Economic Updates

Weekly Report – Why L.A. Matters – March 28, 2016

Part Two – Is L.A. Big Enough for Everyone?

Urban Trends: Planning for Economic and Population Growth

L.A.’s urban landscape is fast becoming as diverse as its population. From Hollywood to Playa Vista, major office development, residential development and redevelopment have created LA’s most bustling business centers, where one can find media companies, ad agencies, university-affiliated institutes and start-ups working alongside the world’s most-established companies and tech giants.

These changes are dramatically shaping the L.A. market, creating concentrated activities centers with more people living, working, and shopping in them. At the same time, these centers are surrounded by single-family neighborhoods that have easy access to all the conveniences provided by urban life.

The significance of Hollywood’s renaissance (and downtown L.A.’s) should not be overlooked, because they provide an illustrative window into the numerous opportunities that exist to shape L.A.’s economy and quality of life. Playa Vista is a great example of the right way to leverage urbanization, land use, environment and transportation trends, in order to “put people first”. Hollywood is a great example of providing more residents (and visitors) better access to housing, quality jobs, walkable neighborhoods and more options to use the region’s emerging transit system.

Most importantly, in an age of increasing “no-growth sentiment” from local home owners, these developments prove that accommodating and planning for growth is not an either or proposition.

The fact is more and more people want to live in cities, because people and their relationships matter. Cities have long been the most productive places to do business – they bring firms, customers and workers closer together, driving innovation and human progress. In 2001 the richest 50 cities and their surroundings produced 27 percent more per head than America as a whole. This is drawing a disproportionate number of Americans to the top cities in the nation. Between 2010 and 2014 America’s population grew by 3.1 percent; its cities, by 3.7 percent. But the fifty richest cities swelled by 9.2 percent. At the same time 60 percent of rural counties are losing population.

Hollywood’s resurgence is part of this trend and a movement to once again capture what drove L.A.’s economy for more than 50 years – well planned dense master-planned centers which aligned planned urban developments within close proximity to industrial development.

L.A.’s economy has not been able to sustain this model. Looking at jobs data within the City’s 15 council districts (each one equally represents 250,000 residents) shows that not all of them are equally represented with enough quality jobs – District 14 (downtown/northeast LA) has 333,000 jobs while District 8 (south LA) has 18,890. The median income in District 12 (San Fernando Valley) is $77,000 and only $26,152 in District 1 (northeast and northwest LA).

In is imperative that policymakers work to reverse this trend and develop more job centers throughout the region.

I will be providing recommendations in part three of this series to address that core issue and for now part two concludes with some additional data points that will begin to provide a better perspective on our ever changing world:

