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SAN JOSE STATE UNIVERSITYRegional Intelligence Report
March 2020
Prepared by
ABOUT BEACON ECONOMICS
PROJECT TEAM
Founded in 2007, Beacon Economics, an LLC and certified Small Business Enterprise in California, is an independent research and consulting firm dedicated to delivering accurate, insightful and objective economic analysis. Leveraging unique proprietary models, vast databases and sophisticated data processing, the company’s specialized practice areas include sustainable growth and development, real estate market analysis, economic forecasting, industry analysis, economic policy analysis, and economic impact studies. Beacon Economics provides its clients with the data and analysis required to understand the significance of on-the-ground realities and to make informed business and policy decisions.
Practice Areas:
For further information about this report, or to learn more about Beacon Economics’ practice areas, please contact:
Visit the Beacon’s website at www.BeaconEcon.com
• Sustainable Growth and Development
• Housing, Land Use and Real Estate Advisory
• Economic and Revenue Forecasting
• Economic, Fiscal and Social Impact Analysis
• Regional and Sub-Regional Analysis
• Litigation and Testimony
SHERIF HANNA
Managing [email protected]
CHRISTOPHER THORNBERG, PhD
Founding [email protected]
MAZEN BOU ZEINEDDINE
Practice Lead, Economic, Fiscal, and Social Impact [email protected]
TANER OSMAN, PhD
Manager, Regional and Sub-Regional [email protected]
JOHN MACKE
Research Associate, Regional and Sub-Regional [email protected]
VICTORIA PIKE BOND
Director of [email protected]
RICK SMITH
Director of Business [email protected]
Regional Intelligence Report | United States Outlook3
THE TIME OF THE CORONAVIRUS: A LITTLE, NOT A LOT, OF PANIC GOES A LONG WAY
The current state of affairs in the global and U.S economy is unlike anything experienced in modern times, and like
many forecasting organizations, Beacon Economics is working to fully grasp the scope of what is happening and
exactly how it might shift the economic outlook. There are many potential outcomes to this crisis. And while it is easy to
underestimate the resilience of the U.S. economy, that does not diminish the risks posed by the worldwide Coronavirus
(Covid-19) pandemic – it is the greatest threat to the nation’s economic expansion in over a decade.
This is significant for Beacon Economics as we were largely dismissive of the many bearish claims and predictions of
recession that have dominated the headlines over the past couple of years. The health crisis created by the Coronavirus
is extremely serious and the economic risks are still not fully understood. The next two weeks will be critical in gaining
an accurate sense of the true scope of the problem.
United States Outlook
Regional Intelligence Report | United States Outlook 4
Despite it all, it is by no means fait accompli that the U.S. economy is about to fall into a recession of any scale, much
less a major one – or even a depression as suggested by U.S. Treasury Secretary Steve Mnuchin. Too many pundits,
forecasters, and politicians are leaping to the conclusion that a recession is inevitable (or even already here) and the
financial markets are in almost complete freefall while panic grips short term debt markets. Of course, hyperbolic
overreactions have become routine on Wall Street—remember that 14 months ago the stock market was down 20%
due to fears centered on inflation, rising interest rates, the trade war, and a real estate bust. But this time, Wall Street’s
overreaction is on the verge of creating an unnecessary financial crisis of its own, distinct from the real effects of the
pandemic.
At the center of the uncertainty are the actions being taken by businesses, consumers, and regulators to contain the
disease. There have been wholesale cancelations of conferences, travel, sporting events, live entertainment, and
really any forum in which large groups of people gather. Public health mandates, both voluntary and otherwise, have
led many businesses to implement short run work-from-home policies for their employees and caused restaurants
and bars across the nation to close temporarily. The San Francisco Bay Area upped the ante by instituting mandatory
shelter-in-place rules that restrict activity to essential needs such as grocery shopping and medical appointments. Just
before this outlook was published, both the State of California and New York followed suit. Such draconian actions may
well be emulated in other parts of the nation.
Regional Intelligence Report | United States Outlook 4
Regional Intelligence Report | United States Outlook5
This sudden halt in economic activity will create turmoil in the economy in the coming weeks. The March employment
numbers will surely be grim. Initial unemployment claims are already crashing some state’s computer systems due
to demand and will likely jump more quickly than ever before. The pullback in retail sales (outside of essentials) will
send ripples through the U.S. and global manufacturing base. The will also be a slowing in home sales and business
formation. Many businesses will continue to operate but will experience a loss in productivity driven by absent
employees and the basic complications of unexpected work-from-home policies. Local governments will experience
short-term disruptions in their revenue flows. This is one big pothole the U.S. economy is hitting.
But as dramatic as these changes are, such a shock is not necessarily recession causing. A recession occurs when a
negative shock to one part of the economic system is large enough and sustained enough to create cascading effects
on other parts of the economy. While the sharp jump in unemployment will be startling, it’s important to remember that,
at least initially, these are furloughed jobs, not lost jobs.
As long as current public health measures are sufficient to prevent the Coronavirus from becoming truly widespread
across the nation, it is business delayed rather than business cancelled. The vast majority of restaurants will reopen.
Cars not purchased this month, will likely be bought in the months ahead. Canceled trips to Disneyland or other travel
will happen this summer if not now.
Truly ‘lost’ jobs are positions that will not return for a long period… perhaps years, if ever. This characterizes the
construction, mortgage lending, retail furniture and appliance, and real estate jobs that disappeared after the crash of
the sub-prime fueled real estate bubble more than a decade ago. Today, we are talking about jobs that may only be lost
for a period as short as 6 to 10 weeks—of course this is highly dependent on containment of the virus. And while short-
term job losses will be a jolt to the system, the impact will be partly offset by employment increases in sectors such
as health care and transportation, as well as unemployment insurance and various assistance programs the Federal
government is rushing to put into place.
Beacon Economics expects there to be a sharp drop in employment and a commensurate rise in unemployment in the
near term. It is highly likely that the U.S. economy will experience negative growth in the second quarter—although how
negative is unknown. But if the shock is short lived enough, the economy will quickly catch up, possibly with a positive
third quarter that makes up for much of the loss in the second. Under this scenario job growth would get back to trend
by the end of the year. Critically, how this plays out will be revealed over the next few weeks as the U.S. health and
medical system gets a more accurate sense of the true breadth of the nation’s outbreak.
