1990 ORANGE COUNTY : <i> Orange County’s economy will continue to grow in the next decade, but at a slower pace than in the 1980’s. The county’s employment base will contine to shift to services.</i> : O.C. Economy Will Slow Some but It Should Stay on the Go

Like a front-running racer who cuts the pace to conserve energy, Orange County’s economy is expected to slow to a jog in the 1990s after nearly a decade of sprinting flat-out.

But even a slow jogger covers a lot of ground.

By the end of the ‘90s, the economic landscape of Orange County will have undergone some profound changes. But things won’t really look a lot different to the casual passer-by because the physical layout of the county has been well-established by past development.

Behind the familiar facade will be a county in which white-collar office workers, engineers, computer programmers, bankers, consultants and executives far outnumber lunch bucket-toting machinists, carpenters, plumbers and drill-press operators.

Many manufacturing companies that grew up here--makers of machinery and industrial equipment, of spas and TV sets--will relocate to places where land and labor costs are cheaper and environmental constraints and tax laws more hospitable.

Acres and acres of the windowless concrete tilt-up buildings that housed those manufacturers in places like Garden Grove, Santa Ana, Orange and Anaheim will give way to offices and business parks devoted to cleaner, more service-oriented pursuits.

Unless a national calamity should strike, Orange County’s economy--now 10th-largest among counties nationwide and larger than many sizable countries--will certainly get bigger, economists and business executives said.

By the end of the ‘90s, the county’s gross product--the value of all goods and services produced locally--should be approaching $104 billion, up from $64 billion this year. And that is at an annual pace of 5%, half the growth rate of the past decade.

The area’s population is projected to grow by 262,000 to 2.6 million by the year 2000, spurring retail sales, fueling a demand for new housing and bringing a steady supply of both unskilled, foreign workers and highly educated professionals.

Employment should grow by some 25,000 new jobs a year to a total of about 1.4 million jobs by 1999. And because most of those employees will be hired into positions at the top end of the pay scale because of the need for highly trained technical and professional workers, the median annual family income in the county could grow from the current $49,916 to almost $90,000 by the end of the decade.

The strength of the county’s economic engine will remain small business, the nearly 80,000 enterprises that make, market, sell, design, distribute and deliver everything from toilet valves to computer memory chips.

John Galvin, vice chairman of the Irvine Co., the county’s largest land owner and developer, said that while the ‘90s will be marked by a slower economy, the county still “is positioned to have spectacular economic growth. We should lead the rest of California.”

But from scores of interviews with regional economists and local business executives it is clear that the next decade will have some rough spots. Some of the more important trends that will effect Orange County include:

* A decline in defense spending. This will mean a loss of aerospace and other defense-related jobs as international tensions ease and the federal government struggles to balance its budget. Defense contractors will grapple with “economic conversion,” attempting to develop private-sector markets for their products.

* Growth of the service sector. A drop in defense and other manufacturing jobs will be offset by increases in service jobs, which are expected to jump 26% in just the first half of the decade to about 373,000 jobs. The shift from an industrial to a service economy has been going on for most of the past two decades as land and housing costs, traffic congestion and air pollution and environmental control measures make the county too expensive for traditional manufacturing and for the lower-paid workers who support an industrial economy.

* A construction slump. The pace of commercial and residential construction will lag well behind the frenetic pace of the past decade. Construction employment is expected to stagnate at just about 5% of the total jobs in the county. High vacancy rates will curb commercial building. High prices and overbuilding will pressure housing construction.

* Slowing of housing appreciation rates. The average yearly appreciation of houses in the ‘90s will be below 10% annually, particularly in the early part of the decade. That is far below the 20% increase in values the county has seen the past two years.

* Expansion of import-export opportunities. Orange County business will compete more in the international marketplace as Eastern Europe opens its borders, the Pacific Rim nations continue flexing their economic muscle and the major nations of Western Europe form a single market economy in 1992.

* Greater environmental controls. Some businesses will be forced to leave Orange County because of stricter air pollution and toxic waste rules. Rules already proposed for the Southern California basin would place more than 100 restrictions on oil companies, factories using paint and solvents, automobiles and other sources of pollution.

