Business

Saturday, Dec 29 2012 10:47 PM

2012 YEAR IN REVIEW: Kern's economic score card

BY JOHN COX Californian staff writer jcox@bakersfield.com

Much has been made over the past year about the relative strength of Kern County's economy. Major news organizations flocked to Kern to write about the "Bakersfield Boom." Inland California is finding hope in Bakersfield's new home construction, The Wall Street Journal gushed on Dec. 11, calling it evidence that Kern is shaking off lingering effects of the Great Recession.

In fact is it not just new homes. Significant gains are being recorded here in areas such as commercial real estate, vehicle sales and hospitality, all of which can be seen as gauges of local business activity.

A key factor is the continuing strength in oil and ag. Despite various uncertainties ahead, these industries are doing better than they were before the national economy started sputtering in 2006.

So, has Kern County overcome the slowdown? Have we fully recovered?

The answer, unfortunately, is no. Nevertheless, progress is being seen across the board.

Overall, Kern's economy is doing well -- worthy of a "B" grade, you might say. Key sectors are making good progress and this energy is spreading to related fields.

The Californian took a look at several different parts of the business scene, some of which are important for their employment potential, others for their value as measures of the greater economy.

In issuing admittedly subjective grades to each of these sectors, we have taken into account how they have done lately as compared with where they were before or during the recession.

We also looked at industry outlook. Some areas are performing admirably now but face challenges and uncertainties.

Over the next 12 months, if things continue to improve at the present rate, Kern County's economy may well be the envy of the West Coast.

It's difficult to say whether that would be enough to drive down the county's unemployment rate from November's 12.4 percent to the 6.2 percent Kern saw in September and October 2006.

Even so, continuing economic improvement just might be enough to earn the county an "A" grade.

Here's a sector-by-sector look:

Single-family home sales

Grade: B+

Almost any sign of improvement is welcome in Bakersfield's single-family home market. But these aren't just any signs of improvement.

Bakersfield's median home sales price in the third quarter of 2012 was $150,000 -- a 22 percent increase over the second quarter of 2009, when the market hit a low of $122,500, according to data maintained by local appraiser Gary Crabtree. The median is the point at which half sold for more money and half sold for less.

(Reality check: The city's median peaked at $293,000 in the overheated second quarter of 2006.)

In 2012, Crabtree estimates, city building permits are on track to top 1,000 -- something that hasn't happened since 2009. But again with the reality checks: Bakersfield issued 5,216 such permits in 2005.

Given the extraordinary heights reached just before the bust, year-over-year comparisons may be more reflective of progress toward a reasonable recovery.

Crabtree reported that between November 2011 and November 2012, current home listings in Bakersfield dropped by 44 percent to 601. That's an indication the market is hungry for new home construction.

Over the same 12-month period, he stated, the median sales price of newly built homes rose nearly 11 percent to $230,500. Meanwhile, total home foreclosures in Bakersfield fell nearly a quarter to 253.

The bad news -- for buyers and Realtors but not homebuilders -- is that the market is running low on homes for sale, Crabtree said in a note accompanying his latest market report. His good news: Distressed property sales are down and prices are headed upward.

"Not to say that we are out of the woods. Not by far," he wrote, noting that potential state and federal tax policy changes, including possible elimination of the mortgage interest tax deduction, could cut into home affordability.

Hospitality

Grade: B+

Progress in some parts of the local economy is cause for celebration simply because success in those areas tends to spread to other industries.

Hospitality -- a significant job engine in its own right -- is one of those sectors. More out-of-towners staying in local hotel rooms tends to mean more money is being spent at nearby restaurants, entertainment venues and retailers.

But there's another reason to keep an eye on how well local hotels are doing: If they're busy, it means business in general is likely improving as well.

Consider, then, positive recent data on Kern County hotel stays. Although occupancy rates haven't fully rebounded from the recession, average daily room rates have made solid gains.