Regional Intelligence Report | United States Outlook 6
The more quickly the Coronavirus’s transmission rates can be slowed, which will prevent hospitals and the health care
system from being overwhelmed, the less long run harm to the economy. This does not imply that the disease will be
eradicated in a few weeks—but rather
that the current pause in economic activity will give regulators a chance to slow the spread and contain the virus within
a few hot spots. This will still lead to disruptive local situations, but the nation as a whole will largely be able to get back
to business albeit with a different modus operandum. The good news is that at the moment outside of New York and
Seattle, as of this writing, hospitals are not yet overrun with severe cases of the illness. But, again, what happens over
the next few days and weeks will be - we have to wait and see what transpires over the next few days.
Beacon Economics also acknowledges the possibility that the cat is already out of the bag, and there will be an explosive
increase in confirmed cases in the coming days. If the virus does overrun a substantial portion of the population and
the United States has to deal with the kind of tragedy occurring in Italy or Wuhan, then expect the economic disruptions
to go on longer – the fallout of delayed action by U.S. authorities. Clearly there is a breaking point, where the economy
can’t simply rebound quickly and will fall into a recession.
But how bad will it get? A recession would be likely, but it isn’t clear how deep or damaging it would be. Mitigation
and adaption will be key. The ability of people and businesses to mitigate and adapt under challenging circumstances
is often underestimated. History is replete with examples of populations and nations overcoming complex obstacles
created by disastrous circumstances ranging from natural disasters to war.
Regional Intelligence Report | United States Outlook7
While we continue to see dire predictions of millions of American becoming infected with the Coronavirus, some of the
earliest hit countries, including China, Korea, and Japan, appear to have gained control over the spread of the disease
within two months. Data coming from Korea’s extensive testing also indicates that for a large portion of the population
the virus has had a fairly modest health impact. Even under the worst of circumstances, businesses will eventually have
to start operating and people will begin to travel again.
Sadly, the United States is running in the dark because of our dangerous lack of capacity in Coronavirus testing.
While we should be prepared for any scenario, best to worst, simply assuming the worst and acting on that right now
may cause unnecessary harm. For example, policymakers in some regions, including here in California, are already
suggesting that schools may end up being closed for the rest of the school year. At the moment there are less than
1,000 cases in California, out of 40 million people. This doesn’t imply that schools should necessarily reopen, but that
decision will hopefully be made only after several weeks of stay-at-home efforts and increased testing provide better
direction.
And consider the increasingly hysterical reactions of the financial markets. The utter panic gripping short run credit
markets could create an economic crisis all by itself, leading the Federal Reserve to intervene heavily in the markets
to keep things somewhat stable. Some of the most hyperbolic rhetoric and cries for relief are coming from hedge fund
managers, which is ironic given how they seem to be the ones who make out the best in these situations.
And then there is the Trump administration itself which seems intent on offsetting their lack of action at the beginning
of the crisis with an extreme fiscal stimulus plan that could cost the Federal government upwards of $1 trillion in a
year when the nation is already expected to borrow $1 trillion due to the 2017 tax cut. There are very real long run
implications to further exploding the national deficit if the situation actually doesn’t warrant such dramatic intervention.
Throughout all this, in our favor, is the strength of the U.S. economy. While business investment has been a drag over
the last 18 months, the fundamentals for growth are very good. Unlike the typical rhetoric heard in this miserabilist age,
households are not on the verge of financial apocalypse. Financial obligation ratios and debt-to-income ratios are at
their lowest points in years. Savings rates are at a 30-year high even as housing affordability, as measured by housing
cost-to-income ratios is at a ten-year low. Consumer debt delinquencies outside of student loan debt are all lower
today than they were at any point before the Great Recession.
Regional Intelligence Report | United States Outlook 8
U.S. unemployment has been at record low levels even though over the last two years the number of job openings in
the nation has been greater than the number of people looking for work. It is true that corporations have been building
up debt to buy back shares, something that the Federal policymakers should worry about and address. But overall,
business debt-to-GDP is actually lower now than five years ago. Banks look rock solid in their portfolios as well, largely
due to the (excessive) restrictions placed on them by Dodd-Frank. This is an economy that can take a hit.
Overall, Beacon Economics is urging caution but not panic. In the days ahead, we will do our best to stay in front of
this rapidly changing situation and deliver to our clients the best economic outlooks possible. Right now, we lack the
data to fully understand how effects from the pandemic might ripple through the economy. This is true of all economic
prognosticators—and it’s precarious to release dire outlooks without appropriate caveats. Yes, things could get much
worse and have a truly profound impact on the economy. Then again there is another case to be made. that this crisis
could be nothing more than a period that lies at the heart of your “what I did during the great virus lockdown” story in
the years ahead.
Regional Intelligence Report | California9
California Outlook
The final quarter of 2019 brought to a close another strong year for the California economy. During the year, 310,300
jobs were added to total nonfarm payrolls in the state. This represented a growth rate of 1.8% for the year, and compared
favorably to 2018, when 260,400 nonfarm jobs were added by the state’s nonfarm employers, a growth rate of 1.5%.
The state’s strong fourth quarter paints a picture that is a far cry from the beginning of the year, when the stock market
had just seen a major correction, there was anxiety about trade uncertainty, and forecasts about a national and global
slowdown were coming from all quarters. The fears surrounding trade, for now, seem overblown, and there is no
evidence that we are on the cusp of a turndown in economic activity. While there are concerns surrounding the spread
of the Coronavirus, the extent of any impact on the California economy, while uncertain, would likely be temporary and
limited.
Yet as California’s economy continues to soar, questions remain about the growth of the state’s labor force and the out-
migration of low-income workers. And with another defeat for SB 50 – the state’s ambitious effort to increase housing
construction though density increases in cities – the state’s housing shortage remains cause for worry.
