INLAND EMPIRE

QUARTERLY ECONOMIC REPORT RIVERSIDE VOL. 27 NO. 1

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SAN

BERNARDINO

COUNTIES,

JANUARY 2016

CALIFORNIA $5.00

INLAND EMPIRE Job QUALITY 2011 - 2015 John E. Husing, Ph.D.

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fundamental question often raised for the Inland Empire has been the quality of its job growth. Here, the results are somewhat surprising. During the years 2011-2015 inclusive, the inland area added 187,967 jobs. That took the economy from 1,159,717 to 1,347,683, a growth rate of 16.2% (see Exhibit 5). In this period, California grew from 14,508,398 to 16,530,717, up 1,932,408 or 13.2%. Both the Inland Empire (-9,050) and the state (-27,558) lost government jobs in the 2011-2015 period. That left the Inland Empire’s private sector jobs plus its schools systems up by 197,017 and the state up by 1,932,408. The distribution of these job growth levels provide an interesting perspective on job quality (Exhibit 1).

Low paying sectors with median incomes of under $30,000 in each segment represented 41.8% of private sector job growth in the Inland Empire from 2011-2015 (See Exhibit 2 for median incomes by sector). In California, these sectors were a much higher 50.8% of employment growth. There were 83,392 Inland Empire jobs created in this group from 2011 to 2015. Large shares of the new positions in this group were in population serving sectors: social assistance (22%), retailing (17%), consumer services (7%), eating and drinking (29%). Also, included were new people working in amusement (3%) and accommodation (2%). So were job changes in agriculture (-1%), temporary agencies (7%) and business support services (13%). It takes more than two people per family working in these sectors to provide a household with a middle class income of $65,000 to $70,000. If another person in a family has a worker Continued on page 2 January, 2016

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in one of the better paying sectors, a person in these sectors would bring them to that level. Moderate paying blue collar or technical sectors with median incomes of $45,000 to $55,000 in each segment represented 36.6% of private sector job growth in the Inland Empire during 2011-2015. In California, these sectors added only 18.3% of the state’s job growth. Here, the unintended consequences of state policies that are suppressing the growth of jobs needed by marginally educated workers to gain access to the middle class are clearly shown. The 72,135 jobs created in this group in the Inland Empire from 2011 through 2015 included growth in three sectors. Logistics operations (wholesale trade, public warehousing, transportation) had the largest share of this group’s growth (57%) due to the continued growth of imports at the ports of Los Angeles and Long Beach, plus the rapid expansion of fulfillment centers to process goods for delivery to Southern Californians buying on the internet. Construction job growth ranked second in this category (31%) mostly due to infrastructure and industrial projects. Manufacturing (12%) accounted for the smallest share of new jobs of this type as California has accounted for only 2.8% of the 868,000 production jobs created nationally since 2010. It takes one people per family working in these sectors plus another person in the low paying group to provide a family with a middle class income of $65,000 to $70,000.

Moderate paying office sectors with median incomes of $45,000 to $55,000 in each segment represented 17.6% of private sector job growth in the Inland Empire from 20112015. In California, these sectors added 11.9% of the state’s job growth. Families with one people per family working in these sectors also needed another person in the low paying group to reach a middle class income of $65,000 to $70,000. The 34,717 jobs created in this group in the Inland 2

