 3701 S Higuera 18,447 sq. ft $5,600,000 approximate 6.9 cap 1135 Santa Rosa 11,780 sq. ft $7,350,000 approximate 4.2 cap Appraisers have been wrestling with a larger variance in cap rates as investors seek out specific investments in smaller areas. This deemphasizes the investment location somewhat and puts more emphasis on the type of investment or franchisee, giving cap rates a wider range. These assets were selling between 7 and 8 caps. Hospitality cap rates are typically higher than non operational assets where there is no associated business or operational component. 65 66 67 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Apartment Notes In 2018, there were five sales between $1,200,000 and $4,000,000 and numerous sales below the $1,000,000 threshold. In their analysis these cap rates are typically between 3 and 4s. Following are demonstrated capitalization rate ranges over the last fifteen years for the Central Coast market area: 2002 9.0 to 9.5 2003 7.0 to 8.0 2004 6.5 to 7.5 2005 5.5 to 6.5 2006 4.5 to 6.5 2007 5 to 7 2008 4.5 to 8 2009 5.5 to 9 2010 6.5 to 9 2011 5.5 to 9.7 2012 5.5 to 8.5 2013 5.5 to 8.5 2014 4.5 to 8.5 2015 4.5 to 7.0 2016 4.0 to 6.5 2017 4.0 to 6.5 2018 4.0 to 6.5 Cannabis Activity Cannabis activity on the Central Coast continues to be an interesting market segment to follow. Last year saw a bit of the “Wild West” syndrome play out as Grover Beach moved to license both dispensaries and other cannabis related activities. Property values in the industrial area rose from roughly $150/sq. ft. to over $500/sq. ft. for buildings. Prices have now fallen back into a range of about $300/sq. ft. Lease rates for cannabis related businesses are in the $2.00 - $3.00/sq. ft. range. This has caused the migration of many businesses that had occupied the Grover Beach industrial area to other locations. The City of Grover Beach approved four dispensary operators and it appears that only two of those operators/ locations will actually operate. This is not uncommon in the industry as this product has attracted a wide range of people with various backgrounds and financial and business capabilities. The City of San Luis Obispo has been patient in forming their cannabis ordinances and appears to be the only City in the County that will allow a retail, non-medical dispensary to operate (they have discussed allowing two such dispensaries). The County has approved their Land Use Designations which has forced many existing operations to cease as they are no longer are allowed to cultivate at their current locations. There has recently been a surge in demand for smaller non-cultivation related (manufacturing, testing, distribution, etc.) activities in the County. 68 69 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE 2018 CCEF FORECAST - COMMERCIAL REAL ESTATE Conclusion Continuing confidence in commercial real estate over the last five years is a precursor to, “when will this change” conversations. There are various changes occurring that could affect commercial real estate over the coming year. Interest rates are rising although it is not clear how significant of an impact that will have on continued growth. But the higher rates for loans will affect cash flows and affordability. Mixed-use projects are becoming more common in both proposed plans as well as in terms of interest from buyers. There is strong interest from developers for housing projects as well. We are, however, seeing some developers putting entitled projects up for sale, causing one to wonder how long they see strong growth in jobs and incomes continuing. Increased housing costs are a key factor in determining where people live and work. High housing costs are causing problems for employers and affecting their ability to attract key employees. Given the large volume of transactions this past year, it appears that people could be repositioning themselves for the next cycle of the economy. Despite the few warning signs flickering in the distance, the Central Coast remains a desirable place to locate your business, operate, and to invest. To illustrate the capitalization influence on valuation, let us assume a commercial building produces a net income to the investor of $100,000 per year. The declining market cap rates would correlate to the approximate purchase prices according to the following years: 2002 $1,053,000 