Report: San Diego-area economy won't remain robust without changes

Monday, June 20, 2005
Last modified Saturday, June 18, 2005 6:30 PM PDT

By: BRADLEY J. FIKES - Staff Writer

Houses most people can't afford. Traffic that makes commuters spend an average of an hour a day on the road. Students who don't understand basic science. These are the most threatening snakes in San Diego County's paradise. Business leaders have bewailed them for years as a long-range threat to the region's future economic competitiveness.

That future is getting closer, according to a June report from the San Diego Association of Governments. It warns that the region's robust economy will be unsustainable without making housing more affordable, reducing congestion and improving education.

What it says

The report rates San Diego and 18 other metropolitan areas on three elements: Economy, Environment, and Equity (roads, schools and other supporting infrastructure). Here's part of the scorecard:

Environment: The county's strongest suit, tying for first place with Seattle, up from third in the 2001 report. Scored high for environmental preservation and investment in water supply and wastewater management. Lost points for poor air quality.

Economy: Squarely in the middle, ranking 9th. Strong on venture capital; important for the region's technology companies. Poor on the level of education, ranked 13th. Poor record of investment in ports, airports and roads to move goods.

Equity: Near the bottom, ranking 16th. This is partly because of its high cost of housing, the least affordable of all 19 areas. Below-average record in early childhood education.

The report offered no solutions; its purpose was to point out the problems and describe them in an objective, quantifiable way.

While there's little surprising in the report, there was one unsettling conclusion: Since a similar report was issued in 2001, the region has not made any progress in solving its problems. And if those problems are not solved, the quality of life and business environment the county now enjoys will disappear.

Next step: Finding the solutions.

Housing and transportation

Where to live? How to get to work? You can't answer one question without the other.

So cities will tackle both issues at the same time, said Mickey Cafagna, SANDAG's chairman. For the first time, all local governments in the county have signed onto a plan to coordinate transportation and development projects.

Cafagna said he expects San Diego County to improve its transportation system because of its long-term commitment to spend $42 billion on roads and mass transit systems under the TransNet sales tax, a half-cent addition to sales taxes collected in the county. The existing TransNet tax was extended until 2048 under Proposition A, passed by voters last year.

On the development side, Cafagna and Alan Gin, an economist at the University of San Diego, recommend more mixed-use housing and higher-density development. One benefit of mixed-use is that it gives people the option of living where they work, Gin said.

Marney Cox, SANDAG's chief economist, said residential development can be encouraged, not only in San Diego, but throughout the state, by changing the way sales tax money is distributed. For every dollar spent, 1 cent goes back to the jurisdiction where the store is located.

"Cities compete heavily for sales tax and transient occupancy tax money from retail and hotel developments," Cox said. "They will bend over backwards to get 7-Elevens, regional malls, strip malls, all of em," Cox said. "At the same time they shy away from housing because it doesn't provide enough money to pay for ongoing services."

If the sales tax formula was changed to eliminate that advantage, Cox said cities would find it easier to make land-use decisions based on merit. The housing supply would increase, and California's persistent housing shortage would dwindle.

However, Christopher Thornberg, a senior economist at the respected UCLA Anderson Forecast, said the commonly accepted view of a housing shortage is a "red herring."

"What's lacking is low-rent apartments for low-skilled people," Thornberg said. That lack is caused by regulations and fees that add to the fixed cost of building apartments. With higher fixed costs, apartment builders naturally tend toward high-end units.

Thornberg said it would be a mistake to adopt a housing policy that assumes prices will constantly rise. San Diego is in a massive housing bubble, he warned, because the price of homes has become detached from underpinning fundamentals, such as rents.

"Prices have gone up 40 percent in the last two years, and there's no fundamental reason that real estate is worth 40 percent more now than in 2003," Thornberg said.

Education

Employers, especially in the high-tech and biotech fields, also complain that many local job applicants aren't adequately educated, so they have to import qualified people from elsewhere.

And across the board, young people from the area lack the "soft skills" such as communication and promptness, said Gary Knight, president and chief executive of the San Diego North Economic Development Council. However, he finds signs of progress in education, such as Guajome Park Academy in Vista, where he praised the students' attitude and command of language.

"They would make many of us appear inarticulate," Knight said of students in the charter school in the Vista Unified School District.