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Empire from 2011 through 2015 included growth in three sectors. Health care employers added the largest share of jobs in this group (61%) as both population growth and the Affordable Care Act increased demand for these services. Health care includes a very large number of technical occupations requiring skill training at less than the bachelor’s level. Growth among K-12 teachers and classified staff ranked second in this group (29%) as the repair of education budgets allowed jobs to be restored. Employment in finance, insurance and real estate (10%) expanded a little as the mortgage refinancing, some new home sales, and overall population growth required more services. High paying sectors with median incomes over $55,000 in each group represented a weak 3.9% of private sector job growth in the Inland Empire from 2011-2015. In California, these sectors added 19.0% of the state’s job growth. The 7,733 jobs created in these sectors in the Inland Empire from 2011 through 2015 included employment changes in five categories. Management, professional and scientific firms represented more new jobs than the high paying group as a whole (120%). Its growth largely occurred as the Inland Empire’s economy has needed more managerial and professional services as its economy has recovered and expanded. The job growth share in higher education ranked second in this category (18%) as college and university budgets have healed after the recession. Mining firms (2%) had a little of the growth as the construction sector has needed raw materials to expand. The group’s greatest difficulty was shrinkage among information firms (-37% share) as newspapers cutback and printing was hit by adverse technological changes. Utilities (-3%) also shrank primarily due to retrenchment by Southern California Edison. Median income jobs in these five sectors are able to put people very near the middle class, though some require a second worker with a part time job. Clearly, the high paying sectors of the Inland Empire’s economy represent its greatest job growth challenge. Strategies For decades, the Inland Empire’s job growth has centered around sectors paying moderate incomes (blue collar/technical; office based) as well as lower paying sectors. This is largely the result of a population with low educational attainment levels. In 2014, the Census Bureau put the share of adults with high school or less education at 47.1% in San Bernardino County and 45.7% in Riverside County. These levels have come about largely in reaction to limited home building in Southern California’s coastal counties that has created huge price differentials January, 2016

compared to the Inland Empire and forced marginally educated families to migrate inland for dwellings they could afford to buy or rent (see Exhibit 13). The abuse of the CA Environmental Quality Act to stop housing projects has played a role in this dilemma. In the past decade however, the Inland Empire has begun to enter the stage of its development where families with bachelors or higher degrees have migrated inland for upscale new homes. This has primarily occurred in three areas (Exhibit 3). The greatest concentration is in an arc from Rancho Cucamonga around to Corona. There, the share of adults with four year degrees in several cities is competitive with those in Los Angeles (30.3%), San Diego (37.1%) and Orange (38.0%). These cities range from Chino Hills (44.9%) to Corona (27.7%). Another node is in the southwestern Riverside County cities of Temecula (33.7%) and Murrieta (28.1%). A third group includes Loma Linda (49.5%), Redlands (33.4%) and Grand Terrace (26.0%) in eastern San Bernardino County. Any short term strategy for developing greater growth of higher paying companies will likely evolve within a short distance of these three geographic areas. They provide employers with nearby access to workers many of whom will want to give up long range commutes. The more companies that are convinced to tap into these workers, January, 2016

the more likely it will be that the area’s college graduates will find local firms to their liking. Longer term, there is a critical need for strategies to raise the Inland Empire’s educational attainment. Here, concentration must be on three groups. First is the importance of moving toddlers through 12th graders with programs that will move them on to post-high school academic or skill based technical training. Second is the need to ensure that students who start academic programs have the tools and assistance to graduate with four year degrees. Third is the importance of developing workforce training at a scale commensurate with the huge size of the regional issue. It must provide marginally educated adults with the industry defined credentials and skills in occupations where trained workers are in scarce supply. Fortunately, there are now significant efforts aimed at all three of these challenges. Meanwhile, another set of strategies is needed that will define sectors in which the Inland Empire has location advantages but has not successfully organized itself to create working networks of mutually supportive private sector, education and local government leaders aimed at developing high paying jobs within them. One example is with the enormous logistics sector where an effort is needed to begin tapping into the engineering, development and production of the technologies it requires. Again, the region has a deficit in health care workers, but needs a defined effort to create the framework for providing the skilled technicians it needs. In addition, the region is home to the world’s largest geographic information system company that should provide an opportunity to develop a network aimed at expanding on that homegrown technology. Summary The Inland Empire economy has outperformed California in its good paying blue collar/technical sectors and office based sectors. This has allowed its job growth to include a much lower percentage of jobs in lower paying sectors (41.8%) than the state (50.8%). The region thus does not suffer from the huge split between low paying and high paying sectors that is plaguing California. However, its challenge is to begin concentrating on strategies that can overcome its deficit of job growth in higher paying sectors.  For further information on the economic analysis in the QER, visit Dr. John Husing’s website at: www.johnhusing.com You’ll also find pages on Dr. Husing’s background, speaking engagements, downloadable presentations, adventures, and other items of interest.

