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The CSUN Economic Forecast for the San Fernando Valley

‘06

‘06CSUNThe CSUN Economic Forecast for the San Fernando Val ley

2006 San Fernando Valley Economic Summit Sponsors

‘06CSUN The CSUN Economic Forecast for the San Fernando Val ley

The CSUN Economic Forecast For The San Fernando Valley May 2006

San Fernando Valley

Economic Research Center,

California State University, Northridge

Daniel Blake Ph.D., Director

(818) 677-7021

Business Survey Sponsor

Calabasas

Copyright 2006 by the California State University at Northridge.

Reproduction of this document or any portion therein is prohibited without the expressed written permission of the California State

University at Northridge.

All queries regarding this publication should be directed to the CSUN's San Fernando Valley Economic Research Center.

Designed and produced by


Table of Contents

Description of the San Fernando Valley . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6

The 2006 Economic Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

The 2006 Economic Forecast Summary Table . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Real Estate: Conditions and 2006 Forecast . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20

Forecast Survey of Valley Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

The Los Angeles County Forecast by Mark Schneipp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

Acknowledgements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

THE 2006 CSUN SAN FERNANDO VALLEY ECONOMIC FORECAST WRITTEN BY DR. DANIEL BLAKE;

THE LOS ANGELES COUNTY FORECAST BY MARK SCHNEIPP.

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Jolene KoesterPresident

May 2006

Welcome to the 2006 California State University Northridge San Fernando Valley EconomicForecast, presented at the 1st annual San Fernando Valley Economic Summit. Cal State Northridgeis proud to be a part of the only event that brings business scholars and professionals together todiscuss the economic environment of the San Fernando Valley. As a major contributor to theeconomic well-being of the valley, the university hopes that you find this Forecast and the Summitto be of great use.

As the economic, intellectual, and cultural heart of the San Fernando Valley and beyond, Cal StateNorthridge partners with the business community to increase the Valley’s impact in the greater LosAngeles area. Our future looks even greater as Envision 2035 master plan calls for a university ofnearly 45,000 students to meet the growing educational and employment needs of the region.

Cal State Northridge is a vibrant, diverse university community of nearly 33,000 students andmore than 4,000 faculty and staff, on a 356-acre campus in the heart of the San Fernando Valley.You will find that the university’s commitment to the educational and professional goals ofstudents, and its extensive service to the community is evident in our participation in this event.

Thank you for your participation and continued support.

Sincerely,

Jolene KoesterPresident

May 2006

On behalf of the College of Business and Economics at California State University, Northridge, I am pleased to welcome you to the first annual San Fernando Valley Economic Summit. Thepresentation of this CSUN San Fernando Valley Economic Forecast, which has become a criticaltool for our San Fernando Valley’s business community, is a significant component of the Summit.

The Forecast strives to provide an accurate and useful analysis of the many differing indicatorsaffecting the San Fernando Valley economic climate. The College of Business and Economics isproud of Dr. Dan Blake and his team of researchers, who provide precise and accurate informationand forecasts year after year.

The College is committed to mutually beneficial partnerships with the business community. TheForecast is a prime example of this partnership. Without the support and participation of ouralumni and friends in the business community, we could not offer this unique, high quality reportthat is of such great benefit to the local economy. Without the support of our alumni and friendsin the business community the college could not offer the same high quality education that youare accustomed to and deserve.

Sincerely,

Fred J. EvansDean

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Fred J. EvansDean

The San Fernando Valley is a geographical area roughlybounded by the Santa Susana Mountains to the north andwest, the Santa Monica Mountains to the south, and the

San Gabriel Mountains to the east. It lies wholly within LosAngeles County and includes the cities of: Burbank, Calabasas,Glendale, Hidden Hills, and San Fernando, as well as the Valleyportion of the City of Los Angeles. In this report the "six-cityValley" refers to this area.

The Valley portion of the City of Los Angeles, which is roughlydefined as that portion north of Mulholland Boulevard, comprisesthe largest part of the San Fernando Valley, accounting forapproximately 80 percent of the Valley's population and 77

percent of its land area. The Los Angeles portion of the Valley isbetter known by its array of "named communities". At present, 27"named" communities make up the Los Angeles portion of theValley, including Universal City, home to Universal StudiosHollywood. None of these communities are legal entities; all arepart of Los Angeles. The power to name a particular area restswith the Los Angeles City Council, and they exercise that powerrelatively often, carving newly named communities out of existingones. In recent years, three new areas have been carved out andnamed -- West Hills, Valley Village and Valley Glen. The Valleyportion also accounts for an important and sizable part of the Cityof Los Angeles with 47 percent of its land area and 36 percent ofits population.

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Description of the San Fernando Valley

ValleyVillage

Chatsworth

West Hills

Woodland HillsHidden Hills

Calabasas

CanogaPark

WinnetkaReseda

Northridge NorthHills

Van Nuys

PanoramaCity

ValleyGlen

TarzanaEncino

ShermanOaks

Studio City

TolucaLake

NorthHollywood

Sun Valley

SunlandLake View

Terrace

San Fernando

Sylmar

Pacoima

Arleta

BurbankGlendale

UniversalCity

TujungaMissionHills

Granada Hills

Cities (White) and Census Tract Approximation of "Named" Communities in Los Angeles

POPULATION, GROWTH, AND DENSITY1/1/06 2005-06 Census 2000-06 Area 2006

City or Area Estimated Percent 2000 Annualized (Square Miles) PopulationPopulation Change Population Growth Rate Density*

Burbank 106,879 0.7% 100,316 1.1% 17.36 6,155 Calabasas 23,387 1.7% 20,033 2.8% 12.93 1,809 Glendale 206,308 0.3% 194,973 1.0% 30.64 6,734 Hidden Hills 2,035 0.4% 1,875 1.4% 1.62 1,256 Los Angeles Portion of the Valley 1,460,256 1.0% 1,357,374 1.3% 223.98 6,520 San Fernando 25,035 0.9% 23,564 1.0% 2.39 10,479 Six-City Valley Total 1,823,900 0.9% 1,698,135 1.2% 289.38 6,303

Los Angeles City 3,976,071 1.1% 3,694,820 1.3% 469.09 8,476 Los Angeles County 10,245,572 0.8% 9,519,330 1.3% 4,060.90 2,523 California 37,172,015 1.2% 33,873,294 1.6%

The San Fernando Valley is home to more than 1.8 million peopleand more than 50,000 businesses. Its workforce exceeds 750thousand, its private businesses employ over 690 thousand wageand salary workers, and it hosts one of the nation’s largestconcentrations of entertainment activity. The Valley is a desirableplace to be as evidenced by its median home selling price, whichhit $610,000 in March 2006. Its pace of life is both measured andbustling, depending on the activity and the time of day. It containsthe nation’s busiest freeway interchange, as many of its residentsare well aware.

• The Valley’s economy is large, vibrant, and expanding at astrong, sustainable pace. Private-sector job growth eased a bitfrom its hectic 2.1 percent growth rate in 2004 to record a stillrobust 1.6 percent in 2005 as it switched from a “recoverymode” to “strong and sustainable growth” mode. Valley jobcreation continues at that 1.6 percent pace this year, then picksup the pace a bit with a 1.8 percent growth in 2007, and finallyeases again to 1.5 percent growth in 2008 while sustainable butsomewhat lower growth rates prevail in the national andCalifornia economies.

• Most of the Valley’s sectors participate in the continued growth,though in varying degrees. The Valley’s important Informationsector continues to experience impressive growth after its 2004turnaround, recording a 2.6 percent growth last year andmoving to slightly higher rates in the forecast period.

• The health sector, where employment growth cooled a bit in2004-05, rejoins the Valley’s faster growing sectors with ratesover 3 percent during the forecast period.

• Financial Activity, which had given up jobs in 2004, adds someback in 2005 and throughout the forecast period albeit at asubdued pace.

• The Trade sector slows from faster pace spurred by therefinancing frenzy to a respectable rate of job creations in linewith projected wage and salary growth and total earning growth.

• The large Professional and Business Services sector also shiftsfrom the faster recovery pace of job creation to one aligned withsustainable growth as temporary help hiring rates notch down.

• Construction employment, which grew over 8 percent in 2004and over 5 percent in 2005, takes a breather in 2006, resumesmodest growth in 2007, and may take another breather in 2008as remodeling and new construction rates slow.

• Manufacturing, which lost over 2,000 jobs in 2004 and justunder 2,000 jobs in 2005, cuts its losses to the hundreds duringthe forecast period, and its NonDurable segment even adds afew jobs through the forecast period.

• The growing Valley economy boosts average wages and salaries,producing respectable gains in purchasing power for the averageworker. The higher average salaries combined with expandingemployment rolls will create a rising real income pool for theValley and an attractive environment in which to develop andexpand local businesses.

• The retail climate shifts from recovery to sustained growth asresidents’ real earnings log steady gains throughout the forecastperiod and translate into expanding real retail sales throughoutthe Valley.

• Population growth slows significantly relative to the first part ofthe decade as the births stabilize, deaths inch up, and the Valley’snet in-migration shifts to lower levels as a result of recent homeprice run ups along with increasing local congestion.

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SFV Real Private Sector Total Wages and Salaries 1991-2008

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SFV Total Private-Sector Employment 1991-2008

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Forecast Summary

• Median home prices continue to rise but at much slower ratesof appreciation as home building rates catch up and populationgrowth slows down. Look for single digit rates by year’s end. Ahousing bubble is not in the picture at this time.

• The high price of housing encourage continued residentialbuilding at a measured pace after a banner year in 2004. Limiteddevelopable space and rising construction costs push the mix ofnew units strongly in favor of condominiums and apartments,though single family units continue to make a strong showing.

• The density of the population will rise both in terms of personsper household and households per square mile but at a slower

pace. The increasing densities will continue to present newpressures and challenges for the Valley’s infrastructure.

• Construction permit value growth cools after shooting upmore than 60 percent in the last two years. The 2004 boostcame from a doubling of residential units permitted while the2005 boost derived from a jump in non-residential newbuilding permits and alteration and additions. Residentialpermit growth slows into the low single digits while non-residential permit growth remains positive in 2006 butsidelined for the rest of the forecast period.

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1,400

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SFV Population 1991-2008

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SFV Real Retail Sales 1991-2008

The fortunes of the San Fernando Valley economy are tied invarying degrees to the economies of Los Angeles County,California, and the nation. The economic ties are closest withthe County, but since Los Angeles County represents about one-third of the California economy, which in turn represents aboutone-tenth of the national economy, the national and statefortunes and misfortunes will be felt at the County level and inthe San Fernando Valley.

Clearly, the Valley economy is influenced by the trends andconditions in the Los Angeles County economy. The mobility ofworkers, buyers, sellers, and even businesses mean that economicimpacts visited on the County economy will be felt in the Valley.However, with a population of over 1.8 million people and over50,000 businesses located here, the Valley’s economic course is notcharted by the County or the State. The varied and diverse clustersof activities, different locational advantages, and the stronginteractive effects of Valley industries with one-another mean thatthe Valley economy is not merely a microcosm of the Countyeconomy, and that the Valley may well experience a somewhatdifferent economic path than Los Angeles County as a whole.

The San Fernando Valley economic forecast model is linked to theLos Angeles County forecast provided by the California EconomicForecast, and to California and the nation though projectionscontained in the well-respected UCLA Anderson Forecast. TheValley’s economic forecast is also informed by a survey of medium-sized Valley businesses in key industries. A total of 127 businessesresponded to our business survey. A description of the survey anda summary of the responses in the medium-sized business surveyare provided at the end of this chapter.

Job GrowthIn 2005, the Valley chalked up another impressive growth rate inthe aftermath of the 2001 recession. Last year, the Valley’s jobcreation machine cranked out another 10,600 new jobs toproduce a total of over 691,400 private sector jobs in the Valley.This 1.6 percent job growth rate followed a very impressive 2.1percent job growth rate in 2004, (bolstered by a particularlystrong fourth quarter), and a respectable growth rate of 1.1percent in 2003, when the job recovery really began. All of theseValley growth rates were more than double Los Angeles County’sprivate job growth rate, which was actually negative in 2003 (-1.1

Forecast Detail

percent), but positive in 2004 (0.8 percent) and 2005 (0.7percent). These very different track records between job growth inthe Valley and Los Angeles County underscores the point madeabove—the Valley is not merely a microcosm of the LA economythat behaves like a trailer pulled behind a truck.

The Valley’s strong growth path will continue through the forecastperiod. The Valley’s private sector will add over 10,700 new jobsin 2006, recording another 1.6 percent growth rate. Job creationwill step up a notch in 2007 as the Valley’s private sectionproduces 12,300 new jobs, or 1.8 percent growth. At the end ofthe forecast period, the Valley’s job growth moderates to 1.5percent, which translates into 10,800 new private sector jobs.

These strong Valley growth rates continue to compare veryfavorably with those of Los Angeles County, which is forecast tosee job growth of 0.6 percent in 2006, followed by 0.5 percentin 2007, and 0.7 percent in 2008, according to Mark Schniepp’sCalifornia Forecast projection presented later in this book. TheValley’s job growth forecast also tops the job growth ratesprojected for California by the UCLA Anderson Forecast, whichproject a 1.5 percent growth in 2006, 1.0 percent in 2007, and1.1 percent in 2008.

Recent Job Creation by SectorThe industry sectors contributing most significantly to the Valley’srobust job growth in 2005 were professional and businessservices, information, construction, trade, health, and finance.The Recent Job Creation by Sector table displays the number ofjobs each sector contributed and the job growth rate within thatsector for 2004 and 2005.

Professional and Business Services contributed the most new jobsin 2005, growing by almost 3,700 jobs or 3.5 percent over their2004 level. As the Table shows this is actually a decrease in growthfor this sector from its 4.1 percent level in 2003. The reason is thatthis sector contains the temporary help agencies which supplied alot of workers in the other sectors early in the recovery, but as the

recovery has matured many of those temporary jobs have beenmade permanent, decreasing growth in this sector and adding itelsewhere. Obviously this sector has experienced strong growth inmany of its other facets, as it includes all sorts of business andprofessional services, from legal and accounting services, tomarketing and management, and to collection agencies, travel,security, cleaning, landscaping, and waste collection services.

Ranking second in jobs contributed, the Valley’s Informationsector produced over 2,700 new jobs to add to the 2005 growthtotal. The Information sector, which contains the Valley importantentertainment industry, grew internally by an impressive 2.6percent in 2005, down somewhat from its 3.8 percent growth in2004. However that 2004 growth followed three successive yearsof retrenchment for the Valley’s Information industry followingthe industry strike threats of early 2001.

Construction contributed nearly 1,800 jobs to the 2005 growthtotal. The Construction industry has been the benefactor of thehome refinance frenzy, which poured money into many remodelprojects, and to the locally soaring home prices, which rekindlednew construction activity in the last few years. While down fromits 8.1 percent growth in 2004, Construction’s 5.1 percent 2005growth is still impressive.

Trade—including both retail and wholesale—contributed over1,700 jobs to last year’s Valley growth, recording a 1.5 percent jobgrowth internally. As with the above industries, this wassomewhat slower than its 2004 growth rate of 3.1 percent whenit added nearly 3,400 jobs to its employment rolls. In part, thatdifferential growth rate was due to the stellar fourth quarterexperienced in 2004 compared to the rather lackluster fourthquarter in 2005.

The Health and Private Education sector contributed 1,250 newjobs to the 2005 growth, with a 1.4 percent growth rate. Thissector’s contribution was 200 jobs less than its 2004 growth (1.6percent), but both of these years fell far short of the this sector’s

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Jobs Created in the SFV Private-Sector 1992-2008

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Industry 2004 Employment 2005 Employment

Change % Change Change % Change

Agric & Mining -16 -0.9% 34 2.0%Construction 2,613 8.1% 1,764 5.1%Manufacturing -2,401 -3.0% -1,906 -2.5%Trnsptn & Util 219 1.7% -47 -0.4%Whsl & Ret Trade 3,374 3.1% 1,745 1.5%Information 3,858 3.8% 2,723 2.6%Financial Activity -1,638 -2.8% 1,104 1.9%Prof & Bus Serv 4,050 4.1% 3,659 3.5%Health & P Educ 1,437 1.6% 1,257 1.4%Leis & Accom 2,172 3.7% 465 0.8%Other Services 54 0.2% -203 -0.8%Valley Total 13,722 2.1% 10,595 1.6%

growth in the preceding four years which was at least twice asgreat. In spite of the trimming of private education jobs asenrollments declined, not much of this sector’s declining growthrate can be attributed to private education because the health-related activities account for about 90 percent of this sector’semployment. On the health side, the recent failure of operatingrevenues to keep pace with operating costs for both hospitals andnursing homes has probably kept a lid on job creation.