According to Smith Travel Research, Kern hotels were about 67 percent full on average in October, which was the latest data available. Average rates were $68.85 a night.

Both of these numbers represent improvement over a year before, when occupancy stood at just under 64 percent and rates were $65.31 a night.

Granted, hotels were generally busier in October 2006, when STR reported Kern lodging being 72 percent occupied on average -- 5 percentage points better than Bakersfield's rate from two months ago. But in 2006, when the economy was peaking, an average one-night hotel stay in the city cost $3.36 less than it did in October.

The head of the Greater Bakersfield Convention and Visitors Bureau, David Lyman, said more people are coming to town for business reasons, such as scouting for possible corporate relocations, personnel transfers and job interviews.

All of this represents opportunity for local businesses, he noted in an email.

"My biggest challenge: educating local residents that people from throughout the world visit Bakersfield and have money to spend," he wrote. "Those visitors ask us, 'What should I see and do?' What they are really saying is, 'Help me spend my money.'" He asked that businesses with good suggestions call the bureau at 852-7282.

Agriculture

Grade: B

Kern agriculture is like the local oil industry in one key respect: Although business conditions are strong, regulatory and other threats loom.

Strength in the county's ag fields shone bright in the 2011 Kern County Ag Crop Report, which contains the most up-to-date data available. For the first time ever, the sector's gross production value surpassed $5 billion, registering a 12.8 percent increase over 2010's total.

Notably, this was achieved with only 874,559 acres harvested -- 5 percent less than were reported harvested in 2007.

Ben McFarland, executive director of the Kern County Farm Bureau, attributed the local industry's success to a mixture of being in a good location for exports, high commodity prices and a strong domestic market for California-grown produce.

"I think, generally speaking ... there's going to be a strong future in these next several years for Kern County agriculture," he said.

At the same time, he said, regulation, the drought and pests remain big concerns.

By far the biggest regulatory worry has to do with groundwater contamination related to the use of fertilizers. State officials are working on new rules that would monitor local farmers' use of water and fertilizers. Nothing is final, but the bureau fears such a measure would greatly increase growers' costs.

"It has the potential to put small family farmers, small family businesses, out of production just due to the fact that the cost of compliance is (a) deterrent to continue in small operations," McFarland said.

Water for irrigation is another area of concern. State and federal sources are diminishing, which puts pressure on growers to idle their land.

Then there's the Asian citrus psyllid. It's a pest that carries a bacterial disease deadly to the state's oranges and other crops. It hasn't been reported in Kern County, but the insect has been found to the north and the south.

Oil

Grade: B-

It would be easy to say that everything's rosy in the oil patch these days. Recent barrel prices have been in the healthy $90 to $110 range. But there's more to the story.

Uncertainty, in the prospect of possible new state regulations, hovers over oil producers considering whether to invest here or in another state.

State regulators are working to change the rules for hydraulic fracturing, or "fracking," as well as waste disposal injections and cyclic steaming, or "steam fracking." All of these are common in Kern County.

What's more, there are lingering questions about the viability of drilling in the Monterey Shale, a vast reservoir underlying much of the county. Recent assessments suggest the formation might not be the boon some producers hoped it was. The long-term implications for employment in local oil fields are enormous.

Recent oil rig activity has been good but not stellar. Figures provided by Baker Hughes Inc. indicate that 32 rotary rigs were drilling and overhauling wells in California in November. That's nearly a third less than were active in the state a year before (46 rigs). But it's more than were busy in November 2009 (23 rigs).

Local independent oil producer Chad Hathaway said that although recent prices are encouraging, he and other industry players worry about talk in Washington of doing away with the federal Tangible Drilling Cost Tax Deduction.

While critics say the deduction is an unnecessary subsidy, Hathaway said that's just not the case, and any move to ax the deduction would "seriously reduce our drilling programs."

Industrial space

Grade: A

One of the sharpest and most hopeful turnarounds in Kern's economy is taking place in its industrial real estate sector.