2003 $1,250,000 2004 $1,333,333 2005 $1,538,000 2006 $1,538,000 2007 $1,428,000 2008 $1,250,000 2009 $1,111,111 2010 $1,111,111 2011 $1,031,000 2012 $1,818,000 2013 $1,818,000 2014 $1,818,000 2015 $1,428,000 2016 $1,538,000 2017 $1,538,000 2018 $1,538,000 A major community issue is the upcoming closing of the PG&E nuclear power plant, Diablo Canyon. The closing will affect jobs and trickle-down income for many parts of the community. From a commercial real estate perspective, there is both a large office building (one of, if not the, biggest in the County) and a large warehouse at the plant that will likely become available for lease. When these buildings are available, they will, in one fell swoop, add 3 to 4 years of commercial absorption into the market. However, although breathtaking and sitting on the coast, the location is not central and uses within the Coastal Zone may be problematic. 70 71 San Luis Obispo County’s population growth is slowing, with few parts outside of unincorporated areas having added significant numbers from 2017 to 2018. The natural growth rate has been quite slow, with relatively few women in child-rearing years. Additionaly, many residents with bachelor’s degrees moved to find better pay. San Luis Obispo County is following Central Coast and statewide trends and adding Hispanics while decreasing its share of non- Hispanic whites. As other Central Coast counties and the State sustained increased highway congestion, San Luis Obispo County residents have experienced shorter commutes even as single-occupancy-vehicle use has grown. 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS Population Estimates San Luis Obispo County is home to 280,101 people in 2018, a 0.32% increase from 2017 and a 2.5% increase from 2013. Compared with the rest of the Central Coast, San Luis Obispo County’s growth in population is lagging; it added the fewest people in absolute terms over the last five years. All four Central Coast counties have had lower population growth than California as a whole over the last five years. The City of San Luis Obispo is currently the largest city by population in the County, at 46,548, but remains smaller than unincorporated areas. Year-to-date changes in San Luis Obispo include: • The population increased 0.32%, outpacing only Ventura County, the slowest-growing Central Coast county, which grew 0.26%. • Population growth statewide (0.8%) far outpaced that of all four Central Coast counties. • Among cities, San Luis Obispo grew the most, at 0.27%. • Unincorporated areas grew faster, 0.62%, more than any city. • Paso Robles, Grover Beach and Morro Bay sustained slight declines, at -0.01%, -0.24% and -0.23% respectively. POPULATION CHANGE IN THE CENTRAL COAST Fastest Growing Counties, 2013-2018 Source: California Department of Finance; Analysis by Beacon Economics, LLC 0 5,000 10,000 15,000 20,000 25,000 Santa Barbara Ventura Monerey San Luis Obispo Demographics Overview by Joshua Baum, Beacon Economics LLC RACE AND ETHNICITY, SAN LUIS OBISPO COUNTY Source: American Community Survey; Analysis by Beacon Economics, LLC 60% 0% 20% 40% 80% 2012 2017 Non-Hispanic White Non-Hispanic Black Non-Hispanic Asian Hispanic or Latino ( of any race) California San Luis Obispo County Monterey County Santa Barbara County Ventura County 2012 2017 39% 43% 40% 41% 42% 44% WOMEN AGED 15-44 Source: American Community Survey; Analysis by Beacon Economics, LLC 37% 35% 36% 38% 72 73 Race and Ethnicity The population of San Luis Obispo County is less diverse than the State as a whole. In 2017, 68.7% were non- Hispanic white, 22.6% were Hispanic or Latino (of any race), 3.6% were non-Hispanic Asian and 1.6% were non- Hispanic black. Similar to statewide trends, though, the number of Hispanics has been increasing since 2012, from 21.5% of the population in 2012 to 22.6% in 2017. In contrast, the non-Hispanic white population declined from 70.1% in 2012 to 68.7% in 2017. California’s non-Hispanic white population fell from 39.2% in 2012 to 27% in 2017. County Total 280,101 891 0.32% Incorporated 159,462 149 0.09% Unincorporated 120,639 742 0.62% San Luis Obispo 46,548 124 0.27% El Paso De Robles 31,559 -3 -0.01% Atascadero 31,147 12 0.04% Arroyo Grande 17,912 38 0.21% Grover Beach 13,560 -33 -0.24% Morro Bay 10,503 -13 -0.12% Pismo Beach 8,233 24 0.29% POPULATION GROWTH IN SAN LUIS