The Financial sector shook off its 2004 retrenchment thatliquidated 2.8 percent of its jobs that year to contribute over1,100 jobs to Valley job growth in 2005. The Financial sector’s 1.9percent job gain in 2005 is very good news for a sector that saw1,600 jobs lopped off its employment rolls in 2004. Preceding its2004 retrenchment, the sector had grown rapidly, logging annualgrowth rates between 4 and 5 percent per year during therefinancing boom.

On the other hand, the Manufacturing sector shed another 1,900jobs in 2005 as it continues to grapple with intense globalcompetition. The only good news for this sector was that its job losswas down from 2,400 jobs in 2004. The Durable Goods segment isalmost twice the size of the Non-Durable Goods segment in theindustry and tends to be where most of the job consolidation takesplace. Meeting the global competition requires continually highproductivity increases in Durable Goods manufacturing whichmakes it difficult to add jobs in this segment.

Job Growth in 2006 and BeyondOur forecast calls for a continued strong 1.6 percent job growthrate in the Valley in 2006, which will add over 10,700 new jobsand boost the private sector employment rolls to over 702,000this year. This strong job growth continues in 2007 when theValley’s job creating machine produces another 12,300 jobs torecord a 1.8 percent growth rate. And our forecast period iscapped by a slightly moderated 1.5 percent job expansion, addinganother 10,800 jobs in 2007.

The different sectors of the Valley’s economy contribute to this jobgrowth to varying degrees; some make large contributions andother not so large. The 2006 Projected Job Change by Sector tabledetails the job creation outlook for the Valley sectors in the firstyear of our forecast period. The outlook for the various sectors inthe second and third years of our forecast period are presented inthe following text and displayed in the accompanying industryforecast charts.

The Valley’s important Information sector, which houses theEntertainment Industry, is scheduled for continued job growththis year. After one year of shedding jobs and two years of nogrowth, the Valley’s Information sector roared to life in 2004adding over 3,800 jobs then continued its performance in 2005by expanding again at an impressive 2.6 percent rate, creatinganother 2,700 Valley jobs. The 2006 season finds theInformation sector upstaging last year’s growth performance

with a healthy 3.0 percent clip, producing more than 3,500extra jobs for the Valley. The Information sector eases back alittle in 2007 with a breath-catching 2.6 percent expansion. Thefinal year casts the industry as producing another 3,500 jobs inits title role as one of the strongest economic engines in theValley’s economy in the forecast period.

The Valley’s large Trade sector, which includes both wholesaleand retail trade, grows at a respectable 1.3 percent rate and addsnearly 1,500 jobs in 2006. The Trade sector saw its 2005 jobcreation fall by half to 1,500 from the nearly 3,400 jobs it addedin 2004 as a result of the consumer buying spree resulting fromthe home refinancing frenzy. Trade’s slower job expansion rate in2005 and 2006 will be typical of its performance throughout theforecast period. Trade’s 2007 growth rate will pick up slightly to1.5 percent growth, when it contributes 1,750 jobs to the total,but the sector slows again to the 1.3 percent growth in 2008.While these growth rates are down a bit from the 2 to 3 percentgrowth that Trade experienced in the frenzied refinancing years,the projected 1.3 to 1.5 percent rates are steady and respectablegrowth associated with normal population and income growth

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SFV Information Industry Employment 1991-2008

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Industry 2005 2006 Projected

Employment Change % Change

Agric & Mining 1,705 102 6.0%Constction 36,660 -1,188 -3.2%Manufacturing 74,977 -120 -0.2%Trnsptn & Util 12,963 223 1.7%Whsl & Ret Trade 115,112 1,457 1.3%Information 108,160 3,547 3.3%Financial Activity 58,767 493 0.8%Prof & Bus Serv 107,582 1,633 1.5%Health & P Educ 89,831 2,879 3.2%Leis & Accom 60,651 1,030 1.7%Other Services 25,033 677 2.7%Valley Total 691,441 10,733 1.6%

in the Valley. These forecasted growth rates will produce about1,500 to 1,800 more Trade jobs per year, which will supplyexpansionary opportunities for current sector establishments ornew entrants.

The Health and Private Education sector weighs in with 2,900new jobs in 2006, tipping the scales at a very healthy 3.2 percentgrowth rate, and more than doubling its growth rate over the lasttwo years as the Valley’s population grows and matures, anddemands more health care services. This sector’s strong growthcontinues in 2007 as the sector delivers another 2,800 jobs,growing at 3.1 percent. The Health sector gives a final push at theend of the forecast period to produce a 3.4 percent growth rateand adds nearly 3,300 jobs to the Valley’s employment rolls.(Private-sector education accounts for less than 10,000 of the89,000 jobs in this sector, and the private-sector education sideproduces virtually none of the growth.)

Construction employment growth will take a break in 2006, aftertwo years of overtime job production. After racking up rate-busting job production of 2,600 jobs in 2004 (8.1 percent) andnearly 1,800 jobs in 2005 (5.1 percent), the industry will take awell-deserved breather in 2006, easing about 1,200 jobs off itsrolls, for a reduction of 3.2 percent. The 2004-2005 buildup inConstruction jobs corresponded to a 61 percent increase inconstruction permitting values over those two years. Thatpermitting value growth will slow to 2.8 percent in 2006 andactually notch down in 2007. The same trend is reflected inresidential units permitted which more than doubled in 2004relative to 2003 but dropped back somewhat (28 percent) in2005. The Construction sector picks up a few workers in 2007,adding nearly 600 jobs (1.6 percent), but cannot hold onto themthrough the end of the forecast period as they let go of 1,400workers, or 3.9 percent.

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SFV Construction Industry Employment 1991-2008

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1991-2008

SFV Employment in Health and Private-Sector Education

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SFV Trade Sector Employment 1991-2008

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The Financial Activity sector put itself back in the plus columnwith job gains in 2005 after losing employment in 2004. Thissector will continue to accumulate jobs over the forecast period,but at nowhere near its halcyon refinancing rates. The Financialsector includes the financial institutions along with insurance, realestate, and rental/leasing activity, and can expect to record about500 new jobs in 2006 (0.8 percent growth), to yield 600 more in2007 (1.0 percent), and offer 350 more in 2008. These modestgrowth rates will correlate to more normal refinancing, newmortgage, and other related activity going forward as the housingand construction markets cool.

The Professional and Business Services sector secured nearly3,650 new jobs in 2005, which translates to an impressive 3.5percent growth rate. Much of this sector’s dramatic job growthcontinued to come from employment services and temporary helpagencies as they supply needed workers to the rest of theeconomy. Job growth in this sector will moderate significantly in2006 as a portion of the temporary jobs become permanent intheir respective sectors, dropping its growth rate to a stillrespectable 1.5 percent and its job creation total to just over1,600. Professional and Business Services sector employment levelwill notch up later in the forecast period as other portions of thissector expand with the rest of the Valley’s economy. Look for 2.2percent growth accounting for nearly 2,400 new jobs in 2007 and2.5 percent growth rendering 2,800 jobs in 2008.

The Valley’s Leisure and Hospitality industry was slammed by theevents of 9/11, losing over 2,700 jobs that year, but came backstrongly in 2003 and 2004. This industry digested some of itsrecent gains with growth on the mild side in 2005, serving up justover 450 new jobs to register a 0.8 percent growth rate. As thissector returns to a roughly normal growth rate, expect it to furnishjust over 1,000 new jobs for a 1.7 percent rate. Growth will coolsomewhat during the forecast period, with the industry deliveringnearly 800 more jobs in 2007 (1.3 percent), and another 700 in2008 (1.2 percent).

The Other Services sector dropped 200 jobs from its 25,000 jobbase in 2005 after showing slow growth the year before. Theforecast period finds the Other Services industry back on the plusside with the sector producing nearly 700 more jobs in 2006,nearly 500 more in 2007, and about 450 in 2008.

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SFV Professional, Technical, and Business Services Employment

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SFV Employment in the Finance Sector 1991-2008

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SFV Employment in the Other Services Sector 1991-2008

Manufacturing—The Bad News and some GoodNews….The outflow of jobs from the Valley’s large Manufacturing sector isstemmed during the forecast period but not stopped. Aftershedding over 2,400 jobs in 2004 and nearly 1,900 jobs in 2005,the sector’s losses will slow dramatically to just over 100 in 2006.Manufacturing job losses continue for the remainder of theforecast period but losses stay in the hundreds of jobs per yearrather than the thousands.

Within the Manufacturing sector, recent job losses have beenshared by both Durable and Non-Durable manufacturers in roughproportion to their size. Last year the Durable sector lost a 2.4percent of its jobs while Non-Durable sector lost 2.7 percent of itsjobs. But going forward, manufacturing job losses will beconcentrated in the Durable sector, with the Non-Durable sectorprojected to gain a few hundred jobs in both 2006 and 2007 (1.6and 1.4 percent respectively), and remain essentially flat in 2008.Durable manufacturing sheds 560 jobs (1.2 percent) this year and480 jobs (1.0 percent) in 2007, and possibly a few more at thevery end of the forecast period.

The problem in the Valley’s manufacturing industry is not thewaning fortunes of the companies, many of which are increasingsales. Rather it is intense national and international competitionthat makes productivity gains a must for manufacturers and drivesa wedge between output growth and employment growth. Thegeneral disconnect between output and jobs in manufacturing isillustrated by California’s manufacturing industry whichproduced 85 percent more real output between 1993 and 2000while adding only 9.6 percent more workers to its employmentrolls. The recently publicized record level productivity gains arelargely due to efficiencies realized in the manufacturing sector,which is a global and highly competitive industry where costefficiencies dictate success or failure.

Recent devaluations of the dollar relative to some internationalcurrencies have slightly lessened the competitive pressure for U.S.manufacturers. However, California manufacturers are stilldisadvantaged by the high cost of workers’ compensation, healthcare, and housing costs here relative to other possible U.S.locations. While some progress on this front has been madeduring the last year, California manufacturers still facedifferentially higher costs than many other US manufacturinglocations. Until the costs of hiring in California moderates relativeto the costs elsewhere in the U.S., manufacturing jobs inCalifornia are not likely to return in large numbers.

The impact of domestic and global competition is mitigated tosome extent in Non-Durable manufacturing because this segmentcontains a significant component of food and beveragemanufacturers that serve local and regional markets with productsthat are often not practical to ship long distances. This differentialimpact of competition on the Durable and Non-Durable segmentsof manufacturing is probably responsible for the differentialgrowth rates that these segments are expected to experience.

0

10

20

30

40

50

60

70

80

90

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Thou

sand

s

Durable MfgNonDurable Mfg

SFV Durable and NonDurable Mfg Employment 1991-2008

50

60

70

80

90

100

110

120

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Thou

sand

s

SFV Employment in the Manufacturing Sector 1991-2008

13


Average Salaries and Total EarningsValley workers chalked up gains in the average wages and salariesduring 2005, as the average rose from $46,800 in 2004 to $49,200in 2005, an increase of 4.8 percent. Unfortunately, a jump in the localinflation rate to 4.5 percent gobbled up most of that increase, leavingValley workers with a fairly meager 0.3 percent gain in purchasingpower in 2005. A chart of the Los Angeles region inflation rate basedon the Consumer Price Index (CPI) is displayed so readers canappreciate the significant increase in the inflation that occurred in2005. Not only did the progression from an inflation rate of 2.6 in2003 to 3.3 percent in 2004 and to 4.5 percent in 2005 take a chunkof purchasing power out of Valley residents’ pay checks, it alsoconvinced the Federal Reserve money managers that inflation threatwas real which may call for continued hikes in interest rates.

Workers fortunes improve during the forecast period when averagewages and salaries for all private sector workers grow at higherrates, averaging 4 to 5 percent growth annually. Adjusted forinflation, these growth rates yield increases in purchasing power forthe average wage and salaried workers of 1.3 percent in 2006, 1.2percent in 2007, and 1.1 percent in 2008. These projected growthrates reflect a respectable accumulation of real paycheck purchasingpower during a period of normal and sustained growth.

The Valley’s private sector total wages and salaries grewimpressively at a 6.4 percent rate in 2005. Unfortunately, realpayroll growth also suffered at the hands of 2005’s 4.5 percentinflation rate, which left just a 1.9 percent increase in total payrollpurchasing power. Basically, the growth in real total payrollpurchasing power is the percentage growth in the average wageand salary plus the growth in employment. So last year’s 1.6percent growth in employment plus its 0.3 percent growth in realaverage wage and salary yields last year’s 1.9 percent growth inreal total payrolls. Looking forward, our forecast calls for relativelyimproved rates of total payroll growth throughout the forecastperiod as inflation-adjusted average wages and salaries grow atrespectable rates and employment growth stays strong.

Specifically, total payroll purchasing power will increase at anannual rate of 3 percent or just below throughout the forecastperiod. A 2006 rate of purchasing power growth of 2.8 percentwill be followed in 2007 by a 3.0 percent rate, and the period willend with a 2.6 percent rate as employment growth slows slightly.This growth path calls for total private-sector wages and salariesto add roughly $1 billion in real purchasing power each yearduring the forecast period to the current $34 billion Valley privatesector payroll base.

The Valley’s total earnings growth matched that of total wages andsalaries in 2005 at 1.9 percent. This total earnings measure addsproprietary income and public sector wages and salaries to thetotal private sector wages and salaries. Going forward, totalearnings growth drops slightly below wage and salary growththroughout the forecast period. Total earnings will add 2.5percent in 2006, 2.3 percent in 2007, and 2.2 percent in 2008; its

slower growth is probably explained by the slower growth rate ofpublic sector wages and salaries over the forecast period.

14


15

20

25

30

35

40

45

50

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

In B

illio

ns o

f Con

stan

t 200

5 $

Real Total EarningsReal Total Wages & Salaries

SFV Total Real Earnings and Wages & Salaries 1991-2008

$40

$42

$44

$46

$48

$50

$52

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Thou

sand

s

Forecast

SFV Real Wages and Salaries per Worker 1991-2008

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Inflation Rate for Los Angeles 1991-2005

Consumer SpendingSpending on retail goods is a good indicator of overall consumerspending. Retail sales in the Valley registered impressive gains inthe late 1990s, but took a hit in 2001 with the impact of therecession. Recovery started in 2002 with a 1 percent growth ininflation-adjusted retail sales, and gained traction in 2003 whenValley retailers posted a very strong 3.3 percent increase ininflation-adjusted sales followed by a 3.4 percent increase in 2004as the recovery matured. The strong retail sales growth in 2003was partially fed by the home refinancing frenzy, whichblossomed in 2003 and continued through 2004. Retail salesgrowth hesitated in 2005 when it logged just under a 1 percentincrease in real sales, as the boost from refinancing dollars waned.Another contributed factor to that hesitation was the very strongfourth quarter of 2004 followed a year later by a relatively weakfourth quarter in 2005.

The forecast calls for retail sales growth returning to a healthy 2percent inflation-adjusted growth rate and remaining in that rangefor the remainder of the forecast period. The rate of real retailtrade expansion roughly matches the growth in real wages andsalaries and total earnings, and suggests that retail sales isreturning to a normal expansion path again.

Population and Net MigrationThe Valley’s population continues to grow over the forecastperiod, though at subdued rates relative to the last several years.In 2005, the Valley’s population grew at the slowest rate in adecade. The annual change in the Valley’s population, whichtopped 27,000 in 2002, dropped to 23,000 in 2003, and slidunder 20,000 in 2004, according to revised estimates justreleased by the California Department of Finance. These revisedestimates put the Valley’s population growth at 0.8 percent in2004 and 2005, and population growth will remain atapproximately this level throughout the forecast period, whichtranslate into annual population growth of roughly 16,000annually in the forecast period.