Driven for years by food processing and oil field services, interest in the county's industrial properties has surged since 2010. And while oil and ag continue to provide a lot of the demand, so does distribution activity.

In 2012, Caterpillar Inc. opened a 46-acre, 400,000-square-foot distribution center at the Tejon Ranch Commerce Center, which also gained a Dollar General warehouse this year.

Further north, Paramount Agricultural Cos. picked up another 362 acres this year at Shafter's International Trade and Transportation Center, where it intends to improve an industrial park that's already home to heavy hitters such as Target, Formica and Baker Hughes, the oil field service giant.

All of this contributed to strong Kern County occupancy rates, as reported by Colliers International.

Between 2007 and 2010, Kern's industrial vacancy rate shot up from about 2.5 percent to 10.26 percent, Colliers reported. But by the third quarter of 2012, the rate was back down to about 4.5 percent.

Also encouraging is a trend of higher sales prices. Colliers' third-quarter report said Kern's 2012 industrial property sales prices are 20 percent higher on average than they were in 2011.

New construction is up, too. Projects totaling more than 800,000 square feet were under way by the third quarter, which beats every year-end total since 2008, when construction spiked to 1.8 million square feet, according to Colliers.

The brokerage gave due credit to the county's growing distribution and logistics sector, but it also nodded to oil's influence.

"The oil service industry continues to be the shining light in Kern County," Collier's third-quarter report stated. "Projects, such as Schlumberger, Baker Hughes, Halliburton, MI Swaco, Nabors and Weatherford are leading the charge with major expansions projects and new jobs."

Lending

Grade: B

As businesses and consumers begin to find their footing in the local economy, so too do the banks and credit unions that loan them money.

Bakersfield's two locally based community banks, Mission Bank and Valley Republic Bank, experienced this rebound first. Both reported more business lending in 2011 than 2010.

More recently, Mission President A.J. Antongiovanni stated in an email, residential construction loans are on the rise.

"We recently approved a new, $1 million loan to a local builder who had not borrowed that amount for construction since before 2008," he wrote.

But as local credit unions know too well, consumer lending has lagged behind business loans. That's partly because credit unions, which rely heavily on income from car loans, have had a hard time competing with vehicle manufacturers' no-interest lending.

Their fortunes appear to be improving as home mortgage refinancings and purchases -- and even car loans -- start to pick up.

"Consumer lending (mostly auto loans) has been increasing nicely through the end of October," Steve Renock, president and CEO of Kern Schools Federal Credit Union, wrote in an email. "It has slowed in November and December but is still above November and December of 2011."

Renock added that lending to homebuyers has increased steadily in 2012 and "looks to remain strong going into 2013."

Another good sign is that Mission Bank's proposed merger with Mojave Desert Bank N.A. is expected to close next month.

Such a transaction would shore up Mojave, which has struggled with its customers' bad debt, while allowing Mission to expand into eastern Kern and the Antelope Valley.

Health care

Grade: B

Often a single investment is a harbinger of greater business activity to come, even if the project in question is confined to one corner of a much larger industry.

Here we're referring to San Joaquin Community Hospital's upcoming opening of the AIS Cancer Center, a $36 million, 60,000-square-foot building on Chester Avenue.

Already the center has prompted a competitive response from four other local institutions. Perhaps more importantly, it suggests health care as a line of business is attracting capital, not chasing it away.

That's an important hope to stoke, especially in these times of worry over the Affordable Care Act, also known as Obamacare.

No doubt demand for health care will rise as the general population ages and Obamacare promises to expand insurance coverage nationwide. Both trends would seem to bode well for local employment of physicians and allied professionals such as therapists and pharmacists.

Recent state employment figures show progress in that area. Between November 2011 and November 2012, 800 new jobs were created in a category that includes hospitals and ambulatory health-care services -- an increase of 3.2 percent.

