Download What`s heating up and cooling off in the San Francisco Bay Area

January 31, 2017
Economics Group
Special Commentary
Mark Vitner, Senior Economist
[email protected] ● (704) 410-3277
Misa Batcheller, Economic Analyst
[email protected] ● (704) 410-3060
What’s Heating Up and Cooling Off in the
San Francisco Bay Area
California’s economy has outpaced the nation for the past six years, and the San Francisco Bay
Area has been the fastest growing part of the state by far (Figure 1). Annual real GDP growth in
the greater Bay Area has averaged a strong 4.0 percent between 2010 and 2015.1 Growth in the
local economy has been driven primarily by the strength of the region’s technology sector and its
impact on construction and supporting industries. The surge of economic growth at a time when
the national economy has been growing only modestly is largely without precedent. Combined,
the San Francisco-Oakland-Hayward and San Jose-Sunnyvale-Santa Clara metropolitan areas
accounted for 8.0 percent of all U.S. real GDP growth from 2010 to 2015, despite comprising just
3.8 percent of the nation’s economy.
Bay Area employment growth continues to outpace the nation (Figure 2). Payroll gains have
cooled relative to recent years, however, as late-cycle headwinds, including tighter labor market
conditions and rising compensation costs, have created a more challenging business environment.
Annual job growth in the Bay Area has slowed to between 2.5 percent and 3 percent compared to
the 3.5 percent to 4 percent pace registered during the majority of 2013 to 2015. Notably, this
slowdown has also been evident in the region’s tech sector. Job growth in the professional,
scientific & technical services and information sectors, which capture a significant portion of
high-tech professions such as computer programmers, software developers and engineers, has
decelerated over the past year. The number of initial public offerings (IPOs) has also slowed, as
valuations have been stretched in the private markets, making IPOs appear less attractive.
Figure 1
Figure 2
Job Growth: SF Bay Area vs. United States
GDP Growth Comparison
Year-over-Year Percent Change
8%
8%
SF Bay Area: 2015 @ 5.7%
California: 2015 @ 3.8%
United States: 2015 @ 2.5%
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
3-MMA Year-over-Year Percent Change
8%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
-8%
-8%
SF Bay Area CSA: Dec @ 2.5%
United States: Dec @ 1.5%
San Jose MSA: Dec @ 3.4%
San Francisco DMA: Dec @ 2.2%
Oakland DMA: Dec @ 2.3%
-10%
-12%
-6%
-6%
02
03
04
05
06
07
08
09
10
11
12
13
14
15
8%
6%
-10%
-12%
-14%
-14%
95
97
99
01
03
05
07
09
11
13
15
17
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities
1
The greater San Francisco Bay Area is comprised of the 12 counties that make up the San Jose-San
Francisco-Oakland combined statistical area, which include Alameda, Contra Costa, Napa, Marin, San
Francisco, San Mateo, Santa Clara, Sonoma, Solano, Santa Cruz, San Benito and San Joaquin.
This report is available on wellsfargo.com/economics and on Bloomberg WFRE.
Bay Area
employment
growth
continues to
outpace the
nation.
Late-cycle
headwinds have
created a more
challenging
business
environment.
What’s Heating Up and Cooling Off in the San Francisco Bay Area
January 31, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
Tighter Labor Markets Are Restraining Growth
The persistent tightening of the labor market has been a notable development across the country
this past year, as the labor market has reached levels widely thought to be consistent with full
employment. The U.S. unemployment rate stood at 4.7 percent in December and has been at or
below 5 percent for the past year. In comparison, labor market conditions in the Bay Area have
been tight for quite some time, as the jobless rate in the greater San Francisco Bay Area has been
below 5 percent for nearly two years. The Bay Area’s unemployment rate is trending near
4.3 percent and is just about even with its previous 2006 low, but remains a full percentage point
above the low reached during the height of the dot-com era in 1999. Jobless rates among the Bay
Area’s counties range from a low of 3.1 percent in San Mateo to a high of 5.4 percent in Solano.
Labor costs have
been edging
higher as
employers
compete to
attract and
retain qualified
workers.