Regional Intelligence Report | California 10
ANOTHER STRONG EMPLOYMENT YEAR CAPS A STRONG DECADE
The fourth quarter of 2019 marked the end of a decade of strong expansion for the California economy. Over the course
of the past decade, nearly 3.5 million nonfarm jobs were added to the state, at a growth rate of 23%. In the preceding
decade, fewer than one quarter of a million jobs were added to California’s economy, a growth rate of 1.5%. These
numbers are obviously skewed by the business cycle: the first decade of this century ended during the depths of the
‘Great Recession’, while the last decade ended in the midst of the nation’s longest economic expansion on record. That
said, California’s rate of job growth over the past decade was not only impressive compared to the previous decade,
but also when compared to the entire nation, where the rate of job growth was 18%.
Within California, job growth has varied by region. Over the past year, Los Angeles County added 66,500 jobs, more
than any other county in the state. This is a function of LA County’s size – it’s the largest in the state and nation –
where a small percentage increase in jobs can lead to a large number of total jobs added. In terms of growth rate, the
number of jobs in the County grew at a 1.5% rate, slower than the state average. The fastest growth was in the Yuba
City MSA, were jobs grew at a 4% rate. Given its relatively small size, this rate of growth equals just 1,700 jobs, which
while important to the local economy, accounted for less than 1% of the state’s job growth.
The most impressive combination of absolute job growth and percentage increases occurred in San Diego County at
34,500 jobs and 2.3% growth, the San Jose MSA at 33,200 jobs and 2.9% growth, the Inland Empire at 30, 800 jobs
and 2.0% growth, and the San Francisco MSA at 29,800 jobs and 2.6% growth.
Regional Intelligence Report | California 10
Regional Intelligence Report | California11
MSA Dec-19 YTY Change YTY % Change
CALIFORNIA EMPLOYMENT BY REGION
California
Los Angeles-Long Beach-Glendale Metro Div
San Diego-Carlsbad MSA
San Jose-Sunnyvale-Santa Clara MSA
Riverside-San Bernardino-Ontario MSA
San Francisco-Redwood City-South San Francisco Metro Div
Anaheim-Santa Ana-Irvine Metro Div
Oakland-Hayward-Berkeley Metro Div
Sacramento--Roseville--Arden-Arcade MSA
Fresno MSA
Salinas MSA
Santa Rosa MSA
Bakersfield MSA
San Rafael MD
Modesto MSA
Merced MSA
Santa Maria-Santa Barbara MSA
San Luis Obispo-Paso Robles-Arroyo Grande MSA
Visalia-Porterville MSA
Yuba City MSA
Oxnard-Thousand Oaks-Ventura MSA
Santa Cruz-Watsonville MSA
Chico MSA
Redding MSA
Hanford-Corcoran MSA
Napa MSA
Stockton-Lodi MSA
Madera MSA
El Centro MSA
Vallejo-Fairfield MSA
17,612,500
4,599,000
1,529,700
1,167,300
1,544,900
1,193,700
1,676,600
1,206,200
1,025,100
367,000
150,200
213,400
273,700
120,400
182,000
70,700
189,100
120,900
129,900
46,600
312,300
104,700
85,000
68,200
41,900
75,700
244,100
39,900
52,800
141,000
310,300
66,500
34,500
33,200
30,800
29,800
23,000
19,800
11,400
7,100
4,500
4,200
4,000
3,700
2,700
2,500
2,300
1,900
1,800
1,800
1,700
1,400
1,100
1,000
900
900
900
800
600
-100
1.8
1.5
2.3
2.9
2.0
2.6
1.4
1.7
1.1
2.0
3.1
2.0
1.5
3.2
1.5
3.7
1.2
1.6
1.4
4.0
0.5
1.4
1.3
1.5
2.2
1.2
0.4
2.0
1.1
-0.1
Source: California Employment Development Department; Analysis by Beacon Economics
Regional Intelligence Report | California 12
EMPLOYMENT GROWTH BY INDUSTRY
In terms of relative growth by job sector, Educational Services, Construction, and Health Care and Social Assistance
saw the biggest employment gains while the highest number of jobs was added in Health Care and Social Assistance
and Government. Long-term trends, particularly an aging population, will continue to drive job growth in Health Care
and Social Assistance. Modest job losses occurred in Retail Trade and Wholesale Trade. In relation to Retail Trade, the
continued trend towards ecommerce will suppress employment prospects for physical retail businesses.
Industry Dec-19 YTY Change YTY % Change
CALIFORNIA JOB GROWTH BY SECTOR
Total Nonfarm
Educational Services
Construction
Health Care & Social Assistance
Administrative & Support & Waste Services
Professional, Scientific & Technical Services
Real Estate & Rental & Leasing
Information
Management of Companies & Enterprises
Government
Transportation, Warehousing & Utilities
Leisure & Hospitality
Finance & Insurance
Manufacturing
Other Services
Mining and Logging
Retail Trade
Wholesale Trade
17,612,500
399,200
902,400
2,456,100
1,178,600
1,330,700
299,700
562,400
258,800
2,641,700
686,100
2,032,700
547,300
1,344,200
576,500
23,400
1,677,100
695,600
310,300
17,100
31,300
81,000
36,500
30,700
6,400
11,600
4,300
40,300
10,300
28,000
6,600
11,400
2,900
100
-5,400
-2,800
1.8
4.5
3.6
3.4
3.2
2.4
2.2
2.1
1.7
1.5
1.5
1.4
1.2
0.9
0.5
0.4
-0.3
-0.4
Source: California Employment Development Department; Analysis by Beacon Economics
Regional Intelligence Report | California13
Beacon Economics is forecasting that employment in California will grow by 1.83% in 2020 or 322,561 jobs. Growth will
continue in 2021 with employment forecast to expand by 1.43%, or 252,209 jobs.
