Business & Real Estate

A look ahead: Sacramento’s five-year forecast

The recession is officially over, but the region’s comeback is still a work in progress. Unemployment is dropping, the housing market is rebuilding, a new downtown Sacramento Kings arena is under construction and small business startups are popping up from Elk Grove to Roseville.

As the Sacramento region continues emerging from the recession’s grip, we asked local leaders from three backbones of the regional economy – development, housing and automotive – to share their thoughts on what’s ahead.

In a three-part series starting today, Bee reporters talked with experts in each of those fields. Here’s an excerpt from Sacramento Bee writer Dale Kasler’s interviews by email with Mark Friedman, founder and president of Fulcrum Property; Phil Angelides, former state treasurer and president of Riverview Capital Investments; and Jeffrey Michael, director of the Business Forecasting Center, University of the Pacific.

Mark Friedman

Beyond the new Kings arena, name a handful of development projects in the works or on the drawing board that you believe will redefine the Sacramento area over the next five to six years.

Sacramento will become more vital, diverse and energetic over the next five years because residents are returning to the city. The Bridge District (in West Sacramento) will re-establish the city’s relationship to its waterfront and redefine the boundaries of our urban core. Township Nine will begin the transformation of Richards Boulevard into an eclectic, mixed-use, mixed-income neighborhood. Midtown will continue to evolve as the vibrant creative hub of the city. And the railyard will finally start moving. Their success will trigger a virtuous cycle where new residents make the city more interesting, which will attract more new residents.

Sacramento leaders have talked a lot about green tech and medical tech the past few years as drivers of the new regional economy. Do you agree? Will these industries be making a meaningful contribution to the Sacramento economy by, say, 2020?

Cities around the world are chasing green-tech and med-tech jobs. If we are to succeed, we must focus our efforts on areas of regional strength where we have sustainable competitive advantages. Fortunately, there is something that our region does better than anyone else in the world: We grow food. It is our heritage. It is the cornerstone of our economy and the reason why Sacramento initially prospered. Even today, we live in the middle of the most productive agriculture region in the world. Further, our region has a unique set of assets that will allow us to combine the green-tech and med-tech industries in ways that other communities cannot. We have great hospitals, a growing medical device industry and tying it all together is UC Davis – the top American university in agricultural science, ecology and environmental studies. Their research is actively connecting what we eat to personal health.

We have competitive advantages that no one else can match. This gives us an opportunity to create something that is great, something that belongs in Sacramento and nowhere else. Chancellor (Linda P.B.) Katehi and UC Davis are on the right track with the creation of the World Food Center. It can become a beacon that attracts the rest of the world to our doorstep. It can be the place that people think of first when they want to solve the world’s critical food problems. It will drive the creation of new labs, new research and new businesses that will literally change the world. It can become the catalyst that transforms our region into the Silicon Valley of food.

Right now, the real estate and construction markets are gaining strength in the Sacramento area. How sustainable is this expansion?

It is all about jobs. Development is not feasible without a strong underlying economy. Good, high-paying jobs create demand for new office space and new homes. And disposable income creates demand for goods and services that fuel more jobs. Without new jobs there is no need for new office buildings, no disposable income for new merchandise and no demand for new housing.

As you look out over the next few years, what is the largest potential pitfall you see in Sacramento? Put another way: What scares you the most as you try to forecast Sacramento’s economy in the coming years?

After many years of trial and error, we are ready to renew and invigorate the central city. The biggest risk to success is the possibility that we hold ourselves back, whether intentionally or inadvertently. We stop more progress with good intentions than with ill will. We need to make it easier to do business in Sacramento, to try new things, and to take entrepreneurial risk. Cities are great laboratories for experiment and innovation. We will make mistakes, but let’s create an environment that encourages creativity in everything we do.

Phil Angelides

Given your obvious familiarity with the circumstances behind the 2008 economic meltdown, what’s your view of the current recovery? Does it seem more sustainable?

I remain deeply concerned, on both a national and regional level, about our recovery from the financial crisis and economic meltdown that followed. Incomes are stagnant, unemployment remains stubbornly high with record levels of long-term unemployment, and income and wealth inequality are at the highest levels since the 1920s. Nine years after the housing market peaked in Sacramento, our economy is still struggling to recover. While we have bounced back from the bottom, it is by no means clear that we are on a path to sustainable economic progress and growth. Policies and investments to strengthen our long-term economic prospects and to boost income and job growth in the near term are badly needed to spur recovery.