But the overarching question is, will greater need for medical services coincide with a proportionate jump in spending?

Consider that nearly half of all U.S. health-care dollars now come from government sources. That's a bit worrisome when you take into account that the government spending on hospitals and doctors is likely to decline under Obamacare.

In light of this dilemma, Bob Severs, president and CEO of Bakersfield-based GEMCare Mercy Memorial Health System, said this shifting supply-demand balance creates an incentive for the industry to take a good hard look at itself.

"The answer," he wrote in an email, "may ultimately lie in how efficient health-care providers can become in the face of the reimbursement issue."

Vehicle sales

Grade: C+

Just a couple of years ago Bakersfield new car dealers faced some of the hardest times they've ever seen.

Layoffs had become widespread at local dealerships. Entire car and truck lots were shut down for good. The fate of Detroit itself was in doubt.

Unfortunately, these things can happen in a really tough economy. But at the same time, the industry knew people's vehicles were slowly wearing out, which only creates pent-up demand for new cars and trucks.

Finally, it seems, that demand may have reached a tipping point.

In September, dealerships across the county sold a total of 1,817 new vehicles, according to Dominion, Cross-Sell Report. That's half again as many vehicles as were sold in the county in September of last year (1,245). But it's also a fifth lower than September 2007's total (2,271).

Clearly local vehicle sales have not fully recovered from the Great Recession. But how soon is that likely to happen?

A peek at consumers' stated purchasing plans provides some insight.

According to Scarborough Survey, 8 percent of Kern adults were planning this year to buy a new vehicle within the next 12 months. A little more than that, 13 percent, stated that they planned to purchase a used vehicle.

Just last year, Scarborough's survey responses looked better, with 10 percent expecting to buy new and 14 percent looking to buy used.

By comparison, the share of Kern adults stating in 2007 that they planned to buy a new vehicle over the next 12 months was 11 percent, while those planning to purchase used stood at 13 percent.

In other words, demand for used cars and trucks looks as strong as it was before the recession, while the county's appetite for new vehicles remains a bit depressed.

John Pitre, general manager of Bakersfield's Motor City Auto Center and former president of the Greater Bakersfield New Car Dealers Association, pointed to two reasons for optimism.

First, he noted that local companies have begun "re-fleeting" their vehicle supplies in advance of reduced tax credits in 2013. Also, financing rates are low by historical standards, which makes buying a new vehicle less expensive than it has been in years.

"Our overall opinion of (2013) is it will be a competitive market with many new product releases," Pitre wrote in an email, "and the pent up demand of some owners with high mileage vehicles, and new or expanding local companies, will make it a very good year to be in the automotive business."

Office space

Grade: B

In another sign of a broad-based economic recovery, Bakersfield's office market is seeing clear signs of improvement as demand grows for professional space in the city's center, northwest and southwest.

For the first time since late 2008, Bakersfield's overall office vacancy rate dropped below 9 percent in the third quarter of this year, according to Grubb & Ellis/ASU & Associates. The rate peaked at 11.23 percent in early 2011; four years earlier it was 4.35 percent.

The overall vacancy rate, though good, belies strong individual performances in 2012.

Professional space at a two-story, 27,777-square-foot office building under construction at 11200 River Run Blvd. is already fully leased, reported Mark Smith, a principal at ASU CRE Partners Inc., which is part of Grubb & Ellis. The property was built on a speculative basis and is expected to open in summer 2013.

Another "big story" in town is the shortage of land in the University Centre and southwest Bakersfield submarkets, Smith said. Of particular note, he said, is Bolthouse Properties LLC's 260-acre Seven Oaks Business Park off Buena Vista Road. That project includes a nearly complete Houchin Community Blood Bank facility, which will soon will be joined there by Hoffman Hospice Care.