NONFARM EMPLOYMENT, HISTORICAL AND FORECAST
Source: California Employment Development Department; Analysis by Beacon Economics
6
2
-2
-6
4
0
-4
-8
Actual Forecast
Qua
rter
Q4-
01
Q4-
91
Q4-
03
Q4-
93
Q4-
05
Q4-
95
Q4-
07
Q4-
97
Q4-
09
Q4-
90
Q4-
02
Q4-
92
Q4-
04
Q4-
94
Q4-
06
Q4-
96
Q4-
08
Q4-
98
Q4-
10
Q4-
99
Q4-
11
Q4-
15
Q4-
00
Q4-
12
Q4-
16
Q4-
19
Q4-
13
Q4-
17
Q4-
20
Q4-
22
Q4-
14
Q4-
18
Q4-
21
Q4-
23Q
4-24
Regional Intelligence Report | California13
Regional Intelligence Report | California 14
The number of housing permits issued in the state peaked in the first quarter of 2018 and has trended lower since then.
Even before this downturn, the state was in the midst of a housing shortage. As the shortage persists, it will create two
primary effects. First, it will put upward pressure on housing prices, exacerbating affordability problems, and second
(relatedly), it will shape the nature of the state’s labor force.
LABOR FORCE AND HOUSING SHORTAGES
After five months of no growth or negative growth, California’s labor force finally expanded in December 2019, although
growth was down for the quarter overall, and December’s growth was below the trend since the ‘Great Regression’.
This naturally raises questions about the state’s housing market, and more specifically, the extent to which local
governments have created a conducive environment for creating new, badly needed housing.
Labo
r For
ce (S
A) T
hous
ands
Year
-ove
r-Yea
r Gro
wth
Rat
e (S
A)
20,000 2.0
19,0001.0
18,000
0.0
19,5001.5
18,500
0.5
-0.5
17,500 -1.0
Jan-
10
Jan-
12
Jan-
14
Jan-
16
Jan-
18
Jan-
11
Jan-
13
Jan-
15
Jan-
17
Jan-
19
Sep-
10
Sep-
12
Sep-
14
Sep-
16
Sep-
18
Sep-
11
Sep-
13
Sep-
15
Sep-
17
Sep-
19
May
-10
May
-12
May
-14
May
-16
May
-18
May
-11
May
-13
May
-15
May
-17
May
-19
Labor Force Growth
Source: California Employment Development Department; Analysis by Beacon Economics
LABOR FORCE
Regional Intelligence Report | California15
Source: The American Community Survey (ACS) Public Use Microdata Sample; Analysis by Beacon Economics
Domestic net migration patterns reveal a worrying trend: California has lost more population to other states than
it has gained from them. These losses have been offset by international migration to the state, but the nature of
domestic net migration raises red flags. California has been losing low-income workers to other states, while also
losing workers with lower levels of education as housing shortages are rendering California relatively inaccessible
for these residents.
Num
ber o
f Per
mits
35,000
25,000
15,000
5,000
30,000
20,000
10,000
0
Q1-1
0
Q1-1
1
Q1-1
4
Q1-1
7
Q1-1
2
Q1-1
5
Q1-1
8
Q1-1
3
Q1-1
6
Q1-1
9
Q3-
10
Q3-
11
Q3-
14
Q3-
17
Q3-
12
Q3-
15
Q3-
18
Q3-
13
Q3-
16
Q3-
19
Single-Family Multi-Family
Source: California Employment Development Department; Analysis by Beacon Economics
HOUSING PERMITS
Income EducationWages Net Migration
Under $30,000
$30,000 to $49,999
$50,000 to $99,999
$100,000 to $149,999
Over $150,000
Total
-219,812
-65,502
28,075
18,447
13,774
-225,018
Less Than High School
High School Graduate
Some College
Bachelors Degree
Grad./Prof. Degree
Total
-67,283
-153,804
-202,881
-18,228
62,646
-379,550
HOUSING PERMITS
Regional Intelligence Report | California 16
TRENDS IN INTERNATIONAL TRADE
The recent tariff war truce between the United States and China will be welcome news for California’s trade businesses,
as 2019 marked downward years for both imports to and exports from the state, compared to 2018. Removing the
uncertainty surrounding U.S. trade policies, if only in the short-term, should help to improve the picture in 2020. How
this plays out, however, is yet to be seen.
Overall, 2019 marked a strong year for the state’s economy, and this trend is expected to continue in 2020.
250
150
50
200
100
0
2003
2006
2009
2004
2007
2010
2005
2008
2011
2013
2015
2017
2012
2014
2016
2018
2018
YTD
2019
YTD
TOTAL EXPORTS, CALIFORNIA ($BILLIONS)
TOTAL IMPORTS, CALIFORNIA ($BILLIONS)
Source: Wiser Trade; Analysis by Beacon Economics
Source: Wiser Trade; Analysis by Beacon Economics
600
400
200
100
500
300
0
2003
2006
2009
2004
2007
2010
2005
2008
2011
2013
2015
2017
2012
2014
2016
2018
2018
YTD
2019
YTD
Regional Intelligence Report | San Jose State University17
THE SOUTH BAY
The previous sections discussed the potential impact of the Coronavirus (COVID-19) on the U.S. and California
economies. The same uncertainties surrounding the national and state pictures apply to the South Bay as well.
The following analysis demonstrates that the South Bay is entering these troubled waters from a position of
strength.
The South Bay kicked off the year with total nonfarm employment growing 1.4% from January 2019, to total
1.2 million workers. Although year-over-year growth was below January 2019’s 2.4%, it wasn’t because of a
lack of job openings, but rather a tightening labor force. The South Bay’s year-over-year nonfarm growth was
slightly below the 1.5% statewide increase and far ahead of the East Bay’s employment growth of 0.2%. But San
Francisco County had stronger growth from January 2019 to January 2020, at 3.0%. The South Bay’s labor force
increased 0.7% from January 2019 to January 2020, slower than the previous year’s growth of 1.8%. Most of the
workers were absorbed into the job market, however, as the unemployment rate fell 0.3 percentage point to
2.5%, far lower than California’s unemployment rate of 3.9%.