Housing

• Millennials may be staying in the city longer than previous generations, but their long-term aspirations remain fixed on buying a single-family house. This trend will accelerate in the next few years, suggests economist Jed Kolko, as the peak of the millennial population turns 30. Faced with a huge student debt load, a weaker job market, and often high housing prices, millennials face tougher challenges than some previous generations, but retain remarkably similar aspirations.
• In L.A. about 27 percent of households can afford to buy a median-priced house. Not only are there fewer homes available to buyers of all income levels, but those just starting out or making their first foray into home ownership are worse off than they’ve been in years.
• The percentage of individuals living alone and single-parent families increased from 29 percent in 1980 to 38 percent in 1990. Of the 17 million households formed nationwide during the 1980s, only about one in four involved a married couple or a married couple with children. Nearly one in four involved people over 65 years of age.
• High housing prices are also rapidly remaking America’s regional geography. Even areas with strong economies but ultra-high prices are not attracting new domestic migrants. One reason is soaring rents: According to Zillow, for workers between 22 and 34, rent costs claim upwards of 45 percent of income in L.A., San Francisco, New York, and Miami compared to less than 30 percent of income in cities like Dallas and Houston. The costs of purchasing a house are even more lopsided: In L.A. and the Bay Area, a monthly mortgage takes, on average, close to 40 percent of income, compared to 15 percent nationally.
• The differential of housing cost accounts for much of this disparity. High housing prices tend to stunt upward mobility, particularly for minorities. One reason: The house remains the last great asset of the middle class. Homes represent only 9.4 percent of the wealth of the top 1 percent, but 30 percent for those in the upper 20 percent and, for the 60 percent of the population in the middle, roughly 60 percent. The decline in property ownership threatens to turn much of the middle class into a class of rental serfs, effectively wiping out the social gains of the past half-century.
• A growing number of Americans are living in a household with multiple adult generations as baby boomers look to support older parents as well as boomerang children struggling with student debt and a tough job market. The rub: There is a shortage of homes designed for multigenerational living arrangements.
• In all, more than 18% of the U.S. population lives in a multigenerational household, according to a 2014 Pew Research Center study, up from about 15% in 2000. Multigenerational households are defined as those that include at least two adult generations or with a skipped generation such as a grandchild living with a grandparent.
• High rents in cities like L.A. have prompted some local activists to call for slowing down gentrification by slowing down construction of new market-rate housing units. These initiatives are based on the common misconception that new market-rate housing causes higher rents. People see new pricey condos in gentrifying neighborhoods like Hollywood and downtown L.A. and conclude that the pricey condos cause higher rents. This conclusion is flawed. Rents increase not because there are too many new housing units, but because there are too few, relative to demand.
• The increase in renting is evident across all types of American households, regardless of age and income. Despite the conversion of millions of single-family homes to rentals and an upsurge in multifamily construction, the supply has not responded fully to the rising tide of demand. As a result, rents have climbed at the same time that household incomes have yet to recover from substantial declines over the past decade. Together these trends have led to record numbers of renters paying excessive amounts of income for housing, with little prospect for meaningful improvement.
• As cities and counties continue to be strapped for funds, resources to maintain general plans will increasingly fall short. The lack of proper general plan maintenance will increasingly expose proposed projects and localities to successful legal attack when a neighborhood organization, environmental group or competing business is seeking to overturn a development decision.
• The higher costs and risks associated with the approval process prompts developers to build projects that will be least controversial and will contain the biggest profit margins. Experts say that the market is distorted by four factors: 1) Neighborhood opposition makes it difficult to increase density or redevelop existing cities. 2) Suburban development is often down zoned to a lower density. 3) Current laws make it hard to establish new cites. 4) And for fiscal reasons, local governments encourage developers to build fewer large and expensive homes rather than more compact, affordable units.
• Some of these issues transcend the state, while some of them are much more prominent in California. A federal study found that opposition from neighbors to new development shared the blame for the affordability crisis in many U.S. cities. The study traced NIMBY-ism to concern over the preservation of property values, community characteristics, service levels and homogeneity. With the shift in emphasis from property taxes to sales taxes for funding local government comes increased incentives on the part of the cities and counties to encourage the development of shopping centers and auto malls instead of housing and manufacturing in an effort to boost sales tax revenue. Housing development, particularly low and moderate income housing, cannot provide enough tax revenue to pay for the local services that would have to be provided.
• The regions with the deepest declines in housing affordability, notes William Fischel, an economist at Dartmouth College, tend to employ stringent land-use regulations, a notion recently seconded by Jason Furman, chairman of President Obama’s Council of Economic Advisors. In 1970, for example, housing costs adjusted for income were similar in coastal California and the rest of the country. Today house prices in places like San Francisco and Los Angeles are three or more times higher, when adjusted for income, than most other metropolitan areas. For most new buyers, such areas are becoming what Fischel calls “exclusionary regions” for all but the most well-heeled new buyers.
• The biggest impact from regulation has been to diminish the supply of housing, particularly single-family homes. In a recent examination of permits across the nation from 2011 to 2014 for Forbes, they found that California regions lag well behind the national average in terms of new housing production, both multi-family and single family. Houston and Dallas-Fort Worth, areas with less draconian regulations, have issued three times as many permits per capita last year. Overall California’s rate of new permits is 2.2 per 1000 while across the Lone Star state the rate was nearly three times higher.
• In the “exclusionary regions” along both coasts, high land prices have made it all but impossible to build much of anything except luxury units. In Manhattan this has taken the form of high-rise towers that have been gobbled by the rich, including many foreigners, but this new construction has done little to make New York affordable for most residents. Between 2010 and 2015, Gotham rents increased 50 percent, while incomes for renters between ages 25 and 44 grew by just 8 percent.

