2014 MID-YEAR ECONOMIC FORECAST &TRENDS · 2014-07-28 · 50 AN ADVERTISING SUPPLEMENT TO THE LOS ANGELES BUSINESS JOURNAL JULY 28, 2014 52 2014 MID-YEAR ECONOMIC FORECAST & TRENDS

July 28, 2014 • An Advertising Supplement to the Los Angeles Business Journal

2014 MID-YEARECONOMICFORECAST&TRENDS

This special advertising supplement did not involve the reporting or editing staff of the Los Angeles Business Journal.

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50 AN ADVERTISING SUPPLEMENT TO THE LOS ANGELES BUSINESS JOURNAL JULY 28, 2014

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2014 MID-YEAR ECONOMIC FORECAST & TRENDS

ON Thursday, July 31st, the Los Angeles Business Journal and San Fernando ValleyBusiness Journal teamed to host a round-table style discussion on economictrends and forecasts for Los Angeles County and Southern California. Our panel

of regional experts shared their insights on the biggest headlines of 2014 thus far andwhere they feel the market is going for the remainder of the year.

Moderated by the Los Angeles Business Journal's Publisher and CEO, Matt Toledo, thediscussion was spirited, informative and insightful.

To help get the conversation going, we asked several of our expert panelists to answer afew general questions about our current economical state of affairs in advance of the event.What follows is a run through of their spirited and informative responses to our questions.

PANELISTS

PHILIP J. WILSON, CPAPartner-in-Charge SouthernCalifornia RegionMarcum LLP

JOSE RASCOManaging Director, Head of Investment StrategyHSBC Private Bank Americas

BERNARD BOLLINGERShareholder and Chair,Insolvency and FinancialSolutions Practice Group BuchalterNemer, AProfessional Corporation

SEAN FULPExecutive Managing Director,Western Region NGKF Capital Markets

2014 - A Look Back at the first half of the year

In terms of issues that impacted theirbusinesses – from the workforce tohealthcare to financing and taxation -what has worried your clients most?

Bollinger: Interest rates and taxes are always atthe forefront of client concerns, but this pastyear those issues were trumped by complianceconcerns. Dodd Frank and the resultingConsumer Financial Protection Bureau (CFPB)rules and regulations combined with thechanges wrought by the Patient Protection andAffordable Care Act provided a constant streamof inquiries from clients. The healthcare issuesalone contributed to the trebling of the size ofour Healthcare Department over the course ofthe last year.

Fulp: My clients were kept up at night by thefear of being unable to successfully sourceopportunities and allocate capital into the LosAngeles market. We experienced $17.3 billionof commercial sales in L.A. over the past 12months, which is respectable when comparedto 2007 at $20.8 billion; yet, we haven’t beenable to completely satisfy investor appetite. Ifwe don’t see greater transaction volume, pricing

will need to continually rise until demand istempered or fundamentals no longer can sup-port the seller’s ask.

Rasco: Clients remain concerned over severalissues. The economy, which went through amini Ice Age in the first quarter, shouldrebound in the remainder of 2014. The hopeis that is a sustainable rebound. Also, therebound in European economic growthremains concerning as the central bank seemsto need to do more to boost activity. Clientsare not yet convinced that rebound is real orsustainable either. Geopolitical events aroundthe world are also a concern.

Which industries had the biggestchange in growth over the past 12-18months, in terms of jobs, revenue ormarket share?

Wilson: Real estate has been one of thebiggest drivers of job growth. Residentialprojects have restarted, after years of beingdormant, as the housing market is on its wayto recovery and properties are selling forincreasing prices. Commercial construction isalso on the uptick as investors and lendersare more confident.

Rasco: Cyclical industries suffered with theslowdown in activity in the first quarter. Therehas been a rebound in certain sectors. Jobgrowth has been focused on low paying servic-es sectors.

What industries are most likely to seegrowth over the next 12-18 months?

Wilson: Technology companies anchored in theSilicon Beach area of Santa Monica and Veniceare creating jobs and injecting a boost into theeconomy. Along with start-up companies,household names like Google, Amazon andYouTube have significant operations in the LosAngeles area. With the rapid evolution of thestart-ups, some of them will become the house-hold names of the next year or two, throughacquisitions or IPO’s.

Rasco: We are looking for a solid outlook glob-ally for energy, agriculture, manufacturing,technology, and industrials.

Is the year shaping up like you predicted?