OVERVIEW
EMPLOYMENT
Empl
oym
ent (
000s
,SA)
Year
-Ove
r-Yea
r (%
) Gro
wth
1200 6
10002
800
700
-2
-4
-6
-8
11004
900
0
600 -10
Jan-
05
Jan-
07
Jan-
09
Jan-
11
Jan-
06
Jan-
08
Jan-
10
Jan-
12
Jan-
13
Jan-
14
Jan-
15
Jan-
16
Jan-
17
Jan-
18
Jan-
19
Jan-
20
Jul-0
5
Jul-0
7
Jul-0
9
Jul-1
1
Jul-0
6
Jul-0
8
Jul-1
0
Jul-1
2
Jul-1
3
Jul-1
4
Jul-1
5
Jul-1
6
Jul-1
7
Jul-1
8
Jul-1
9
Total Nonfarm Employment Year-Over-Year % Growth
Source: California Employment Development Department; Analysis by Beacon Economics
TOTAL NONFARM EMPLOYMENT AND GROWTH
Regional Intelligence Report | San Jose State University 18
Information Services was the fastest-growing sector from January 2019 to January 2020 at 8.4%, following the
previous year’s 9.0% increase. Transport and Warehousing grew 4.9%. Professional, Scientific, and Technical
Services grew 2.2%, slowing from the previous year’s 4.9% growth. Nonetheless, Professional, Scientific, and
Technical Services added a little over 3,500 workers over 2019, second only to Information Services, which
increased by roughly 8,100 employees.
Although overall employment was up throughout the South Bay, certain sectors lost workers in 2019. Leisure
and Hospitality, which has over 106,000 employees, declined 0.5% from January 2019 to January 2020, following
growth of 2.6% in the previous year. Management had the largest percentage decrease of any sector at 6.1%,
similar to 2018, when it fell 9.3% year over year. In absolute numbers, Retail Trade sustained the largest job
losses from January 2019 to January 2020: 1,300 workers, or 1.6%.
Year
-ove
r-Yea
r % G
row
th
15
5
-5
-10
10
0
-15
Jan-
05
Jan-
10
Jan-
15
Sep-
06
Sep-
11
Sep-
16
May
-08
May
-13
May
-18
Nov
-05
Nov
-10
Nov
-15
Jul-0
7
Jul-1
2
Jul-1
7
Mar
-09
Mar
-14
Mar
-19
Jul-0
5
Jul-1
0
Jul-1
5
Feb-
07
Feb-
12
Feb-
17
Oct
-08
Oct
-13
Oct
-18
Apr-0
6
Apr-1
1
Apr-1
6
Dec
-07
Dec
-12
Dec
-17
Aug-
09
Aug-
14
Aug-
19Ja
n-20
Tech Total
Source: California Employment Development Department; analysis by Beacon Economics*Tech is defined as the Professional, Scientific, and Technical Services Industry (NAICS 54)
TECH* VS. TOTAL NONFARM GROWTH
Regional Intelligence Report | San Jose State University19
IndustryJanuary 2020
Emploment (Thousands) 1-Year % Growth1-Year Absolute
Change (Thousands)
JANUARY 2020 EMPLOYMENT BY INDUSTRY
San Jose
Total Nonfarm
Information
Transport/Warehouse
Other Services
Financial Activities
Prof Sci and Tech
Admin Support
Government
Construction
Manufacturing
Education/Health
Leisure and Hospitality
Utilities
Retail Trade
Wholesale Trade
Management
1,156.1
104.6
15.4
29.8
38.5
166.6
63.7
96.8
51.9
174.8
176.8
106.3
1.6
83.2
31.3
14.7
1.4
8.4
4.9
3.8
3.6
2.2
2.0
1.5
1.4
0.9
0.2
-0.5
-0.5
-1.6
-2.3
-6.1
2.3
9.0
8.7
0.3
1.6
4.9
0.2
-0.5
1.6
2.2
3.4
2.6
-11.2
-2.0
-2.8
-9.3
Source: California Employment Development Department; Analysis by Beacon Economics
Regional Intelligence Report | San Jose State University 20
Average annual wages across the South Bay declined slightly from the third quarter of 2018 to the third quarter
of 2019, contracting 0.6% to $129,500. The main factor was a decline in Information Services, which fell 7.8%.
Because the industry picked up the largest number of workers, it is likely several of the added positions paid
less than average for the industry, causing the average wage to drop. The average annual wage for Information
Services is nonetheless the highest in the South Bay at $284,900. Wages in manufacturing, another high-paying
industry, also declined. The industry’s annual average wage fell 3.4%, to $187,800, from the third quarter of
2018 to the third quarter of 2019.
Wages rose in several industries in 2019. Leisure and Hospitality’s increased 11.1%, the largest percent increase
of any industry. Leisure and Hospitality’s annual wage reached $34,600, the lowest among all industries in the
South Bay and far below the average. Construction’s annual wage increased to $87,300 in the third quarter of
2019, a growth of 4.0%, the second highest in the two counties. Financial Activities followed suit, with a year-
over-year growth of 3.5%, which increased the annual average wage to $128,800, just shy of the South Bay
average.
WAGES
Industry 1-Year % GrowthQ3-2019 ($)
Q3-2019 ANNUAL AVERAGE WAGE BY INDUSTRY
South Bay
Total Private
Leisure/Hospitality
Construction
Financial Activities
Education/Health
Logistics
Natural Resources
Administrative Support
Other Services
Professional/Business
Wholesale Trade
Retail Trade
Manufacturing
Information Services
129,469
34,601
87,332
128,779
76,258
70,324
48,067
61,781
45,020
188,359
130,900
47,809
186,789
284,888
-0.6
11.1
4.0
3.5
2.9
2.5
2.2
1.9
1.9
0.0
-0.2
-1.6
-3.4
-7.8
Source: Quarterly Census of Employment and Wages; analysis by Beacon Economics
Regional Intelligence Report | San Jose State University21
Consumer and business spending was aided by increased employment throughout the South Bay in 2019.
Taxable sales climbed to roughly $48.0 billion in 2019. Its 4.5% growth beat the East Bay’s increase of 1.7%. San
Francisco fell 10.1%. The South Bay’s growth outpaced California’s 4.1%.