OBISPO COUNTY, 2018 Source: California Department of Finance; Analysis by Beacon Economics, LLC Age San Luis Obispo County’s population is aging. As of 2017, the latest year for which data is available, the median age was 39.6, compared with 38.1 for California. Nearly two-fifths of the population were senior citizens (65+) compared with just 13.9% of California’s population. This is not necessarily a Central Coast trend, though. Santa Barbara (33.8) and Monterey counties (34.3), the two youngest in the Central Coast, have median ages significantly below that of California (36.5). Some five-year trends (2012 to 2017): Less than 5 5 to 19 20 to 34 35 to 49 50 to 64 65 and older 2012 2017 0.0% 20.0% 5.0% 10.0% 15.0% 25.0% SAN LUIS OBISPO COUNTY AGE BREAKDOWN Source: American Community Survey; Analysis by Beacon Economics, LLC • San Luis Obispo County’s median age increased from 39.2 to 39.6, while California’s increased from 35.5 to 36.5. • The share of the County’s population under 5 declined from 4.8% to 4.6%, while California’s share dropped from 6.7% to 6.2%. • Despite being the home of Cal Poly San Luis Obispo, the County’s share of 20- to 34-year-olds dropped from 22.6% to 21.6%; by contrast, the state’s share increased slightly, from 22.1% to 22.3%. • Seniors increased from 16.3% to 19.4%, while the statewide share increased by a smaller margin, from 12.1% to 13.9%. • The share of women in child-bearing years (15 to 44) in San Luis Obispo County decreased from 39.8% to 37.9%, with the statewide share falling from 41.6% to 40.7%. 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS Location 2018 1-Year Abs. Change 1-Year Pct. Change MEDIAN HOUSEHOLD INCOME Source: American Community Survey; Analysis by Beacon Economics, LLC $80,000 $20,000 $40,000 $60,000 $10,000 2012 2017 $0Household IncomeCalifornia San Luis Obispo County Monterey County Santa Barbara County Ventura County 74 75 Income Median household income in San Luis Obispo County was $71,880 in 2017, nearly matching the State’s median. Although it had increased since 2012, the County’s 29.3% rise in median household income has trailed that of the state, largely because of smaller gains by those with bachelor’s degrees. • Ventura County was the richest in the Central Coast region in 2017, with a median household income of $82,857. This was likely due to its proximity to major job centers in the Los Angeles MSA. • San Luis Obispo County’s 19.3% increase in household income from 2012 to 2017 trailed California’s 23.1% increase. Education The County, as of 2017, had a high level of high school graduates and those with advanced degrees compared with the rest of the Central Coast and California as a whole. But compared with 2012, San Luis Obispo County is losing those with some college education and those with bachelor’s degrees. The County’s relatively low incomes for those with bachelor’s degrees are likely to blame as workers move to take higher-paid positions elsewhere. Trends among residents 25 and older include: • Only 8% of the population lack a high school diploma or its equivalent, the lowest rate in the Central Coast and less than half that of California (16.7%). • San Luis Obispo County’s lowest-skilled workers (those with a high school diploma or less) earned $32,472 in 2017 (an increase of 19.3% over 2012), more than their counterparts in the rest of the Central Coast and California. • Similar to the other Central Coast counties and California as a whole, San Luis Obispo County’s share of the population with at least a high school education increased from 91.2% in 2012 to 92.1% in 2017. • San Luis Obispo County increased its share of the population with at least a bachelor’s degree from 2012 (33.5%) to 2017 (34.6%), but did so more slowly than California (30.9% to 33.7%) and the broader Central Coast region. • The share of County residents with bachelor’s degrees (lacking advanced or professional degrees) fell from 21.7% in 2012 to 19.8% in 2017. • County workers with bachelor’s degrees increased their incomes just 0.2% from 2012 to 2017, a lower rate than in California (14.9%) and the rest of the Central Coast. • The County’s share of population with graduate or professional degrees increased from 2012 (11.8%) to 2017 (14.8%), representing the largest increase in the Central Coast and more than California (11.3% to 12.6%). • San Luis Obispo County residents with graduate or professional degrees made $71,371 in 2017, the least in the Central Coast and much less than California ($85,555). 