Rasco: No, the rebound in economic growthhas been more muted globally than wethought it would have been. China looks to



be closest to its target of 7.5% as expected.The US will have to work hard to grow fasterthan it did last year. Europe’s economicgrowth remains weak and the rebound hasbeen less pervasive than we thought. It hasbeen focused on Germany and England morethan forecasted.

Fulp: Although we have experienced a recoveryin L.A. that resembles more of a crawl than abounce, we are picking up speed and gainingmomentum as anticipated. Vacancies are trend-ing down, rents are moving up, and we are nowat an inflection where some of the more attrac-tive submarkets are turning into a landlord’smarket. Looking ahead, I am concerned abouthow many functionally obsolete buildings thereare and how very little product is under con-struction. New office, retail and industrial underconstruction amounts to less than 0.5% of thetotal existing square footage in each of theirrespective sectors. If L.A. begins to experience amoderate uptick in tenant demand, we’ll have aserious supply issue on our hands and rents willinevitably be pushed much higher. We need toremember that technology now allows compa-nies to scale more quickly, but greater regulationhas made it more difficult and timely to entitle,permit and construct.

Wilson: We expected 2014 to be an improvingyear, but it seems much stronger than expected.Our clients are involved in more deals, increas-ing operations internationally, and increasingthe amount of planning and consulting tounderstand the economics as well as tax impli-cations. The public markets for our microcappublic companies is stronger than it has beensince 2008, which points to investor confidenceas well as management’s willingness to investin the future.

Bollinger: As an insolvency attorney accustomedto the counter-cyclical nature of my practice, Iexpected a significant slowdown this year asthe economy improved, so I haven’t quite fig-ured out why my entire department of nearlytwenty insolvency-focused attorneys remainsbusy. I suspect it is indicative of an economicrecovery that has buoyed certain industry nich-es (real estate development, for instance) buthas left others foundering.

2014 & Beyond – General Economic Trends

What is your outlook on the health ofthe Los Angeles area economy for 2014compared to the same time last year?

Wilson: As the unemployment rate continues todecrease, coupled with an increase in consumerconfidence, we see 2014 continuing to gainstrength and momentum through all areas of

the local economy. There is an influx of foreignbuyers for residential real estate, as they recog-nize that Southern California is undervaluedand has a strengthening economy. Tourismincreases as consumers feel they can spend dis-posable income, which leads to jobs in the hos-pitality sector.

Bollinger: This time last year the view from myoffice window revealed a single skyscraper inthe midst of construction. Now there are four.While this isn’t necessary emblematic of thestate of the Los Angeles area economy, it cer-tainly lends credence to the notion that theoutlook is rosy. Yet it remains to be seenwhether the apparent real estate boom willtranslate into the type of broad-based recoverythat the Federal Reserve has been working sohard to foster. One thing appears certain—things are better here than in many parts of thecountry and savvy local businesses are in aposition to capitalize on that development.

What are the biggest challenges indoing business in Los Angeles comparedto other markets?

Rasco: Los Angeles is a fragmented and decen-tralized market. The Bay Area has done a greatjob of developing its ecosystem, connectingcompanies to employees, resources and capital.When comparing the two regions, L.A. has theelements to rival the corporate desirability ofthe Bay Area but we need to do a better job ofconnecting people. One obvious step in theright direction is to continue to improve theregion’s transportation network and leverage allmodes of transportation. We are now a multi-modal society, so the solution is not just MetroRail and carpool lanes. We need to keep inno-vating while also employing amenities such asZipcars in parking garages of office buildings,city bikes that can be shared, and allowingUber, Lyft, Yellow Cab and other shared or paidservice providers to compete for our business.

Wilson: One of our biggest challenges is trafficand the lack of a public transportation infra-structure. Compared to other large metropolitanareas, there is no network that allows people tobe transported in an efficient, cost effective man-ner. An added complexity is Los Angeles has sev-eral major business hubs, rather than a centraldowntown area. Technology allows increasedand efficient communication, but there is stillno substitute for the face-to-face meeting.

What industries are most likely to seegrowth?

Fulp: Technology and technology related com-panies. Los Angeles has more than 70,000 engi-neers (the most in the country), Southern

California has 5 of the nation’s top 20 engi-neering schools, and more engineers areenrolled at USC and UCLA than at Stanfordand Berkeley. The cost of housing, office spaceand staffing is also now cheaper in L.A. thanthe Bay Area. The climate’s tough to beat aswell, especially as this time of year can feel likewinter in San Francisco. Clearly, talent, lifestyleand cost are not the issue for L.A.; we need tofurther develop the region’s start-up ecosystemand attract more venture capital so that we canaccelerate growth.