With the pool of available workers continuing to diminish, labor costs have been edging higher as
employers compete to attract and retain qualified workers. By a range of measures, wage growth
has picked up across the country. Average hourly earnings in the United States were up
2.9 percent year over year in December after rising by an average of around 2 percent from
2010 to 2015. Wages have risen much faster in the Bay Area, and the region is home to some of
the highest earning counties in the country. Santa Clara County ranks No. 1, with average weekly
wages in the second quarter of 2016 at $2,252. That marks a significant $1,263 above the national
average. Santa Clara’s neighboring tech-centric counties, San Mateo and San Francisco, also
placed among the top five. As shown in Figure 3, the majority of the Bay Area’s localities have
outpaced both the state and the national average wage growth. Napa County recorded a
particularly strong increase, with average weekly wages rising more than 5 percent year over year.
The strength in average hourly earnings is largely due to the preponderance of higher-paying jobs
in information technology and life sciences. The rapid growth in these jobs has supported hiring
in other industries, which has worsened income polarization within the region and made it much
more difficult for a large proportion of Bay Area residents to find affordable housing. Wages in
lower-paying parts of the economy have also been pulled higher in recent years, however.
Many Bay Area
cities have been
at the forefront
of local
minimum wage
increases.
Adding to these building wage pressures, California’s state minimum wage increased $0.50 to
$10.50 an hour at the start of 2017. The state’s minimum wage is scheduled to increase every year
until it reaches $15 for all businesses by Jan. 1, 2023. Many Bay Area cities have been at the
forefront of local wage increases, with some implementing changes as part of a plan to reach a
$15 minimum wage ahead of the statewide mandate. San Jose’s minimum wage is set to increase
to $12 on July 1, 2017, before ultimately reaching $15 by Jan. 1, 2019. Palo Alto and Cupertino
have also adopted legislation to reach $15 by Jan. 1, 2019. Meanwhile, Mountain View and
Sunnyvale have laws in place to reach the $15 minimum a year sooner, by 2018. While the rise of
the minimum wage is providing some relief to workers, it places an additional burden on many
businesses and will likely slow job growth modestly in the affected sectors.
Figure 3
Figure 4
Average Weekly Wage Growth by County
CPI: SF Bay Area vs. United States
4-Quarter Moving Average, Year over Year Pct. Change
6-MMA Year-over-Year Percent Change
7%
Napa
Sonoma
Santa Clara
7%
San Francisco-Oakland-San Jose: Oct @ 3.1%
United States: Nov @ 1.3%
6%
6%
5%
5%
4%
4%
3%
3%
2%
2%
1%
1%
0%
0%
-1%
-1%
San Joaquin
Marin
Alameda
San Francisco
Solano
California
Contra Costa
United States
June 2016
San Mateo
0%
1%
2%
3%
4%
5%
6%
-2%
-2%
95
97
Source: U.S. Department of Labor and Wells Fargo Securities
2
99
01
03
05
07
09
11
13
15
17
What’s Heating Up and Cooling Off in the San Francisco Bay Area
January 31, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
The Cost of Living in the Bay Area
Strong economic growth is pushing the Bay Area’s already high cost of living up at a faster pace
relative to the nation. The Consumer Price Index (CPI) for the San Francisco-San Jose-Oakland
combined metropolitan region has risen 3.1 percent year over year compared to the national
increase of just 1.3 percent (Figure 4). Higher energy prices have played a meaningful role in price
increases this past year, as gasoline prices have rebounded. We note that energy prices are more
volatile in California due to environmental restrictions on the blends of gasoline used in the state
and initiatives to promote green energy. The core CPI, which strips out the more volatile food and
energy components, is still up 3.8 percent in the Bay Area and 2.2 nationwide. Shelter costs,
which account for roughly 40 percent of the core CPI and captures rental prices, are up a sizable
6.9 percent over the past year in the Bay Area. In comparison, shelter prices nationwide are up
just 3.6 percent over the period.
The Bay Area’s
already high
cost of living is
rising at a faster
pace relative to
the nation.
Skyrocketing home prices and rents continue to top the list of cost burdens for Bay Area
residents. Higher housing costs are not a new development for the Bay Area, as the region’s
perennially tight housing market tends to support prices and rents even when the economy is
growing slowly. When growth picks up, the high costs and considerable delays in bringing new
properties to the market tend to cause prices and rents to surge. In economic terms, San
Francisco has an incredibly inelastic supply of housing.