The City of San Jose had the largest increase in terms of absolute taxable sales, with over $770 million added
from 2018 to 2019, to total $17.2 billion. The City of Cupertino also added a significant amount, over $235.1
million, with its taxable sales reaching $2.9 billion in 2019. The largest percentage growth of any city in the
South Bay was Hollister: 8.9% to reach $425.6 million. Some cities’ taxable sales fell. The largest drop was in
Sunnyvale, where taxable sales fell by $214.2 million, followed by the City of Santa Clara, with a decline of
$108.6 million.
Analyzing sales tax receipts allows us to examine areas of consumer and business spending that are changing in
the South Bay. Sales tax receipts increased 0.4% from the first three quarters of 2018 to the first three quarters
of 2019 (year to date), reaching $343.7 million. Restaurants and Hotels had the largest percentage growth,
3.4%, followed by Food and Drugs at 2.0%. This is unsurprising, because as more people were employed and
earnings increased across several industries, higher demand arose for leisure and food. The largest decline in
sales tax receipts was in General Consumer Goods, which fell 4.6%, followed by Business and Industry, which
dropped 3.2%.
LOCAL SPENDING
Category 1-Year % Growth2019* Sales Tax Receipts ($ Millions)
SOUTH BAY TAXABLE SALES BY CATEGORY
Restaurants and Hotels
Food and Drugs
Building and Construction
Fuel and Service Stations
Autos and Transportation
Business and Industry
General Consumer Goods
42.6
13.3
26.0
19.9
48.0
78.0
53.2
3.4
2.0
0.3
-1.1
-1.7
-3.2
-4.6
Source: HdL Cos.; analysis by Beacon Economics
Regional Intelligence Report | San Jose State University 22
With Silicon Valley home to some of the world’s most prominent tech company headquarters, venture capital
plays a vital role in the South Bay economy. Over the past few years, the region has had massive increases in
capital raised and deals completed across various industries and verticals, and 2019 was no exception. From
2018 to 2019, total capital raised in the South Bay increased 18.1% to $11.9 billion—the largest amount ever
raised in the region. Furthermore, year-over-year growth was stronger than the 12.4% increase in 2018. The
total number of deals in 2019 was 771, slightly lower than the 797 in 2018, but the capital raised per deal was
much higher.
Automotive deals dominated in 2019. Nuro completed a deal for $940 million and Aurora Innovation did
one for $600 million. These two deals accounted for 12.9% of all venture capital raised in 2019. Business and
Productivity Software also was notable in 2019, with three deals worth $700 million total.
VENTURE CAPITALC
apita
l Rai
sed
($, B
illio
ns)
Dea
l Cou
nt
14 1200
10800
6
4
2
400
200
12 1000
8600
0 0
2001
2005
2009
2013
2003
2007
2011
2015
2017
2019
2002
2006
2010
2014
2004
2008
2012
2016
2018
Capital Raised Deal Count
Source: PitchBook; analysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.
SOUTH BAY CAPITAL RAISED AND DEAL COUNT
Regional Intelligence Report | San Jose State University23
As we approach the second quarter of 2020, significant deals have already been completed in the South Bay. In
early March, Waymo, also in the automotive industry, completed a deal for a whopping $2.25 billion. Netskope
had the second-largest deal so far: $340 million for network management software.
Company Primary Industry Code HQ LocationDate Size, ($ Millions)
2019’S TOP 15 DEALS
Nuro
Aurora Innovation
Carta
BridgeBio
Rubrik
Next Insurance
TripActions
ThoughtSpot
PsiQ
Fungible
CloudMinds
SambaNova Systems
Pensando Systems
Clumio
Druva
Feb-19
Feb-19
Apr-19
Jan-19
Jan-19
Oct-19
Jul-19
Aug-19
Sep-19
Jun-19
May-19
May-19
Oct-19
Nov-19
Jun-19
940.00
600.00
318.00
299.20
261.00
250.00
250.00
248.00
229.70
200.00
186.00
150.00
145.00
135.00
130.00
Automotive
Automotive
Financial Software
Pharmaceuticals
Network Management Software
Commercial/Professional Insurance
Business/Productivity Software
Business/Productivity Software
Computers, Parts and Peripherals
Business/Productivity Software
Electronic Equipment and Instruments
Application Specific Semiconductors
Application Specific Semiconductors
IT Consulting and Outsourcing
Network Management Software
Mountain View, CA
Palo Alto, CA
Palo Alto, CA
Palo Alto, CA
Palo Alto, CA
Palo Alto, CA
Palo Alto, CA
Sunnyvale, CA
Palo Alto, CA
Santa Clara, CA
Santa Clara, CA
Palo Alto, CA
San Jose, CA
Santa Clara, CA
Sunnyvale, CA
Source: Pitchbook; analysis by Beacon Economics
Regional Intelligence Report | San Jose State University 24
Company Primary Industry Code HQ LocationDate Size, ($ Millions)
2020’S TOP 15 DEALS YEAR-TO-DATA (MARCH)
Waymo
Netskope
SambaNova Systems
SentinelOne
Outset Medical
NextNav
Plume
Mojo Vision
Arctic Wolf Networks
HeadSpin
Cepton Technologies
Securiti.ai
Bigfoot Biomedical
Rancher Labs
OpsRamp
Mar-20
Feb-20
Feb-20
Feb-20
Feb-20
Jan-20
Feb-20
Feb-20
Mar-20
Feb-20
Feb-20
Jan-20
Jan-20
Mar-20
Jan-20
2,250.00
340.00
250.00
200.00
125.00
120.00
85.00
82.00
60.00
60.00
50.00
50.00
45.93
40.00
37.50
Automotive
Network Management Software
Application Specific Semiconductors
Network Management Software
Therapeutic Devices
Other Communications and Networking
Wireless Communications Equipment
Electronic Equipment and Instruments
Network Management Software
Software Development Applications
Electronic Equipment and Instruments
Network Management Software
Decision/Risk Analysis
Software Development Applications
Network Management Software
Mountain View, CA
Santa Clara, CA
Palo Alto, CA
Mountain View, CA
San Jose, CA
Sunnyvale, CA
Palo Alto, CA
Saratoga, CA
Sunnyvale, CA
Palo Alto, CA
San Jose, CA
San Jose, CA
Milpitas, CA
Cupertino, CA
San Jose, CA
Source: Pitchbook; analysis by Beacon Economics
Regional Intelligence Report | San Jose State University25
A key factor influencing the housing market has been the changing mortgage rates in recent years. Fixed-
rate mortgage averages in the U.S. increased throughout 2018. Not surprisingly, sales of existing single-family
homes in the South Bay began falling. After reaching a local peak in November 2018, however, 30-year fixed
rate averages in the U.S. began declining. Although home sales were slow to react, the lower rates began
taking effect in the fourth quarter of 2019 in the South Bay and much of California. From the fourth quarter
of 2018 to the fourth quarter of 2019, single-family home resales in the South Bay increased 2.0% to roughly
2,700. However, the double-digit home sales growth in the fourth quarter of 2019 across Southern California
outpaced the South Bay, as well as San Francisco County (1.3%), Alameda County (0.8%), and Contra Costa
County (-3.5%).