Wilson: With the recent implementation ofObamacare, the healthcare industry will havefar reaching effects. Everything from the wayhealth care is delivered, to the billing and theeffect on the federal government with IRSinvolvement in monitoring the enrollment andpenalties, point to increased complexity andadministration of the system. This affectsemployers, who are concerned about the num-ber of full-time employees that receive benefitsand limit the number of hours worked to mini-mize costs.

What are you hearing from small busi-ness owners regarding their opportuni-ties in the Los Angeles area? How do weaddress the concerns of small business?

Bollinger: While small business owners have been impacted by a number of issues, the twomost prevalent concerns are the ability toattract high caliber employees and to accesscapital. The employment issue is perplexing, asrecent reports have demonstrated that theunemployment rate is going down yet the per-centage of employers that cannot find theemployee they need has gone up. While banksmay be more willing to lend, regulatory pres-sures have resulted in access to capital for pri-marily the very most credit-worthy businessesand little increase in lending to small business-es that don’t have the requisite asset base.Neither of these issues can be resolved immedi-ately, but both may be incrementally favorablyaddressed as the economy improves.

What is the most pressing jobs issue?

Rasco: The most pressing jobs issue is the qualityof jobs and the role of technology. Many of thejobs created this year have been low paying serv-ices jobs in the services industries. That is whythis has been the slowest expansion in terms ofwage growth in the post-World War II economy.

An “Industry Specific” Look

Regulations and taxation in Californiahave become notoriously burdensomefor businesses here. How great is the

Continued from page 50

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‘This time last year the view from my office window revealed asingle skyscraper in the midst of construction. Now there arefour. While this isn’t necessary emblematic of the state of theLos Angeles area economy, it certainly lends credence to thenotion that the outlook is rosy.’ BERNARD BOLLINGER




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risk of business flight from Los Angelesand, more generally, California, due toover-regulation and taxation?

Fulp: In 2014 Los Angeles certainly experiencedsome high profile job loss announcements withthe departure of Toyota and OccidentalPetroleum to Texas. State leaders, however, havemade it clear this legislative session that they arecommitted to keeping advanced manufacturingand technology companies in the state. TheGovernor recently signed legislation that wouldprovide a 10-year tax break for commercialspacecraft manufacturers, such as Hawthorne-based SpaceX, and a $420 million tax credit foraerospace companies such as Lockheed Martinand Boeing. As we saw with Mayor Ed Lee in SanFrancisco with the Twitter tax break, local gov-ernment can also help bolster further invest-ment. Mayor Garcetti has already demonstrated

significant leadership and willingness on thisfront and has the opportunity to make a big eco-nomic impact at just the right time.

Wilson: The cost of doing business in Californiais a real concern to business owners and com-panies. From the cost of workers’ compensationinsurance to tax rates that are among the high-est in the nation, employers, and specificallymanufacturers, are looking to other jurisdic-tions with lower costs of doing business. Atsome point, the cost of wages, insurance, andtaxes, out-weigh the benefits of having opera-tions in California. Not all employers have theability to move operations out of state, but los-ing companies and the jobs they provide hurtsour economy and reduces our state’s tax base.

2013 was generally considered to havebeen a “flat” year for middle market

mergers and acquisitions. What arethe prospects for increased activity inmiddle market mergers and acquisi-tions in 2014?

Bollinger: There is no question that we have seena marked uptick in mergers and acquisitionsactivity in 2014. While the increase in activityhas been industry-wide, we’ve seen a lot ofactivity in the apparel industry, where privateequity and foreign investment have both playeda role in heating up that market segment.

Is access to capital generally more fluid and arebanks more aggressive in corporate lending?

Rasco: Regional bank lending, according to theFed’s Senior Loan Officer Survey, has picked upin recent months and lending standards havebeen loosened. C&I loans have picked

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‘Although we have experienced a recovery in L.A. thatresembles more of a crawl than a bounce, we are picking upspeed and gaining momentum as anticipated. Vacancies aretrending down, rents are moving up, and we are now at aninflection where some of the more attractive submarkets areturning into a landlord’s market.’SEAN FULP




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up and lending for commercial banking hasbeen rising in 2014. Another source of capitalhas been in the M&A arena, as corporate cashstockpiles remain quite high. Companies areacquiring the organic growth of the future asthey are purchasing competitors around theworld. Finally, from a global perspective, capitalis now available from the world of the emerg-ing market economies. We have never seen theBRIC economies of Brazil, Russia, India, andChina set up the New Development Bank with$50 billion of capital and lending capability ofmultiple times that number. Moreover, the EMcorporate sector remains focused on globalgrowth and also has seen corporate cash levelsrise consistently since the onset of recovery inthis business cycle.

