By Pacific Coast Business Times Staff Saturday, January 3rd, 2009

The signs of a sliding economy are clear across the Tri-Counties – empty storefronts, job losses, spiraling gas and home prices, and fear among employers.

So it comes as no surprise that expectations for 2009 remain bleak among economic forecasters.

Most sectors will be flat or down, except for bright spots in health care and technology, said Bill Watkins, executive director of the University of California, Santa Barbara, Economic Forecast Project. But even those areas, Watkins noted, are expected to thrive because of government backing rather than strong economic conditions.

Since the collapse of many American financial giants in late 2008, Watkins said, the Forecast Project has had to reevaluate most of its predictions for 2009 – what likely will be what he politely terms a “challenging year.”

Higher education

The state budget crisis’ latest casualty has been higher education, as the Tri-Counties’ two California State University campuses have put an immediate stop to several large construction projects.

In 2006, California voters approved Proposition 1D, which promised millions of funds to California State University, Channel Islands, and California Polytechnic State University, San Luis Obispo.

On Dec. 23, CSUCI announced its plan to cease construction work on $105 million worth of state-backed projects. They include $49 million in infrastructure improvements, $31 million to renovate North Hall and $25 million for a new entrance road.

Cal Poly budgeted about $16.7 million from the Prop. 1D fund to rebuild its math and science building, located in the heart of campus, as well as one of its pools.
Excavation had already begun on the pool, which will remain a gaping hole in the ground for at least three months, said Mark Hunter, Cal Poly’s director of facility services.

The new science center is in better shape, as it hasn’t broken ground yet and is between the design and bidding phases.

“We may hit this suspension right at the time where it doesn’t hurt the scheduling,” Hunter said.

Cal Poly is also depending on Prop. 1D funds to stock the latest equipment in its new engineering and construction management buildings.

The state budget

As California contemplates running out of its operating cash by February, Watkins said the public sector will most likely begin shedding jobs in earnest throughout 2009. One exception, he noted, might be health care.

“Health care we expect to remain relatively strong because of the demographics,” Watkins said. “There’s still a lot of investment in … the rebuilding of Cottage Hospital — and for the South Coast, it is a lot of economic activity.”

Santa Barbara Cottage Hospital’s $700 million construction project will escape direct ramifications of the budget crisis because it is being completed without any government funding.

As for construction in the Tri-Counties overall, Watkins said not to expect “any sort of rebound.”

“The only bright spots in construction have been hospitals and public works projects, and the public works projects are going to grind to a halt,” he said in reference to the state’s move to postpone funding dozens of infrastructure projects.

At the federal level, Rep. Lois Capps, D-Santa Barbara, who serves much of the Tri-Counties, said she will be working in the House and with President-elect Barack Obama to get an economic stimulus package passed, which she said will help her constituents.

“Much of this is about confidence building,” Capps told the Business Times. “We need to have the kind of stimulus that will give people confidence again. That will free up banks to loan money so people can add to their small business; they can add staff … and not be paralyzed so much in the Central Coast, as it is today.”

Capps said she is most worried about the region’s housing crisis and noted frustration with the financial industry and Treasury Secretary Henry Paulson.

“People are still having trouble with their mortgages, and that’s unconscionable to me,” Capps said.

Retail

After gasoline prices topped out near $5 a gallon, demand tumbled and brought prices down to about $2 a gallon, providing relief to businesses moving goods and services in the Tri-Counties.

However, the drop prices probably won’t provide enough positive traction for businesses — especially retailers — skidding toward closure.

“We’re worried about retail space, and we expect more chain retailers to cut back or go out of business after the holiday season,” Watkins said.

Three retailers — Linens-N-Things, Circuit City and Mervyns — said they would close their tri-county operations after the holiday season. CompUSA closed its Goleta location early in 2008 as part of a statewide restructuring. The building is under renovation and will be replaced by Best Buy in 2009.

Watkins warned that empty commercial space – particularly the thousands of square feet in Ventura County – are poison for the local economy. “It just sits there,” Watkins said of vacant properties. “Its value goes down; taxes go down for the local government; it’s an eyesore, and it’s not generating jobs. A building that might hold a couple hundred people — that’s a few hundred jobs you don’t have.”