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EDUCATIONAL ATTAINMENT: HIGH SCHOOL OR LESS Adults, 25 & Over, by Region, 2014

Adult Educational Performance. The toughest economic issue facing the Inland Empire is the share of its adults that have a high school or less education. In 2014, the Census Bureau found that 47.1% of San Bernardino County’s population 25 and over were in this group. It was 45.7% in Riverside County. Those figures were below the Central Valley (51.9%) but above Los Angeles (43.4%), and well over the southern coastal counties (34.5%) and the expanded Bay Area (31.3%). This underscores the difficulty for the inland area in competing for firms needing well educated workers. It also emphasizes the need for successful educational strategies in the region.

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ASSESSED VALUATION Inland Empire, July 1, 1990-2015

Assessed Valuation. As of July 1, 2015, assessed valuation in the Inland Empire stood at $422 billion. That is a record level, up $3.2 billion or 0.8% above the previous high of $419 billion on July 1, 2008. In San Bernardino County, the increase in valuation was 2.8% above its 2008 high. The assessment roll was still down -0.8% from the 2008 record for Riverside County. Meanwhile, between 2008-2015, Southern California’s prices rose 8.7%. That means that the purchasing power of property taxes collected by the two counties is still significantly below their 2008 levels.

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JOBS LOCATED IN THE INLAND EMPIRE 1983-2015

Total Inland Empire Employment. The growth of jobs at the Inland Empire’s firms and agencies has brought its employment from a recession low of 1,159,717 in 2010 to a record 16,530,717 in 2015, up 187,967 jobs or 16.2%. The preliminary data shows 2015 employment up 45,033 jobs or 3.5% above the previous all-time high of 1,302,650 in 2007. The area’s 16.2% recovery in the period was more rapid that California’s 13.2% (not shown). The Inland Empire’s 2015 data will be revised in early March 2016 with signs that it will rise to a higher level (see Exhibit 8).

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S&P 500 STOCK AVERAGE - 5 YEARS

Stock Prices. Since the start of 2016, financial markets have fallen abruptly and have had trouble recovering. At the end of 2015, the S&P 500 stock average stood at 2,043.94. By January 20, 2016, it was down to 1,859.33, off -9.0%. An erratic recovery brought it back to 1,940.24 by January 29th. That was still off -5.1% from the end of last year. Financial markets sometimes have an impact on the “real” economy though economists point out that the markets have forecasted “nine of the last five” recessions. However, given the underlying stock market fears about oil prices and international trade, this bears watching. January, 2016

INLAND EMPIRE EMPLOYMENT ... Job Growth Remains Strong

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ith the full twelve months estimates of the Inland Empire’s job growth from 2014-2015, the difficulty analysts face is the fact CA Employment Development Department (EDD) estimates (48,200 jobs; 3.71%) must now be revised to U.S. Bureau of Labor Statistics (BLS) findings In 2015, these changes appeared relatively mild. In the half of 2015, EDD’s surveys showed the inland area gaining 51,550 jobs, up 3.99%. BLS’s hard data based on actual company filings put the growth at 53,847 jobs, up 4.21% (Exhibit 8). EDD found job growth slowing at the end of the year to their 3.71% estimate for the full year. This analyst is not comfortable with that great a slowdown but anticipates a third straight year of job growth over 50,000 jobs. Still, the annual averages from EDD’s twelve monthly surveys gives an idea of the share of growth that occurred in each sector in 2015 (Exhibit 9).