Business Growth

• Attracting the right companies to a region matters. Today, American firms are diverging. In the past two decades returns to investment at the most profitable 10 percent have more than doubled by one measure, while returns for middling performers have increased only a little. A recent report from McKinsey attributes the divergence to the varying pace of digitization across industries. Highly digitized industries such as technology, media and professional services – all common in successful cities – have benefited from significant increases in margins. Digital laggards, such as healthcare and offline retail, are doing less well.
• The Brookings Institute reckons that America’s 50 most research and technology intensive industries have added nearly 1 million jobs since 2011. These industries are disproportionately based in cities and since they pay high wages have a galvanizing effect on local economies.
• The information sector, which includes motion picture production, broadcasting, publishing and new media industries, will continue to gain employment.
• As the automobile capital of the nation, L.A. is the recognized center of automotive design and transportation innovation. Additionally, current environment policy is motivating significant investment and research into this industry. This momentum suggests that there is a high growth potential in Los Angeles County. Think Tesla, Faraday, BYD.
• Los Angeles is home to some of the leading medical and bioscience research institutions in the nation. The biosciences industry is demonstrating the potential to grow and thrive in the L.A region, motivated in part by partnerships among private, non-profit and public agencies to develop competitive strength and capability here.
• The largest number of overall openings in L.A. will occur in the largest occupational groups, such as office and administrative support occupations, food preparation and serving occupations, and healthcare occupations (practitioners, technicians and support). Many of these occupations require lower levels of education and training. The expected openings for these job market participants are especially important to understand given the capabilities of the local labor supply. More than one-third of the projected openings for the next five years require workers without a high school diploma and no work experience. Another 29 percent will require workers with a high school diploma (or equivalent) and with no work experience. Together, these represent entry level jobs for unskilled workers across industries and occupations.
• During the recession, average wage growth slowed much less than was expected given the massive increase in unemployment, but has remained relatively flat during the recovery. Over the past two years, wage growth has floated around 2.25%, significantly below the 3.25% average rate that occurred from 1983 to 2015. A new report published by the Federal Reserve Bank San Francisco sheds some light on this puzzling aspect of the labor markets. During the recession, changes in the composition of workers propped up wage growth despite the large increase in unemployment. As the labor market recovered, this pattern reversed. Although these patterns are part of the normal dynamics of recession and recovery, the magnitude of the Great Recession and demographic changes (retiring baby boomers) has thrown a wrench in the works. The implication of these findings is that sluggish wage growth may be a poor indicator of slack in today’s labor market. In fact, the report notes that after correcting for worker composition changes, current wages are consistent with a strong labor market that is drawing low-wage workers to full time employment. Therefore, measures of wage growth that focus on full-time and continuously employed workers are probably better indicators of labor market strength.