The major economic uncertainty in Orange County for the ‘90s is whether the U.S. economy can continue to move forward, avoiding a full-scale recession--something many economists now think is possible.

Instead of an all-encompassing slump, the economic scene of the ‘90s is likely to be marked by what Chapman College economist James Doti refers to as “rolling corrections”--mini-recessions in individual industries, offset by the relative good health of the rest of the economy.

“The deregulation of banking and other industries,” Doti said, “has reduced the buildup of pressures that in the past were relieved by recessionary-inflationary cycles.”

The last decade saw the county solidify its position as a leading center of high technology and biomedical research and emerge on the cutting edge of the new industrial and information revolutions.

But the pace at which the county has been developing is one that economists and business leaders say is practically impossible--and, quite possibly, impractical--to sustain.

The 1980s alone have seen median annual family income nearly double to $50,000; the creation of more than 300,000 new jobs and about 10,000 new businesses, and an almost 90% increase in the gross county product.

That growth has put tremendous strain on Orange County’s infrastructure, however, testing almost to the limits the county’s ability to support the very business community that has helped make it a desirable place to live and work.

The principal economic problems the county faces in the ‘90s--upheaval in defense-related employment, a transportation system that barely works and soaring housing costs--are not easy to resolve.

The strength of the county’s business base is in its diversity and broad base of small businesses with few employees--96% have fewer than 50 workers and 64% have no more than five. That diversity means that the business community can, and does, adjust rapidly to change.

Still, the county likely will enter a period of slower growth tempered by major readjustments in aerospace, manufacturing and construction--the so-called goods-producing sectors. Those industries carried the county to its current economic heights.

The changes will be particularly dramatic in manufacturing, which in Orange County has never been marked by belching smokestacks and grime-encrusted workers trudging home from the factory.

There has always been a small segment of heavy manufacturing in the county, but with the exception of the large aerospace companies that came here in the 1950s and still churn out rockets and radar systems, manufacturing in the county today is largely assembly of prefabricated components.

Increasingly in the ‘90s, manufacturing facilities will be research and development-oriented, employing 20 or 30 engineers and a handful of highly skilled specialists to turn out prototypes of the medical instruments, computer systems and other high-technology items they have designed.

But the manufacturing companies dependent on defense spending are not expected to fare well in the county. A 15% drop in national defense spending by 1994 is estimated in a new long-range forecast prepared by Esmael Adibi, director of the Chapman College Center for Economic Research.

Because Orange County manufacturers receive a disproportionately high percentage of the defense dollar--about $4 billion of the $241 billion spent last year, Adibi says--the decline will translate into substantial job losses. He predicts that aerospace employment, which now accounts for about 96,000 jobs in the county, will drop to 88,000 jobs by 1994.

The ability of some major firms to convert to peacetime products could offset deep damage to the economy, but there will be a lot of disruption over the short term, Adibi predicts.

In construction, employment will bounce up and down over the years because of changes in interest rates and overall economic conditions.

And as the county’s available store of raw land continues to diminish, the bulk of the residential construction business will move into faster-growing areas, such as Riverside and San Bernardino counties, said Paul Whelan, a development consultant with the Meyers Group in Ontario.

Within Orange County, the trend increasingly will be to the development of multiple-family housing. More and more people will live in apartments for longer and longer periods--by preference or through necessity as they try to save money to buy a home, said Earl Timmons, a recently retired development consultant and former Irvine Co. executive.

And except for resales in older parts of the county, he said, the detached single-family home will be out of the price range of all but the wealthiest. The average price of a home in the county--new and resale, condo and detached single-family combined--is a hefty $246,000. But when only new detached single-family homes are counted, it rises to a staggering $350,000.

Housing Slowdown

Because the county is still considered a desirable place to live, the population will continue to grow and demand for housing will continue to outstrip the supply, helping to prop up prices. Duplexes, townhouses and condominiums will be all that is available for middle-class new home buyers, Timmons said.

That economic slowdown will affect Orange County housing price appreciation, however, with the 20% annual hikes common in the last years of the ‘80s dropping dramatically. In fact, in real terms when inflation is considered, housing prices in the county could deflate slightly next year, Doti projects.