Home prices have been rising steadily throughout the region since the end of the Great Recession
as the Bay Area was one of the first major regions to see economic growth kick into higher gear.
Home prices in San Francisco recovered back in April 2013 and currently stand nearly 40 percent
higher than their previous 2007 peak. Despite the increases, home price appreciation across the
Bay Area has largely decelerated (Figure 5). San Francisco County has seen a particularly notable
slowdown in home price gains, with home price appreciation falling from an annual average
increase of 12 percent in 2015 to a modest pickup of 1.3 percent year over year in November 2016.
Much of this deceleration has occurred at the top of the market where price gains had been the
greatest. Price increases for more modestly priced homes have actually accelerated in many parts
of the Bay Area, as relatively little new supply has come on line.
Home price
growth across
the Bay Area has
largely cooled.
Effective apartment rents were $2,472 per month in San Francisco, $2,059 per month in San Jose
and $1,719 per month in the East Bay in the third quarter, according to data from Reis.2 Higher
rents have brought about new supply, which has pushed the vacancy rate slightly higher and
helped cool off the rise in apartment rents. San Francisco’s apartment vacancy rate has risen
about a percentage point over the past two years to 4.4 percent in the third quarter (Figure 6).
Figure 5
Figure 6
San Francisco Apartment Supply & Demand
SF Bay Area Counties Home Price Growth
Percent, Thousands of Units
Year-over-Year Percent Change CoreLogic HPI
30%
7%
20%
20%
6%
10%
10%
5%
0.5
0%
4%
0.0
-10%
3%
-0.5
-20%
2%
-1.0
-30%
1%
30%
0%
-10%
Alameda: Nov @ 5.7%
San Francisco: Nov @ 1.3%
Santa Clara: Nov @ 5.1%
San Mateo: Nov @ 5.3%
-20%
-30%
05
06
07
08
09
10
11
12
13
14
15
16
17
1.5
Apartment Completions: Q3 @ 463 Units (Right Axis)
Apartment Net Absorption: Q3 @ 566 Units (Right Axis)
Apartment Vacancy Rate: Q3 @ 4.4% (Left Axis)
1.0
-1.5
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: CoreLogic, Reis, Inc. and Wells Fargo Securities
2
Reis metro area definitions are as follows: San Francisco includes San Francisco, Marin and San Mateo
counties. San Jose includes Santa Clara County. East Bay includes Alameda and Contra Costa counties.
3
What’s Heating Up and Cooling Off in the San Francisco Bay Area
January 31, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
Summary and Outlook
We estimate that
the Bay Area’s
economy grew
5.9 percent in
2016.
After five years of exceptionally solid economic growth, the Bay Area is beginning buckle on some
of the strains generated from growing at such a rapid pace. Annual real GDP growth averaged a
4.0 percent pace in the Bay Area from 2010 to 2015.3 We estimate that the economy grew
5.9 percent in 2016. By contrast, real GDP growth has averaged just a 1.9 percent pace nationwide
over this period, and the U.S. economy grew just 1.6 percent in 2016. Stronger economic growth
has brought the unemployment rate back down to levels long considered to be near full
employment and wage gains have accelerated. The cost of living has also ramped up in the region,
where growth has been much stronger and impediments to development are much greater. Traffic
congestion has also worsened considerably, raising the costs of commuting. The higher costs of
doing business and increasing frustration with traffic congestion have contributed to the outmigration of some businesses away from the region. Growth has also shifted to lower-cost parts of
the Bay Area, most notably Oakland and the East Bay in general.
Growth in the region has shown some signs of moderation this past year. Nonfarm employment
growth has decelerated. Job growth in the San Francisco metropolitan division was 3.1 percent in
2016, down from 4.8 percent the prior year. That still left payrolls some 32,400 jobs higher than
the prior year, but the increase was down from a gain of 47,700 jobs in 2015. Much of the
deceleration occurred during the second half of the year. Employment growth in Oakland
followed a similar pattern, with nonfarm payrolls rising 2.5 percent in 2016, following a
3.1 percent rise the prior year. Oakland saw a net increase of 27,100 jobs in 2016, which is smaller
than the 32,800 jobs added in 2015.