Attracting Skilled Talent

• Tyler Cowen, and economist at George Mason University, predicted in his book “Average is Over” that the fortunes of both people and places would become more polarized. Ambitious and talented workers, he argued would want to work in a relatively small number of cities and regions. These economically successful clusters would benefit from scale and cement their advantages.
• Cowen believes that America is dividing itself in two. At the top will be 10% to 15% of high achievers, whose self-motivation and mastery of technology will allow them to roar away into the future. Outlining the radical economic transformations that lie in store for us, predicting the rise and fall of cities depending on their capacity to adapt to this machine-driven world and offering policy prescriptions for preserving American prosperity.
• The world’s skilled talent is more mobile than ever; they are choosing global cities that are investing in quality of life initiatives that help foster an environment in which collective talent can turn ideas into business opportunities and jobs. Washington, D.C., San Francisco, Boston, and San Jose are great examples of region’s embracing this idea. In the last decade these cities have increased their population’s level of 25-to-34 year olds with at least a four-year college degree to almost half.
• LA has the world’s largest higher education system with 112 college and university campuses which produce more Ph.D.s and graduate degrees than any in America, and they are home to the world’s greatest research institutes and concentration of Nobel laureates, MacArthur fellows, and members of the National Academies.
• The Los Angeles metropolitan region has  been successful, attracting 664,000 new 25-to-34 year olds with a bachelors degree in 2012 (a 30.4 percent increase since 2000). Yet LA seems to have two challenges — a turnstile economy and a growing population of 25 year olds and older – 48 percent in the city – who only possesses a high school degree or less.
• LA has the world’s largest higher education system with 112 college and university campuses which produce more Ph.D.s and graduate degrees than any in America, and they are home to the world’s greatest research institutes and concentration of Nobel laureates, MacArthur fellows, and members of the National Academies. LA’s network of five Cal State campuses now educate 110,000 students; they will celebrate their role in graduating the Cal State system’s 3 millionth student this year.
• LA’s college and university campuses and high tech companies have become our new “Anchor Tenants,” a term Stanford University sociologist Woody Powell uses to describe institutions that provide economic character and culture to a region. This network supports hundreds of thousands of jobs, research and education opportunities, and they commit incredible amounts of human and financial resources to LA’s communities.
• The Los Angeles County Economic Development Corporation just reported that the region currently supports 763,600 high tech jobs across a broad spectrum of industries. These are jobs that, on average, pay 70 percent more than other industries. Each new high tech job helps to create four more quality jobs for accountants, administrative assistants, and human resource professionals, to name a few.

Demographics

• Recent research from the Manhattan Institute showed that since 2000, the LA region has become California’s leader in net domestic migration to states like Arizona, Texas, and Nevada. Two thirds of those leaving were in our region’s workforce. In 2010 the LA Mayor’s Council on Innovation and Industry found that since 2008, 54 percent of UCLA’s engineering graduates have chosen to relocate from the region for a job. Further research shows that LA is graduating more engineers than Northern California by the astonishing ratio of three to one – but the vast majority of those graduates have chosen to relocate upon graduation.
• According to 2011 Census figures, children between ages 5 and 14 constituted about 7 percent of the population, less than half the level seen in newer suburbs and exurbs. The common habitués of these high-cost, high-density urban areas—singles and childless couples—have emerged.
• The highest percentage of U.S. women over age 40 without children—a remarkable 70 percent—can be found in Washington, D.C. In Manhattan, singles make up half of all households. In some central neighborhoods of major metropolitan areas such as New York, San Francisco, and Seattle, less than 10 percent of the population is made up of children under 18.Perhaps the ultimate primary example of the new child-free city is San Francisco, home now to 80,000 more dogs than children, and where the percentage of children has dropped 40 percent since 1970.
• In contrast, familial America clusters largely in newer suburbs and exurbs, and increasingly in the lower-cost cities in the South, the Intermountain West, and especially in Texas. Overall—and contrary to the bold predictions of many urbanists—suburban areas are once again, after a brief slowdown, growing faster than the urban cores.
• A. County lost nearly 18 percent of its children under the age of 10 between 2000 and 2013. This was due to a confluence of factors: the baby-boomer generation stopped having babies, immigrants stopped coming here in large numbers, the existing Latino population — which has a higher birthrate than whites — started moving away, and the birth rate has gone down significantly. The number of babies born in L.A. County today is roughly 134,000 per year, down from 204,000 in 1990. Fewer children can translate to not enough taxpayers and workers for the future.
• A. County has about 20 seniors for every 100 people of working age, and that ratio is projected to double by 2040. In the next 15 years, baby boomers will all hit 65 or older, and with that come the policy implications in providing nursing home care, in-home services, transportation services and medical and health needs to this surging population.

Transportation

• While population grows by 2 percent per year, automobile use is increasing by 5 percent. While fewer highways are being built, traffic is increasing. In each of the last four decades, the miles traveled on California roads has grown significantly faster than the growth in population. What has not been factored into the calculations is how land-use patterns can increase or decrease vehicle use and the demands on infrastructure. Approximately 200,000 people live within a quarter-mile of a transit stop in L.A. County, but six times that number – 1.24 million – live within one mile of a transit stop. Research shows that if these people used transit as often as those who live a quarter-mile from a stop, ridership would increase by 70,000 riders – a 19 percent increase on Metro rail lines.