jobs (4.3%) as low interest rates led to more mortgage activity. Publishing and telecommunications lost -67 positions (-0.6%). DIRTY WORK, MODERATE PAY: 18,650 Jobs; 6.1% Blue collar and technical jobs in the Inland Empire grew by 18,650 jobs (6.1%) during 2015. Distribution and transportation added 10,025 workers (7.1%) as import activity expanded at Southern California’s ports and fulfillment operations expanded locally. Construction added 5,183 jobs (6.7%) as infrastructure and industrial projects continued and home building saw a little life. Manufacturing gained 3,442 positions (3.8%) despite the difficulty of doing business in California. These jobs also pay $45,000-$55,000. LOWER PAYING JOBS: 15,917 Jobs; 3.1% The Inland Empire’s lower paying sectors added 15,917 jobs (3.1%) in 2015. The largest growth was in eating & drinking outlets, up 5,925 (5.3%), followed by firms providing services to offices (5,092; 10.4%). Employment agencies ranked third (3,225; 8.1%). Amusement operations grew next (1,167 jobs; 6.7%) while the related accommodation group was up a little (258 jobs; 1.7%). Retailing gained a surprisingly weak 883 jobs (0.5%) as did other consumer services (492; 1.1%). Declines occurred in agriculture (-192; -1.3%) and social assistance (-933; -1.8%). These jobs pay under $30,000.

CLEAN WORK, GOOD PAY: 4,308 Jobs; 2.3% Job growth in sectors that pay a median of over $65,000 is estimated at 4,308, up 2.3% from 2014-2015. Management and professions led adding 3,233 jobs (6.5%). High education’s growth was 592 as budgets continued healing (3.4%). Federal and state government grew a little (317 jobs; 0.9%). Local government was up 275 positions (0.4%). Utilities lost -17 jobs (-0.3%). Mining contracted (-92; -7.2%).

COMMENT Last year, the QER forecasted that 2015 would see 51,250 more jobs, up 3.9%. This preliminary look at likely EDD revisions to match BLS growth (4.21 v. 3.99%) appears to show that could be a small underestimate. Unemployment was forecasted at 7.6%. It averaged 6.5% in 2015. 

CLEAN WORK, MODERATE PAY: 9,325 Jobs; 3.2% From 2014-2015, the Inland Empire’s sectors that primarily pay moderate incomes ($45,000-$55,000) to office-based workers are estimated to have gained 9,325 workers (3.2%). Health care appears to be up 3,867 positions (3.2%) as demand for services is increasing. K-12 education added 3,700 jobs (3.1%) with the stronger state budget. Financial groups increased by 1,825 January, 2016

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INDUSTRIAL SPACE NET ABSORPTION Inland Empire, 1991-Present (moving 4-quarter total)

Industrial Space Net Absorption. For the four quarters ended in December 2015, industrial firms took a net of 23.1 million square feet of Inland Empire space. That activity has grown steadily since late 2012 partly due to the continued growth of imported cargo at the ports of L.A. and Long Beach. Lately, more important has been the surge in large fulfillment centers in the inland area. They are being built and opened to process and ship goods to families throughout Southern California who have rapidly expanded their on-line buying. This activity brought the vacancy rate down to a very low 3.3%.

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TAXABLE RETAIL SALES Inland Empire, 1990-2015e (billion)

Taxable Sales. A major issue facing the Inland Empire’s local governments and transportation agencies was the deep decline in taxable retail sales during the Great Recession. Volume peaked at $61.1 billion in 2006, but fell -24.9% to $45.9 billion by 2009. Volume has since steadily increased reaching an estimated $68.8 billion in 2015. That was a record, 12.6% above 2006. However, Southern California prices rose 16.2% in this period. The purchasing power of the sales taxes collected in 2015 have not matched the 2006 record. The increase was 14.4% in San Bernardino County and 10.7% in Riverside County. 6

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INDUSTRIAL SPACE UNDER CONSTRUCTION Southern California Market, December 2015

Industrial Construction. One reason that the Inland Empire’s construction employment has strengthen has been the strong demand to build new industrial facilities for international trade and e-commerce operations. In December 2015, 20.7 million square feet were under construction or 80.1% of the space being built in Southern California. That was nearly eight times the amount in second placed Los Angeles County due to that county’s lack of undeveloped space. Completed facilities in L.A. County totaled 935.3 million square feet while it was 468.5 million in the Inland Empire (not shown). The local inventory is thus 51.2% of the amount in its more developed neighbor.

