Slow but Continued Growth Is Predicted
Are we running with the bulls or will we be trampled by the bears? Will the San Fernando Valley economy, on a roll for the past three years, succumb to what some experts see as a national economic slowdown coming for 2001? Or will the region, which has recovered from the blunt-force trauma of the mid-’90s recession and the Northridge earthquake, shake it off and continue to steam ahead?
To help assess the economic outlook for the region, the Los Angeles Times recently assembled a panel of local business leaders and experts. The panel, which included representatives of small business, academia, entertainment and energy production, was a decidedly upbeat lot. The members generally predicted continued growth, but perhaps at a slower pace than in the past few years.
The panel consisted of:
* Joel Simon, chairman, governmental affairs committee, United Chambers of Commerce.
* Tamika Bridgewater, president, San Fernando Valley Black Chamber of Commerce.
* Wade Welch, vice president, administration, Capstone Turbine Corp., in Chatsworth.
* Daniel R. Blake, incoming director, San Fernando Valley Economic Research Center, Cal State Northridge.
* Wendy Furth, president-elect, Southland Regional Assn. of Realtors.
* Kathleen Milnes, senior vice president, Entertainment Industry Development Corp.
* Noam Lotan, president and chief executive, MRV Communications Inc., Chatsworth.
Here is an edited transcript of their 90-minute discussion:
The Outlook
Question: There have been some troubling signs in the economy, with a struggling stock market and projections that the business cycle is coming to an end. What do you see as the 2001 outlook for business in the San Fernando Valley?
Simon: I haven’t noticed any comments about decline. The Valley presents a unique situation with regard to what’s going on in the city. In the areas of transportation and in housing there’s going to be considerable effort--at least from United Chambers’ point of view--to move forward in that area.
Bridgewater: I’m a little more concerned about the entertainment industry and talk of new strikes, considering that a lot of our businesses and income has to do with the entertainment industry. However, if we take a slight turn [in the overall economy] and start to move downward, it could actually benefit the Valley. If interest rates go down, it helps home prices go down a little bit.
Welch: We have a recently commercialized product and are going through periods of high growth in a new market: the distributed power generation market. The growth of this market will not be significantly affected with the overall economic trends. It’s more what this new opening market and energy prices and some of the electric utility issues will mean. That will have a bigger impact on us.
Blake: At the national level, there are signs of slowdown. The real debate is not whether it’s going to slow down but whether we are going to achieve a soft landing or a hard landing. People are looking for something like a 3.5% growth rate of Gross Domestic Product next year as a whole, as opposed to somewhere in the 5% range in the past. It looks like the slowdown is coming, but at the same time the countervailing inertia in the Valley and in Los Angeles is still for continued recovery from the early 1990s and the earthquake. Our outlook is that the Valley isn’t going to slow down. In fact, we expect it to grow faster than California as a whole. We expect California to grow faster than the nation as a whole.
Furth: With the wonderful hints we’ve gotten from [Federal Reserve Chairman] Alan Greenspan about the lowering of interest rates, we’re continuing to look at a strong, strong [housing] market, especially for 2001. Home prices are going to be increasing. We ended up with a 19.5% increase in the median price this year. Next year, I’m going to go out on a limb and say [the increase] will be between 10% and 15%.
Milnes: Overall, the trajectory of this [entertainment] industry just continues to go up. Hours worked from all the unions and guilds are up, employment is up, revenue is up. What we may see in the Valley is some consolidation of services and vendors, where companies that perhaps have a fairly narrow niche and are vulnerable to downturns in certain segments of the industry may combine with other companies to survive in the market. But overall, the industry continues to grow and we don’t see any slowdown.
Lotan: We are actually not seeing any slowdown. There is all this talk of a soft landing, but we are not ready to land yet. We are looking at growth rates in excess of 50% or certainly above 40%. Our backlog is much stronger than it has ever been. The experience of the Internet, I believe we’re just beginning to scratch the surface of what can be done in terms of applications and in terms of being connected, whether it’s through fiber optics or optical laser beams.
Entertainment Strike
Q: What will be the effect of a strike on the local entertainment industry.
Milnes: Because there is talk of strikes, it means that people are stockpiling product. So right now, we are at a humongous peak in production, about as high as we’ve been in the last five years. They’re hiring people off the street. So regardless of whether there is a strike or not, the pipeline of product is primed to stop in May. So we have what is referred to in the industry as a de facto strike, because it doesn’t make any difference whether they go out [on strike] or not, there’s not enough work ready to go because no one wants to be caught in the middle of producing in that instance. As we saw in the SAG [Screen Actors Guild] strike against the commercial producers [in 2000], the people who were hurt were crews with the below-the-line people and vendors to that industry. The Valley has a heavy concentration of residents who work in the industry. Everybody gets hurt. You go all the way down to the people who do car detailing, massage therapists, dog walkers and every other discretionary thing that our income provides.
Blake: In terms of the entertainment industry, one of six people in the Valley in the private, nonfarm sector are employed in the entertainment industry. Twenty-five percent of the payroll comes from entertainment. So a strike in that area, depending on how long it is, depending on the nature of it, could have a major impact on the Valley.