Housing costs are also showing some tentative signs of cooling. Home price appreciation has
moderated, following huge gains at the higher-end of the market. In addition to suffering from
some indigestion from previous price spikes, demand for higher-priced homes also likely cooled
off a bit as the IPO market slowed and interest from overseas buyers waned. Apartment rent
growth has also lessened as development has increased significantly in recent years and the
sudden onslaught of new units caused rents to rise more slowly this past year.
The moderation
in employment
growth and
housing costs
should continue
in 2017.
The moderation in employment growth and housing costs should continue in 2017. Hiring has
cooled off as employers have had a more difficult time filling vacant positions and rising
compensation costs have raised the bar for many new hires. In addition, with the unemployment
rate near 5 percent, many of the jobs being added are pulling workers from the ranks of the
underemployed and involuntary part-time workers. The net result has been stronger wage and
salary growth but less employment growth.
The impact of the Trump presidency on the Bay Area remains uncertain but does create both
upside and downside risks. Tax cuts would benefit high wage earners in the Bay Area, and the
stock market rally since the election has helped reignite the IPO market. Regulatory reform would
also likely benefit the region, possibly paving the way for more residential development. In
addition, the Bay Area would benefit from an increase in infrastructure spending, although any
growth on that front is likely years away. We also anticipate interest rates to be modestly higher,
which will add to the region’s housing affordability challenges. In addition, we look for the dollar
to be stronger, which will likely impact corporate earnings for large multinational firms based in
the region. The Trump administration’s trade initiatives may also create some downside risks to
the region, with threats of border taxes and tariffs potentially slowing trade with key trading
partners such as Mexico and China. Increasing restrictions on immigration is another issue for
employers and the Bay Area in general, which may adversely affect hiring in the region’s
technology, construction, hospitality and agriculture sectors.
3
4
2015 is the latest data available.
5,783
1,923
3,860
Total Housing Permits
Single-Family Permits
Multifamily Permits
3,097
1,002
2,095
890
21
9.3
1,870
28
176,062
7.3
5,532
1,501
4,031
924
34
7.9
1,898
28
182,694
3.8
2012
9,163
3,095
6,068
2,037
73
7.7
4,462
62
343,656
5.6
2012
7,764
1,870
5,894
961
37
6.5
1,929
31
190,640
4.3
2013
10,922
3,659
7,263
2,107
70
6.3
4,529
67
349,283
1.6
2013
Actual
Source: U.S. Department of Commerce, U.S. Department of Labor and Wells Fargo Securities
Forecast as of: January 31, 2017
Total Housing Permits
Single-Family Permits
Multifamily Permits
Nonfarm Employment, Thousands
Change, Thousands
Unemployment Rate, Annual Average
Population, Thousands
Change, Thousands
Real Gross Domestic Product, Millions
Annual Rate
2011
1,964
34
9.0
Nonfarm Employment, Thousands
Change, Thousands
Unemployment Rate, Annual Average
San Jose-Sunny v ale-Santa Clara MSA
4,401
55
325,411
-0.1
2011
Population, Thousands
Change, Thousands
Real Gross Domestic Product, Millions
Annual Rate
San Francisco-Oakland-Hay ward MSA
10,037
1,861
8,176
1,002
41
5.2
1,954
26
204,783
7.4
2014
10,001
3,716
6,285
2,177
70
5.2
4,596
67
363,951
4.2
2014
San Francisco Bay Area Economic Outlook
5,788
1,897
3,891
1,043
41
4.3
1,977
22
223,088
8.9
2015
13,386
4,804
8,582
2,258
81
4.3
4,656
60
378,763
4.1
2015
5,900
2,030
3,870
1,080
37
3.8
1,998
21
236,919
6.2
2016
14,400
4,900
9,500
2,322
64
3.9
4,712
56
400,352
5.7
2016
6,600
2,150
