“It shouldn’t be about country club California. This should be a California everyone can live in,” said Christopher Thornberg, director of the UC Riverside School of Business Center for Economic Forecasting and Development, neatly summarizing the theme of the center’s 2019 annual conference. 

“The House That Wasn’t Built. Housing Scarcity: The Inland Empire’s Natural Barrier to Economic Growth” was held Nov. 6 at the Riverside Convention Center. It coincided with the release of a new economic forecast for the U.S., California, and Inland Empire economies.

Thornberg said that contrary to the bleak vision of inland California embedded in some statewide economic development agendas, the Inland Empire, which consists of Riverside and San Bernardino counties, has a robust economy and the 14th largest labor force in the nation. Over the past five years the Inland Empire joined the Bay Area in fastest job growth in the state. The region’s unemployment rate of 4% is the lowest it has ever been, equaling that of Los Angeles, and it has the same income per level of educational attainment as Los Angeles and Orange counties. 

However, while coastal areas boast large, highly paid professional and technical sectors, healthcare, government, and logistics dominate the Inland Empire’s economy. These jobs often require less education and fewer skills, and generally pay less than jobs in technology, finance, and educated professions that lead the coast. 

Rather than regard this as an impediment to developing the kind of economy found in coastal California, Thornberg suggested the Inland Empire’s labor force and housing supply have been necessary supports to California’s growth all along and comparison to coastal areas is both methodologically unsound and unfair. 

“Comparing local economies to San Jose is like comparing your health to an Olympic athlete,” Thornberg said. “The only place that looks like San Jose is San Jose.”

The housing supply, however, has not kept pace with the population, which over the past 25 years has grown three times faster than that of the coast. Apartment vacancies, for example, are at less than 4%. The region is not building enough housing, and neither are Los Angeles and Orange counties. This situation will increase regional competition for housing that is already pushing out the Inland Empire’s workforce as housing grows scarcer and rents rise. While some worry the rich are leaving California in droves, far more people at the other end of the spectrum are abandoning the state for places like Nevada and Arizona, where housing is available and affordable. 

The Center for Economic Forecasting’s analysis indicates a crisis of housing supply, not affordability. California has the second lowest vacancy rate in the nation and the highest percentage of adults living with parents. Thornberg said California needs to be issuing 200,000-250,000 building permits per year to sustain a 2% job growth rate but is only doing 130,000.

“Lower-skilled workers moved inland because coastal areas put the kibosh on housing 20 years ago,” Thornberg said. “It’s like we’re saying, ‘We already kicked you out of the coastal areas; now we want to kick you out of the inland, too.’”

The center’s analysis finds the housing problem is a land use issue that needs to be solved at the local level. Thornberg said a poorly thought-out tax model exacerbates the housing crisis. Most city revenue comes from business taxes, which encourages local governments to invest in business development, not housing. If cities have to build housing, they want it to be high-end and often enact restrictive laws to prevent high-density alternatives that attract lower-income occupants, like apartment complexes. 

“Baby Boomers are often the primary opponents of housing because they’ve got theirs already,” said speaker Steve PonTell, chief executive officer and president of National Community Renaissance, or National CORE, a nonprofit affordable housing developer with a focus on community revitalization. He said high-density housing does reduce home value, but self-interest shouldn’t influence a city’s housing decisions.

PonTell said the Inland Empire’s key to continued economic development is to build more housing, but the region has overzoned and overbuilt for business and underzoned and underbuilt for housing. 

“Housing should be considered a necessary infrastructure,” he said. “Cities can make this happen. Inland Empire cities should lead when it comes to how cities solve these problems. We need to be more aggressive about how we come together to do that.”

Paavo Monkkonen, an associate professor of urban planning and public policy at UCLA, said in his presentation that cities could add more housing by building to zoning capacity. One example would be to build up, not out — think high-rise apartments in urban centers instead of single-family homes in sprawling subdivisions. He also said building more housing in high-rent areas will spur economic development. 

“The decisions that need to be made to continue amazing growth in the Inland Empire are local,” said Thornberg. “We need to start having these land use conversations and making decisions.”

In addition, the Center for Economic Forecasting also released its new economic forecast with current outlooks for the U.S., California, and Inland Empire economies. A copy of the forecast and conference book can be downloaded in its entirety here.

Select key findings:

• Of all the industrial and business development in the Inland Empire, rapid expansion occurring at the Ontario International Airport is a standout. Year-over-year growth in passenger traffic at the airport has jumped 9.6% compared to 0.3% growth at Los Angeles International Airport and a 3.4% drop at John Wayne Airport in Orange County.
• Due to the multiple ways employment is measured by the U.S. Bureau of Labor Statistics and the California Employment Development Department, and due to a lag in some of the data, the new forecast finds current monthly figures may be underestimating the Inland Empire’s true jobs growth trends. There is a good chance growth levels will be revised upward when the annual benchmarking occurs in March 2020. 
• Despite the trade war that has been underway since March 2018 with some of California’s most vital trading partners, the Inland Empire’s logistics sector has continued to grow at a robust pace, with 3% job expansion from August 2018 to August 2019. 
• As of the second quarter of 2019, average rent in the Inland Empire reached $1,390/month, a 3.8% year-over-year increase. Notably, rents are most expensive in submarkets closest to L.A. County where vacancy rates are also the lowest, indicating higher demand, likely from commuters who drive to the coast for work.
• Sales of existing single-family homes in the Inland Empire were down 6.4% in the first half of 2019 while they fell 7.2% statewide. The pullback can partially be traced to last year’s sharp rise in interest rates and limits on mortgage deductibility that resulted from the federal Tax Cuts and Jobs Act. The good news is 2018’s surge in interest rates has largely been erased, and today’s lower rates should stimulate the market.
• Yield curve, schmield curve: The strong correlation in this data to the onset of a recession is traditionally driven by the Federal Reserve raising short-term interest rates to cool an overheating economy. The inverted yield curve is like the skid marks left behind after trying to avoid going over a cliff. But in this case, the U.S. is not facing a cliff. The national economy is stable and the expansion will continue.