Real Estate
Q: What effect would a protracted entertainment strike have on the real estate market?
Furth: In terms of real estate, we have for a long time had an influx of talent coming to buy in the Valley. You get so much more for the money. That particular market has never dried up, as far as talent, as far as producers and writers, especially in the Ventura Boulevard area. And now we have a huge growth in upper-end properties in Bell Canyon, West Hills, Chatsworth and the Northridge areas. It’s very, very popular for people in the industry to come up there. I think we are going to keep seeing these people from the industry moving to the Valley. It might affect people’s move-up strategies.
Milnes: I know that the unions are telling their members, “Don’t do anything rash,” “Save your money,” “Don’t take on any new debts.” So maybe somebody who might be contemplating moving up in terms of the housing market might not make that choice right now.
Blake: This is an industry accustomed to variations in paychecks and working conditions. So it would probably impact a lot less there than it would impact if we had something like in the late 1980s with aerospace going down or something like that, where people are counting on a steady paycheck and not prepared for a dry period of a couple or three months.
Milnes: Sixty-five percent of our employment is freelance. It’s about a 15,000-person swing every couple of months: up and down, up and down, up and down. So if you’re somebody who’s interested in a stable career and a gold watch after 30 years, that’s not where you are going to go. So maybe we are a little more resilient.
Q: The median price for a single family home in August hit $255,000, an all-time high. What do you think prices and sales are going to do this year?
Furth: I’m projecting that we will see a 10%-15% increase in terms of a median price range. We have seen a continued drop in amounts of sales. And that’s strictly an affordability factor right there. I would imagine we are going to see a continued drop in sales. But when we see so much appreciation in homes, especially in the San Fernando Valley, it gives you a very optimistic feel about 2001.
High-Tech Expansion
Q: Is there enough land available for expansion for companies involved in high-tech manufacturing?
Lotan: We were fortunate to be able to tap into existing, available commercial real estate facilities. We have been able to expand. In the near term, we don’t see a major issue in obtaining new space, although it’s getting a little tighter. Our expansion in production will probably drive us more and more into Taiwan and China, in the sense we want to move labor-intensive operations away to the extent that you can. If we play it correctly, we can continue to expand here and elsewhere in the world. As I said, it’s getting a little tighter but it’s probably OK for the next year or two.
Welch: We recently opened in Chatsworth, in the summer of [2000], our new corporate headquarters of nearly 100,000 square feet. The encouraging news is that we have been able to find the facilities, the space, in the Valley, to do what we’ve wanted to do. We have two new combination 160,000-square-foot facilities. We’re not in the market right now. But our history, to date, has been that there is, in the existing building market, available space.
Why the Valley?
Q: We’re curious why your companies chose the Valley.
Lotan: This Valley, not Silicon Valley, is an ideal location for high-tech manufacturing. The turnover of the people here strikes exactly the right balance between enough competitiveness so you can attract from competitors and you have a good sound educational base from Santa Barbara to Pasadena. Yet you don’t have the hyper-turnover that you have in Silicon Valley, where 18% to 20% turnover is normal and if you have 7% turnover you are doing great. We happen to have something like 1% to 2%, which is fantastic. From that point of view, of having the Valley being a melting pot and a multicultural environment, sometimes presents challenges in terms of the various ethnic groups [that are] part of your work force and maybe five or six languages being spoken on the production floor. But I think the benefits far outweigh this. We are able to draw upon the best of various cultures and having this kind of almost cosmopolitan environment actually brings us closer to foreign markets as well.
Welch: Ours is a little bit of a Silicon Valley-type of story. We started more or less out of a garage. Our founder started in the Valley in a very small facility. And several times during our history of about 10 years we’ve looked to expand and in each of those cases have evaluated it from a number of criterion: available space, available work force. We, somewhat, have taken advantage of the misfortune of the downsizing of the aerospace industry by using some of the technical talent associated with the aerospace industry.
Bridgewater: One thing that can affect how many new large businesses come to the Valley is the affordability of the housing. If they move from the Silicon Valley, they’re going to love our housing prices. But if they move from some of the other areas, it’s really tough. So that’s something that definitely needs to be looked at.
Blake: The two most important locational factors for high-tech manufacturing are the quality and skills of the labor force, and you really have that legacy from aerospace, and the second one is the founder’s location. And the Valley is rich in both of those areas.
Q: What do you foresee this year for hiring and access to capital?
Lotan: There is a very strong demand for technology and for bandwidth. A lot more competitors are coming into the field and that’s something that, from the standpoint of Valley microeconomics, is a tremendous thing. So I see the demand, even at the smoother valuations that are more realistic, is still going to drive people toward entrepreneurship, and the climate here is just ideal for that.
Welch: I think [Capstone is] in somewhat of an enviable position in that we’re not facing too much of a financial need. Our segment of the market, the distributed power generation market, is a new, technology-based market and it’s the demand for that new technology base [that’s key.] We’re not depending on a certain percentage growth in the overall economy to drive the growth of our company and our product.
