DENNIS W. MACHESKI : Qualifying the Superlatives : Grubb & Ellis Officer Keeps Things in Perspective

Every year about this time a deluge of economic statistics pours from government, the banks and the universities. In Orange County those statistics are often framed in superlatives: The most expensive houses, the most new jobs, the lowest unemployment. For a place that, until recently, was just another suburb of Los Angeles, Orange County has become an economic power in its own right.

Now, however, land in Orange County is so scarce and expensive that a single acre in a residential neighborhood in Irvine is said to cost as much as $1 million.

The freeways lay claim to a new superlative: some of the most clogged highway interchanges in the nation. Houses are so expensive--a new one costs about $380,000 on the average--that the middle class is abandoning the county and moving inland to Riverside and San Bernardino counties.

In short, everything about Orange County’s economic life--its problems and its pluses--seems outsized for what is, after all, just a sprawling collection of suburbs. It’s sometimes difficult to get it in perspective.

That’s one reason Grubb & Ellis Co. employs people like Dennis W. Macheski.

As a vice president and director of research for Grubb’s southwest region, one of Macheski’s jobs, in a sense, is to keep things in perspective for the commercial real estate broker.

Macheski, 40, comes by his facility with figures naturally. He has an undergraduate degree in urban studies and a master’s degree in urban planning--both from USC--and an MBA from UCLA. Before joining Grubb & Ellis two years ago, he worked for the Southern California Assn. of Governments.

Times staff writer Michael Flagg talked to Macheski about how Orange County’s economy compares with the rest of the Southwest and the nation, and what that means in the real estate market.

Q. Let’s take the big picture first. How does the economy of the Southwest--which you define as Southern California and Arizona--stack up to the rest of the nation?

A. It’s astounding. The growth rate has been about three times the national average for population and about twice the national average for employment recently. The reason it’s astounding is because you usually only see that type of growth when you have a small base, places of 4 million or 5 million people. But we’re talking about a base of 17 million people that’s growing at rates of 2.5% a year. Nowhere else in the industrialized world do you have that large an area growing so rapidly. The national average is less than 1%.

Q. What do those increases translate into in real numbers?

A. That’s 3 million new people in the last decade alone just in Southern California. In the rest of the industrialized world, large metropolitan areas grew rapidly in the 1950s and 1960s. But around the 1970s a plateau started. You now see growth rates of half a percent to 1% a year. Southern California, on the other hand, began to plateau too. But then it picked up again.

Q. Where are all these new people coming from?

A: What appears to be happening is a combination of high levels of immigration with high levels of natural increase--births--in the population. If you look at who’s moving here, we get a large amount of highly educated, well-paid professionals and managers moving from within the U.S. And then we get a lot of immigrants, mainly Mexican. We’re becoming more bipolar, with the upper end of the scale and the lower end increasing rapidly.

Q. That doesn’t sound good. Aren’t you describing the gradual disappearance of the middle class?

A. From a perspective of economic growth, it’s healthy. You can’t expect the children of immigrants to keep low-skilled jobs forever, and one of our biggest challenges is going to be incorporating them into the economic mainstream. But if you take a look at industry sectors that have grown nationwide, they tend to be the higher-skill jobs and management at one end and factory jobs in light industries at the other end. And that’s what’s happening here. But there’s also something happening here that’s very different from the rest of the United States because elsewhere there’s a big shortage of lower-skilled employees which is getting worse. We don’t have such a shortage.

Q. What’s the outlook for Southern California for the next five years?

A. think it’s unrealistic to expect Southern California to grow as dramatically as it has in the last five years. It can’t continue. We’ll be running out of land and running into congestion. Typically, a large metro area must eventually slow down and approach the national average. I’d expect a growth rate two-thirds that of the last five years both in population and employment.

Q. Why?

A. As the baby boom passes, there just aren’t going to be that many people in the labor force. There’s also the drop in unemployment from 8% a few years ago to 5%. That doesn’t sound like much, but based on the size of the nation’s work force it’s a huge increase in the number of new employees. Since we’re now approaching a point where unemployment is near its natural floor of 4% or 5%, there won’t be any new employees available from the pool of unemployed people. Then there’s been a large increase in women in the labor force in the last two decades, but that’s also approaching a ceiling. When those sources of employees top out, all we’ll have is the natural increase in population, which will mean less dramatic growth in jobs.

Q. One could assume that would mean less demand for factory and office space?

A. would expect a slowdown in the absorption of office space and industrial space.

Q. How do things generally look in the so-called Inland Empire, Riverside and San Bernardino counties?

A. If there’s a problem in terms of employment growth in Southern California, it’s in the Inland Empire. It’s been good, but population growth has been fantastic. So if there’s a problem, it’s an imbalance between growth in jobs and growth in housing there, which means all those new residents have to commute back to Los Angeles and Orange County to get to their jobs. Still, job growth out there has been very strong.

Q. Do you see Riverside and San Bernardino counties developing an employment base large enough to eventually correct that imbalance? The freeways could use the help.

A. It will, with a lag. If you look at subregions of urban areas, like the San Fernando Valley or Orange County, there appears to be a 20-year time lag between population growth and employment growth. In the Valley and in Orange County, the population boom began in the 1950s, and the employment boom didn’t happen until 20 years later. In the Inland Empire the housing boom began in the mid-1970s as people began fleeing high housing costs in Orange County and Los Angeles, so it’ll probably be at least the 1990s before it catches up.

