Monday, July 21, 2008

I whip out my crystal ball and try to predict the future of Downtown, Pt. 1

If you’ve been paying attention to the news lately, you’ll notice that the economy is, well, going to hell.

Bank failures, middle-class people becoming homeless, food and gas prices skyrocketing--it's ugly and it's likely to stay ugly for a long time.

This is all going down at a pivotal point in Downtown's history. A lot of new condos and rentals are coming online, there's an influx of new residents, and more restaurants and other retail are opening up. So how will the economy affect the Downtown revival? I'm joining Clio's Psychic Network and making a few predictions. Note that I have no background in economics so all of this is essentially

Today's I'm focusing on all of the reasons why Downtown is doomed. Wednesday's installment will explain why Downtown's future is golden.

The Bad News
Credit/Mortgage Crisis: There has been a lot written on the credit crisis so I won't get into details here (though if you want to read in-depth analysis of what's going on, I strongly suggest you check out Calculated Risk). The most important thing you need to know is that banks have tightened lending standards across the board--mortgages, home equity loans, credit cards, car loans, etc. People who would've qualified for a mortgage just a year ago can't get one today, and those who do qualify have to pony up a lot more money for a down payment and fees.

Effect on Downtown: For the time being, the condo market is essentially gone. Home sales as a whole in Southern California are down 29.3% and 41% of the homes that did sell were foreclosures. Whew. First time homebuyers who can't meet stricter credit guidelines are shut out of the market. And people who already own a home can't buy a new one because they can't find a buyer for the house they're in or because dropping prices means they can't sell the house for enough money to pay back their mortgage.

We're already seeing condo buildings converted to rentals (Union Lofts, SB Manhattan) and this trend is going to continue. Another effect this will have is to temporarily drive down rental prices. This seems weird because usually falling home sales pushes rents up, but the rental market is being flooded by condos and homes that can't be sold. I'm already seeing lower rents Downtown and they are likely to go even lower.

Job Losses: The unemployment rate hit 5.5% in May. Especially hard hit is the financial services industry, which makes up a major portion of Downtown jobs (Downtown employers include Bank of America, Wells Fargo and Union Bank of California). Just last week, JP Morgan announced a 53% decline in earnings, Merrill Lynch reported a $4.65 billion second-quarter net loss and Capital One announced a 40% drop in income because of credit card charge-offs (in other words, people are defaulting on their credit cards). Look for all of these institutions to shed tens of thousands of jobs. Then there's the IndyMac debacle--3,800 jobs lost there alone.

Another Downtown mainstay that will lose jobs is the Jewelry District. A cratering economy means no demand for luxury goods (see below for more on the retail crash).

Effect on Downtown: One of the big attractions of living Downtown is a short commute. Big layoffs means there will be a shrinking pool of people working Downtown means there will be fewer people interested in living Downtown (or who can afford it). Layoffs will also likely help increase the condo foreclosure rate since people who aren't working can't make mortgage payments.

Retail Crash: From the NY Times:

The slide in the labor market has become both symptom and cause of a weak economy, pulling many families into a downward spiral. Back when housing prices were still rising, Americans borrowed exuberantly against the value of their homes to finance renovations, vacations and shopping sprees. But that artery of finance has constricted considerably along with access to credit cards, forcing a reversion to the traditional limits of household finance. Millions of American families must now confine their spending to what they can bring home from work.

With job losses growing and working hours shrinking, many paychecks are eroding, prompting millions of families to cut their spending. Soaring prices for food and gasoline are overwhelming modest wage gains for most workers, leaving households with even less money to spend. All of which deprives struggling businesses of sales, prompting them to shed more workers, sending the cycle down another turn. Starbucks announced on Tuesday that it would close stores and eliminate up to 12,000 jobs, about 7 percent of its work force.

Effect on Downtown: Downtown has struggled to attract higher end retailers even with all of the residential construction and influx of new residents. This economic climate will make attracting retailers even tougher. I'm particularly skeptical about the prospects of not-yet-built retail developments like Grand Avenue and the mall at 4th & Main. I wouldn't be surprised to see these projects fall through or be severely cut back.

So, yeah, things are bad and getting worse and we aren't even officially in a recession yet. But don't panic yet--Downtown does have some glimmers of hope on the horizon. More on that on Wednesday.


Anonymous said...

Great post-- I will stay tuned for Part 2. It will be really sad if the momentum that has gathered around downtown revitalization is killed off by the economic downturn-- who knows when there will be another chance?

Anonymous said...

agreeing with onetenten. quite circumspect. personally i am tuning in for the 'on-the-ground' perspective of the rental market.

word UP

Anonymous said...

Great post and I look forward to reading part two!

I have often wondered while walking downtown who is buying all these units at the prices being asked ... My guess would be very few people these days.