The growing population will also create demand for more retail development--although the county likely has seen the end of major shopping mall construction.

Irvine Co. officials still insist that the proposed Irvine Center at the junction of the Santa Ana and San Diego freeways will be built, but Timmons argues that the population of the county simply won’t support another huge mall.

With or without the Irvine project, other retail development likely will concentrate on specialty centers because that is the direction in which the retailing business is heading, industry specialists say.

Although most of the population growth and residential and retail construction will occur in the South County, the bulk of the commercial and industrial building activity will stay north of El Toro, principally in Irvine and the central core area of Anaheim, Orange, Santa Ana and Costa Mesa, predicted James Renzas, president of Location Management Services of Irvine.

“The key to commercial development in the south is transportation,” said Michael Dorsey, head of the Grubb & Ellis Co. commercial real estate office in Laguna Hills.

Slow Going Ahead

A number of improvements are expected to be made to the county’s jammed-up transportation system during the decade, but they aren’t expected to bring much relief to residents or business commuters anywhere in the county.

The hope is simply that new traffic-control technologies, freeway widenings, monorails and other proposed mass transit systems will keep things from deteriorating further.

An expanded John Wayne Airport will open sometime next year. Airport manager George Rebella predicts that the new terminal and a nearly 100% increase in flights, to an estimated 150 a day, won’t be enough to meet the demand.

He said the new terminal and flight schedules are designed to handle no more than 8.4 million passengers a year, while the demand already exists for an airport big enough to serve about 21 million.

The airport expansion--limited by the terms of a settlement of a noise damage lawsuit--also doesn’t provide for increased cargo capacity. “And everybody in business wants air cargo service,” said J.J. Broadbeck, Orange County research director for Grubb & Ellis commercial real estate.

Calling the prospect “a long shot,” he predicts “a supernova of commercial construction” if the El Toro Marine Corps Air Station could be opened for joint use by civilian cargo carriers.

As it is, the nearly 4,000-acre Irvine Spectrum, which borders the Marine facility on the south and east, is likely to be the single most important industrial complex in the county almost until the end of the decade.

Elsewhere, smaller retail, commercial and light industrial centers will spring up in the hills of East Orange to serve the 13,000 homes the Irvine Co. is planning to build there; in Rancho Santa Margarita and the Coto de Caza areas to serve the homes being built in the county’s backcountry, and in Santa Ana canyon to serve the growing residential developments in Placentia and east Anaheim.

A sizable chunk of the Irvine Coast--9,000 acres of rugged hills and pristine canyons between Corona del Mar and Laguna Beach--will be shorn, torn, graded, compacted and shaped into building pads that will be covered with 2,300 million-dollar homes, several resort hotels and a small tourist-oriented retail center.

The desirability of Orange County land also will continue making the area a prime target for overseas investors, said Ralph Sabin, head of the entrepreneurial business consulting division of Ernst & Young in Costa Mesa.

Major investment in the ‘90s should come from companies in Japan, Europe, Korea and Singapore, Sabin said. And Orange County firms will have to seek out markets abroad to stay competitive.

And as traffic, air pollution and other environmental and social problems make downtown Los Angeles less livable, a number of large Los Angeles-based firms will probably move their headquarters to Orange County to be closer to the kind of white-collar workers they need.

Marta Borsanyi, managing partner of the Newport Beach office of Robert Charles Lesser & Co., a national development consulting firm that specializes in future planning, compares the economic changes in the ‘90s to those of the industrial revolution.

“All in all, I’m very optimistic,” she said. “The economy is changing from a manufacturing base to an information and technology base, and Orange County is in the forefront of the movement.”

Orange County’s economy will continue to grow in the next decade, but at a slower pace than in the 1980s. The county’s employment base will continue to shift to services.

Business Hot Spots

The focal point of Orange County’s economy should remain its central core--Anaheim, Santa Ana, Orange, Costa Mesa, Newport Beach and Irvine--but employment centers in South County and other scattered areas will emerge as development continues.