The Valley’s population growth derives from two sources—thenatural rate of population increase and net immigration to theValley. Both of these sources are contributing to the Valley’sreduced growth rate. The Valley’s natural rate of populationincrease depends on the birth and death rates, and the Valley’sbirth rate has been trending down, as has California’s. Valleybirths, which totaled around 27,000 annually a few years ago,now hover just below 25,000 in spite of the intervening growth inpopulation. Valley deaths rose slightly over the last few years dueto population growth, and the combined with the decrease inbirths is producing a slower natural population growth in theValley. Last year, the Valley’s natural increase was 13,400 and ourforecast calls for a natural population increase of 13,500 in 2006,then dropping to 13,300 and 13,200 in 2007 and 2008.

15


5,000

10,000

15,000

20,000

25,000

30,000

35,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Forecast

Births

Deaths

SFV Births and Deaths 1991-2008

-5,000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Annu

al C

hang

e

San Fernando Valley Population Growth 1991-2008

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Annu

al P

erce

ntag

e Ch

ange

SFV Real Retail Sales Change 1991-2008

Since the mid-1990s, positive net in-migration has supplementedthe natural population growth to produce greater population.Immigration to the Valley responds strongly to changes in jobopportunities in the Valley, but with a time lag. This relationshipis amply demonstrated in the recession of the early 1990s, whenthe decrease in Valley job opportunities in the early 1990sproduced net out migration (negative net in-migration) from theValley. In the subsequent recovery, net in-migration to the Valleyturned positive again. The 2001 recession and its low job growthaftermath put another damper on in-migration rates. While Valleynet in-migration remains positive during the forecast period, it isexpected to remain quite subdued, and the culprit is the cost ofliving in the Valley.

Over the last few years, rising housing costs pushed the Valley’snet in-migration downward as potential in-migrants soughtcheaper alternatives. Net in-migration stood at 7,500 in 2003,down from 13,000 a year earlier. In the last two years, Valley in-migration virtually stropped, with only 750 net in-migrantsshowing up in 2004 and just 350 last year. The forecast calls for amodest pickup in in-migration to the Valley over the next threeyears. We expect roughly 1,800 in-migrants per year over theforecast period as job growth steadies and the rate of increase inhousing prices diminishes significantly.

The Valley’s population density, measured in terms of populationper household, marched upward in the early part of the decade aspopulation growth far outstripped new home construction. Thepopulation growth slowdown noted in 2004-05 and forecast toremain at subdued rates through the forecast period reduces thepressure on this population density measure. Pressure relief alsocame from elevated residential permitting rates in 2004-05 andprojected permitting rates above the early part of the decade(detailed in the next section). These two factors actually produceda one-year hesitation in the upward trend in persons perhousehold last year. The forecast calls for the upward trend toresume during the forecast period albeit at a very slow rate.

A broader measure of population density is persons per squaremile, and the average number of persons per square mile in theValley is growing at the same rate as the Valley’s population sincethe number of square miles does not change. This means that thepersons per square mile will average just under a 1 percent growthrate per year over the projection period. Obviously, growth in thisdensity measure will impact some Valley communities more thanothers depending on where the new units are built and existingunits accommodate more people. Care should be taken in theplanning and permitting process to guide the new housing unitsto areas that are best equipped to handle the new development.Attention must also be paid to areas of the Valley where existinghousing units are accommodating more residents. Increasingpopulation density puts pressure on roadways, freeways, parks,schools, and other social infrastructure, and requires additionalfacilities to handle the additional load if the quality of life in theValley is not to be jeopardized.

2.70

2.75

2.80

2.85

2.90

2.95

3.00

3.05

3.10

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Pers

ons

Per H

ouse

hold

SFV Residential Density 1991-2008

(20)

(15)

(10)

(5)

-

5

10

15

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Thou

sand

s

SFV Net In-Migration Population 1991-2008

16


The CSUN Economic Forecast for the San Fernando Valley

Summary Table


18


San Fernando Valley Economic Forecast History 1995 - 2005; Forecast: 2006-2008

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005p 2006f 2007f 2008f

Employment –––––––––– jobs by sector –––––––––– ––––––––––Forecasted Values––––––––––Construction 26,469 24,610 25,244 27,524 29,325 30,788 32,179 32,717 32,283 34,896 36,660 35,472 36,038 34,634Mining & Agriculture 1,396 1,477 1,402 1,374 1,483 1,579 1,628 1,626 1,687 1,671 1,705 1,807 1,822 1,838Manufacturing 89,652 92,048 91,705 93,999 94,263 94,474 91,317 83,006 79,284 76,883 74,977 74,857 74,747 74,013

Durable 59,069 60,673 59,803 61,951 62,159 62,130 59,620 53,014 50,658 49,517 48,347 47,789 47,312 46,539Non-durable 30,583 31,375 31,902 32,048 32,104 32,344 31,697 29,992 28,626 27,366 26,630 27,068 27,435 27,475

Transportation and Utilities 12,532 12,314 12,377 13,108 14,062 13,810 14,399 13,184 12,791 13,010 12,963 13,186 13,297 13,521Wholesale and Retail Trade 99,502 97,248 101,956 102,888 105,347 105,829 105,815 108,002 109,993 113,367 115,112 116,569 118,326 119,920Financial Activity 55,228 52,662 51,302 50,452 52,516 51,710 54,045 56,914 59,301 57,663 58,767 59,260 59,856 60,208Professional and Business Services 99,986 94,483 97,927 98,276 101,144 97,080 98,904 98,348 99,873 103,923 107,582 109,215 111,573 114,387Information 89,050 104,354 105,227 105,941 114,611 115,177 106,650 101,742 101,579 105,437 108,160 111,707 114,599 118,093Health & Education 67,934 70,107 65,067 69,734 69,290 73,481 77,826 84,226 87,137 88,574 89,831 92,710 95,540 98,820Leisure & Accom. 51,530 52,903 53,519 53,602 56,516 57,567 54,848 55,793 58,014 60,186 60,651 61,681 62,471 63,194Other 21,760 22,405 21,883 22,251 23,037 22,982 23,627 24,480 25,182 25,236 25,033 25,710 26,198 26,644

Total Private Employment 615,039 624,611 627,609 639,149 661,594 664,477 661,238 660,038 667,124 680,846 691,441 702,174 714,468 725,272annual change 29,252 9,572 2,998 11,540 22,445 2,883 -3,239 -1,200 7,086 13,722 10,595 10,733 12,294 10,805percent change 5.0% 1.6% 0.5% 1.8% 3.5% 0.4% -0.5% -0.2% 1.1% 2.1% 1.6% 1.6% 1.8% 1.5%

Income –––––––––– dollars per worker ––––––––––Average salary per worker $32,780 $34,204 $36,836 $37,852 $38,763 $40,495 $42,166 $42,758 $44,833 $46,915 $49,165 $51,544 $53,642 $55,909

constant 2005 dollars $42,764 $43,870 $46,472 $47,080 $47,106 $47,642 $47,995 $47,357 $48,399 $49,011 $49,165 $49,785 $50,387 $50,923

–––––––––– millions of dollars ––––––––––Total Private Sector Wages & Salaries (2005 dollars) $26,302 $27,402 $29,166 $30,091 $31,165 $31,571 $31,605 $31,257 $32,288 $33,369 $33,995 $34,958 $36,000 $36,933

percent change 5.0% 4.2% 6.4% 3.2% 3.6% 1.3% 0.1% -1.1% 3.3% 3.3% 1.9% 2.8% 3.0% 2.6%

Total Earnings (constant 2005 dollars) $31,266 $32,037 $33,841 $36,666 $38,826 $39,229 $39,964 $39,664 $40,482 $42,712 $43,514 $44,601 $45,640 $46,647percent change 1.7% 2.5% 5.6% 8.3% 5.9% 1.0% 1.9% -0.8% 2.1% 5.5% 1.9% 2.5% 2.3% 2.2%

Retail Sales –––––––––– billons of dollars ––––––––––Retail Sales $10.0 $10.4 $10.7 $11.2 $12.5 $13.9 $14.4 $15.0 $15.9 $17.0 $17.9 $18.9 $19.8 $20.8

constant 2005 dollars $13.1 $13.3 $13.5 $13.9 $15.2 $16.3 $16.4 $16.6 $17.1 $17.7 $17.9 $18.2 $18.6 $19.0percent change

New Development –––––––––– number of homes permitted ––––––––––Single Family Units permitted 813 590 892 899 895 1,010 939 901 760 892 1,187 1,279 1,377 1,495Multiple Family Units permitted 790 717 294 407 347 1,505 2,287 2,256 1,992 4,847 2,967 3,157 3,044 2,478Total Units 1,603 1,307 1,186 1,306 1,242 2,515 3,226 3,157 2,752 5,739 4,154 4,436 4,422 3,973

–––––––––– thousands of dollars ––––––––––Residential Building Value - new structures $283,915 $249,475 $285,988 $347,867 $314,013 $519,076 $566,858 $522,228 $487,205 $894,732 $863,110 $854,262 $843,724 $876,570Res Build Value - alterations and additions $644,732 $328,711 $174,185 $164,569 $172,634 $204,075 $194,542 $231,923 $274,336 $357,257 $408,180 $435,120 $463,838 $494,451Total Non-Residential Building Value $544,917 $493,275 $324,869 $647,124 $580,268 $487,410 $546,167 $445,761 $420,637 $441,149 $638,120 $674,208 $608,626 $605,382

–––––––––– dollars ––––––––––Median Home Selling Price (2005 dollars) $212,668 $211,652 $220,479 $248,788 $267,391 $294,156 $302,803 $371,061 $431,861 $522,386 $595,059 $624,339 $638,353 $652,206percent change -2.2% -0.5% 4.2% 12.8% 7.5% 10.0% 2.9% 22.5% 16.4% 21.0% 13.9% 4.9% 2.2% 2.2%

DemographicsTotal Population 1,591,992 1,609,964 1,632,147 1,655,024 1,678,422 1,709,916 1,737,362 1,765,195 1,787,094 1,801,905 1,815,691 1,831,433 1,848,160 1,863,626

percent change 0.1% 1.1% 1.4% 1.4% 1.4% 1.9% 1.6% 1.6% 1.2% 0.8% 0.8% 0.9% 0.9% 0.8%Births 27,991 27,615 26,976 26,897 26,128 26,154 25,723 25,155 25,273 24,728 24,635 24,874 24,734 24,617Deaths 10,863 10,419 10,866 10,786 10,884 10,800 10,910 10,842 11,208 11,279 11,277 11,318 11,390 11,448Net in Migration (Based on January Population) -15,767 844 4,987 6,767 10,581 12,956 12,093 13,020 7,586 747 323 1,807 1,822 1,838

Housing Stock (units in place) 592,568 594,427 595,990 597,432 598,994 600,492 603,007 606,374 609,531 612,283 618,022 622,176 626,612 631,034Number of Households 547,820 554,265 562,259 568,865 576,450 582,116 587,932 591,215 594,293 596,976 602,571 604,928 608,900 612,785Vacancy Rate (%) 7.6% 6.8% 5.7% 4.8% 3.8% 3.1% 2.5% 2.5% 2.5% 3.0% 3.5% 2.9% 2.9% 3.0%Persons per Household 2.91 2.90 2.90 2.91 2.91 2.94 2.96 2.99 3.01 3.02 3.01 3.03 3.05 3.06

19


History 1995 - 2005; Forecast: 2006-2008

2001 2002 2003 2004 2005p 2006f 2007f 2008f

––––––––––Forecasted Values––––––––––32,179 32,717 32,283 34,896 36,660 35,472 36,038 34,6341,628 1,626 1,687 1,671 1,705 1,807 1,822 1,838

91,317 83,006 79,284 76,883 74,977 74,857 74,747 74,01359,620 53,014 50,658 49,517 48,347 47,789 47,312 46,53931,697 29,992 28,626 27,366 26,630 27,068 27,435 27,47514,399 13,184 12,791 13,010 12,963 13,186 13,297 13,521

105,815 108,002 109,993 113,367 115,112 116,569 118,326 119,92054,045 56,914 59,301 57,663 58,767 59,260 59,856 60,20898,904 98,348 99,873 103,923 107,582 109,215 111,573 114,387

106,650 101,742 101,579 105,437 108,160 111,707 114,599 118,09377,826 84,226 87,137 88,574 89,831 92,710 95,540 98,82054,848 55,793 58,014 60,186 60,651 61,681 62,471 63,19423,627 24,480 25,182 25,236 25,033 25,710 26,198 26,644

661,238 660,038 667,124 680,846 691,441 702,174 714,468 725,272-3,239 -1,200 7,086 13,722 10,595 10,733 12,294 10,805-0.5% -0.2% 1.1% 2.1% 1.6% 1.6% 1.8% 1.5%

$42,166 $42,758 $44,833 $46,915 $49,165 $51,544 $53,642 $55,909$47,995 $47,357 $48,399 $49,011 $49,165 $49,785 $50,387 $50,923

$31,605 $31,257 $32,288 $33,369 $33,995 $34,958 $36,000 $36,9330.1% -1.1% 3.3% 3.3% 1.9% 2.8% 3.0% 2.6%

$39,964 $39,664 $40,482 $42,712 $43,514 $44,601 $45,640 $46,6471.9% -0.8% 2.1% 5.5% 1.9% 2.5% 2.3% 2.2%

$14.4 $15.0 $15.9 $17.0 $17.9 $18.9 $19.8 $20.8$16.4 $16.6 $17.1 $17.7 $17.9 $18.2 $18.6 $19.0

939 901 760 892 1,187 1,279 1,377 1,4952,287 2,256 1,992 4,847 2,967 3,157 3,044 2,4783,226 3,157 2,752 5,739 4,154 4,436 4,422 3,973

$566,858 $522,228 $487,205 $894,732 $863,110 $854,262 $843,724 $876,570$194,542 $231,923 $274,336 $357,257 $408,180 $435,120 $463,838 $494,451$546,167 $445,761 $420,637 $441,149 $638,120 $674,208 $608,626 $605,382

$302,803 $371,061 $431,861 $522,386 $595,059 $624,339 $638,353 $652,2062.9% 22.5% 16.4% 21.0% 13.9% 4.9% 2.2% 2.2%

1,737,362 1,765,195 1,787,094 1,801,905 1,815,691 1,831,433 1,848,160 1,863,6261.6% 1.6% 1.2% 0.8% 0.8% 0.9% 0.9% 0.8%

25,723 25,155 25,273 24,728 24,635 24,874 24,734 24,61710,910 10,842 11,208 11,279 11,277 11,318 11,390 11,44812,093 13,020 7,586 747 323 1,807 1,822 1,838

603,007 606,374 609,531 612,283 618,022 622,176 626,612 631,034587,932 591,215 594,293 596,976 602,571 604,928 608,900 612,785

2.5% 2.5% 2.5% 3.0% 3.5% 2.9% 2.9% 3.0%2.96 2.99 3.01 3.02 3.01 3.03 3.05 3.06

20


Home Prices:Valley home price appreciation slowed but currently remains inthe double-digits, fueled by strong demand and meagersupply…Double-digit appreciation moves to single-digitappreciation as supply increases and higher mortgage ratesquell demand...No bubble for now, but caution is still advised…

Housing Bubble DynamicsEveryone knows what a housing market bubble is—a period oftime in which housing prices rise dramatically, then fallsignificantly giving back a substantial portion of their recent gains.The fallout from a housing bubble usually includes financiallyhard times for many recent home purchasers who find that theylose rather than build equity. The lost equity means reducedconsumer borrowing power and increasing foreclosures. Theresulting hike in foreclosures aggravates the housing price slideand exposes more people to financial hardship. Homeconstruction drops off substantially and that industry loses jobs.These job losses and homeowners’ reduced wealth translate intosluggish business conditions in the community, limiting job andincome growth and further aggravating the problem.