RESIDENTIAL REAL ESTATE MARKETSM
edia
n Pr
ices
($)
Sale
s
1,400,000 7,000
1,000,000 5,000
600,000
400,000
200,000
3,000
1,000
0
2,000
1,200,000 6,000
800,000 4,000
0
Q2-
07
Q2-
12
Q2-
17
Q4-
04
Q4-
09
Q4-
14
Q4-
19
Q3-
08
Q3-
13
Q3-
18
Q1-0
6
Q1-1
1
Q1-1
6
SalesMedian Price
Source: CoreLogic; analysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.
EXISTING SINGLE-FAMILY HOMES
South Bay
Regional Intelligence Report | San Jose State University 26
After year-over-year home price appreciation tracked into negative territory from the fourth quarter of 2018
through the third quarter of 2019, the median home price in the South Bay increased 1.2% year-over-year in
the fourth quarter of 2019. The turnaround was probably due to the rebound in home sales, as increased home
sales indicates more demand for single-family housing, driving up prices as potential buyers compete for a
limited supply.
Low inventories have also contributed to the substantial price growth of the past 10 years, as the tight supply of
single-family homes put upward pressure on prices. In October 2019, the supply of homes on the market in the
South Bay would have been exhausted in 2.0 months at the current pace of sales. At $1,207,000 in the fourth
quarter of 2019, roughly double the statewide average, the median price in the South Bay left homeownership
out of reach for many. In 2018 the median home price in the South Bay was 7.0 times the median household
income.
Much as in the state as a whole, single-family permitting in the South Bay has failed to reflect the needs of the
growing labor market. In 2019, the South Bay issued 130 more single-family permits than the previous year. But
this came after a 400-unit decline in 2018.
Perm
its Is
sued
9,000
4,000
7,000
2,000
5,000
0
8,000
3,000
6,000
1,000
Single-Family Multifamily
Source: CIRB; analysis by Beacon Economics
RESIDENTIAL CONSTRUCTION ACTIVITY
South Bay
2001
1995
2005
1999
2009
2013
2003
1997
2007
2011
2015
2017
2019
Regional Intelligence Report | San Jose State University27
For those priced out of homeownership, the average rent in the South Bay increased 2.4% year over year in
the fourth quarter of 2019 to reach $2,750. Second only to San Francisco ($3,270), the South Bay is among the
most expensive rental markets in California. But rent growth has cooled from the 6.2% average annual growth
following the 2008-09 recession. Apartment vacancies stabilized near 4.4% in the fourth quarter of 2019, with
the lowest vacancy rates in the East San Jose (2.6%), Cupertino/Saratoga (3.3%), and Campbell/Los Gatos (3.4%)
submarkets. Not surprisingly, two of the submarkets with the lowest vacancies also had the lowest cost of rent,
with high housing costs pushing residents into lower-cost neighborhoods such as East San Jose ($2,380) and
Campbell/Los Gatos ($2,570).
The emergence of COVID-19 as a threat to the U.S. and California economy muddies the near-term outlook for
residential real estate. Homebuyer sentiment will drop as isolationist policies restrict their ability to visit open
houses. But countervailing financial effects will offset some of the drop in homebuyer demand. Concerns over
the economic implications of COVID-19 have pushed U.S. bond yields to record lows amid a global flight to
quality assets. The 10-year Treasury bond yield fell to all-time lows of less than 1%, which should subsequently
push the 30-year fixed-rate mortgage rate to a record low. Lower financing costs will boost demand, especially
in the second half of the year, assuming sufficient containment by the end of summer. As a result, the housing
market in 2020 will probably decline in the first half of the year and then rebound. However, there is a substantial
amount of uncertainty around the length of time until proper containment and the overall decline in economic
activity that may come as a result.
Cos
t of R
ent (
$)
Vaca
ncy
Rate
(%)
3,000 7.0
2,0005.0
1,000
500
3.0
1.0
0.0
2.0
2,500 6.0
1,5004.0
0
Q2-
01
Q2-
06
Q2-
11
Q2-
16
Q4-
03
Q4-
08
Q4-
13
Q4-
18
Q3-
02
Q3-
07
Q3-
12
Q3-
17
Q1-0
0
Q1-0
5
Q1-1
0
Q1-1
5
Cost of Rent Vacancy RateSource: REIS; Analysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.
APARTMENT MARKET
South Bay
Regional Intelligence Report | San Jose State University 28
Performance of the various nonresidential real estate markets was a mixed bag in 2019. Employment growth
and a tight labor market led to robust demand for most commercial property types and drove gains in rent and
appreciation. The office and retail markets had strong demand and robust construction and cooling growth
in the cost of rent. Net demand for warehouse and distribution space fell, however, as softening rents, rising
vacancies, and negative net absorption indicated that more space was vacated and placed on the market than
was leased.