You just committed to a major investment in Sacramento’s housing market, at McKinley Village. What seems to be fueling the Sacramento region’s recovery these days?

In partnership with The New Home Company and Encore Capital Management, we have committed to invest over $160 million to build the McKinley Village neighborhood. We have done so in part because of the growing strength of the urban infill housing market resulting from the increasing demand for housing in the urban core close to jobs, shopping, dining and services. While I am optimistic and hopeful about the region’s future economic resurgence, our economy remains fragile in the wake of the financial meltdown of 2007-08, with income and job growth still well below what is needed or desired.

What will the region’s economy look like in, say, six years? Do you expect a dramatic shift in the mix of industries driving the economy in Sacramento?

My hope is to see greater private-sector momentum and diversity in the region’s economy in the years ahead. We need to create a much more robust private sector, including a vibrant culture of entrepreneurship and innovation, to propel our regional economy forward in the years ahead. In this regard, we have much work to do.

As you look out over the next few years, what is the largest potential pitfall you see in Sacramento? Put another way: What scares you the most as you try to forecast Sacramento’s economy in coming years?

My most significant concern about our region’s economy is the absence of a driving private-sector engine to sustain future economic progress. To make our vision of Sacramento as a dynamic, economically successful urban community a reality, we must expand our private-sector job base, recruit new companies to our region, support and build local enterprises, foster economic innovation and entrepreneurship, invest in education and our civic infrastructure, and promote high-quality urban infill development. Absent a strong regional effort to achieve these goals, I am fearful that incomes and job growth in our region will continue to stagnate.

Jeffrey Michael

Eight years ago, the Sacramento regional economy boomed largely because of the roaring housing market. Is the current recovery any different? What’s fueling the local economy this time around?

Eight years ago, Sacramento not only had a housing bubble but had been riding several decades of strong growth. The California recessions of the early 1990s and 2000s mostly avoided Sacramento. The current recovery is certainly not a boom, and follows a deep recession that hit Sacramento disproportionately hard. The Sacramento area still has 4 percent fewer jobs than it did seven years ago; only Placer County has recovered its pre-recession levels of employment. Housing is a much smaller part of the economy than it was eight years ago, but improvements in the battered but traditional mainstays of government and real estate are most responsible for recent economic improvements. Health care is a larger and growing part of the economy. In addition to the growth in health care providers seen across the country as the population ages and consumes more health services, Sacramento is emerging as a center for management, finance and insurance of health services. Examples of this include the large regional administrative center for Sutter Health and the expansion of VSP. Manufacturing is still relatively small in Sacramento, but it is dynamic. For every Campbell’s Soup, Wonder bread and HP downsizing, there seems to be an offsetting new development in food processing or medical devices.

Does the current recovery seem more, or less, sustainable than the boom of eight years ago?

The recovery seems sustainable at this point, but it will likely take another two or three years to achieve a full economic recovery in the area. This is a good question to revisit in three or four years.

What will the Sacramento region’s economy look like in six years? Do you foresee a dramatic shift in the mix of industries driving the area’s economy?

I don’t see a dramatic shift in the overall mix. Government, real estate and health care will still be the main sectors. I think we will see some interesting expansions in higher education over the next six years in the Sacramento area that could set the stage for economic shifts over the next two decades. The new arena and other related and unrelated developments in and around downtown will create a shift in the location of economic activity in the area. That won’t change the overall industry mix over the next six years, but a more vibrant urban core could work similarly to higher education expansion to set the stage for a more dynamic, urban economy in the 2020s. Having said that, I still expect the fastest growth and greatest private investment in the suburbs, and not just housing.

As you look ahead, what is the largest potential pitfall for Sacramento? Put another way: What scares you the most as you try to forecast Sacramento’s economy in coming years?

It’s still a government town, so I worry most about the sustainability of the Silicon Valley tech boom that is filling the state treasury and the expiration of the governor’s tax increase if the state is unable to develop a more sustainable finance system. I worry about the continuing dearth of corporate headquarters in Sacramento in an era when more income is in the form of profit and returns to capital, and less income is earned through wages. I worry Sacramento will be unable to retain businesses as they grow and expand even as the region develops a stronger culture of entrepreneurship and innovation.

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