Residents in the San Fernando Valley and Los Angeles do nothave to look too far to find a housing bubble. One occurred herein the late 1980s and early 1990s. Area home prices rose sharplyin the late 1980s, peaked at a median price of $240,000 in late1989, then fell over the next six years to the low $160,000range. A median-priced Valley home lost one-third of its valueover those six years. Median home prices languished in the low$160,000 range from the fourth quarter of 1995 until the firstquarter of 1997 and then began to rise, posting modest gains atfirst, but dramatic gains in the past few years. The track ofDecember’s median prices over the last few years illustrates thosedramatic increases: $266,000 in 2001; $335,000 in 2002;$400,000 in 2003; $500,000 in 2004; $595;000 in 2005. TheValley’s median home price set a new record of $610,000 inMarch 2006.

Last year, median home price appreciation rates in the SanFernando Valley and throughout Southern California droppedfrom unprecedented levels to only slightly more modest ones.The Valley began its double-digit appreciation rates in 1998,and averaged 11 percent annually from 1999 to 2001, whichjumped to 19 percent in 2002-2003, and then accelerated toan annual average in excess of 25 percent in 2004. Last year,the 12 month appreciation rate returned to a “more moderate”19 percent average, with all of the appreciation occurring inthe first 8 months of 2005, and that appreciation rate edgeddown slightly in March 2006 to 17 percent. The MonthlyMedian Home Price Chart shows both the impressiveacceleration of home price appreciation and its modestslowdown in the last year or so.

REAL ESTATE CONDITIONS AND FORECAST: RESIDENTIAL

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

$550,000

$600,000

$650,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: DataQuick

SFV Quarterly Median Home Price 1988-2006

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

J FMAMJ J A SO ND J FMAMJ J A SO ND J FMAMJ J A SO N D J FMAMJ J A SO ND J FMAMJ J A SO ND J FMAMJ J A SO ND J FMAMJ J A SO ND J FMAMJ J A SO ND J FMAMJ J A SO ND J FM

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: DataQuick

SFV Rate of Median Home Price Change During Previous 12 Months

$500,000 - $600,000

$600,000 - $700,000

$700,000 - $800,000

$800,000 - $900,000

$900,000 - $1,700,000

Median Home Prices

Median Home Prices (Resale Only) March 2006, by Zip Code

The ZIP Code map shows the median prices of single-detachedhomes sold in the various ZIP code areas of the Valley in March2006, based on DataQuick information. The highest medianhome price recorded was in the Calabasas / Hidden Hills ZIP codearea at $1.65 million. The next highest were five areas in theSouthern Foothills with median prices between $900,000 and$1.2 million. The lowest median prices recorded were in theNortheast Valley and were still over $500,000 in March 2006.

The median home price in any particular ZIP code area can varysubstantially from month to month, especially in an area that hasfew sales and substantial variation in the prices of homes based onhouse features and quality within that area. To reduce thatvariation, ZIP code areas with similar home prices can be combinedand the consequentially larger number of sales should substantiallyreduce the monthly price variations, provided the combined areashave similarly priced housing. The Valley Regions map showscombined ZIP code areas where the regions were selected tocapture enough similarly priced housing in a sufficient number ofZIP codes to suppress the median home price variations due tovarying features and qualities. The Regions map shows themedian home prices within each region for March 2006.

The Demand SideA primary driver of the recent record-setting home appreciationrates has been the fall in mortgage rates to 40-year lows. Themechanics are simple—lower mortgage rates mean lowerpayment for a certain priced home. Renters and people eyeingsecond homes suddenly can afford a house that they could notafford before, and come into the market, creating new demand.Lower interest rates also increase the price of the home that anygiven buyer can afford, so as entering buyers drive home pricesup, the higher prices do not push many other buyers out. Theaccelerating home price appreciation also can attract others whobegin to see a house as a potential investment instrument and shifttheir asset portfolios toward housing, entering the market tocapture home price appreciation. Moreover, a rising appreciationrate can convince under-funded home buyers that they can affordto buy because their expected home appreciation will provide thewealth that enables them to buy a house now. Some housingmarket analysts believe that the recent surge in demand was aidedand abetted in 2005 by a flurry of creative financing programs inwhich little or no down payments were required, and lowintroductory interest rates were offered for the first several monthsof the mortgage. Such programs allow more people to buy into themarket but may have consequences in eventual foreclosures in thefuture if the borrowers’ incomes or home prices do not risesufficiently.

The impact of the falling mortgage rates is obvious in acomparison of the Home Price Change chart with the MortgageRate chart. As mortgage rates fell, home prices appreciated faster,while rising mortgage rates slowed home price appreciation. Thedrop in mortgage rates in early 2003 set off home priceappreciation rates exceeding 20 percent, and the drop in mortgage

21


New Listings of Homes on the Market During the Previous 12 Months

4%

5%

6%

7%

8%

9%

10%

Jan-

97Ap

r-97

Jul-9

7

Oct-9

7Ja

n-98

Apr-

98Ju

l-98

Oct-9

8Ja

n-99

Apr-

99Ju

l-99

Oct-9

9Ja

n-00

Apr-

00Ju

l-00

Oct-0

0Ja

n-01

Apr-

01Ju

l-01

Oct-0

1Ja

n-02

Apr-

02Ju

l-02

Oct-0

2

Jan-

03Ap

r-03

Jul-0

3

Oct-0

3Ja

n-04

Apr-

04Ju

l-04

Oct-0

4Ja

n-05

Apr-

05Ju

l-05

Oct-0

5Ja

n-06

Source: The Federal Reserve Board

Conventional 30-Year Mortgage Rates

Northeast ValleyNorthwest Valley

West Foothills

South Foothills

Central ValleySoutheast Valley

Glendale & Burbank$729,000

$529,000$626,000

$570,000$727,750

$1,057,000

$590,000

San Fernando Valley $610,000

SFV Median Home Prices for Single Family Residence March 2006

rates early in 2004 pushed home appreciation rates to theirhighest levels, even exceeding a 30 percent annual rate during onemonth. After a quick rise and a 3-month drop in early 2005,mortgage rates have been on a generally upward course, andhome price appreciation rates have begun to slow as a result.

The Supply SideThe supply side also contributed to the sharp rise in home pricesby actually reducing the supply of housing on the market.Appreciating home prices signaled homeowners and investorsthat real estate holdings offered a good return on investment,particularly after the stock market retrenchment in 2000. As longas home prices continued to rise, some homeowners who couldsell were reluctant to do so. Many homebuyers who were movingup in the market or even out of the area decided to keep their oldhomes as rentals to capture continued appreciation. Retirees whocould move out of the area stayed on to capture the gains. Thesesupply-withholding activities reduced the supply on the marketduring 2003 and most of 2004, as shown in the New Listingschart. The reduced supply aggravated the run-up in housingprices as can be seen in the 2004 spike in home price appreciationrates in the Median Price Rate of Change chart above. However, assoon as the dramatic gains in home prices abated somewhat, thewithheld supplies came back on the market, reducing the upwardpressure on prices.

A second factor in the Valley’s relatively low housing supply hasbeen the rate of building new housing units. Normally, rapidlyappreciating housing prices would spur a response in homebuilding activity, like they did in the 1980s when the defensebuildup hiked jobs and pay in the Valley’s aerospace and relatedindust- ries. This caused housing prices to surge and the housingmarket answered with a ramped up building program.

Until recently, the supply response to the current surge in housingprices had been muted. In the face of the largest price increases in2002 and 2003, the new residential building permits issued in theValley actually decreased from 3,367 in 2001 to 3,157 in 2002,and to 2,749 in 2003. The decrease in the number of unitspermitted in the Valley from 2001 through 2003 actuallyaggravated the recent housing price surge by limiting the supply.Fortunately, that decline in residential permitting activity reverseditself in 2004, with a vengeance. The number of residential unitspermitted in the Valley more than doubled in 2004, rising from2,749 units in 2003 to 5,739 units in 2004. Unfortunately, thesurge in residential permitting does not spell immediate relief forrunaway house price appreciation. Permits authorize building; thenewly built units come on the market later—usually a year ormore later. Since the twin spikes in permitted units occurred inthe second and fourth quarters of 2004, their impacts on thehousing market should begin to be felt in the latter half of 2005and on into 2006.

Recent home sales and inventory trends are consistent with thebooming and now cooling housing market. Average monthly sales

in the Valley posted by the Southland Regional Association ofRealtors rose from under 1,000 units a month in 1995 to around1,400 a month by 1998. Sales stayed around that level through2001, then rose again to monthly sales averages of 1,572 homes in2002, and 1,567 homes in 2003. The inventory of available homes(sales/listing ratio) plummeted over the period, falling from over an8 month supply of homes to a low of a 1.0 month supply in March2004, verifying the existence of a home buying frenzy. Theinventory rose to a 3.0 months supply later in 2004 and thendropped again to a 1.2 month supply early in 2005. Housinginventory subsequently rose steadily and now stands just slightlyover a 5 month supply. Since industry analysts claim that a 5 to 8month supply is one hallmark of a normal housing market, theValley may be set to enjoy a more normal housing market.

Demand and Supply TodayThe recent home price appreciation rates—even at their recentlymoderated levels of 17 percent annually—are simply notsustainable, and will not persist. The recent extraordinary rates ofhome price appreciation were fueled by two discernable surges inhousing demand and a nearly moribund supply.The initial surge in housing demand was caused by the recoveringeconomy in the late 1990s. Housing prices had adjusteddownward in the early 1990s in response to the falling demandassociated with the recession and the “overhang” of supply causedby the enthusiastic building in the 1980s. Home prices haddropped to the point that they were a good deal in a recoveringeconomy. The recovery added population and increased incomeand purchasing power to the Valley which translated into a strongand growing demand for housing. Home prices began to climb,but were still too low to evoke much of a supply response. As therecovery continued, more people and purchasing power wereadded to the mix and housing prices began to accelerate.

The second surge in demand came ironically with the 2001recession, which the Federal Reserve decided to fight bydramatically lowering interest rates to keep consumers andbusinesses buying products. It worked, at least on the consumer

22


0

5

10

15

20

25

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

List

ings

/Mon

thly

Sal

es

Source: Southland Regional Association of Realtors

Inventory of Homes and Condominiums in MonthsLos Angeles Portion of the Valley, Calabasas, and San Fernando

side. The consumers responded by buying consumer durablesand other things with credit cards, which had newly loweredinterest rates. And they bought houses because the record lowinterest rates pushed down mortgage rates and dramaticallylowered monthly mortgage costs. Suddenly, home buyers couldafford much more expensive homes without increasing theirpayments, and they bought them. Others, who previously couldnot afford to buy homes, now could, and did. These two groupsof demanders quickened the pace of home price appreciation,especially in areas where the supplies of new housing were morelimited because of the availability of building sites, regulatoryrestraints, and the like. Housing prices surged until their higherlevels moderated the demand by removing some potential buyersfrom the market. While creative financing allowed some whowould have been excluded by the higher prices to stay in thehousing market, the current combination of high prices and risingmortgage rates are effectively checking demand growth.

On the supply side, the expectation of a slower appreciation ofprices already has released additional supplies to the market assome of the discretionary homeowners cashed out of their homesto capture the paper gains they racked up. In addition, the supplyof new residential units has begun to respond to the much higherhome prices after a significant time lag, undoubtedly rooted in thehousing construction doldrums of the 1990s. Housing marketsupply will be augmented as the significant increase in unitspermitted during 2004 and 2005 come onto the market. Theexpected permitting rates this year and next also should relievesome of the pressure on the market.

Going forward, our forecast calls for significantly increasedpermitting rates from those experienced in the early part of thedecade and marginally higher than last year’s 4,150 unitspermitted, but still not at the level experienced in 2004.Population and price factors that operate on the housing marketsuggest permitting rates of roughly 4,400 units in 2006 and 2007would be consistent with expected market forces. Multiple familyunit permits will provide roughly 70 percent of the new units (justover 3,000 units) while single family units provide the remainder. The forecast calls for a drop in the annual permitting rate at theend of the period. The permitting rate drops to just under 4,000units in 2008 as the demand pressures on both owner occupiedand rental housing ease at the end of the period.

In summary, the slowing demand growth and the increases insupply appear to be sufficient to substantially more moderate therate of housing appreciation over the next 12 months and beyond,but not to reverse it. The growth in demand for Valley housingwill be fueled by the projected modest growth in population fromboth natural increase and positive net immigration to the Valleycoupled with modest growth in earnings. This modest growth inhousing demand combined with the increased supply nowcoming onto the market and that projected for the future willkeep housing prices in check.

The forecasted real rates of home price appreciation drop justbelow 10 percent for 2006, and continue in the lower single digitsfor 2007 and 2008. The Table indicates that the median price forthe Valley in 2006 will be just under $625,000 in 2005 dollars.Translating this into 2006 dollars would add about 3.5 percent tocompensate for inflation, which means that the December 2006median price for Valley homes will be roughly $646,000. In termsof a rate of return on investment, the yield for the median-pricedhome would be 5 percent in inflation-adjusted terms and 8.5percent in nominal terms, which is about half the appreciationrate last year. The forecast suggests that 2007 and 2008 will yieldeven lower appreciation rates.

23


0

100

200

300

400

500

600

700

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

in T

hous

ands

of 2

005

$

SFV Real Home Prices 1991-2008

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2000

2001

2002

2003

2004

2005

2006

2007

2008

Multiple-Family UnitsSingle-Family Units

SFV New Housing Units Permitted 1980-2008

Should We Be on a Bubble Watch?In the housing bubble of the late 1980s and early 1990s,housing demand surged and housing supply responded with arapid building program, then demand collapsed while workerrelocations pushed increasing supplies on to the market. Therapid defense buildup in the 1980s spiked housing prices andspawned a massive supply response, particularly in multiple-family units construction. Then, with the new level of housingsupply still coming onto the market, the Berlin Wall fell and theSoviet Union disappeared. Peace broke out and defensecontracting fell sharply. The Valley’s aerospace industry shedmany jobs, cut supply contracts, and some of the remainingindustry migrated to the east coast with the shift in politicalpower. At nearly the same time, the Van Nuys General Motorsplant closed, and offered most of its workers jobs in other GMplants around the country. Consequently, many relatively high-paid aerospace and GM workers sold their houses in an alreadyoversupplied housing market to follow their jobs elsewhere. TheValley’s job exodus—more than 40,000 of the Valley’s private-sector jobs disappeared between 1991 and 1993—bloated thehousing supply, which easily overwhelmed the sluggishdemand, and prices fell significantly. The high volume of salesassociated with the bursting of the late 1980s can be seen in SFVHome Sales chart

Do these two necessary conditions exist in the Valley today? Thestrong demand has been there, and housing prices have certainlybeen bid up rapidly with the recent “sellers’ market” propelled bythe historically low mortgage rates. But there are no apparentlooming factors that could rapidly and significantly increase thesupply of housing relative to demand and cause a rapid deflationof Valley home prices, producing the downside of a bubble.Currently, even though the durable goods sector of manufacturingis consolidating somewhat, overall job growth remains in thestrong positive category for the Valley.

Moreover, even with the increased residential building permits in2004 and 2005, and the projected elevated permits rates for 2006and 2007, the building rate in the Valley falls far below the “overexuberant” building of the late 1980s. The current and projectednumbers of housing units to be built are less than a third of thoselate 1980s building rates. The Inventory chart suggests that the“discretionary homeowners” have already put their houses backon the market. In summary, even with the projected slowdown inValley population moderating demand, and the increased housingunits permitted in 2004 and 2005 and beyond, there are no signsthat the demand for Valley housing is abating sufficiently andsupply increasing sufficiently to generate a housing bubble.

Our conclusions in this section are underscored by the data on theValley’s Notices of Default rates and Foreclosure rates reported inthe next section.

Residential Notices of Default and ForeclosuresValley Notices of Default remain low in spite of anuptick….Foreclosures also edge up slightly but also remainlow…The Valley’s share of the County’s foreclosures zoomsbut both the Valley’s and the County’s low absoluteforeclosure numbers rob the Valley’s share numbers of anysignificance….

Residential notices of default (NODs) are the first step in theforeclosure process for residential property, and many real estateobservers consider rising NODs as an early warning signal forrising foreclosures and possible signs of trouble in housingmarkets. Notices of default generally drop when homes areappreciating in price and owners have alternatives to defaultingon their mortgages such as refinancing and transforming some oftheir increased equity into cash to payoff accumulated debts orselling into a market with prices above the owner’s mortgageobligation. When home prices are falling, these options disappearfor some buyers and notices of default rise as a result. One issuefor the Valley NODs—DataQuick began collecting notice ofdefault data in 1998, which does not provide a long data seriesthat can be examined for clues about normal and abnormal rangesof NODs for the Valley.