Cox pointed to High Tech High, a charter school in San Diego created by a group of educators and business leaders, as a model that deserves to be duplicated. The school stresses personal instruction, connection with the work world, and a focus on technology. More about the school can be found at www.hightechhigh.org.

Faulty Vision

No solution can work without the cooperation of the city of San Diego. The city has half the county's population and dominates the region economically. North County's umbrella tourism and economic organizations recognize this fact in their names: the San Diego North Convention & Visitors Bureau and the San Diego North Economic Development Council.

But San Diego is a troubled giant, struggling with a multibillion-dollar pension deficit caused by questionable accounting, giving it the unenviable name of "Enron-by-the-Sea." That's because its leadership sweeps problems under the rug until they become too big to ignore.

Diann Shipione, who raised the alarm about San Diego's pension deficit, was ostracized by the city's establishment for her pains. Shipione, then on the city's pension board, warned of the impending crisis in 2002. Dick Murphy, San Diego's mayor, declined to heed Shipione, preferring to disparage her.

In March, Murphy, who barely won re-election against Councilwoman Donna Frye, removed Shipione from the pension board. But Murphy, who campaigned under the slogan: "Leadership With 20/20 Vision," admitted in April his inability to solve the deficit. He announced he would resign on July 15.

North County example

It doesn't have to be this way. Carlsbad, which has held to a consistent development strategy for decades, is widely known as a city that has thriving businesses, is pleasant to live in, and can pay its bills with ease.

Carlsbad did this by setting rigorous limits on the amount and quality of residential development, and attracting a good mix of commercial development. The goal was to balance business activity with residential living, along with good schools.

The plan has worked almost unbelievably well. Carlsbad has developed into a second technology hub in the county, home to such companies as Invitrogen Corp., a biotech company valued at $4 billion.

With a population of 93,000 ---- up 19 percent between 2000 and 2004 ---- Carlsbad has accumulated nearly $70 million in reserves. In fiscal year 2004-2005, the city projects it will spend just under $90 million and take in just under $100 million.

SANDAG's Cox said Carlsbad benefits from having a regional mall, its auto mall, and the sales tax revenue these bring.

"Carlsbad generates revenue from residents of Oceanside, San Marcos, Vista who shop there but don't use the city's services," Cox said.

Looking back

The city of San Diego ---- and the whole county for that matter ----- can also get inspiration by looking to its own past. Specifically, the year 1960.

Back then, San Diego was a sleepy cultural backwater. That year marked the start of two world-class academic centers, UCSD and the Salk Institute. Voters approved donating prime coastal land to house the Salk Institute, out of faith that research would produce great benefits in finding cures for diseases.

That investment produced an unexpected payoff: biotech and high-tech spinoffs that created great wealth and employed tens of thousands of San Diegans.

A new class of local entrepreneurs emerged, such as Irwin Jacobs, the co-founder of San Diego telecom giant Qualcomm Inc. They became philanthropists, giving millions of dollars to local schools and arts centers.

In the 1970s, the city, led by then-Mayor Pete Wilson, began a farsighted program to redevelop San Diego's seedy downtown, including establishment of a trolley system and a modernistic shopping center in Horton Plaza.

Downtown San Diego came alive, with a vibrant entertainment area in the Gaslamp Quarter and newly fashionable condominium developments pushing up property values. People flocked to work there, many from North County.

As a step toward relieving freeway congestion, the North County Transit District established the Coaster commuter rail line running from Oceanside to downtown San Diego.

Modern San Diego County is the product of all these elements coming together ---- education, entrepreneurs, transportation and redevelopment. To keep it a desirable area to live and work ---- and gain ground against competing cities ---- these elements will have to come together again.

Some key elements of the report

Environment: San Diego ranked first here, tied with Seattle, up from third place in the 2001 report.

Strong habitat preservation efforts.

Strong investment in waste management and water supply.

Poor air quality, the only environmental segment where the county ranked low.

Economy: San Diego placed ninth, out of the 19, squarely in the middle.

An excellent record of attracting venture capital, ranking fourth, an increase from eighth in the 2001 report.

Poor record of investment in airports, marine ports and highway expansion to move goods. San Diego ranked 14th.

A poor record of educational attainment, ranking 13th. However, this was up one notch from 2001.