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HOME PRICE ADVANTAGE, INLAND EMPIRE & SOCAL MARKETS Median Priced New & Existing Home, 4th Quarter 2015

Home Price Advantage. In fourth quarter 2015, the median priced Inland Empire home sold for $302,000. That was $212,000 less than the $514,000 in Los Angeles County, $224,000 below the $526,000 in San Diego County and $401,000 below Orange County’s $703,000. Typically, these enormous price differentials caused numerous families to migrate inland to buy more affordable homes. To date, this has not happened likely due to the pervasive fears developed by consumers during the Great Recession’s housing collapse. With underwater homes down to 11.4% and notice of mortgage defaults at just 28.1% of the 2007 level before the crisis erupted, normal demand will re-emerge. January, 2016

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SINGLE FAMILY HOME PRICES 4th Quarter, 2014-2015

County

4th-2014

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4th-2015 % Chg. Area

New Homes Riverside San Bernardino Los Angeles Orange San Diego Ventura So. California

$359,000 407,500 548,000 822,500 589,500 486,750 $552,800

$388,500 445,500 568,500 865,000 670,000 509,750 $577,300

8.2% 9.3% 3.7% 5.2% 13.7% 4.7% 4.4%

Existing Homes Riverside San Bernardino Los Angeles Orange San Diego Ventura So. California

$293,000 240,000 475,000 647,000 475,000 520,000 $432,800

HOME DEED RECORDINGS Inland Empire, 4th Quarter, 2014-2015

$310,000 255,000 510,000 669,000 507,500 550,000 $459,000

5.8% 6.3% 7.4% 3.4% 6.8% 5.8% 6.1%

NEW HOMES 4th 14 4th 15 % Chg.

SB Mountains 4 Redlands, Loma Linda, Yucaipa 31 Chino, CHill, Mtcl, Ont, RC, Upl 205 SB Desert 6 San Bernardino, Highland 75 Victor Valley 85 Fontana, Rialto, Colton, GT 111 SAN BDNO COUNTY 517 Riverside-Jurupa Valley 30 Corona, Norco 93 Murrieta, Temecula, L. Elsinore 370 Beaumont, Banning, Calimesa 166 Coachella Valley 113 Perris, Hemet, S. Jacinto 415 Moreno Valley 46 Riverside Rural 153 RIVERSIDE COUNTY 1,386

9 50 306 8 96 86 111 666 137 201 376 165 111 340 35 101 1,466

125.0% 61.3% 49.3% 33.3% 28.0% 1.2% 0.0% 28.8% 356.7% 116.1% 1.6% -0.6% -1.8% -18.1% -23.9% -34.0% 5.8%

INLAND EMPIRE

2,132

12.0%

1,903

Area

EXISTING HOMES 4th 14 4th 15

Chino, CHill, Mtcl, Ont, RC, Upl 1,071 Victor Valley 984 Redlands, Loma Linda, Yucaipa 387 SB Desert 405 SB Mountains 778 San Bernardino, Highland 669 Fontana, Rialto, Colton, GT 896 SAN BDNO COUNTY 5,190 Perris, Hemet, S. Jacinto, Menifee 1,442 Riverside Rural 479 Riverside, Jurupa Valley 841 Beaumont, Banning, Calimesa 345 Coachella Valley 1,017 Murrieta, Temecula, L. Elsinore, Wildomar 1,384 Moreno Valley 505 Corona, Norco, Eastvale 770 RIVERSIDE COUNTY 6,783 INLAND EMPIRE

% Chg.