Fulp: When it comes to commercial real estatefinancing, banks are more aggressive but so are

conduit, bridge, mezzanine and life insurancecompanies. The number of firms actively lend-ing and the amount of capital at their disposalis significant. In fact, we are starting to see thevarious lending types converge on certain deals;in other words, a bank may not just be compet-ing against another bank for a loan assignment,but also with conduit and bridge lenders. As anexample of the market’s strength, there are cur-rently more than 40 active conduit lenders thathave provided $126.7B of financing over thepast 18 months. That amount is more than inall of 2008, 2009, 2010, 2011 and 2012 com-bined ($107.5 billion).

Bollinger: There is more access to capital for themost credit-worthy borrowers, and the increasedcompetition for these borrowers has led banksto be less restrictive on loan terms to those bor-rowers. Nevertheless, there remains little

appetite for risk, in large part due to regulatoryissues and low interest rates. While some havecommented that this attempt by regulators tomake banking as boring as warehousing mightlead to a loss of talent in the banking industry,it certainly has led to an inability of banks tocreatively address the capital needs of a largenumber of small and midsized businesses.

Where are businesses finding successraising capital? What could be done tofurther those successes?

Fulp: While growth spawns from liquidity, rapidgrowth has most recently come from venture capi-tal. The L.A. region clearly has the ingredients tofuel the creative and tech economy, but businessescould benefit from greater access to venture capitalfunding. In 2013, venture capital firms invested$12 billion in Silicon Valley businesses

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‘We need to keep innovating while also employing amenities such as Zipcars in parking garages ofoffice buildings, city bikes that can be shared, andallowing Uber, Lyft, Yellow Cab and other shared orpaid service providers to compete for our business.’ JOSE RASCO




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compared to only $1.7 billion in the LosAngeles/Orange County region. Last year’s divisionof the VC pie is also consistent with historicalaverages. Los Angeles could do a better job of pro-moting our region to the VC community outsidethe region, while also working to develop a greaterVC presence within the region.

We hear that businesses want to knowthe current state of the banking indus-try, but what they really want to knowis … are they lending?

Wilson: Banks have increased lending… cau-tiously. They are looking for companies with aproven track record of earnings and the abilityto collateralize the loans, often with personalguarantees. Lenders with an SBA group are see-ing an increase in clients willing to expand,especially those borrowers with a mix of real

estate and operations. This, combined withmany companies who are not actively lookingto finance their growth, results in less lendingthan the improving economy would indicate.

What changes are expected within theReal Estate Industry?

Bollinger: The two issues that are most likely torequire change in the real estate industry arethe shrinking demand for retail space and theneed for municipalities to increase revenue. Anincrease in internet sales has boosted the needfor warehouse space but has begun to gut shop-ping centers previously reliant upon big boxretailers. The manner in which developersaddress this issue will have a direct impactupon the tax base of local municipalities. Thatissue has exacerbated the financial travails ofmany municipalities and may result in the

loosening of development restrictions in orderto increase revenue.

Fulp: A couple of the biggest changes are thedemocratization of real estate through technol-ogy and the repurposing of existing properties.Whether you are raising capital on a crowd-funding website, selling property on an auctionwebsite, or using online survey tools to retrievelocation, design and amenity preferences froman entire workforce – the playing field is beinglevelled. We’re also seeing a lot of buildings beconverted to creative office space as we move toa more highly skilled workforce, and we arewatching retailers move to smaller formats ascommerce moves online while warehousesbecome automatized. The reality is real estatethat is used by people is not just about thephysical space any more. It needs to providesignificant intangible benefits.

‘Technology companies anchored in the SiliconBeach area of Santa Monica and Venice are creatingjobs and injecting a boost into the economy. Alongwith start-up companies, household names likeGoogle, Amazon and YouTube have significant oper-ations in the Los Angeles area.’PHILIP WILSON



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2014 MID-YEAR ECONOMIC FORECAST &TRENDS · 2014-07-28 · 50 AN ADVERTISING SUPPLEMENT TO THE LOS ANGELES BUSINESS JOURNAL JULY 28, 2014 52 2014 MID-YEAR ECONOMIC FORECAST & TRENDS