From SoCal Real Estate’s September 2018 issue:
Current economic developments in Orange County are making Richard Green nervous about 2019. Green, director of The University of Southern California’s Lusk Center for Real Estate, told attendees at a recent three-part real estate event, “The Lusk Executive Forum – Continuing Orange County’s Economic Leadership: Pathways for the Next Generation,” that high asset values, potential trade war, and the looming prospect of rent control are among the issues giving him pause about the county’s future.
“Asset values are not just high, but extremely high,” Green told the crowd at The Resort at Pelican Hill in Newport Coast, California, opening the event. “We have the highest ratio of wealth to income ever.” He said the last time the ratio peaked was 2007 and 1999 before that — and we all know what followed those peaks. “Is history repeating itself?”
Price-earnings ratios are also making Green uncomfortable. PE ratios for publicly traded companies are higher now than they were in 1929 and 2008, although they were higher in 1999 before the dot-com bust, he said. Questioning whether stocks are overpriced, he commented, “Things are fleeting for even dominant companies like Amazon, and the possibility of stocks decreasing 25 percent is real.”
Worldwide housing prices are also higher than any point in history, Green said, but the cascading of home prices won’t be what it was 10 years ago because the building sector has been more cautious.
Trade wars are another concern, especially since Americans are notoriously bad at saving compared to residents of many other countries, Green said. Since the region’s economy relies heavily on trade and industrial real estate, a potential trade war with other countries could have a truly negative impact on it. “People who are investing in the U.S.— the Chinese and the Germans — save their money,” Green said. “That money needs to go somewhere. The Germans spend half as much as we do, and they put their money in places they see as growth opportunities, such as the U.S. They sell BMWs to the U.S., which is a problem if there is a trade war.”
Lastly, Green cited rent control as a concern and a “terrible idea” for the region. In rent-controlled areas, “houses are maintained less well, which leads to having less housing and more owner-user landlords. A landlord could make less income than their tenant in a unit.”
Also, rents are going up while renter income is going down. Green said that renters today have less money after rent than they did 25 years ago.
He concluded that 2019 might be a tough year for us, but it will be better than 2008.
Next, Gary McKitterick, a partner with Allen Matkins, interviewed Emile Haddad, CEO of FivePoint Holdings LLC and chairman of the USC Lusk Center, about how Orange County is changing and where it is positioned for the new economy. Haddad said the region is positioned well, but very few people outside of the area know about it because they think of Orange County as a bedroom community to Los Angeles.
“We haven’t done a good job of promoting Orange County,” Haddad said. “‘The OC’ put Orange County on the map. It’s a problem because companies and people don’t know what we have here.”
Haddad’s biggest fear about Orange County is that it’s in such a comfortable environment that “we will wake up in 10 or 15 years and realize we’ve missed our opportunity. Companies are leaving because we don’t have leadership. We’re a bunch of unconnected cities. We need to attract people with a lifestyle experience buzz.”
The final part of the event was a panel discussion on the future or Orange County leadership. One of the greatest concerns among the panel was the lack of affordable housing and options for augmenting the stock. Leonard Miller, COO of The New Home Company, the second-biggest builder in the county, said the market is still a safe place for investors to park capital, “but I do hear of my girls’ friends who go away to school coming back only to leave the area again for a job. We’ve lost three employees in the last six months in their late 20s and early 30s who moved out of Orange County to take less pay in order to live in a place that’s more affordable.”
Lucy Dunn, president and CEO of the Orange County Business Council, said leadership should come from the companies that have a presence in the market — Edwards LifeScience, Allergan, Western Digital. They need to say, “How do we market Orange County and create high-paying jobs?”