The cost of rent in the South Bay office market increased 3.4% from the fourth quarter of 2018 to the fourth
quarter of 2019 to $46.9 per square foot. Second only to San Francisco ($64.3 per square foot), the South Bay
office market remains one of the most expensive in California. But annual rent growth cooled from the highs of
2012 to 2016 and rested below the postrecession average of 4.4%. At 18.2%, the vacancy rate was the highest
of California’s major metro areas: 15.3% in the East Bay and 8.9% in San Francisco.
Many new developments have come online over the past five years. Office completions in 2019 totaled 2.15
million square feet, the largest by far of the nonresidential real estate markets in the South Bay. Of the new
supply added to the market in 2019, roughly 70% was A-class office space.1 Additionally, annual net absorption
remained positive in 2019, indicating that more office space was leased than was vacated and that demand for
office space in the South Bay remained strong.
The COVID-19 pandemic will hurt demand for office space in 2020, as economic activity drags amid uncertainty
about the virus’ spread. This effect will be largest in regions with a large amount of service exports and regions
tied directly to goods trade, as social distancing and travel restrictions limit services consumption and disrupted
global supply chains place a heavy drag on trade.
NONRESIDENTIAL REAL ESTATE MARKETS
Property Type 3-Year Growth % 3-Year Change (p.p.) Q4-19 Q4-19
COMMERCIAL RENTS AND VACANCY RATE
South Bay, Q4-16 to Q4-19
Office
Retail
Warehouse & Distribution
46.9
37.7
8.4
18.2
5.5
8.1
11.9
7.5
8.6
1.2
0.0
-0.6
Source: REIS; Analysis by Beacon Economics
1 A property’s asset class indicates a property’s condition and operating performance. A-class properties tend to be the best in the market, with above-average design, minimal or no deferred maintenance, superior locations, the highest rents, and tenants with strong credit.
Cost of Rent Vacancy Rate
Regional Intelligence Report | San Jose State University29
Rising 0.2% from the fourth quarter of 2018 to the fourth quarter of 2019, the cost of rent in the South Bay
retail market reached $37.7 per square foot, below San Francisco ($38.4 per square foot) but above the East
Bay ($32.1) and every other major metro in California. But annual rent growth has cooled from the highs during
much of the postrecession recovery. Retail space in the South Bay is highly sought after, as shown by the 5.5%
vacancy rate in the fourth quarter of 2019, down 0.3 percentage point from the same period a year earlier.
Squa
re F
eet (
Thou
sand
s)C
ost P
er S
quar
e Fo
ot ($
)
5,000
40.0
0
3,000
30.0
1,000
20.0
-2,000
15.0
4,000
35.0
2,000
25.0
-1,000
Completions Net Absorption
South Bay San Francisco East Bay
Source: REIS; nalysis by Beacon Economics
Source: Reis; nalysis by Beacon EconomicsNote: Dollar values are not inflation adjusted.
OFFICE MARKET COMPLETIONS & ABSORPTION TRENDS
RETAIL MARKET RENTS
South Bay, 2008 to 2019
Bay Area
2010
2012
2009
2014
2016
2011
2008
2013
2015
2017
2018
2019
Q1-9
0
Q1-9
3
Q1-0
2
Q1-1
1
Q1-9
6
Q1-0
5
Q1-1
4
Q1-9
9
Q1-0
8
Q1-1
7
Q3-
91
Q3-
94
Q3-
03
Q3-
12
Q3-
97
Q3-
06
Q3-
15
Q3-
00
Q3-
09
Q3-
18
Regional Intelligence Report | San Jose State University 30
Retail construction has picked up substantially since 2013. $507 million in retail permits were issued in 2019,
up $189 million from the previous year. Despite the increased permitting, no retail developments were brought
online in 2018 or 2019. Facing heavy disruptions from e-commerce, which continues to grow, net absorption
remained positive in 2019, indicating that retail space recorded strong occupancy gains.
In the near term, the spread of COVID-19 will affect the retail sector strongly. As the fear of contagion and
policies of self-isolation continue, brick-and-mortar retailers, restaurants, and entertainment venues will
sustain a large and rapid drop in demand.
Key indicators of real estate supply and demand reveal that during the fourth quarter of 2019, the South Bay
warehouse and distribution market experienced a slowdown in year-over-year rent growth, a modest increase
in vacancies, and negative net absorption. Trailing San Francisco ($10.3 per square foot), the average cost of rent
in the South Bay warehouse and distribution market was $8.4 per square foot, up 0.8% from the fourth quarter
of 2018. This was a substantial moderation in annual rent growth compared with the postrecession average
(2.5%). At 8.1% in the fourth quarter of 2019, the vacancy rate in the South Bay warehouse and distribution
property market was below San Francisco (9.0%) and the East Bay (9.4%). With year-over-year declines in
vacancies from 2014 through the first quarter of 2019, the vacancy rate rose 1.2 percentage points in the
fourth quarter of 2019. No new supply entered the market in 2018 or 2019, and a five-year stretch of positive
net absorption ended in 2019, when the South Bay recorded 530,000 square feet of negative net absorption.
A restriction and decrease in goods trade in the near term due to COVID-19 will impact supply chains and
reduce economic activity. Less consumer spending will eventually lead to a decline in demand for warehouse
space, tempering demand in the industrial property market. But demand in the logistics and industrial market
remains extremely strong, and the increased supply over the past several years has not satiated it. As a result,
after the impact of COVID-19 has faded, we expect construction activity in this market to ramp up very quickly.
Commercial permit values issued in 2019 across all property types totaled $2.25 billion, up $419 million
from the previous year. In fact, the South Bay issued more permits than the East Bay ($693 million) and San
Francisco ($1.0 billion). Similarly, although the total value of commercial permits increased in the South Bay,
they decreased in San Francisco (-$997 million) and remained stagnant in the East Bay ($21 million). The office
property market issued the largest value of permits in the South Bay at $1.07 billion in 2019, and the retail
market recorded the strongest year-over-year gains, with $189 million in additional permits in 2019 over 2018.
On the other hand, construction in the industrial property space has been lackluster starting in 2002 and
remained that way through 2019, with $41 million in industrial permits issued in 2019, up a meager $9 million
from the previous year.
SAN JOSE STATE UNIVERSITYRegional Intelligence Report