San Diego Is on the Rise With Help From Developers, Tech

The region's real estate boom, diverse industries defy a slumping state economy

January 2 2003

San Diego got pounded during the early-1990s recession. But the hammering lately is the sound of new construction.

While the state and national economies stagnate, California's second-largest city is experiencing a residential renaissance. Developers have completed more than 2,000 condos, lofts and apartments downtown over the last three years and are planning 9,000 more in the next five years.

Housing is hot in the rest of the county as well, with the median price for existing single-family homes up 28% in November from the previous year — the biggest increase in California, according to property information service DataQuick.

But it's not just real estate that has made San Diego a standout in a slumping California economy.

The county boasts one of the state's lowest unemployment rates, at 4.1%. Its tourism and technology sectors have held up better than those in other parts of the state. And although its employment growth has slowed markedly since the height of the economic boom, San Diego County is one of the few regions in California that is still adding jobs.

Payroll employment increased by 22,400, or 1.8%, through the first 11 months of 2002, with most of that growth coming in services, according to the state Employment Development Department. By comparison, neighboring Orange County lost 4,000 jobs over the same period. Among major regions in California, only the Riverside-San Bernardino area did better, with 2.4% employment growth.

A laggard during the last recession, San Diego is "really one of the bright spots" this time around, said Cheryl Mason, an analyst with the state employment agency. "It's a pretty diversified economy now."

What a difference a decade makes.

Like Los Angeles, San Diego saw its aerospace-dependent economy crash in the early '90s when the federal government whacked defense spending. More than 20,000 well-paying aerospace jobs vanished from the San Diego area within a few years, according to University of San Diego economist Alan Gin.

But unlike L.A. County, which still hasn't regained all the jobs lost during that period, San Diego more than made up for its defense losses through growth in high-tech industries, including biotechnology, pharmaceuticals, software and computer services.

A federal Small Business Administration study of San Diego's high-tech makeover points to a variety of factors behind its success. For starters, the region's entrepreneurs have demonstrated an ability to find commercial uses for defense technology.

The founders of San Diego-based wireless company Qualcomm Inc., for example, got their start doing communications work for the military. Composite materials developed for the aerospace industry helped propel the region's sporting goods makers, including Carlsbad-based club maker Callaway Golf Co.

San Diego's research and academic institutions also have nurtured entrepreneurial activity. In 1979, two UC San Diego professors started Hybritech Inc., a medical-test manufacturer credited with sparking the biotech industry in the area.

But even as some of the transformation was organic, much was deliberate. Organizations such as the San Diego Regional Economic Development Corp. and a UCSD program called Connect rallied the community behind the high-tech vision and brought key players together to see it through.

"They got everyone focused on high-wage clusters they felt would be attractive to San Diego," Gin said. "To a large extent, it worked."

To be sure, San Diego's high-tech sector has been rocked by the same collapse in business spending that upended Silicon Valley and tipped the nation into recession in early 2001.

The county's telecom workforce has declined as companies such as Qualcomm and Ericsson have shed employees in the face of slumping demand. Software maker Peregrine Systems Inc.,

the computer arm of Sony and semiconductor firms Mindspeed

Technologies, LSI Logic Corp. and STMicroelectronics Inc. also have cut their San Diego payrolls, reflecting the broad sweep of the high-tech downturn.

Nor have San Diego's biotech firms been immune to downsizing as venture funding has ebbed.

"We're starting to feel the slowdown," said Rich Mejia, head of Ernst & Young's regional heath science practice. "There are too many firms competing for the same research dollars. We're bound to see some consolidation in the next 12 to 24 months."

Still, experts say San Diego's diverse cluster of high-tech industries and lack of huge corporate headquarters have insulated it from the kind of deep downturn being experienced in the Bay Area.

"San Diego wasn't nearly so concentrated in the Internet and e-commerce as Silicon Valley and San Francisco were when the investment bubble popped," said Steve Cochrane, director of regional economics at Economy.com. "Areas such as biotech have been much more steady."

San Diego's tourism industry also has survived the economic slump and post-Sept. 11 air-travel jitters better than other vacation hot spots. Although steep declines in business travel and international visitors have hurt destinations such as San Francisco, San Diego's bread and butter is leisure travelers who live within driving distance.

Total visitor spending for 2002 was expected to dip just 0.5% to $5.1 billion, with the tourist head count down slightly to 26.4 million, according to the San Diego Convention and Visitors Bureau. The latest tally of hotel and amusement park employment shows a 3% annual increase. "We're nowhere near as reliant" on air travel as are "some of our competitors," said Sal Giametta, spokesman for the convention bureau.

Even the defense industry, San Diego's Achilles' heel in the early 1990s, is lending stability this time around.

Concerns about homeland security and a looming conflict with Iraq are expected to keep the federal dollars flowing in the near term. The armed Predator drone that blew up six Al Qaeda suspects in Yemen in November was designed in San Diego by General Atomics Aeronautical Systems Inc. The U.S. employed the Global Hawk reconnaissance drone — made by Northrop Grumman Corp.'s San Diego-based unmanned systems unit — to aid in the hunt for Osama bin Laden in Afghanistan. And National Steel & Shipbuilding Co., a San Diego subsidiary of General Dynamics Corp., is building cargo ships for the Navy.

Meanwhile, federal spending at the Marine Corps' Camp Pendleton, Navy bases and other military facilities pump an estimated $11 billion annually into the local economy. In contrast to defense contracts, those bases and their personnel have proved a stable source of funds.

"The military and visitor industries act like a floor for the local economy," said Marney Cox, chief economist for the San Diego Assn. of Governments. "They keep us from falling too hard or too quickly during the down times."

The real estate sector also is cushioning things. Hemmed in by the Pacific Ocean to the west, Camp Pendleton to the north, mountains to the east and Mexico to the south, San Diego has little open space. Thus developers have turned inward, sparking an unprecedented building boom downtown.

Developer Keith Fernandez, president of Intracorp San Diego, says it's a far cry from the last recession, when construction screeched to a halt and the center of the city was the last place anyone would want to live.

Perceptions started to change by the late '90s. Successful retail and entertainment projects such as the Gaslamp Quarter showed that people had an interest in urban living. Demand for housing soared as San Diego's economy revived.

Fernandez decided to test the market with a 57-unit condo project priced from $190,000 to $500,000. The development, known as 235 on Market, sold out before it opened in August 2001.

"We had three buyers for every unit," Fernandez recalled. "That's when we knew we were on to something."

Intracorp has since completed two more downtown condo developments, and those 174 units have likewise all sold out, at prices ranging from $256,000 to $600,000. The company has four additional projects planned, even as competing developers rush to get into the market.

Fernandez's biggest worry? "I'm scrambling for more sites," he said.

Some economy watchers say San Diego's red-hot housing market may be its biggest liability. War or a rise in interest rates could curb demand for all that trendy downtown housing. And with 28%-plus appreciation pushing the median price for an existing home to $353,000 in November, San Diego tops every bubble watcher's list for potentially overheated markets.

"If any kind of uncertainty creeps in, I think we'd see the real estate market come to a halt rather quickly," Cochrane of Economy.com said.

Others say that although values can't keep increasing at the current blistering pace, prices are likely to keep rising, albeit more slowly, given San Diego's solid fundamentals.

"Unemployment is low and we're still creating jobs," economist Cox said. "That's a pretty good place to be right now."