4,450
1,112
32
3.5
2,018
20
250,661
5.8
2017
15,500
5,540
9,960
2,387
65
3.3
4,762
50
421,171
5.2
2017
Forecast
6,700
2,200
4,500
1,140
28
3.2
2,038
20
264,447
5.5
2018
17,000
6,000
11,000
2,444
57
3.1
4,810
48
440,545
4.6
2018
What’s Heating Up and Cooling Off in the San Francisco Bay Area
January 31, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
5
What’s Heating Up and Cooling Off in the San Francisco Bay Area
January 31, 2017
WELLS FARGO SECURITIES
ECONOMICS GROUP
California Venture Capital
San Francisco Bay Area Economic Conditions
In Billions of Dollars
$25
$25
Silicon Valley: Oct @ $3.9 Billion
Job Growth: SF Bay Area vs. United States
California: Oct @ $5.1 Billion
3-MMA Year-over-Year Percent Change
6%
6%
4%
4%
2%
2%
0%
0%
-2%
-2%
-4%
-4%
-6%
-6%
$20
$20
$15
$15
$10
$10
$5
$5
$0
$0
95
-8%
-10%
-10%
94
96
98
00
02
04
99
01
03
05
07
09
11
13
15
-8%
SF Bay Area CSA: Dec @ 2.5%
United States: Dec @ 1.5%
92
97
06
08
10
12
14
Employment Cost Index: Wages & Salaries
16
Private Industry Workers, Year-over-Year Percent Change
6%
Average Weekly Wages by County
4-Quarter Moving Average, USD
6%
Los Angeles-Long Beach-Riverside: Q3 @ 3.8%
San Jose-San Francisco-Oakland: Q3 @ 3.0%
United States: Q3 @ 2.4%
5%
5%
Santa Clara
San Mateo
4%
4%
3%
3%
2%
2%
1%
1%
San Francisco
Alameda
Marin
Contra Costa
California
Solano
United States
Napa
0%
2012
Sonoma
0%
2013
2014
2015
2016
June 2016
San Joaquin
$0
$500
$1,000
$1,500
$2,000
$2,500
Housing Affordability
Percentage of Households That Can Afford Median Priced Home
80%
San Francisco Apartment Effective Rent
Percent Change
12%
70%
4%
9%
3%
6%
2%
3%
1%
0%
0%
-3%
-1%
-6%
-2%
Quarter-over-Quarter: Q3 @ -1.0% (Right Axis)
70%
60%
60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
0%
06
-9%
80%
SF Bay Area: Jun @ 22.9%
US: Jun @ 56.7%
CA: Jun @ 29.8%
07
08
09
10
11
12
13
14
15
16
-3%
Year-over-Year: Q3 @ 0.0% (Left Axis)
-12%
-4%
2007
6
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: CAR, PwC/MoneyTree, Reis, Inc., U.S.
Dept. of Labor and Wells Fargo Securities
Wells Fargo Securities Economics Group
Diane Schumaker-Krieg
Global Head of Research,
Economics & Strategy
(704) 410-1801
(212) 214-5070
[email protected]
John E. Silvia, Ph.D.
Chief Economist
(704) 410-3275
[email protected]
Mark Vitner
Senior Economist
(704) 410-3277
[email protected]
Jay H. Bryson, Ph.D.
Global Economist
(704) 410-3274
[email protected]
Sam Bullard
Senior Economist
(704) 410-3280
[email protected]
Nick Bennenbroek
Currency Strategist
(212) 214-5636
[email protected]
Anika R. Khan
Senior Economist
(212) 214-8543
[email protected]
Eugenio J. Alemán, Ph.D.
Senior Economist
(704) 410-3273
[email protected]
Azhar Iqbal
Econometrician
(704) 410-3270
[email protected]
Tim Quinlan
Senior Economist
(704) 410-3283
[email protected]
Eric Viloria, CFA
Currency Strategist
(212) 214-5637
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Economist
(704) 410-3282
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Michael A. Brown
Economist
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Jamie Feik
Economist
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Erik Nelson
Currency Analyst
(212) 214-5652
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Economic Analyst
(704) 410-3060
[email protected]
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Economic Analyst
(704) 410-3156
[email protected]
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Economic Analyst
(704) 410-3281
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Economic Analyst
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Executive Assistant
(704) 410-3279
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Administrative Assistant
(704) 410-3272
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