Q. Why is Southern California so different from the rest of the nation?

A. Our proximity to Asia, to Mexico; our climate; the tremendous investment in the 1950s and 1960s--which we’re now reaping--in ports and airports and the freeway system. The fact we’re so new as a region means our employment doesn’t depend on heavy industry as much as the Midwest and East, and as it turns out heavy industry is not growing. What’s growing is light manufacturing, business services, and those tend to be the types of industries we have. You still have a lot of room for growth, with lots of vacant land in places like Ventura County, the southern part of Orange County and the Inland Empire. I’ve calculated at current densities you could fit about 23 million people into Southern California, and right now we’ve got about 17 million, so we’ve got a ways to go.

Q. I’ve heard people in the real estate industry--who tend to be optimists--contend that the county is virtually recession-proof because its employers are so diverse; that what’s happening in Massachusetts, for instance, couldn’t happen here. What do you think?

A. It’s kind of like watches. It’s “resistant,” not “recession-proof.” In the sense that we are diversified, that there are a large number of small firms, most of which tend to be in the more prosperous businesses, we are going to feel the impact of a recession less. But the county’s had recessions before, and it can in the future.

Q. What about the purely local problems of Orange County that are unrelated to broad economic cycles, things like the jammed freeways, the deteriorating quality of life and the high housing costs. Do you think it likely they’ll have a big impact on the county’s economic health?

A. You haven’t mentioned one of our biggest problems, the education of the immigrants who’ve come here. The key thing, though, is that what we see as “deterioration” still looks pretty good to many other parts of the nation. My perspective is we’ll continue to draw jobs and people from the rest of the country. Besides, many places much more congested than Orange County have grown rapidly in the past. There’s New York and most of the big cities of the East Coast. Out here there’s San Jose, which is incredibly congested.

Q. So the outlook for real estate should still be pretty good in Orange County?

A. There have been very, very high levels of construction in the last five years. It appears as though that’s slowing down right now in construction of office and industrial space. It’s not slowing in the rest of Southern California, however. Specifically, Orange County has 26% of Southern California’s office space. Last year it captured 29% of all new office space, so it had a share of construction that was slightly disproportionately high. If you take a look at what’s under construction now, though, only 15% of Southern California’s office space is under construction in Orange County. It appears as though construction of office space has actually picked up in places like downtown Los Angeles and central Los Angeles, while it’s down here.

Q. Why is it slower in Orange County?

A. For the last four or five years Orange County’s had the highest level of office vacancies in Southern California. That’s not because demand was weak but because construction was so extraordinarily high. I think the downturn in construction now is a natural adjustment to a high vacancy rate. Developers and lenders are being more conservative. The vacancy rates in West Los Angeles are 11%, in Orange County they’re 21%. I think people are deciding to build more up there than in Orange County.

Q. What about factories?

A. Orange County has 17% of Southern California’s industrial space; last year 13% of the new space was in Orange County, so it’s a decreasing share. What’s currently under construction is about 11% because the price of land has gone up so dramatically that businesses which use a lot of land, like warehouses, are moving to the Inland Empire. The type of industrial space going up here is much higher-end; much of it’s research and development space. All this bodes well for Orange County in the future: If there’s a downturn, people won’t get caught with a lot of empty space they can’t rent.

Q. Your figures show both the Inland Empire and San Diego growing faster than Orange County these days. How much faster?

A. In 1980 the populations of Orange County and San Diego were both growing by about 40,000 people a year. If you look at the last nine years, Orange County has consistently added about 40,000, but San Diego added 50,000 the next year, 60,000 the next and now they’re adding 90,000 people a year. They’re on an upward swing, while Orange County has plateaued with strong steady growth. In the Inland Empire, population grew last year by 6.7%, which is astronomical on a base of nearly 2 million people.

Q. What does this mean?

A. What you’re seeing is that Orange County has turned out to be the most mature of the three areas, while the other two are growing far more rapidly. To some extent Orange County serves as the business center for this triangle of growth, both the Inland Empire and northern San Diego County.

Q. Why is San Diego booming?

A. For some of the same reasons as the Inland Empire: In northern San Diego county, land is available and housing is less expensive. It also goes back to the fact San Diego’s near the coast, has relatively little smog--it’s kind of like the Orange County of the ‘60s. In terms of its economy, it’s exceptionally well diversified, although unlike Orange County it tends to be strong not in high-tech but higher-tech types of industries such as making medical instruments, the more sophisticated kinds of printing and manufacturing of clothing. If growth rates were to drop by half in San Diego tomorrow, it’d still be growing as fast as Orange County today.

Q. Are our faster-growing neighbors a long-term trend?

A. Yes, and they’ll outpace L.A. in terms of percentages of growth too. It’s a function of vacant, available land. There’s much more of it out there than there is here, and that means more affordable housing.

Q. In light of that, what do you see happening in Orange County real estate over the next 10 years or so?

A. Growth will shift to the south, to the Irvine Spectrum area and beyond; there’ll be a shift toward higher-end office space, the kind that has covered parking that you pay for, with mid- and high-rise buildings; the bulldozing of low-slung, low-density buildings and their replacement with high-rises; residential building will be denser too, with demolition of existing duplexes and construction of apartment buildings with more units; Brea will be extraordinarily attractive to firms like insurance companies looking for a big, medium-skilled labor force; and housing will still be in big demand as our 40,000 people a year continue to come in over the next five years, although that’ll probably slow down as we begin to run out of land.

Q. San Diego, I assume, will grow much larger than Orange County eventually?

A. I think it’s destined to be larger. It, too, has much more vacant land than Orange County. And it has a harbor and an international airport. The two counties were roughly the same size in 1980, about 1.93 million for Orange and 1.86 million for San Diego. Now San Diego is 2.4 million and Orange County is 2.3 million, and that gap will grow.