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS EDUCATIONAL ATTAINMENT, SAN LUIS OBISPO COUNTY Source: American Community Survey; Analysis by Beacon Economics, LLC Graduate or professional degree Bachelor’s degree Some College High School Graduate Less than High School Graduate 2017 2012 2017 INCOME BY EDUCATION Source: American Community Survey; Analysis by Beacon Economics, LLC $80,000 $20,000 $40,000 $60,000 $100,00 High School Graduate or less Some College $0 California San Luis Obispo County Bachelor’s degree Graduate or Professional degree Monterey County Santa Barbara County Ventura County 76 77 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS 0%5%10%15%20%25%30%35%40%45% SAN LUIS OBISPO COUNTY INCOME BY EDUCATION Source: American Community Survey; Analysis by Beacon Economics, LLC High School Graduate or less Some College Bachelor’s degree Graduate or Professional degree 2012 2017 $0 $20,000 $40,000 $60,000 $80,000 NATURAL GROWTH RATES, SAN LUIS OBISPO COUNTY Source: American Community Survey; Analysis by Beacon Economics, LLC 2012 2013 2014 2015 2016 2017 -30% -20% -10% 30% 0% 10% 20% 40% Natural Growth Rate 0.30% 0.40% 0.80% 0.50% 0.60% 0.70% 0.90% -40% 0.10% 0.20% 0.00% 78 79 Migration San Luis Obispo County’s population increase of 452 in 2017 was primarily driven by migration; the natural increase (births minus deaths) totaled only 42, or 7.7% of the total increase. This stands in contrast to the State, where most of the recent growth has been through natural increase. Not only is the natural rate of growth in the County at a five-year low, it has consistently had the lowest natural rate of growth over the past five years in the Central Coast and lower than California as a whole. • San Luis Obispo County experienced positive net domestic migration in 2016 (874) and 2017 (35). • Population growth in San Luis Obispo County in 2017 mainly came from foreign migrants, who represented 83% of the growth. • San Luis Obispo County’s natural rate of growth has fallen over the last five years from 0.13% to 0.02%, following Central Coast and statewide trends. • Monterey County had the highest natural rate of growth in the Central Coast in 2017 at 0.82%, likely because of its younger population. Commuting Times and Modes Although its main highways and arteries face congestion during peak commuting periods, San Luis Obispo County is not known for traffic jams. From 2012 to 2017, most residents experienced a slight decrease in commuting time. The exception is the residents who depended on public transportation. Notable trends include: • San Luis Obispo County’s median commuting time fell over the past five years (22.1 to 21.5 minutes). • All other Central Coast counties had increases, with the greatest in Ventura County (24.5 to 29.1 minutes). • More San Luis Obispo County residents are using single-occupancy vehicles to get to work than five years ago (73.1% to 76.8%). Carpooling commuters decreased from 11.2% to 9.9%. • Mass transit use also declined from 2.2% to 0.9% as transit commutes increased by over 20 minutes in each direction. • Other counties in the Central Coast had a decrease in use of mass transit, but did not have so dramatic an increase in commuting time. 2018 CCEF FORECAST - DEMOGRAPHICS 2018 CCEF FORECAST - DEMOGRAPHICS California 73.4%11.1%5.2%27.5 Monterey County, California 71.4%12.6%2.5%22.8 San Luis Obispo County, California 73.1%11.2%2.2%22.1 Santa Barbara County, California 67.3%13.4%3.3%18.7 Ventura County, California 76.3%13.2%1.3%24.5 2012 COMMUTES Source: American Community Survey; Analysis by Beacon Economics, LLC Geography Drive Alone %Carpool %Transit %Median Commuting Time California 73.9%10.0%5.0%29.8 Monterey County, California 72.0%8.6%1.4%22.5 San Luis Obispo County, California 76.8%7.9%0.9%21.5 Santa Barbara County, California 68.7%12.8%2.0%19.5 Ventura County, California 79.7%9.9%0.9%28.1 2017 COMMUTES Source: American Community Survey; Analysis by Beacon Economics, LLC Geography Drive Alone %Carpool %Transit %Median Commuting Time DESIGN BY AMF MEDIA GROUP Central Coast Economic Forecast 2018 Beacon Economics 5777 W Century Blvd, Ste 895 Los Angeles, CA 90045 (310) 571-3399 Beaconecon.com