Equity: San Diego ranked 16th, reflecting its high cost of housing but up one rank from 2001.

A 57-minute combined morning and afternoon commute time, placing the region 14th.

Below-average early-childhood education. That's a critical concern for local businesses, especially biotechnology and high-tech companies, which increasingly complain of poorly educated job applicants. San Diego ranked a disappointing 12th, two places before the national average.

The least affordable housing, same as in 2001.

San Diego Becoming a Second and Third Home Haven for the Rich

By NEIL MORGAN
Voice Senior Editor
Friday, June 3, 2005

During the holiday weekend, steadily inflating housing prices pushed San Diego into prominent recognition on a news map published by The New York Times. Like the City Hall mess, it did not carry the kind of national fame San Diegans crave. It cited San Diego housing costs among the half-dozen highest in the nation. It is a fact that has been painfully obvious to, among many others, institutions and employers that seek to attract people to live and work in San Diego.

Yet as affordable housing has virtually disappeared, multimillion-dollar San Diego homes have become hot collectibles for those of wealth across the United States and abroad. Real estate agents and property assessment records confirm the market. As the Times map appeared, Coldwell Banker advertised million-dollar-plus building lots adjacent to the former hillside home of Helen Alvarez Smith, widow of the banker C. Arnholt Smith. From the southern slopes of Mount Soledad, the lots afford views of Mission Beach and Point Loma.

The world's rich are buying homes and condos in San Diego in unprecedented numbers, many of them speculating on their increasing value. In La Jolla, almost one in three current homeowners does not respond to the County of San Diego inquiry for homeowner's property tax exemptions. It is a revealing statistic, implying that the home is not a primary residence.

As you walk along the beaches of La Jolla, you can look upward at a mile-long sweep of hillside mansions. Within many of them, one eventually notices, there is seldom any movement. Lights on timers click on and off behind the same draped and undraped windows each night, triggering security systems. Gardeners, guards and servants attend the properties daily, providing a fleeting air of a secure, lived-in look. A spare car or two may stand in the driveway to enhance the illusion of occupancy. A bonded overseer checks the property from time to time and even moves cars into fresh and highly visible positions. These are second or third, even fourth homes owned by wealthy investors and speculators from across the nation and the world. They are inhabited, at random, by the wealthy, the leisured, and, in more recent months, by a flurry of home speculators.

The last of the virgin beachfront lots in La Jolla was grabbed up years ago. The best way to see their transformation into multimillion-dollar estates is from a fishing boat offshore. Now the seven-figure buyers are going to the slopes above the village, even enveloping a subdivision that lay empty and unsold for decades, the relic of a subdivider who went broke in the 1930s Depression. He should have lived so long.

La Jolla Farms is among the elite newer neighborhoods. It is an isolated enclave bordering the ocean cliffs west of the University of California, San Diego campus, home to some of the first oceanfront homes to sell in San Diego at prices high in the eight digits. David Dunn, a legendary venture capitalist, has his home here. Real estate agents vie as discreetly as their straight faces allow for the newest, biggest La Jolla sale; some have exceeded $20 million. One agent currently offers a multimillion-dollar residence that "needs work." Sales of homes at astronomical levels are said to have composed about half of the total real estate sales volume in the La Jolla market last year.

The New York Times map offers contrasts and numbers that by now many San Diegans have come to understand -- some with glee, some with despair. As usual, your mood depends on whether you are buying, renting or selling. In an era of wide prosperity, hundreds of thousands of wealthy Americans are buying homes in more moderate climates and in cities they find desirable. Many live, for at least a few weeks each year, in such homes at posh enclaves or coastal resorts. Busy executives skip vacations and ship their families off to such houses. San Diego stands near the top in that desirability category.

Such buyers push the home price curve upward as they invest. In San Diego, that adds to the desperate perplexity of first-time home shoppers. Just as stock prices rise when buyers rush to queue up, home prices soar when luxury properties appear to be both shrewd and prestigious investments. There is a lap-over effect on lower-priced housing costs.

This market aberration comes as no surprise to those in Rancho Santa Fe, where the phenomenon has existed for years in modest numbers and with multi-acre estates. In La Jolla, the shock value seems more startling and the incidence of buyers far more widespread.