Marty Blum, mayor of Santa Barbara, said that though the city often has a downtown commercial vacancy rate that stirs jealousy among other cities, the rate grew steadily in 2008. “And that’s cause of alarm for me,” she said.

Blum said that Santa Barbara usually weathers recessions better than most other cities because of its strong tourism and sales tax bases.

“But unfortunately, this particular recession is just so mammoth that it’s going to be difficult for all cities in the country — even for Santa Barbara,” she said.

Blum added that the city’s sales tax revenue has taken a dive as tourism has tapered off, sapping funds generated from the city’s hotels and motels.

She said that the city will have to shave $5.5 million from its budget by Jan. 30, forcing the city to trim expenses, offer unpaid internships and possibly extend a furlough program to employees.

The Dollar

A weak dollar in early 2008 had tourism advocates excited about foreign visitors.

But global economic uncertainty shoved the euro down from its high of around $1.60 in April to $1.25 in November. The British pound also plummeted from around $2 to $1.45 or so this year.

Mike Gibson, president and chief executive officer of the Paso Robles Chamber of Commerce, said his city is still seeing some international travelers, but mainly those who booked their trips when the dollar was weak.

Now the city has had to shift its focus to California travelers, especially as gas prices tempt families to put their SUVs back on the road.

“We’re already starting to market about a day trip from the Bay Area, Los Angeles, Bakersfield and inland,” Gibson said.

Watkins agreed that luring tourists from those areas will be key in the coming year, but said it won’t be enough to save the region’s economy.

“[The dollar] might pick up,” he said. “It should bode well for tourism, but the fact is … we’re not looking for tourism to provide any strength at all in the Tri-Counties. People are definitely cutting back their vacation plans.”

Earlier in 2008, the cities of Paso Robles and San Luis Obispo each approved their own business improvement districts, or BIDs, to pool money from local hoteliers to pay for tourism marketing efforts. Gibson was optimistic that the BIDs could help bring in some extra cash flow to the county, which is facing a $21.5 million budget shortfall.

But the dollar’s minor flourish remains precarious. Watkins said a weak dollar would help exports, particularly those shipped out of Port Hueneme, the region’s main portal.

“It will help some of our growers and should also help the wine producers and producers of berries, lemons” and other agricultural goods in the area, he said.

The the falling dollar concerns Capps, who is worried about the health of Port Hueneme as American auto companies huddle on the edge of bankruptcy. Some of the port’s biggest clients are the automakers.

“A lot of the automobiles made in the United States are shipped abroad, so they’re very concerned about getting the auto industry back on track,” said Capps, who voted for the auto bailout in December. “Some of the suppliers come from California as well. So they need a bridge. They need to be able to survive.”

Technology

If anything is going to keep the tri-county economy chugging along in 2009, Capps and Watkins said, it is technology. With hundreds of companies in the high-tech, green-tech and manufacturing fields, business might dip but should remain relatively strong.

Capps said she was optimistic about the alternative energy companies Clipper Windpower in Carpinteria, REC Solar in San Luis Obispo and Ceres in Thousand Oaks. She also touted lemon-producer Limoneira as a model for other companies wanting to “green” their businesses. The Santa Paula-based company has added 5.5 acres of solar panels – enough to power its cold-storage and packing facility.

“Their harvesting of solar energy is just as important as the lemons … and that’s something we should stimulate from the federal government,” Capps said of Limoneira.

Even firms without a history in the green tech space are jumping in. Power-One, which makes power supplies for computer servers, has begun making converters for solar and wind power equipment.

Ventura will boost its technology presence as the city’s first technology incubator opens this month. Start-ups will now have an inexpensive and collaborative workspace to put their ideas into action.

The business of Internet bandwidth is also expected to surge in 2009, and three tri-county companies – Inphi, Occam Networks and Xirrus – will lead the way.

Despite economic troubles, Internet traffic is growing by 60 percent a year, said Loi Nguyen, founder and vice president of technology at Westlake Village-based Inphi. Nguyen said demand will most likely continue to rise through the coming year, spelling revenue growth for the trio.

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