OC’s Changing Job Market

Service jobs will make up a greater portion of the county work force in the 1990s. 1989:

Service Jobs: Wholesale Trade, Retail Trade, Transportation, Finance/Real Estate, Government: 71.7%

Goods-Producing Jobs: Mineral Extraction, Construction, Non-Durable, Aerospace, Other Durable: 28.3% 1994:

Service Jobs: Wholesale Trade, Retail Trade, Transportation, Finance/Real Estate, Government: 75.4%

Goods-Producing Jobs: Mineral Extraction, Construction, Non-Durable, Aerospace, Other Durable: 24.6%

Source: Chapman College

Up-and-Comers

These executives--among OC’s best and brightest business minds--could emerge as leaders in the 1990s.

Peter Ochs, pres. Fieldstone Co.: A successful homebuilder and political infighter, he is likely to weild his growing clout on behalf of the local real estate community.

Kathyrn Braun, sr. vp. Western Digital Corp.: Rising through the ranks of the computer company, she is a possible successor to Chairman Roger Johnson.

Leslie Mc Craw, CEO-designee, Fluor Corp.: After making it to the top of the county’s largest public company, he will become more involved in local civic business affairs.

Daniel Reed: partner, Reed & Davidson: A well-connected lawyer involved in fund-raising for business-supported issues, he could emerge as a candidate for county supervisor.

Gene Lu: pres. Advanced Logic Research: From obscurity, he created a successful PC firm and could emerge as a force in the computer industry.

Job Growth

The county should add 181,280 new jobs in the next five years. 1994: 1,339,527

Retail Sales

Increased sales at stores, restaurants and other retail outlets should help keep the county’s economy healthy. 1994: $25.69 billion Source: Chapman College

Real Estate Values

Appreciation of used homes should cool substantially in the next decade. 1994: 8.9%

Personal Income

Wages should continue to grow to keep pace with the county’s high cost of living. 1994: $79.67 billion

KEY COUNTY ECONOMIC FORECASTS

Gross County Product, 1989-94

(in billions of dollars) 1989: $63.6 1994: $82.1

Median Family Income, 1989-94 1989: $49,916 1994: $69,993

Number of Wage and Salary Employees, 1989-94

Estimate Forecast Percent Industry 1989 1994 Change Mineral extraction 1,266 1,034 -18.3 Construction 68,093 68,110,-0.02 Non-durable 70,489 83,085 +17.9 Aerospace 95,143 87,827 -7.7 Other durable 92,952 90,104 -3.1 Transportation & public utilities 33,832 40,253 +19.0 Wholesale trade 76,541 107,468 +40.4 Retail trade 214,946 250,061 +16.3 Finance, insurance & real estate 91,544 117,551 +28.4 Services 292,581 373,085 +27.5 Federal civilian government 16,213 16,647 +3.5 State & local government 104,647 104,302 -0.3 TOTAL NON-AGRICULTURAL 1,158,247 1,339,527 +15.7

Taxable Sales, 1989-94

(in thousands of dollars)

Estimate Forecast Percent Industry 1989 1994 Change Apparel group $1,067,029 $1,497,554 +40.4 General merchandise 2,810,497 3,969,037 +37.7 Specialty stores 2,554,588 4,705,888 +84.2 Food Stores 1,346,872 1,830,101 +35.9 Eating & drinking 2,221,258 3,402,345 +53.2 Furniture & appliances 1,041,111 1,467,161 +40.9 Building materials 1,440,506 2,070,399 +43.7 New motor vehicles 2,897,800 4,577,947 +58.0 Other motor vehicles 869,280 1,248,942 +43.7 Service stations 984,686 1,020,593 +3.7 TOTAL RETAIL SALES 19,233,626 25,689 +49.1

Agenda for the 1990s

* Today: The local economy is expected to keep growing, although at a slower pace. D1

* Tuesday: With new professional teams and an arena on the way, it will be a bountiful era for sports fans. C1

* Wednesday: What the decade holds for the theater, art, music, dance and other entertainment. F1

* Thursday: A day in the high-tech-dominated life of an upscale Orange County family 10 years from now. N1