The Valley’s residential notices of default drifted downward in2002 and 2003 and then fell substantially in the first threequarters of 2004 to rest between 300 and 400 per quarter in thesecond and third quarters. During the last quarter of 2004 andthroughout 2005, the NODs moved back up to the 600 to 700per quarter range, but then jumped to 865 in the first quarter of2006. Even at its current level, the Valleys NOD rate is notalarming since they ran in this range during most of 2002 and2003, and above this level in 2000-2001, all of which were yearsin which housing appreciated between 5 and 15 percentannually and refinancing options were generally available forhome owners with financial issues. In fact, the last quarter’sincrease could signal the Valley’s NODs returning to the low endof a more normal range.

SFV Residential Notices of Default, 1999-2006

24


Valley foreclosures appear to have bottomed out in the firstquarter of 2005 at an average quarterly rate of 25 foreclosures forthe entire Valley. Even though the quarterly rate for the last twoquarters of 2005 rose to 49 and 45 respectively, and rose again to75 in the first quarter of 2006, these foreclosure rates are so lowthat there is no current cause for alarm. Valley foreclosures nowstand well below the rates in excess of 200 per quarter of 2001-2002 when housing appreciation rates were 5-15 percent per yearand refinancing options to foreclosure were plentiful.

The Valley’s share of Los Angeles County foreclosures edgedupward from recent lows in the 13 to 15 percent range to breakthrough the 20 percent level in the first two quarter of 2005, andthen shot up to the low 30 percent range in the last two quartersof 2005 and the first quarter of 2006. The series began workingits way upward toward the end of 2003 and displayed greater thanusual volatility along the way because of the very low absolutenumbers of foreclosures for both the Valley and the County.Neither the recent movement in the Valley’s share nor its volatilityare alarming at this point because both are based on very lowquarterly foreclosure rates for the Valley and the County (75 and

223 respectively for first quarter of 2006), and low absolutenumbers tend to produce volatility in percentage shares.

Apartment Vacancy and Rental RatesValley rental market tightens…vacancy rates fall and remain lowrelative to nearby areas…Valley rent increases that had trackedunder 5% annually for four years are beginning to rise…

The Valley’s apartment market is showing clear signs oftightening. Valley vacancy rates in large complexes averaged 3.6percent in 2005 and edged down in the first quarter of 2006 to3.2 percent. These recent rates compare to 4.0 percent in 2004and 4.1 percent in the two previous years. The Valley vacancyrate remains below the one for Los Angeles City, as shown in theApartment Vacancies chart, where it has tracked since 1998,according to data supplied by RealFacts, which surveysapartment complexes with over 100 units. These data show thegap between Los Angeles City and the Valley has widened tonearly 1 percentage point in the last two years.

Until recently, increases in Valley rents averaged about $50 peryear, rising from $1,083 in 2000 to about $1,350 in 2005. Thisyielded a rate of rent increase between 3.5 and 5 percent per yearfor the last four years, based on annual average rents in the Valley.While outpacing inflation rates by a percentage point or two,these rent increases certainly were mild relative to Valley homeprice escalation.

However, the third quarter of 2005 began to tell a different story. Inthird quarter, the rate of rent increase over the previous four-quarters hit 5.0 percent, it elevated to 5.6 percent in the fourthquarter of 2005, and then jumped to 7.5 percent in the first quarterof 2006. The explanation for this recent acceleration in apartmentrent increases very well may be a spillover effect from the housingmarket. As the cost of home ownership recently soared due to theprice increases there, more Valley residents were pushed into therental market, increasing demand, and both raising rents andreducing vacancies. Another factor contributing to the current level

25


0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006Source: DataQuick

SFV Residential Foreclosures, 1988-2006

SFV Residential Foreclosure Share, 1988-2006San Fernando Valley as a Share of LA County

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

SFVLA MSA

SFV 6.4% 5.9% 4.4% 2.6% 2.1% 3.5% 4.1% 4.1% 4.0% 3.6% 3.2%LA MSA 5.4% 4.7% 3.8% 3.0% 2.8% 4.0% 4.8% 4.6% 4.9% 4.3% 4.3%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006:1

Source: RealFacts

Apartment Vacancies in Large Complexes SF Valley and LA MSA

26


of rent increases is the higher interest rates that apartment houseowners may be beginning to pay. As owners cost of financingapartment building purchases or construction increase, increasingrents are an obvious mechanism for adding revenues to offset thoseincreased costs. Note that even at a 7.5 percent annual rate ofincrease, apartment living costs did not rising as fast as the costs ofhome ownership in the Valley. For the record, just over 50 percentof Valley households are currently renters.

Rents differ among the communities in the Valley in expectedways. The Average Rents by Communities chart displays the rentsin selected Valley communities and cities for the first quarter2006. Higher rents prevail in communities along VenturaBoulevard and in Burbank and Glendale. Lower rents appear inthe mid-Valley running from east to west.

The average rents in the San Fernando Valley are compared tothose in nearby Metropolitan Statistical Areas (MSAs) in theAverage Rent Comparison chart. Valley rents are comparable tothose in the Los Angeles and Ventura MSAs, and are higher thanthose in San Diego, and Riverside/San Bernardino MSAs. The

position of the Valley relative to these nearby MSAs, and theirpositions relative to one-another, have been relatively stable overthe past several years. The chart also shows that the rate ofincrease in San Fernando Valley rents is comparable to those inthe Los Angeles-Long Beach-Santa Ana MSA and the Oxnard-Thousand Oaks-Ventura MSA. Because of its lower base, the rateof increases in Riverside-San Bernardino-Ontario exceeds that ofthe Valley.

The Valley’s large complex occupancy rate exceeds all of those inthe selected California MSAs and is evidence that the rentalmarket here remains relatively tight. The occupancy rate is thecomplement of the vacancy rate, so the 96.4 percent occupancyrate in the Valley translates into a 3.2 percent vacancy rate in thelarge complexes surveyed by RealFacts. The Los Angeles/OrangeCounty MSA had an occupancy rate of 95.7 percent, and VenturaCounty MSA had one of 96.0 percent. The Sacramento MSAregistered the lowest occupancy rate in the first quarter of 2006with a 92.7 percent occupancy rate.

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006:Q1

San Fernando ValleyLos Angeles-Long Beach-Santa AnaOxnard-Thousand Oaks-VenturaRiverside-San Bernardino-OntarioSan Diego-Carlsbad-San Marcos

Source: Real Facts

Average Rent in Large Complexes Comparison 1996-2006

$933

$953

$1,020$1,039

$1,093

$1,108

$1,149

$1,218

$1,220

$1,327

$1,353

$1,384

$1,428

$1,485

$1,529

$1,552

$1,596

$1,648

$1,687

$1,842

$- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $2,000

Pacoima

Sylmar

Van Nuys

North Hollywood

Valley Village

Northridge

SFV Average

Sherman Oaks

Woodland Hills

Calabasas

Source: Real Facts

Apartment Rents in Large Complexes by Community 2006: Q1

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

0%

2%

4%

6%

8%

10%

12%

SFV Average Rent $894 $934 $987 $1,083 $1,148 $1,189 $1,249 $1,301 $1,363 $1,428 % Change in Rent 3.2% 4.5% 5.7% 9.7% 6.0% 3.6% 5.0% 4.2% 4.8%

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006:Q1

Source: Real Facts

SFV Average Rent and Rate Change in Large Complexes

96.0%

95.1%

94.3%

90.0% 91.0% 92.0% 93.0% 94.0% 95.0% 96.0% 97.0% 98.0%

San Fernando Valley

Oxnard-Thousand Oaks-Ventura

Los Angeles-Long Beach-Santa Ana

San Diego-Carlsbad-SanMarcos

Riverside-San Bernardino-Ontario

San Jose-Sunnyvale-SantaClara

San Francisco-Oakland-Fremont

Sacramento-Arden-Arcade-Roseville

Source: Real Facts

92.7%

95.9%

95.7%

96.8%

95.5%

Occupancy in Large Complexes Comparison 2006, 1st Quarter

27


Industrial PropertyValley industry vacancy rate holds at a very low 2.0%...WestValley lowest with 1.3% vacancy rate…

The Valley is located in the hottest industrial space market in thenation—the Los Angeles area, which registered the lowest vacancyrate in the continental U.S. with a 2.0 percent rate in the firstquarter 2006, compared to an 8.1 percent national rate accordingto Cushman & Wakefield. The San Fernando Valley’s industrialvacancy rate matched the Los Angeles market average of 2.0percent, and both checked in at less than one-quarter of thenational rate.

The Valley’s industrial space market, which had edged down to3.0 percent in the late 1990s, bounced up to a high of 5.5 percentin the 2001 recession, and quickly recovered, re-establishing itselfin the mid to low 3 percent vacancy range in 2002. After hoveringaround 3 percent until the second quarter of 2004, the Valley’sindustrial vacancy rate tumbled to 1.9 percent in the third quarterof 2005, moderated slightly to 2.0 percent in fourth quarter andmaintained that low 2.0 percent rate in the first quarter of 2006.The SFV Industrial Vacancy chart shows the Valley’s industrialvacancy rate in steep descent before its recent leveling.

The various regions of the Valley experienced somewhat differentvacancy industrial rates in the first quarter of 2006 with the WestValley turning in the lowest rate at 1.3 percent, the Central Valleyregistering close to the Valley average with a 2.3 percent rate, andthe East Valley slightly higher at 2.4 percent vacancy. The EastValley contains the most industrial space with 43.4 percent ofexisting Valley space, followed by the West Valley with 33.1percent of the space, and the Central Valley with 23.5 percent.

These low vacancy rates have pressured lease rates and spawnedthe development of some new industrial space in the Valley. Grubb

SFV Industrial Vacancy Rate

0%

1%

2%

3%

4%

5%

6%

7%

8%

% 6.0 4.5 6.0 7.7 6.8 7.0 5.2 4.4 5.9 4.4 4.3 3.2 3.5 4.2 4.4 2.1 4.3 4.0 2.2 2.1 2.8 2.7 2.8 2.6 2.8 2.2 2.3 1.5 1.6 1.5 1.1 1.2 1.3

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q1998 1999 2000 2001 2002 2003 2004 2005 2006

Source: Grubb & Ellis

West Valley Industrial Vacancy Rate

0%

1%

2%

3%

4%

5%

6%

7%

8%

7.3 4.5 4.9 5.2 4.2 6.2 6.3 6.9 5.2 4.9 3.6 2.2 1.7 2.8 3.2 6.5 5.3 3.8 2.8 2.5 2.1 2.5 3.3 3.6 2.1 3.9 2.6 2.6 3.8 3.4 2.6 2.2 2.3



%

Central Valley Industrial Vacancy Rate

0%

1%

2%

3%

4%

5%

6%

7%

8%

2.6 2.3 3.0 4.0 4.1 4.1 3.8 4.5 3.3 3.4 3.2 3.2 3.5 4.6 5.2 6.6 6.5 6.3 4.9 4.5 4.1 2.7 3.1 3.4 4.1 4.0 3.0 2.9 3.0 2.7 2.2 2.5 2.4



%

East Valley Industrial Vacancy Rate

REAL ESTATE CONDITIONS AND FORECAST: NON-RESIDENTIAL

& Ellis tracks all industrial buildings with over 10,000 square feetavailable for lease but their Valley data does not include Calabasas.The Valley projects they track contained a total of 128.4 millionsquare feet of occupied and available industrial space in the firstquarter of 2006, compared to 127.4 million feet in the fourthquarter 2005, an increase of just over 1 million feet or 0.8 percentin the quarter. Most of that square footage was added in the eastand the west Valley areas while the central Valley remainedessentially unchanged. That rate of industrial space increase isconsistent with the level for all of 2005, which saw the addition of3.6 percent over the 123.0 million feet existing in fourth quarter2004. While these space additions are helpful to the crunch inindustrial space availability in the Valley, the growth of industrialspace seems muted relative to the very low vacancy rates beingexperienced here. The lack of available land for the expansion ofindustrial space is the probable reason for this muted response.

Lease rates for industrial space vary greatly depending on the typeof industrial activities the space is designed to accommodate.Cushman and Wakefield report that recent lease activity in theValley puts the average rate for High-Tech space at $.74 per footwith Office Service Center, Manufacturing, andWarehousing/Distribution all averaging in the low to mid $.60 perfoot range. In any one quarter the particular mix of the spaceleased could significantly influence the average lease rate, so leaserate comparisons are not provided for industrial space.

Grubb & Ellis Industrial Regions:• East Valley: Arleta, Burbank, Glendale, Lakeview Terrace, North

Hollywood, Pacoima, Studio City, Sun Valley, Sunland, Sylmar,Tujunga.

• Central Valley: Encino, Granada Hills, Mission Hills, North Hills,Northridge, Panorama City, Reseda, San Fernando, Van Nuys.

• West Valley: Canoga Park, Chatsworth, Tarzana, West Hills,Woodland Hills.

Office SpaceValley office space averaged $2.35 per foot in 1st quarter...Rates were highest in Burbank, Universal City, and other EastValley areas…Valley office vacancy rates fell to 8.5% in 2005and opened 2006 at 8.6%…

CB Richard Ellis provides Class A and B office lease rates for Valleycommunities (including Calabasas) in their quarterly reports,which appear in the accompanying San Fernando Valley OfficeLease Rate chart for first quarter 2006. The chart shows theaverage Valley lease rate averaged $2.35 per foot with the highestrate in the Burbank at $2.72 per square foot. Universal City andStudio City office space followed with $2.67 and $2.50respectively. Space in Glendale and Sherman Oaks also leased forabove the Valley average lease rate of $2.35 during the firstquarter. Other communities leased space for less than the Valleyaverage with the lowest rates for the quarter occurring inChatsworth, Panorama City, Mission Hills, and Canoga Park.

CB Richard Ellis also reports office lease rates for other sub-markets in the Los Angeles area, which are displayed in the Sub-Market Lease Rate chart. In the first quarter of 2006, the LosAngeles County market averaged $2.26 per square foot for officespace, with West Los Angeles claiming the top lease rate of $2.91

28


$2.26

$1.85

$1.88

$1.87

$2.16

$2.35

$2.44

$2.91

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50

Los Angeles County

South Bay

Hollywood/WilshireCorridor

Ventura

San Gabriel Valley -Adjusted

San Fernando Valley

Los Angeles Downtown

West Los Angeles

Cost per Square FootSource: CB Richard Ellis

Los Angeles Sub-Markets Office Lease Rates 1st Quarter, 2006

$1.49

$1.55

$1.55

$1.77

$2.00

$2.01

$2.23

$2.25

$2.25

$2.27

$2.30

$2.50

$2.67

$2.72

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00

SFV

Mission Hills

Canoga Park

North Hollywood

Van Nuys

Granada Hills*

Calabasas

Sherman Oaks

Studio City

Burbank

Cost per Square FootSource: CB Richard Ellis

$2.45

$2.37

$1.94

$1.93

$2.35

San Fernando Valley Office Lease Rates 1st Quarter, 2006

and the Downtown area next with $2.44. The Valley comes inabove average with its $2.35 rate while several areas come inbelow the County’s $2.26 average. The San Gabriel Valley registersclose to average with its $2.16 lease rate and, like the SanFernando Valley, it includes areas of high lease rates (Pasadena at$2.39) and areas with lower lease rates (the El Monte area at $1.70or less). The L. A. area chart also shows Ventura County, SouthBay, and the Hollywood/Wilshire Corridor with office lease ratesat or just above $1.85, which are lower on average that all but thefour lowest San Fernando Valley communities.

Cushman & Wakefield also include Calabasas in their SanFernando Valley data and provides another source of office rentaldata for the Valley. Cushman and Wakefield show Class A officerates edged up slightly to $2.32 per square foot in first quarter 2006from the $2.28 in fourth quarter 2005 (Class A space is in the newerand more prestigious buildings). Vacancy rates in these Class Abuildings fell dramatically in 2004-2005 to 7.8 percent, but edgedup to 8.0 percent in the first quarter 2006. The small variancebetween these Cushman and Wakefield lease rate data and thosefrom CB Richard Ellis probably result from a slightly different mixof leases that were included in their respective data sets. Theoverriding point is that both data series show the same trends inlease rates in the Valley. Office space lease rates are rising in responseto the dramatic fall in vacancy rates over the last two years.