Simon: I really think that the beauty of the Valley is that it’s predominantly small business. There are 8,500 businesses represented by United Chambers. The reason I think we are moving forward and are not affected by any one thing as much is because there is such a diversity. And the real driving force of what’s happening in the Valley is on a small-business level. The real question, I think, in terms of the Valley is how are we going to deal with education? How are we going to deal with transportation and keeping the infrastructure [strong] so that all this development can keep going?
Secession
Q: Given your generally favorable outlook on the economic situation here, are you favorably predisposed to a secession movement?
Simon: With respect to the United Chambers, we’re very much in favor of the study. I would venture to say that all of the people who are looking at this really want to see the economics. There’s a lot of dissatisfaction with what has happened in the Valley and the way the Valley’s been treated. I think we’re trying to [be] as open-minded as we can on it.
Q: Yet it seems, listening to you, that Los Angeles must be at least moderately business friendly.
Simon: I think that the Valley is doing well in spite of the city of Los Angeles. . . . There’s a lot of dissatisfaction with the way things have functioned. Whether secession is the right or wrong answer, I think we really want to see the study and see whether it makes economic sense. I think there’s a hope among a lot of people that it will.
Bridgewater: Unless the study comes back and it says there’s just no way, there are so many variables but I would have to say that I would definitely support secession. He mentioned dissatisfaction; I feel completely slighted in so many areas. We should be able to do things on a local level. The Valley is big; the Valley is strong. There are people dedicated to growing the Valley and are very serious about doing whatever they can.
Milnes: From our perspective, since we contract with the city and county of Los Angeles and a number of other incorporated cities to handle filming . . . as long as we had that same deal with the city of San Fernando Valley--or whatever it ends up being called--as long as it stays film friendly . . . Because we’re handling [the equivalent of] 47,000 days of filming a year and a huge percentage of those are in the Valley. So that would be our only concern.
Final Thoughts
Q: Give us your final thoughts on where the Valley economy is headed.
Lotan: From the macro point of view, I hope we are going to have a soft landing and then steady but consistent growth, moderate growth. Then, we can continue to build upon the strengths we have in the Valley. We’re very happy with where we are, we’re happy with the infrastructure, with the small-business environment that allows us to get things done on short notice and the supportive infrastructure that we have for high-tech business. Everything is at the tip of your finger.
Milnes: The primary area I focus on is work force development. And we’ve been looking at some of the specific areas of the industry over the past couple of years in terms of what are the jobs, what are the skills. I work with the community colleges and I’m also the school-to-career liaison for the Los Angeles Unified School District. And we’re seeing those kinds of activities take off and I think we’re going to see a lot more of them. One of the things that we’ve been looking at specifically . . . is the impact of technology on all aspects of our industry, and particularly in television and feature film distribution. I’m concerned that we have the potential for some dislocated workers. If we start seeing, for example, digital distribution, distribution over the Internet or by satellite . . . the people who are putting labels on film cans, the lab workers those kinds of people, may not have jobs anymore. And the question is how do we retrain those people into other jobs?
Furth: I think 2001 is going to see a continuation of a strong seller’s market. With the median price in October in the Valley and Santa Clarita of $245,000, it has really created a bind of supply and demand. We have very little inventory. [Also] we’re very anxious to see a lot of redevelopment going on in some of our areas where it’s wide open [including the northeast Valley]. So we’re just looking forward to more development and more properties on the market. As we get into the spring, I think we’ll see a lot more activity and a lot more properties going on the market, because of the move-ups and lower interest rates. So we’re very optimistic.
Blake: One of the main determinants of growth will be how nice a place we can create. That’s what attracts high-tech businesses. Businesses have a choice of where to locate. And that makes the educational system [and] the character of the community very important variables in determining the rate of growth. I think the Valley has been lucky, so far. I think we have concerns about the affordability of housing, particularly with the constraints on the expansion of housing. We have to be concerned about the quality of our community. It’s going to call for focused effort on redevelopment in certain areas and accommodation of expansion in other areas.
Welch: The Valley in particular, associated with the [Los Angeles Department of Water and Power’s] leadership is positioning itself so that it both has the capacity and is growing in the areas that are important in terms of distributed generation and green power. This puts the Valley in kind of a unique position, relative to other areas within California. So if it does shake out in a way that’s harmful to the California economy, the Valley may be uniquely positioned because of what the DWP has done.
Bridgewater: I’m pretty positive about the economy of the Valley. We’ve got to invest in our children. If people are afraid for their children to go to the schools, then they’re not going to move here. And that’s something that we really have to work on. Other than that, I’m very excited about what’s going to be coming ahead for this new year in the Valley.
Simon: I think that the United Chambers is really working in the areas of education, transportation. We’re very hopeful that the bills that [the Chamber supports] on these issues will move forward this year. We’re trying very hard to keep the momentum going.
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LOOKING AHEAD
Company executives are optimistic about the year ahead. B4
