by Gary H. London

To be frank, the economic recovery seems to be occurring, but it is like a patient coming out of a major life-saving operation in the recovery room: She is still semicomatose, with the prognosis of a prolonged wake-up period ahead, and then an even longer recovery until she mends in full.

Consider this: 2010 employment growth in San Diego County was better, but still only an anemic 6,000 jobs were added. This was a good year in comparison with the 100,000 jobs lost in this region in 2008-2009.

There is good news ahead, according to locally based but nationally acclaimed economist Lynn Reaser of Point Loma Nazarene University.

“In 2011, I project that job growth will add 18,000 jobs,” Reaser said.

In gross domestic product terms, she sees an increase, expressed in the change from the fourth quarter of 2010 of 2.5 percent to a projected 3.4 percent in GDP growth for 2011.

This is significant because it is jobs that drive the economy. It is jobs that attract population who come here to fill them. It is jobs that churn money which is spent on consumer items. And it is ultimately jobs which will reframe the housing market.

The Housing Market Recovery

So it is with housing that we will start. Both sales and production numbers are bad. Very bad. Last year there were only 3,800 new building permits. During the past three years total permits were 12,103. This is a fraction of the 15,000-plus units normally built each year and required in a decent economy.

Housing prices are down overall, to $510,000 on average. While statistically down 35 percent from its 2005 peak, I am convinced that this often quoted statistic is completely meaningless. It measures only what has been selling. Practically all of the sales of the past four years have been distressed or “have to” sales. When the “want to” sales return, this wipeout will turn into a windfall.

It is in the housing sector that I see the brightest lights (at the end of that long proverbial tunnel) now in sight.

This may sound strange in light of the fact that monthly housing sales are still hovering in the 2,500 to 3,500 range, on any given month often less than half their normal rate. That, coupled with the anemic housing start numbers, suggests an industry in depression.

Well, the housing industry is in depression. Most jobs in the production sector have been lost, companies have folded, and production is practically nonexistent. Yet, once the economy gets moving, one has to ask, what exactly do we have?

The answer is that we will have resurging demand for new homes. While it is true that at the present supply/demand snapshot, there is a theoretical six months of supply on the market, the emphasis has to be on theoretic, because this inventory can get absorbed much quicker in a recovery.

This will lead to the climate of distressed sales being replaced by a climate of nondistressed sales. The sellers just don’t have to sell, so they will not likely take lowball offers. The offers and the closings will start to reflect this, as will the statistics of increased housing values.

Eventually, new production will be required. This is more complicated, because it takes entitlement, something which requires lead time and expertise. And new companies must be formed to build those homes. And new expertise will be needed because most of those homes will be condominiums, not single-family homes in a region of depleted land resources. So, all of that delay will reignite the upper price movement.

Help From the Banks

Of course, the banks have to cooperate. Yes, the interest rates are low and are likely to remain so, but good luck qualifying. The reality is that today most people can’t get a loan.

That will change — eventually. The inherently conservative banking sector will need some time to recognize that it is time to emerge from the foxholes.

So the year 2011 is likely to be the second year of a transition from recession to prosperity. The numbers will be better. Excellent, unfortunately, is still some years away.

Even with that prognosis, we San Diegans are in a lucky place. The ongoing economic diversity of our job clusters and drivers — technology, pharmaceuticals and communications — are now solidly in place to drive an earlier recovery than is likely to be the case in other regions around the nation that are not as diversified and lack the right kind of industries.

A Big Recession

What we are missing is patience. What has been interesting about this recession is not so much that there was one. Rather, it was the confluence of events that made it a whopper. Starting with the subprime crisis, which possessed a contagion that shook the financial services world, the event really got scary.

Then came the demographic reality that the baby boomers were getting old and couldn’t easily shift careers; coupled with the even larger Generation Y’s who were just entering the work force and essentially looking to replace the boomers. That equals a giant unemployment figure, and an even bigger under-employment figure.

Another part of our economic growth reality lies in the fact that technology has replaced people. Many jobs shed in the recession won’t be returning. Instead they are being replaced by the virtual, robotic or gigabits.

Rapid Changes Make Major Impact

What is important about all of this is that it was going to happen anyway. The impact of the recession is that the changes in our economy came rapidly, deeply and shockingly in a relatively brief period as the economy compressed, rather than stretched out over a couple of decades as might otherwise have been the case.

Either way, jobs would have been lost, careers would have ended and many regions and their inhabitants would have been impacted.

There was also a psychological impact associated with such a cataclysmic economic event. Consumers abruptly stopped spending. Now they will be reluctant to start spending again, even if they begin to regain the resources.

On the flip side, the companies which make the consumer items, although mostly in pretty good economic health and with the money to spend to start churning out those items again, are reluctant. This is an economic cat and mouse game between supply and demand. Its roots are in psychology and behavior. People have to believe that it is good to spend again. Companies have to believe that higher expenditure levels, as we are now experiencing, are sustainable.

Commercial Sector Fallout

This is a subject I have written about often throughout the last couple of years — that there is real estate fallout to all of this change. We won’t need as much new space for people to work or shop because technology is causing a big shift in space demand and companies and retailers are onto this as they downsize. Moreover, there is a lot of vacancy in our market already:

• Office vacancy: 16.7 million square feet, or 14.9 percent;

• Retail vacancy: 7.5 million square feet, or 5.3 percent.

Most of this space has to be filled to get back to some sort of stabilization. This is not a small chore.

Consider the absorption numbers:

Office annual absorption average during the past three years has been 71,000 square feet. However, a “normal” annual absorption by historical standards reflected in the 2000-2008 period was 1.4 million square feet.

Retail annual absorption average during the past three years has been negative 536,000 square feet. However, a “normal” absorption, measured by historical standards for the 2000-2008 period, was 727,000 square feet.

The really scary part of all of this is that in both the office and retail sectors the name of the game will be adaptive reuse — essentially the market acknowledging that there is little practical use to trying to fill up an aging office building or retail center. Instead, the structures are demolished or go through a major face-lift for a new purpose.

This is the process that should provide tons of opportunity to the commercial sector.

What I sense is that the new variables will present opportunities and be very exciting. “Green” buildings are a must. Technology must be better incorporated with physical structure. Vertical development and infill, as opposed to suburban development, will be the focus of developers.

And there will emerge a whole new set of players in the development and investment game. With some luck, 2011 should be the year when all of this experimentation in the marketplace begins.