1,244 1,097 427 433 803 686 834 5,524 1,623 531 923 367 1,061 1,408 500 758 7,171

16.2% 11.5% 10.3% 6.9% 3.2% 2.5% -6.9% 6.4% 12.6% 10.9% 9.8% 6.4% 4.3% 1.7% -1.0% -1.6% 5.7%

11,973 12,695

6.0%

Source: Dataquick

Source: Dataquick

INLAND EMPIRE: Housing Volumes Flat, Home Prices Soaring

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n second quarter 2006, the Inland Empire’s median new home price peaked at $437,200, with existing homes reaching $389,924 in first quarter 2007. Prices then plunged with new homes reaching a low of $268,155 in third quarter 2010 (-38.7%) and existing home hitting $155,319 in second quarter 2009 (-60.2%). Both prices have since gained significant ground to $404,277 for new homes and $284,853 for existing homes in fourth quarter 2015. The new home price is just -7.1% below the peak. The existing home price is now -26.9% below the peak. The wide gap between these new and existing prices reveals one dilemma facing developers. Their costs have driven up their prices leaving them $121,424 above existing homes or an average 42.6% more costly (Exhibit 16).

Volume While home prices have recently increased significantly, volume has been essentially stuck for the past six years reaching 14.903 seasonally adjusted sales in fourth quarter 2015 down from 15,549 in mid-2010 (not shown). Some growth should be returning to the market in 2016. This is the case since the share of underwater inland homes has fallen from 54.9% (2009) to 11.4% in third quarter 2015, and the inland area’s combined median home price ($302,000) is now $212,000 to $401,000 below prices in the coastal counties (see Exhibit 13).

Looking at raw volume data, Riverside County had 7,171 existing home sales in fourth quarter 2015, up 5.7% from 6,783 in 2014 (Exhibit 15). San Bernardino County had 5,524 existing home sales, up 6.4% from 5,190 in fourth quarter 2014. By sub-market, Riverside’s South- I-215 area had the largest percentage gain in volume and total volume (1,623; 12.6%). In San Bernardino County, the area west of the I-15 freeway led in percentage gain and total volume (1,244; 16.2%). New home sales are showing life. Riverside County’s fourth quarter 2015 volume was 1,466 sales, up 5.8% from 1,386 in 2014 with the largest percentage in gain the Riverside-Jurupa Valley (137; 356.7%). The volume leader was Southwest County (376; 1.6%). San Bernardino County’s volume was 666 sales, up 28.8% from fourth quarter 2014’s volume of 517. The mountain area had the highest percentage gain (9, 125.0%). The area west of the I-15 freeway led in volume (306; 49.3%). Prices Riverside County’s $388,500 new home price in fourth quarter 2015 was up 8.2% from the prior year’s $359,000 (Exhibit 14). Its $310,000 existing home price was up 5.8% from $393,000 in fourth quarter 2014. San Bernardino County’s new home price of $445,500 was up 9.4% from its fourth quarter 2014 price of $407,500. Its fourth quarter 2015 existing home price of $255,000 was up 6.3% from fourth quarter last year ($240,000). In Southern California, the fourth quarter 2015 new home median price was up 4.4% from $552,800 in 2014 to $577,300; the existing home median increased 6.1% from $432,800 to $459,000. Looking Ahead As was the case in 2014, the enormous difference in price between new and existing homes in the inland counties versus that in the coastal counties did not yet caused buyers to begin migrating inland in 2015. In addition, the fact inland affordability is 45% versus 20% to 25% in the coastal counties has not yet overcome buyer fears of large purchases. The unknown is the extent to which that will change in 2016 as the Inland Empire and coastal economies continue overcoming the difficulties created by the Great Recession. 

January, 2016

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