Net absorption of Valley office space set a fast pace in 2005,totaling over 800,000 feet and surpassing all other annualabsorption rates since 1993 with the exception of 2000 when over1 million feet were absorbed. These office absorption data wereprovided by Cushman & Wakefield and apply to the entire officespace market (not just the Class A buildings).

Data from Grubb & Ellis show office vacancy rates for all multi-tenant buildings (not just Class A) in the Valley that contain atleast 20,000 square feet with owner occupancy at less than 25percent (but again excludes Calabasas). These data show theValley-wide office vacancy rate continuing to drop in 2005, falling

to 8.5 percent in the fourth quarter, nearly a 2 percentage pointdrop from the previous year. The Valley opened the new year atick higher with 8.6 percent overall vacancy rate in the firstquarter of 2006. This puts the Valley office vacancy rate over 6

29


East Valley Office Vacancy Rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

SFV % 12.2 10.5 11.6 9.2 11.7 10.8 10.3 10.2 10.5 10.8 9.9 8.6 10.3 10.1 11.9 14.1 15.4 15.6 15.7 16.0 14.5 13.2 12.8 12.9 12.6 11.9 11.2 10.4 10.2 9.8 9.5 8.5 8.6

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q1998 1999 2000 2001 2002 2004 2005 2006


2003

SFV Office Vacancy Rate

257,373

(380,266)

134,954

341,762391,364

53,226

680,716

(54,654)

802,894

589,007692,838

1,064,725

605,165

49,577

(600,000)

(400,000)

(200,000)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1993 1995 1997 1999 2001 2003 2005

Squa

re F

eet

Source: Cushman & Wakefield

Office Building Net Absorption Six City Valley (including Universal City)

Class A Office Building Vacancy and Rental Rates Six City Valley

percentage points below the national rate, which moderated to14.8 percent in the first quarter of 2006.

The effect of the 2001 recession is obvious in the substantialincreases in office vacancy rates in that period, but Valley vacancyrates have blazed a steady downward path since 2003. The vacancyrates in the three areas of the Valley are somewhat more volatile thanthe Valley average. First quarter 2006 found the East Valley’svacancy rate at 10.1 percent, up slightly from fourth quarter’s 9.8percent, but still down almost 2 percentage points from theprevious year. The West Valley rate dropped to 9.2 percent in thefirst quarter of 2006, edging down from 9.6 percent in fourthquarter. The four quarters has been good to the Central Valley,where the office space vacancy rate has rested at 5.3 percent for thelast three quarters. Shares of office space in the three areas arevirtually equal; they vary between 32 and 34 percent.

Grubb & Ellis Office Regions• East Valley: Burbank, Glendale, North Hollywood, Studio City,

Universal City• Central Valley: Encino, Granada Hills, Mission Hills,

Northridge, Reseda , San Fernando, Sherman Oaks, Van Nuys • West Valley: Canoga Park, Chatsworth, Tarzana, Woodland

Hills

30


0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

11.8 9.5 12.0 8.4 9.9 8.3 8.8 9.5 9.6 10.5 10.4 9.6 10.3 10.3 12.6 16.9 15.7 15.8 17.1 17.2 15.8 14.5 14.5 14.6 15.8 10.6 10.4 10.1 10.7 12.4 11.4 9.6 9.2



2003

West Valley Office Vacancy Rate

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

14.0 12.4 13.0 11.8 11.5 11.9 8.8 9.9 9.4 11.5 9.2 7.5 9.1 8.9 10.8 12.4 13.6 12.6 11.4 11.9 11.9 10.0 10.8 10.5 11.9 8.8 8.8 7.8 6.4 5.1 5.3 5.3 5.3



2003

Central Valley Office Vacancy Rate

31


Overall Valley construction permit activity rose 16% in2005…Non-Residential construction jumped 48% in 2005…Residential construction added 4% to its dramatic 68%increase in 2004… The large share of Residentialconstruction activity may spell relief from the recent homeprice run up in the Valley…

The Valley’s overall construction permit activity rose 15.6 percentover last year to total $1,909 million in 2005, compared to $1,651million a year ago. Last year’s sizable increase comes on the heelsof a dramatic 46.3 percent permit value increase 2004. The SFVAnnual Total Permit Values chart shows the total permit values aswell as the breakdown for its two components—Residential andfor Non-Residential building permits.

Non-residential permit activity roared to life in 2005, climbing48.3 percent from $430 million in 2004 to $638 million last year.Non-residential activity had languished in the low $400 millionrange for three years before its sudden awakening in 2005.Undoubtedly, substantial pressure for new and reconfigured spacecame from the Valley’s recent low industrial vacancy rates andrapidly falling commercial vacancy rates.

Residential construction totaled $1,271 million in 2005,topping its near-record level of $1,221 in 2004 by 4.1 percent.Higher construction costs in the aftermath of Katrina may haveadded a marginal amount to residential permit values, but themain driver is clearly the hot housing market and the relativelylow interest rates.

Residential construction activity normally constitutes somewhatmore than half of the Valley’s total construction activity, but itsshare of total Valley construction climbed to roughly two-thirdsin 2003 and has remained there. This shift in the share ofconstruction going to residential construction may spell relieffor the Valley’s recent housing shortage and consequent double-digit home price appreciation rates. Since 1980, when our dataseries begins, residential permit activity has exceeded 60 percentof total permit activity only two other times—once during thehousing build out during 1985-89, and once in the earthquakeaftermath, 1994-95.

This higher pace of permit value activity is good news for theValley—not only because this construction activity spills overinto other economic sectors and stimulates activity there, butalso because building permits are generally considered aleading indicator of future economic activity. The reasoning isthat the value of building permits responds to the anticipateddemand for new space, which in turn is responsive toanticipated growth in activity and spending. Of course, peopledid not need to be overly keen observers to note the strongdemand for both residential and non-residential space in theValley in the last few years.

New residential and new non-residential building permits coveronly new construction, specifically excluding the permit valuesfor alterations and additions that are in both residential and non-residential values above. The Annual New Residential and NewNon-Residential Building Permit Values chart shows that the newpermits follow roughly the same pattern as the total permits, onlyat a somewhat lower value.

Recent annual data shows the Valley’s dramatic 2004-2005increase in new construction permit values. Both new residentialand non-residential construction helped drive that increase. Newnon-residential construction leaped 76 percent in 2005. Newresidential permit values jumped 88 percent in 2004 (eventhough they retreated slightly in 2005).

Permit data for these sections were provided by the Los AngelesCity Department of Building and Safety for the LA portion of theValley, and by the Construction Industry Research Board for theother five cities in the Valley.

REAL ESTATE CONDITIONS AND FORECAST: CONSTRUCTION

Annual New Residential and New Non-Residential Building Permit Values

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

1980 1985 1990 1995 2000 2005

Mill

ions

of D

olla

rs

Total Permit Value

Total Residential Value

Total Non-Residential Value

Source: Los Angeles City Department of Building and Saftey and the Construction Industry Research Board.

SFV Annual Total Permit Values

Residential ConstructionTotal residential construction permit values edged up 4% overtheir dramatic 2004 performance… New residential permitvalues eased slightly in 2005 but residential alterations andadditions took up the slack to push overall activity higher…Multiple family units continue to dominate single family unitspermit activity in number of units but not in value…

Valley residential permit values rose to $1,271 million in 2005,adding 4.1 percent to their dramatic 68.0 percent increase in2004. The large 2004 increase in activity was associated with thepermitting of large multiple family projects in Woodland Hills andNorth Hollywood, which makes the current increase in residentialpermit activity even more impressive. In nominal terms, this puts2005 residential activity second only to 1986, when residentialconstruction permits totaled $1,323 million. Of course, adjustingfor the intervening 20 years of inflation would put the 1986construction values much higher than the 2005 totals. But thecurrent level of residential construction activity remainsimpressive—even adjusting for inflation, the current $1,271million in residential construction activity value exceeds any levelsince 1990, when the last vestiges of the late ‘80s housing boomplayed itself out.

The chart also shows that the main driver in recent permit activityis new construction, even though the chart shows that newresidential activity backed off its 2004 level somewhat, as itdropped from $873 million in 2004 to $863 million in 2005. Newresidential construction activity generally accounts for roughlytwo-thirds of total residential activity, the exceptions occurringjust before the 1994 earthquake (new housing slump) and justafterwards (earthquake repair).

Residential alterations and additions are worthy of mention,especially recently. The recent period of historically low mortgagerates spawned a flurry of refinance activity during which manyhomeowners extracted some home equity to finance delayed ordesired repairs and remodeling activity. The result of this

heightened activity is apparent in the path of the alterations andadditions in the chart. Last year’s permit value for residentialalterations and additions ($408 million) is virtually double whatit was when the refinancing frenzy began in 2002 ($217 million).And it was the increase in additions and alterations permits lastyear that caused the overall residential permit value to rise in2005 rather than decline slightly as the new residential permittingactivity did.

The Units Permitted chart shows the dramatic expansion ofmultiple family units in the 1980s, peaking when nearly 16,000multiple-family units were permitted in 1986. The number ofmultiple units dropped off after that, falling to a level par with thesingle family until 1997 when multiple family units permitted felleven further to less than half of the single family ones. Multiple-family unit permitting picked up in 2000 and has remained morethan double the single units permitted since 2001. In 2004,unusually large multiple family units permitted in Woodland Hillsand North Hollywood pushed the multiple units to nearly sixtimes the number of single units. But 2005 saw the ratio ofmultiple family units to single family units move back towardrecently established 70/30 range. The absence of significant openspace for new single-family developments in the Valley virtuallyensures that a large percentage of future development will bemultiple-family units.

The Annual New Single and Multiple Family Permit Values chartdivides the total new residential permit value into that for singleresidences and multiple family residences. This chart clearlydepicts the mid-1980s boom in new residential constructionactivity and shows the driving force to be multiple family housingpermit values in that period. As that housing boom ended andpermitted units plummeted, the value of multiple family unitpermits fell substantially below that of single family units, eventhough their numbers were roughly equal. The disparity betweenthe permitted units (roughly equal) and the permitted values(multiple much lower than single) results from the lower cost persquare foot of multiple units and their usually lower square

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Single-Family 1,106 686 434 741 1,429 1,499 1,972 1,697 1,514 2,133 1,083 694 598 405 714 813 590 892 899 895 1,010 939 901 760 892 1,187 Multi-Family 6,038 3,562 2,357 4,695 8,638 13,94 15,63 9,091 7,928 5,601 3,792 1,398 1,878 506 960 790 717 294 407 347 1,505 2,287 2,256 1,992 4,847 2,967

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


Single and Multiple Family Units Permitted

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

$1,400

1980 1985 1990 1995 2000 2005

Mill

ions

of D

olla

rs

Total Residential

New Residential

Alterations & Additions


SFV Annual Residential Building Permit Values

32


footage compared to single family housing. The result of thatdisparity is clearly displayed in the years 2001, 2002, 2003, and2005. In each of those years, the number of permitted multipleunits was roughly two and one-half time the number of permittedsingle units, yet the permitted values of the single and multipleunits were about the same. This suggests that the expectedbuilding costs of the average single family housing unit in theValley is about two and one-half times the building cost of theaverage multiple family units.

Looking forward, we expect total residential permit values to growmarginally in 2006 and 2007 from their 2004 and 2005 levels whenadjusted for overall inflation. These two marginal increases are theproduct of two countervailing forces. First the number of unitspermitted is expected to rise and, second, some of the price spikesin construction materials associated with the Katrina disaster and itsaftermath should abate somewhat. The upshot of these two forcesis the relatively mild increase in residential permitting values.

Non-Residential ConstructionNon-residential construction finished 2005 with a 15-yearrecord setting level…Office and retail trade constructiondominated the upswing…Industrial permit activity did not…

Non-Residential construction permit activity shot up impressivelyin 2005, adding 48.4 percent to its $430 million level in 2004 tototal $638 million for 2005. Last year’s banner performance tops allthe annual non-residential construction totals since 1990 innominal terms and, even adjusting for inflation, last year’s permitactivity exceed every year in that 15 year period save one, 1998.

The Annual Non-Residential Building Permit chart shows bothnew building and alterations and additions contributed to lastyear’s impressive growth, though new building did most of thework. New non-residential building permits totaled $393million for the year, surging 76.2 percent from 2004’s total of$223 million. Alterations and additions rose as well, adding18.4 percent onto its 2004 level to total $245 for the year. Thechart also shows that non-residential alterations and additionshave generally hovered around the $200 million mark, with afew ups and downs. The major ups came in the aftermath of the1994 earthquake, as it did for residential activity. While 2005’s$245 million in alterations and additions is clearly on the topend of its recent normal range, it is not yet clear whether thislevel marks a move to a higher “normal level” associated with thecurrent squeeze on space, or just some movement around themean. Time will tell. Undoubtedly, the space crunch in both theindustrial and commercial areas have spawned a significantshare of the higher alterations and additions permitting activityas non-residential users reconfigure their scarce space for moreefficient and effective use.

Was last year’s huge increase in new non-residential permittingactivity a response to the dearth of available industrial space in theValley, as indicated by the record-setting low industrial vacancyrates, or something else? The Annual New Non-Residential PermitValues by Type chart provides the answer. This chart breaks down

$-

$100

$200

$300

$400

$500

$600

$700

$800

1980 1985 1990 1995 2000 2005

Mill

ions

of D

olla

rs

Total Non-ResidentialTotal New Non-ResidentialAlterations & Additions


Annual Non-Residential Building Permit Values

$-

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

in M

illio

ns o

f 200

5 $

SFV Real Residential Total Building Value 1991-2008

$-

$100

$200

$300

$400

$500

$600

$700

$800

$900

$1,000

$1,100

$1,200

$1,300

1980 1985 1990 1995 2000 2005

Mill

ions

of D

olla

rs

Total New ResidentialSingle FamilyMultiple Family


Annual New Single and MultiFamily Permit Values

33


new non-residential permit values by the type and intended use ofthe new construction. The categories include Commercial (officeand retail), Industrial, and Other Non-Residential (includinghospitals, schools, public administration, hotels, theaters, and soforth). The Permits by Type chart show that the Commercialcategory was the real driver in the upsurge of non-residentialconstruction, not industrial permits. New Commercial permitsleaped from$104 million in 2004 to $270 million in 2005,supplying $166 million of the $170 million increase in new non-residential permits. Other Non-Residential activity supplied therest of the increase in new non-residential permits, whileIndustrial permit activity actually declined by $4 million in 2005.

In fact, industrial construction permits have tracked below $50million annually since 1990 (far below in the early 1990srecession) and, rather than increasing, new industrialconstruction in the Valley has been on a downward path since1998. Last year’s total new industrial permit activity of $28million is the lowest level of new industrial construction since1997, when the Valley’s industrial base was still recovering fromthe early 1990s recession. So the answer is “no”, new non-residential permitting activity did not grow in 2005 because of thelow industrial vacancy rates in the Valley.

The New Non-Residential Activity by Type chart also shows thatOther Non-Residential permits rose from the $60 million level,where it had been tracking in the late 1990s, to hover just below$100 million for the last four years. The specific sources of the risein the Other category has been almost as varied as its namesuggests. Public garages contributed strongly in all four years,public administration buildings in three years, airport buildingsand hospitals in two years, and schools and amusement buildingscontributed above average amounts in one year, and so on. Thereis no discernable pattern in the contributions of the various othercategories to the rise in the overall level of new Other Non-Residential permit activity.

Looking forward, we expect total residential permit values togrow marginally in 2006 and 2007 from their 2004 and 2005levels when adjusted for overall inflation. These two marginalincreases are the product of two countervailing forces. First thenumber of units permitted is expected to rise and, second, someof the price spikes in construction materials associated with theKatrina disaster and its aftermath should abate somewhat. Theupshot of these two forces is the relatively mild increase inresidential permitting values.

