Population trends and a potential nightmare

During the 1990s, California has experienced dramatic changes in its population growth trends - changes likely to affect all its real estate markets. One out of every eight U.S. residents lives in California, which has the largest and most influential economy in the nation. So what is happening there is vital to the U.S. real estate industry.

In the 1980s, California's population increased by 6.1 million people, or 25.7%. That is an annual average gain of 609,000 people. From April 1990 to July 1998, the state gained 2.88 million people for an annual average rise of 349,000 people, 42.6% less than its absolute annual population growth rate in the preceding decade. The cause of this drastic drop has been a shift in migration between California and the rest of the United States.

In the 1980s, more than 1 million people moved from the other 49 states into California. But in the 1990s, 2.08 million more people have moved from California into other parts of the U.S. than have moved from those other parts into California. This net loss of 2.08 million Californians to the rest of the nation was largely offset by net immigration of 2.02 million people from abroad into California, primarily from Latin America. That left a natural increase of 2.9 million people - the excess of births in California over deaths there - as the principal net source of population growth so far in the 1990s.

According to the Census Bureau - the source of all these data - California experienced net losses of citizens to the rest of the nation every year from 1990 through 1998. These annual net-outmigrations started at 149,000 people from 1990 to 1991, steadily increased to 429,431 people from 1993 to 1994 and then gradually fell to 89,711 people from 1997 to 1998. This cycle reflects the impact of the severe recession of the early-1990s on California's economy. If the state's prosperity remains as strong as it has been lately, California may again become a net importer of residents from the rest of the nation in 1999 or early in the next century.

One factor aggravating the net movement of people out of California is the high cost of housing. The median price of single-family homes sold in California in February 1999 was $198,060, which is 53.1% above the February 1999 median of $129,300 for the United States as a whole. And in March 1999, housing prices in California were 10.1% higher than a year earlier - 17.2% in the San Francisco area - compared to only 4% higher for the entire United States. However, California's median personal income per capita in 1997 was $23,576, only 4% higher than that for the nation as a whole. That means housing is much less affordable in California than anywhere else. That is one reason why the homeownership rate in California is only 55.7%, compared to 66% for the entire nation.

These facts are relevant to operators of non-residential properties because the California firms that occupy such properties must attract and retain workers in competition with firms across the nation. Although California's mild climate and greatly varied topography are powerful attractions, living there has become extremely expensive compared to living almost anywhere else in the United States. California also suffers from rising congestion on roads and in public facilities. Many companies are finding it difficult to persuade residents to relocated from other parts of the nation to jobs in California because they must sacrifice so much in terms of housing quality.

Moreover, as long as California continues to be a net exporter of people to the rest of the United States, and a net importer from Latin America, it is essentially losing mainly middle-class households and primarily gaining poor ones. This factor, along with the recession of the early-1990s, contributes to a 21.5% increase in the percentage of the state's population with incomes below the poverty line, from 13.9% in 1990 to 16.9% in 1996. Those figures compare to virtually no change in the poverty rate of about 13.4% in the rest of the United States over the same period.

California's ethnic mix is also changing rapidly. As of 2000, California will probably have no single ethnic majority. Then, non-Hispanic whites - the traditional majority - will most likely comprise less than 50% of the state's total population. That is already true amongpeople under 18 throughout the state and among all residents in Southern California. This foreshadows a longer-run national trend, since more than 79% of the 47 million total increase in U.S. population from 2000 to 2020 will consist of more Hispanics, African-Americans and Asians. By 2020, those three groups will comprise 36% of the nation's total population and 45% of its total population under 18.

Why are these trends important to the real estate industry? First, because major flows of capital from other parts of the nation help finance California real estate development and lending. If California's population growth remains much lower than in the past and its share of poor residents continues to rise, it will be a less attractive market for such investments.

Second, firms considering whether to locate in California or elsewhere should take these population trends into account in making their decisions, and rival states can use these data in trying attract these firms. Third, in this era of acute labor shortages, attracting and keeping skilled workers is vital to any regional economy.

Therefore, California's non-residential real estate operators, including many national development and financial institutions, have a strong interest in doing something to lower housing costs if they want to continue attracting jobs and workers from elsewhere or even retain existing jobs.

California should lead the nation's commercial real estate industry into greater sensitivity to the needs and wants of ethnic minorities - both as customers and associates. The real estate industry has long been backwards in developing such sensitivity, as is clear from the almost totally non-Hispanic, white character of its major firms' employees and especially their leaders.

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