Several significant deals closed in the third quarter. Among them, Los Angeles-based Roll Global leased 2,428 square feet at 4805 Centennial Plaza Way, Floyd's Stores leased more than 3,200 square feet at 200 New Stine Road, and Community Action Partnership of Kern leased 4,400 square feet at 5055 California Ave.

Additionally, a Roll Global affiliate recently bought the 213,143-square-foot office building at 10000 Ming Ave. that is fully leased by Bakersfield oil producer Aera Energy LLC.

Retail space

Grade: B+

Few signs of the recession glared as harshly as the empty storefronts that dotted Bakersfield in 2009 and 2010.

Entire shopping centers in the city's northwest and southwest sat empty, or nearly so -- not to mention the gaping vacancies at East Hills Mall.

Things look to be turning around, however. There's even hope that new construction may be justified.

In 2009, the city's retail vacancy rate peaked at 14.1 percent, up from 11.2 percent the year before, said Vince Roche, senior director and principal at Cushman & Wakefield/Pacific Commercial Realty Advisors. By the end of last year the rate had settled to 12.6 percent.

Although Roche hadn't quite finished compiling 2012 figures, he predicted the city's retail vacancy rate would come in at 10 percent or lower.

"That's a pretty low vacancy in the sense that, included in that, is the East Hills Mall, for example," he said.

Even there, at the indoor mall without an anchor tenant, 2012 witnessed progress. Investors finished purchasing all but one major space there, raising hopes that the site will be redeveloped in coming years.

Meanwhile, discount retailers such as Dollar General have moved in across the city, and shopping centers such as The Shops at River Walk attracted new tenants including Eureka! Burger and Chipotle.

Roche said there are indications that the former Mervyns store on California Avenue may well get a new tenant in 2013, as may the former Three-Way Chevrolet lot nearby. He noted that investors have been checking out the former CompUSA store on California Avenue.

The bottom line is that rent prices and property values on Bakersfield retail space are headed upward, which means construction can't be far behind.

"Trends are all positive in the sense that it should lead to new construction in the next two to three years," Roche said.

Renewable energy

Grade: C+

As sources of clean energy and business investment, Kern County's fast-growing wind and solar energy industries are doing exceptionally well. As generators of long-term employment, though, they are merely doing OK.

This point surfaced at the annual Kern County Energy Summit in November, when economist Robert Fountain advised the audience to prepare for a post-boom drop-off in wind and solar construction jobs.

His main message was that the county ought to invest any renewable energy-born cash windfall into Kern's physical infrastructure, highways and schools.

"Don't end up when the boom is over with an environment you can't stand," he said.

It was a harsh assessment that reflects an often-overlooked reality: Renewable energy projects create a good deal of construction jobs -- but after such work is finished, the employment these projects support consists largely of a much smaller pool of maintenance personnel.

Numbers compiled by Fountain, a consultant based in Benicia, show that the combined direct, indirect and induced economic impact of a typical, 100-megawatt renewable energy development is 1,205 employee-years of construction jobs and 36 continuing jobs, as well as $4.6 million in average annual property tax revenue.

That's positive but it's not like the oil industry, which ebbs and flows and isn't particularly clean but employs many more people in Kern County directly and indirectly.

For its part, the county is taking what it can get, and in the process making a name for itself as a place that fosters renewable energy development.

Kern officials helped 11 wind energy projects totaling some 1,650 megawatts move through the approval process in 2011, according to county records. Another five projects that were scheduled for approval in 2012 amounted to about 1,450 megawatts, the records show.

In the solar energy arena, the county has approved development of nearly 2,000 megawatts of generation capacity since 2008, records indicate. Projects accounting for more than 3,000 megawatts are listed as awaiting approval, while facilities that would generate another 563 megawatts have been proposed but their applications are not complete.

While all of this bodes well for construction jobs, there is a possible glitch: the federal wind energy production tax credit. Without action by Congress, it is scheduled to expire at the end of the year.

The wind energy industry has argued that an extension of the tax credit is necessary to continue the momentum in Kern and elsewhere.

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