$-

$100

$200

$300

$400

$500

$600

$700

$800

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

in M

illio

ns o

f 200

5 $

SFV Real Non-Residential Total Building Value 1991-2008

$-

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

1980 1985 1990 1995 2000 2005

Mill

ions

of D

olla

rs

Total New Non-ResidentialNew CommercialNew IndustrialNew Other NonResidential


Annual New Non-Residential Permit Values by Type

34


35


Valley businesses find competition heightened or intense, andexpect even more intense competition next year…hiringexpected to rise in next 12 months…more businesses expectto expand next year…compensation and other cost increasesnext year expected to be similar to this year’s…more Valleybusinesses expect gross sales increases next year…The mostpressing issue is finding workers with adequate skills. Inspite of the pressing issues, only 12% said they wereconsidering moving away in the next two years…On aworrisome note, nearly 25% of these key companies indicatedthey had no strong ties to their Valley locations.

The Survey: The forecast survey project was undertaken with thegenerous assistance of Davis Research, who conducted the 2006phone survey of medium-sized companies and tabulated theresults. This survey has been a feature of our San Fernando ValleyEconomic Forecast since its inception in 2003. J. D. Power andAssociates and Davis Research assisted in initial survey andquestionnaire design. In this year’s survey, Davis Researchcontacted nearly 500 medium-sized Valley companies duringMarch 2006 and completed 127 surveys. The results were used toinform the forecast as an indicator of recent and future economicconditions and trends in the Valley. The survey included questionsregarding trends in the areas of competition, employment, sales,and costs, and requested that respondents compare theirorganization’s experience in the question area over the past twelvemonths and then report expected performance over the nexttwelve-month period. Open ended survey questions asked aboutthe most pressing issues for Valley businesses, and whether therespondent was considering moving outside the Valley.

The telephone surveys were completed for 127 medium-sizedbusinesses in key industries. Medium-sized establishments, thosewith 50 to 100 employees, were selected for the surveypopulation since they represent one of the Valley’s primarybusiness segments. These establishments are large enough torequire systematic planning and are acutely aware of the Valleyeconomy’s influence on their balance sheets; they are also unlikelyto be so large that their fortunes are influenced strictly by eventsbeyond the Valley. In addition, companies targeted for the surveywere selected from industries that are the economic drivers in theValley. These key industries included Aerospace, Biotech, BusinessServices, Entertainment, Health Services, Manufacturing, andWholesale Trade, and changing conditions in these industries arelikely to spillover into other sectors of the Valley’s economy. Theresponses are reported below.

Pressing Issues: The telephone survey begins with an open-ended question asking the company respondent to identify themost pressing issues that Valley businesses now face. Theirresponses are not unexpected and some answers tended to

express some frustration with the issues that the companies stillconfront. The issues are listed below in the order of the numberof the respondents who cited those particular issues. This list doesnot disclose all of the issues that were enumerated nor does itattempt to convey the frustration that some of the respondentsclearly felt.

“What do you think are the most pressing issues facing businessin the Valley?”• Finding skilled workers, cited by over one-third of respondents

(up from one-quarter last year)• Workers Compensation costs cited by nearly 30 percent (down

from one-third last year)• Congested traffic cited by nearly 15 percent (up from 10 percent

last year)• High costs of doing business cited by 11 percent• High home prices cited by 11 percent (up from 10 percent last

year)• Intense offshore competition cited by 8 percent• Local taxes bothered 6 percent (down from 18 percent last

year).After this open-ended question, the respondents were asked aseries of objective questions on the experience of their companiesin the past 12 months and what they expected in the next 12months. Here are their responses:

Competition: Most Valley businesses faced heightened or intensecompetition last year, and expect it to become somewhat moreintense this year. Measured on a scale from 1 (virtually nocompetition) to 5 (intense competition), most Valley businessesfaced heightened or intense competition (58 percent) in the last12 months. Just over 20 percent of businesses faced the highestlevel of competition—intense—last year, but over 25 percentanticipate intense competition this year. The same percentage ofbusinesses that faced heightened competition last year expect todo so again in 2006, while the percentage facing normalcompetition will drop.

Additional Hiring: More Valley businesses expect to expand theirworkforce this year than did last year. While 37 percent ofrespondents indicated that they increased their workforce lastyear, over half of those same respondents expect to add moreworkers this year. Also, only 5 percent of the respondents expectto reduce their workforce this year compared to 12 percent whodid so last year. Slightly over half of the respondents maintained anumerically level labor force last year, and 42 percent of themexpect to maintain a level workforce in 2006.

Facility Expansion: Most businesses did not alter their Valleyfacilities last year (74.4 percent) and almost the same percentagedo not plan to alter them this year either (71.3 percent). Most of

Economic Forecast Survey of Valley Businessesconducted by Davis Research

36


the other respondents indicated that they expanded their Valleyfacilities in 2005 (22 percent) but even more expect to expandtheir facilities this year (nearly 28 percent). Virtually no oneexpects to contract their Valley plant capacity in 2006 eventhough a little over 3 percent of respondents did so last year.

Employee Compensation: Most companies in key industriesincreased their employee compensation last year (68 percent) andmost, but a few less, expect to increase it this year (59 percent).Virtually none of the respondents expect to decrease employeecompensation in 2006 even though a couple reported decreasedemployee compensation last year. Roughly 30 percent reportedthat employee compensation was level in 2005 and 40 percentexpect it to remain constant in 2006.

Other Costs: Most businesses (76.2 percent) reported costincreases in areas other than employee compensation in 2005.Many of these cited cost increases in fuel, raw materials andintermediate goods, insurance and health, shipping, rent, andother contracting (outsourcing) costs. Over 70 percent ofrespondents expect cost increases to continue in 2006 and fuel isagain the leading source of increase followed by roughly the samelist as in 2005.

Gross Sales: More Valley companies in key industries expect theirgross sales to increase this year than experienced a sales increaselast year. Nearly 79 percent of responding companies anticipateincreased gross sales this year, while 17 percent expect roughlylevel gross sales and only 4 percent anticipate lower sales. Theirexpectations for growth this year compare favorably to their

2006 ECONOMIC FORECAST SURVEY: SUMMARY OF RESULTS

IN THE PREVIOUS TWELVE MONTHS IN THE NEXT TWELVE MONTHS

The level of competition in the firm's industry segment

5 (Intense) 20.6% 5 (Intense)–

25.4%4 (Heightened) 37.3% 4 (Heightened) 37.3%3 (Normal) 27.8% Median:4.0 3 (Normal) 23.8% Median:4.02 (Light) 11.1% 2 (Light) 10.3%1 (Virtually none) 3.2% 1 (Virtually none) 3.2%

Total number of employees in the Valley

Increased 37.0% Increase 53.2%Decreased 12.6% Decrease 4.8%Stayed the Same 50.4% Stay the Same 42.1%

Facilities expansion or contraction in the Valley

Expansion 22.4% Expansion 27.9%Contraction 3.2% Contraction 0.8%None 74.4% None 71.3%

Employee compensation


Costs other than employee compensation


Gross Sales


37


experience last year, which was a good year. Nearly two-thirds ofresponding companies reported that their gross sales had increasedlast year, while 25 percent experience level gross sales and 11percent saw their sales decrease. Over 97 percent of respondentswere willing to disclose their company’s gross sales trends.

Are They Considering Moving Out of the Valley? And How Far?We asked respondents whether they were considering moving theiroperations out of the Valley sometime in the next two years. Theoverwhelming response was “no”. Of the 127 respondents to thatquestion, 109 said they were not considering moving (86 percent)and 18 said that they were considering such a move (14 percent).We also asked those respondents who were considering moving(the 14 percent) where they thought they might relocate. The mostfrequent response was within 30 miles of the Valley (6 percent), andsecond most frequent was to another state (5.5 percent).

Why Would They Move: We asked all respondents “What is thestrongest business reason for moving out of the Valley?” eventhough most of them were not considering moving. Our mostfrequent response was that there was “no reason” to move out, asone-third of respondents indicated that there were no advantagesto locations outside the Valley. The other two-thirds played ourgame of identifying the strongest reason to move out even if theywere not considering moving, and their most frequent response

(28 percent) was to obtain a more favorable tax structure. Next,17 percent said a move would lower their rent; another 17 percentsaid it would lower other business costs; 10 percent said a movewould lower their travel (commuting) costs; and another 10percent said it would lower their insurance and workers compcosts. A few others mentioned lower utility costs and access to abetter labor pool.

Why They Stay: We also asked all of the respondents “What isthe strongest business reason for staying in the Valley?” The mostfrequent response (44 percent) was the locational advantage of theValley was proximity to their workers, their market, shippingfacilities and so forth, and 33 percent cited access to the Valley’slabor pool as the strong advantage of being here. But a responsethat should cause concern is that almost a quarter of therespondents indicated that there is no strong advantage to stayingin the Valley—these businesses are here simply because ofinertia—they were established here at sometime and it is costly tomove so they don’t, for now. But the implication is that if costs inthe Valley rise relative to other areas, or if costs in other locales fallrelative to those in the Valley, some number of these businessescould leave. And this group represents nearly a quarter ofsignificantly-sized companies (50 to 100 employees) in theValley’s key industries. Their departure could represent a seriousloss to the Valley and the region.

CONSIDER MOVING FROM THE VALLEY IN THE NEXT 2 YEARS?

Where would the 14 percent move?

Yes 14.2% Within 30 Miles 6.3%No 85.8% Elsewhere in CA 0.8%

Another State 5.5%Don’t Know 1.6%

What are the advantages to staying in the Valley? What are the advantages to moving from the Valley?

None 33.9%Location 44.1% Business Tax 28.3%Labor Pool 33.1% Lower Rent 17.3%None 23.6% Cost 16.5%Rent 7.1% Travel 9.4%Low Costs 7.1% Work Comp/Insurance 9.4%Crime 1.6% Utilities 3.9%

Better Labor Pool 3.9%Crime 0.8%

38

‘06CSUN The CSUN Economic Forecast for the San Fernando Val ley CSUNCSUNCSUN

SummaryThe Los Angeles County economy will continue to expand this yearand into 2007, but accelerated growth of labor markets, income, orspending is not expected. There will be pressure for local firms tohire more workers as the U.S. economy grows, creating moreconsumer and producer demands for California goods.

However, since all coastal counties of California are generallyplagued with high housing prices and insufficient workforcehousing inventory, worker recruitment problems will persist.Unemployment rates are forecast to remain low, and averageearnings will increase 4 percent or more in 2006, reflecting thetight labor markets.

More residential development is currently underway in the countyand that will provide a boost to spending this year, andpopulation and income growth next year. The office and industrialmarkets will remain firm, and more office space will soon beunder construction.

High housing costs continue to place a drag on the local economy,pushing more meaningful economic growth inland. Some relief isunderway with more accelerated housing production planned forthe Santa Clarita and Antelope Valleys.

The lack of adequate infrastructural improvements also placesincreased strains on existing freeways. Traffic counts rise in allareas. Frustrations will continue to increase, and more companydefection to inland areas of the state and other states should beexpected. However, entrepreneurial activities will continue togrow in all coastal areas, and small business expansion will remainthe principal engine of growth.

Over the next five years, the momentum for employment growthremains in services, especially health care services whichsupport the aging population, information, and professional andtechnical services. These three sectors will be responsible fornearly 60 percent of total job growth in Los Angeles Countybetween 2006 and 2011.

State and National InfluencesBecause the economic climate of the State of California is thedominant influence on the Southern California economy, thefuture direction of the state has obvious implications for thedirection of the region. For that reason, the March 2006 UCLAAnderson Forecast of the state and national economies is anintegral part of the forecast model used to develop projections ofeconomic indicators and activity for each of the counties inSouthern California, including Los Angeles County.

No recession is forecast for the U.S. or California economies in2006. However, a slowdown in spending, job creation, andresidential construction is projected for California this year.Furthermore, the housing market is expected to cool throughoutthe state, with price appreciation falling to single digit rates.

470

490

510

530

550

570

590

610

91 93 95 97 99 01 03 05 07 09 11

thousandsof jobs

Professional Services Employment / Los Angeles County 1991-2011

45,000

46,000

47,000

48,000

49,000

50,000

51,000

52,000

53,000

54,000

55,000

91 93 95 97 99 01 03 05 07 09 11

thousandsof 2005 dollars

Average Earnings per Worker / Los Angeles County 1991-2011

4

5

6

7

8

9

10

11

91 93 95 97 99 01 03 05 07 09 11

percent of labor force unemplo yed

Unemployment Rate / Los Angeles County 1991-2011

The 2006 Forecast for Los Angeles CountyMark Schniepp May 2006The California Economic Forcast

39


What about Real Estate in 2006?Housing ProductionThe larger problem in Los Angeles County has been the ongoinglack of new housing production. The current rate of populationgrowth substantially exceeds the creation of new units. This hasproduced an imbalance of supply and demand, pushing housingprices to all time record highs and creating a significant outflow ofjobs from Los Angeles County into the Inland Empire.

More housing production is underway in both the Antelope andSanta Clarita Valleys. This production will accommodate thesurging migration of population from coastal California counties,including Los Angeles. Housing in the north will remain moreaffordable than the rest of Los Angeles County, and more entrylevel families and retirement age populations will demandhousing there.

Housing production, which has increased consistently over thelast ten years, is forecast to remain near the 2005 level of 25,000homes per year, in 2006, 2007, and 2008. More than 25 percentof production is slated for the Santa Clarita and Antelope Valleys.There are a number of large projects that have been approved andthat will break ground this year and next.

5,000

10,000

15,000

20,000

25,000

30,000

91 93 95 97 99 01 03 05 07 09 11

unitspermitted

New Residential Units / Los Angeles County 1991-2011

29,000

31,000

33,000

35,000

37,000

39,000

91 93 95 97 99 01 03 05 07 09 11

1991-2011constant 2005dollars per person

Los Angeles County

California

forecast

Real Per Capita Personal Income / Los Angeles County

NNN

Name Units Status

Santa Clarita ValleyNewhall Ranch 20,885 the first “village” will break ground in 2007North Lake (Castaic) 3,900 site work underwayWestcreek Homes 2,545 grading underway; sales in 2007.River Village 1,100 under constructionSienna 498 under constructionSoledad Village 400 under construction with sales this yearPlum Canyon 492 well underway with sales

Antelope ValleyAnaverde 5,200 under constructionRitter Ranch 7,200 first phase is under construction; sales this yearJoshua Ranch 539 grading underwayWestview Estates 425 under construction and open for sale

Centenniel Homes 23,000 currently under entitlement review by LA County

LARGE RESIDENTIAL PROJECTS NORTHERN LOS ANGELES COUNTY

Home Sales and Selling ValuesExisting home sales rose 4.1 percent in 2005. They are projectedto decline 4 percent in 2006, and 3 percent in 2007. A weakerhousing market is expected throughout the state and especially incoastal communities where selling prices have soared to levelswhich fewer people can afford. The housing sector will remainweak through 2009.

Los Angeles County experienced double-digit home priceappreciation in 2005 for the fifth straight year, rising 19.5 percent.The median selling price was $523,053. No bubble burstingscenario is forecast this year. Sales have slowed and will continueto slow but values will flatten.

The median home price is forecast to increase but remain under$560,000 this year. An appreciation rate of between 6 and 7percent is implied by the forecast. Selling values are not expectedto appreciate at rates which exceed much more than 5 percent peryear over the forecast horizon.

Forecast Highlights• Employment is forecast to rise by 24,000 new jobs in the county

during 2006, and between 22,000 and 33,000 per year over thenext five years.

• Approximately 30 percent of new job creation occurs in theNorth County, with limited but positive job growth in the SanGabriel Valley and the South Bay and East County regions. It isuncertain whether West LA, Downtown LA, and South CentralLA are likely to experience much growth in employment.

• Employment growth will be dominated by professional services,education and healthcare services, retail trade, information, andleisure services. Each of these sectors is forecast to contributemore than 25,000 new jobs between 2006 and 2011.Employment in manufacturing is forecast to continue decliningover the next five years.

• The unemployment rate fell to 5.3 percent in 2005. The rate isforecast to rise slightly this year and next, but reverse and movelower, after 2007.