In these two communities, as in others, particularly on the West Coast and in Florida, large empty houses have become a familiar part of the urban scene. They are second or third, even fourth homes owned by wealthy investors and speculators from across the nation and the world. They are inhabited, at random, by the wealthy, the leisured, and, in more recent months, by the flurry of home speculators.

Curious questions arise: What proportion of such high-value homes in San Diego are sold to wealthy out-of-city investors and speculators? What proportion serves as second- or third-rank residences?

Not even the statistics-crazed real estate industry seems eager to seek such answers. This phenomenon of runaway prosperity has grown so rapidly that agents tend to know more about its effect than neighbors or government. Two who are familiar with it are Susana Corrigan of Prudential and Bonnie Adams, whose La Jolla real estate firm bears her name.

I asked both women what fraction of La Jolla mansions serve as second- or third-homes, and are thus standing empty for long periods. The number could serve as a new statistical insight into residential multiplicity. Corrigan offered an instinctive guess that the number is about 30 percent. Adams was not astonished at that guess; she admitted to her own curiosity and referred me to the county Tax Assessor's Office. Their records and computers, they concluded, are not programmed to provide that answer. But they do identify homeowners who do not seek property tax exemption.

To pursue that odd statistical hunch might be to learn that such multiple homeowners are taking their exemptions on even more expensive properties in higher-tax districts in other cities and regions.

Operation Condo Conversion Invades San Diego

By ANDREW WOODBERRY
Voice Guest Columnist

Condominium conversions in San Diego and all of Southern California are increasing with both positive and negative implication. On the plus side, they offer more affordable housing which allows more people to purchase a home. On the negative side, they can displace renters who may have a hard time finding a new apartment. Here is Andrew Woodberry's story.

Strangers started showing up at my apartment complex in the fall of 2004. Middle-aged men in gabardine slacks and Tommy Bahama shorts strolled out of their BMWs to size up the stucco buildings. Their approving gazes obscured by Ray-Ban sunglasses, the smell of Old Spice wafted through the air. These soldiers of "fortune" were there for one reason: Operation Condo Conversion.

When my girlfriend and I first received the letter in the mail, it was not surprising. Hushed whispers of our apartment complex being sold had circulated for weeks. But what was surprising was the staggering price tag: close to $300,000 for less than 800 square feet. Unless the "conversion" aspect includes doubling the square footage and replacing the faux-granite with real granite, consider me a non-buyer. But plenty of people are jumping in -- people who have no intention of ever living in the complex.

Flipping real estate has become as much a profession as flipping burgers. With easy access to interest-only loans and a seemingly endless supply of buyers, the real estate market is sizzling. It has been since I first moved out here two years ago. But is all this part of a real estate "bubble" or the future of home buying in America's Finest City? Will the people flipping real estate be mentioned in the same breath as those who invested in Pets.com and Webvan? Are they descendants of the 17th century Dutch who bid up the price of bulbs? Or will I continue to beat myself up over sitting on the sidelines while others seem to be getting rich so easily?

The lure of the sun and beach have enticed many to come west. After four years of college in New Hampshire and one frigid winter in Boston during 2002, my girlfriend and I strapped a U-Haul to the back of her Honda Civic and followed the path of Ma and Pa Joad. Our destination, San Diego, was full of youth and vibrancy. Gentrification, however, seems here to stay.

One of the charming things about San Diego is how compact it is. You can get from Del Mar to Coronado in less than 45 minutes on a good day. But increasingly, those of us not benefiting from a six-figure job or inherited wealth have had to move further and further away from downtown (Riverside County may as well be considered a suburb of San Diego). A co-worker of mine recently sold his condo in Little Italy for a 33-percent profit (after living there for only three years), moving into a 4,000 square foot house in a suburb of Denver. The price tag: $450,000. That wouldn't even buy a two-bedroom apartment in my soon-to-be former apartment complex.

Every so often, I think about giving up the San Diego weather to move to New Hampshire, where a two-story home is considerably more attainable. Without taking on the burden of an interest-only loan, I doubt I will ever be able to be a homeowner anywhere near San Diego. It is increasingly an area controlled by the BMW-driving, Tommy Bahama-clad jet set and an area where Florida corporations are buying whole apartment complexes, and selling individual units to people who have no intention of ever visiting or living in the apartments. And an area I'm not sure I can ever call "home."