-4

-2

0

2

4

6

8

10

95 97 99 01 03 05 07 09 11

percentchange

Los Angeles County

North Los AngelesCounty

forecast

Non-farm Job Growth 1995-2011

-200

-160

-120

-80

-40

0

40

80

91 93 95 97 99 01 03 05 07 09 11

thousandsof jobs

Non Farm Jobs Created / Los Angeles County 1991-2011

25,000

30,000

35,000

40,000

45,000

50,000

55,000

60,000

65,000

91 93 95 97 99 01 03 05 07 09 11

index

Existing Homes Sales / Los Angeles County 1991-2011

100,000

200,000

300,000

400,000

500,000

600,000

700,000

91 93 95 97 99 01 03 05 07 09 11

dollars

Median Home Selling Price / Los Angeles County 1991-2011

40


• Inflation for all of Southern California is forecast at 3.5 percentin 2006, and to remain in the 3.0 percent range through 2011.

• Smaller size companies dominate the county with the numberof employees in the smallest firm size category accounting forthe majority of conventional wage and salary employment. Mostnew jobs in recent years were created in firms with less than 50employees.

• The population continues to grow in Los Angeles County, butthe rate of growth remains in decline. After reaching a recentpeak of 2.0 percent in 2000, the rate of population growth hasfallen every year. Over the next five years the population isforecast to grow at an average annual rate of 0.8 percent.

• Net migration is not expected to contribute to populationgrowth over the forecast period. In fact, net migration isprojected to remain negative indefinitely. There will bemovement within the county, with more population growthshifting to the North County area. In general however, fewerimmigrants and domestic migrants will relocate in Los AngelesCounty, due principally to the unaffordability of housing.

• Earnings per worker in Los Angeles County averaged $52,846in 2005. Salaries rise 4.2 percent per in 2006 and 3.6 percent in2007. Healthy increases in average salaries forecast for theregion reflects the difficulty by existing firms to recruit workerswho do not already live in the county.

• Real total personal income is forecast to rise 2.1 percent in 2006and 1.9 percent in 2007. Per capita income rates rise 4.7 percentthis year. Adjusted for inflation, per capita rates of incomeincrease 1.2 percent.

-125,000

-100,000

-75,000

-50,000

-25,000

0

25,000

50,000

75,000

100,000

91 93 95 97 99 01 03 05 07 09 11

inmigrantsminus

outmigrants

Net Migration / Los Angeles County 1991-2011

-0.5

0.0

0.5

1.0

1.5

2.0

91 93 95 97 99 01 03 05 07 09 11

percentchange

Population Growth / Los Angeles County 1991-2011

400

450

500

550

600

650

700

750

800

91 93 95 97 99 01 03 05 07 09 11

thousandsof jobs

Total Manufacturing Employment / Los AngelesCounty 1991-2011

41


-6

-3

0

3

6

9

12

91 93 95 97 99 01 03 05 07 09 11

percent change in real retail sales

Real Retail Sales Growth / Los Angeles County 1991-2011

42


Los Angeles County Economic Forecast Summary 1997-2005 History, 2006-2011 Forecast

New homes Personal Real per capita Median Home Existing Home Inflation Rate UnemploymentPopulation Population Net Migration Households permitted Retail Sales Income income Selling Price Sales (percent change Rate

Year (people) (growth rate) (people) (thousands) (homes) (billions) (billions) (dollars) (dollars) (Index) in regional CPI) (percent)

1997 9,185,584 0.85 -28,693 3,067.2 10,424 $55.3 $232.4 $31,912 $174,820 48,282 1.7 6.91998 9,265,811 0.87 -19,477 3,074.5 11,692 $57.5 $253.5 $34,031 $190,744 54,384 1.4 6.61999 9,394,293 1.39 30,208 3,082.1 14,363 $63.3 $264.0 $34,151 $199,137 53,226 2.3 5.92000 9,578,420 1.96 86,189 3,133.8 17,071 $70.3 $279.0 $34,275 $216,186 54,047 3.3 5.42001 9,746,952 1.76 72,780 3,141.8 18,248 $71.8 $294.5 $34,393 $240,101 56,213 3.4 5.72002 9,910,334 1.68 71,623 3,154.9 19,364 $74.5 $302.1 $33,764 $284,585 60,245 2.8 6.82003 10,047,407 1.38 44,108 3,170.4 21,313 $79.4 $311.3 $33,446 $347,069 62,606 2.6 7.02004 10,130,668 0.83 -8,166 3,184.7 26,935 $86.5 $331.1 $34,143 $437,550 59,856 3.3 6.52005 10,223,055 0.91 -1,830 3,201.4 25,538 $91.6 $344.3 $33,677 $523,053 62,295 4.5 5.32006 10,316,535 0.91 468 3,216.4 25,842 $97.0 $363.8 $34,058 $559,381 59,872 3.5 5.52007 10,406,956 0.88 -1,608 3,237.3 26,236 $102.0 $381.4 $34,420 $587,337 58,717 2.8 5.92008 10,491,072 0.81 -7,309 3,258.5 25,930 $107.8 $401.5 $34,854 $617,279 57,422 3.1 5.32009 10,572,351 0.77 -9,909 3,279.4 24,461 $113.8 $423.3 $35,390 $644,991 56,374 3.0 4.92010 10,653,633 0.77 -10,320 3,299.1 23,877 $120.1 $446.3 $35,864 $671,947 56,387 3.2 4.62011 10,734,649 0.76 -10,844 3,318.4 21,603 $126.4 $470.7 $36,420 $700,156 56,814 3.1 4.6

---------------------------------------------------------------------------------------------------------------- employment (thousands of jobs) ---------------------------------------------------------------------------------------------------------

Non-farm JobNon-farm Growth Transportation Wholesale & Financial Professional Health &

Year Wage & Salary (percent change) Construction Manufacturing Utilities Retail Trade Activities Services Information Education Leisure other services Government

1997 3,865 2.0 110.6 638.3 160.8 583.6 215.0 558.3 214.6 386.3 326.9 130.9 536.31998 3,944 2.0 119.1 642.9 167.8 590.1 218.4 585.1 214.6 394.6 331.6 134.9 541.01999 4,003 1.5 126.9 624.3 172.2 598.3 221.0 585.0 236.2 401.8 335.8 136.5 561.62000 4,072 1.7 131.7 611.3 174.4 610.4 218.7 598.2 242.6 416.2 344.3 139.7 581.32001 4,074 0.0 136.8 577.9 175.6 614.2 228.9 588.0 226.3 432.2 348.5 143.2 598.32002 4,027 -1.1 134.5 534.8 167.2 615.5 232.6 575.0 207.3 450.4 354.2 145.6 606.12003 3,983 -1.1 134.6 500.0 161.5 613.4 239.8 559.9 202.3 460.4 362.6 145.5 599.32004 3,997 0.3 140.2 483.6 161.1 620.4 241.6 562.4 211.9 467.0 372.8 144.7 587.12005 4,017 0.5 148.2 470.4 161.9 630.8 243.7 571.5 209.6 469.7 377.4 146.0 583.82006 4,041 0.6 148.3 468.7 162.7 636.4 242.4 577.3 209.7 474.7 383.4 146.7 586.52007 4,063 0.6 149.0 464.6 163.2 641.8 242.4 581.6 210.8 479.8 388.6 147.5 590.12008 4,091 0.7 148.6 456.6 164.8 646.7 242.6 585.4 219.8 485.5 394.4 148.5 594.32009 4,122 0.8 148.1 449.8 167.0 655.1 242.3 590.0 227.5 491.8 399.6 149.8 597.72010 4,156 0.8 149.1 443.7 169.4 662.6 241.3 596.1 234.6 498.5 404.7 151.6 600.42011 4,194 0.9 150.8 440.3 171.8 669.3 240.9 603.8 240.8 505.5 410.3 153.4 603.3

Source: California Economic Forecast, April 2006

• Retail sales, the proxy for local consumer spending, rose 5.9percent in 2005. Sales are forecast to increase 6.0 percent in2006 and 5.2 percent in 2007.

Final WordGrowth of the greater county economy is not likely to accelerateany time soon. The expansion of the labor market will remainsluggish with many lower paying jobs in retail trade, recreationand leisure, and other services being created over the next fiveyears. However, healthcare and information jobs are also forecast.

The fastest growth occurs in the North County, were substantialproduction of housing will accommodate migrating families fromall over Southern California. Professional services, distribution,retail trade, and jobs in education and healthcare will dominatejob growth in Santa Clarita, Lancaster, and Palmdale over the nextfive years.

43


1997-2005 History, 2006-2011 Forecast

New homes Personal Real per capita Median Home Existing Home Inflation Rate Unemploymentpermitted Retail Sales Income income Selling Price Sales (percent change Rate (homes) (billions) (billions) (dollars) (dollars) (Index) in regional CPI) (percent)

10,424 $55.3 $232.4 $31,912 $174,820 48,282 1.7 6.911,692 $57.5 $253.5 $34,031 $190,744 54,384 1.4 6.614,363 $63.3 $264.0 $34,151 $199,137 53,226 2.3 5.917,071 $70.3 $279.0 $34,275 $216,186 54,047 3.3 5.418,248 $71.8 $294.5 $34,393 $240,101 56,213 3.4 5.719,364 $74.5 $302.1 $33,764 $284,585 60,245 2.8 6.821,313 $79.4 $311.3 $33,446 $347,069 62,606 2.6 7.026,935 $86.5 $331.1 $34,143 $437,550 59,856 3.3 6.525,538 $91.6 $344.3 $33,677 $523,053 62,295 4.5 5.325,842 $97.0 $363.8 $34,058 $559,381 59,872 3.5 5.526,236 $102.0 $381.4 $34,420 $587,337 58,717 2.8 5.925,930 $107.8 $401.5 $34,854 $617,279 57,422 3.1 5.324,461 $113.8 $423.3 $35,390 $644,991 56,374 3.0 4.923,877 $120.1 $446.3 $35,864 $671,947 56,387 3.2 4.621,603 $126.4 $470.7 $36,420 $700,156 56,814 3.1 4.6

----------------------------- employment (thousands of jobs) ---------------------------------------------------------------------------------------------------------

Transportation Wholesale & Financial Professional Health &Utilities Retail Trade Activities Services Information Education Leisure other services Government

160.8 583.6 215.0 558.3 214.6 386.3 326.9 130.9 536.3167.8 590.1 218.4 585.1 214.6 394.6 331.6 134.9 541.0172.2 598.3 221.0 585.0 236.2 401.8 335.8 136.5 561.6174.4 610.4 218.7 598.2 242.6 416.2 344.3 139.7 581.3175.6 614.2 228.9 588.0 226.3 432.2 348.5 143.2 598.3167.2 615.5 232.6 575.0 207.3 450.4 354.2 145.6 606.1161.5 613.4 239.8 559.9 202.3 460.4 362.6 145.5 599.3161.1 620.4 241.6 562.4 211.9 467.0 372.8 144.7 587.1161.9 630.8 243.7 571.5 209.6 469.7 377.4 146.0 583.8162.7 636.4 242.4 577.3 209.7 474.7 383.4 146.7 586.5163.2 641.8 242.4 581.6 210.8 479.8 388.6 147.5 590.1164.8 646.7 242.6 585.4 219.8 485.5 394.4 148.5 594.3167.0 655.1 242.3 590.0 227.5 491.8 399.6 149.8 597.7169.4 662.6 241.3 596.1 234.6 498.5 404.7 151.6 600.4171.8 669.3 240.9 603.8 240.8 505.5 410.3 153.4 603.3

44


Acknowledgements:

This year the San Fernando Valley Economic Research Center (SFVERC) partnered with the Real Estate Center herein the College and the Economic Alliance of the San Fernando Valley to present the CSUN Economic Forecast andthe (previously separate) CSUN Real Estate Outlook under the auspices of an Economic Summit hosted by all threeorganizations. While the content of our Economic Forecast and Real Estate Outlook remain the same, bringing theseevents together with one-another and adding in top-notch keynote speakers provides Valley business people, policymakers, political and civic leaders, and other interested parties with a premier, information-rich, one-stop event togain perspective on recent, current, and likely future conditions in the Valley. Support for this Economic Summit wasmarshaled by Bruce Ackerman, president of the Economic Alliance and Matt Rinnert, our College developmentdirector, with the assistance of the board members of all three organizations. We want to thank all of them for theirhard work, and for all the community organizations that stepped up to sponsor and otherwise support this event andits publications.

The Center would like to acknowledge the critical contributions from our staff and the others who helped make thisForecast book possible. Center Research Associate Aaron Davis helped assemble and analyze the forecast data, preparethe charts and tables, and assist with every other aspect of this project. Shannon Johnson, our College EventsCoordinator, helped coordinated this event as well as many other Center functions. Fred Evans, dean of the Collegeof Business and Economics, provided valued assistance and support in many areas. We also appreciate the generalsupport the Center has received from the University under President Jolene Koester.

Davis Research provided generous assistance by donating their time and resources to update and conduct ourEconomic Forecast Survey and tabulate the results. First Private Bank and Trust provided fresh contact informationfor our survey. Appreciation also goes to J. D. Power and Associates and Davis Research for assistance in designingthe survey and survey instruments for our inaugural forecast in 2003. We also gratefully acknowledge all the Valleybusiness people who took time to respond to our surveys.

The Center’s Advisory Council and its Chair, Marvin Selter, provided much appreciated guidance and encouragement.Our Council members spent considerable time both in and out of meetings to guide the Center and to ensure theCenter’s success.

Special thanks go to Mark Schniepp of the California Economic Forecast for his encouragement in initiating the SanFernando Valley Economic Forecast and his continued technical advice on modeling local economies. He alsoprovided the Los Angeles County Forecast (summarized in this book) and supporting California data, which arerequired for the San Fernando Valley forecast model.

Tracy Beavers of CooperBeavers adeptly handled the layout and design of this book under nearly impossible deadlinesand produced an information rich and accessible book.

Data Sources:Employment Development Department, Labor Market Information Division, Department of Finance, Department ofHealth Services, Center for Health Statistics, DataQuick, Southland Regional Association of Realtors, Grubb & Ellis,CB Richard Ellis, Cushman & Wakefield, RealFacts, Construction Industry Research Board, Los Angeles Departmentof Building and Safety, Los Angeles Department of Housing, Census 2000, and The California Economic Forecast.

45


Marvin Selter, Chairman CMS, Inc.

Bruce Ackerman Economic Alliance of the San Fernando Valley

Wayne Adelstein North Valley Chamber of Commerce

William C. Allen Los Angeles County Economic Development Corporation

Roberto Barragan Valley Economic Development Center

Charles Bearchell CSUN: College of Business

Ray Boyadijan Comerica

John Bwarie Councilman Greig Smith’s Office

Fred Evans CSUN: College of Business & Economics

Fred Gaines Gaines & Stacey

William Hosek Northridge Chamber of Commerce

Dennis Isleib City National Bank

Mel Kohn Kirsch Kohn & Bridge, LLP

Larry Kosmont Kosmont Companies

Deane Leavenworth Time Warner Cable

Wayne Lewis First Private Bank & Trust

Richard Leyner Capital Commercial NAI

John Marquis Vallarta Super Market

Sanford Paris Paris Industrial Parks

Walter Prince Executive-Suites Services, Inc.

Matt Rinnert CSUN: College of Business & Economics

Robert Rodine Polaris Group

Robin Rousselet Voit Development Company

Jason Schaff San Fernando Valley Business Journal

Jerome Simon Simon Altman & Kabaker

Stu Solomon Transcon Property Services, Inc

Daniel Blake, Director CSUN: SFVERC

San Fernando Valley

Economic Research Center

Advisory Council


Notes

48


Sponsors

of CSUN’s Economic Forecast

for The San Fernando Valley

Private funding plays a very significant role in making possible the work of

the San Fernando Valley Economic Research Center and the publication of

this report. The College of Business and economics extends special thanks

to the Center's generous individual and corporate sponsors.

For information on how you can help

support the San Fernando Valley

Economic Research Center, please contact:

Office of Development and Alumni Relations

College of Business and Economics

California State University, Northridge

18111 Nordhoff Street, Business Building 3111

Northridge, California, 91330-8381

(818) 677-3621

A Proud Partnership Bringing You the2006-1st Annual San Fernando Val ley Economic Summit

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