Rent Sense: The Golden State
By: Neil Fjellestad and Chris De Marco FBS Property Management
Historically California will always be “golden” referring back to the California Gold Rush (1840-60) when gold was discovered near Sacramento and tens of thousands people flocked here seeking wealth. It would seem that the emphasis these days is how many people are leaving the state seeking better employment opportunities, affordable housing and/or an enjoyable retirement.
Meanwhile, headlines tell us our prisons are filled beyond capacity, our social services are overrun by those here illegally, our education systems are expensive failures, our governments at the state and local levels are held captive to public pension debt while our infrastructure remains in aging disrepair. We are reminded every time a business or an industry is threatened by rising costs of doing business here, how broken our legal system has become and how antagonizing/non-productive regulators have become in a seemingly singular purpose to justify their existence.
So it would seem to be a valid question- Is California still the golden state? More to the point, does it make sense to own and operate rental property in California? First, let’s set the stage by indicating that we have been in real estate-related businesses for more than 46 years. I am home grown and Chris is a Chicago transplant. Our combined business experience has taken us throughout the U.S. spending time with people and property in at least 28 other states. When I graduated from SDSU I started as a broker with a San Jose-based real estate investment, brokerage and management company that was establishing a second office in southern California. During my first decade in business I regularly walked income property and talked to individual and institutional investors from one end of this state to the other. So, if you detect a bias please know it is an informed bias.
Is California Shrinking?
By 1965 California became the most populous state in the U.S. and with 39 million people in 2015 we still are and by a huge margin; currently home to 8 of the 50 most populous cities in the country. It is true that we are currently growing at a slower pace but economically the gap between our state’s gross product and the rest of the nation is expanding; 43% larger than #2 Texas and more than #3 New York and #4 Florida combined. California provides nearly 13% of the U.S. economy which comfortably dominates any other in the world. Reality check- if our state is being ranked with the world’s leading economies it is virtually a dead heat with #7 India.
Is California Losing Its Edge?
We need to realize that nearly 750 companies including some of the largest and most profitable private and public entities have been founded in California. Currently, there are over 450 such companies headquartered in California. Again, it is the margin between California and every other state that is remarkable. To make this more real take a moment and think of an industry and bring to mind the top competitors in that industry. Some examples to get you started – Android or Apple; Jamba or Naked Juice; eBay or Instacart; Del Monte or Dole Foods; Health Net or Kaiser; Adidas or DC Shoes; Bechtel or KB Home; See’s Candies or Ghirardelli Chocolate; Yelp or Snapchat; Western Mutual or Farmers Insurance; Levi or Gap; Safeway or Trader Joe’s; GoPro or YouTube; Netflix or Pixar; Lucasfilm or Lions Gate; Cheesecake Factory or Fleming’s Steak House; 24 hour Fitness or Jazzercise; Facebook or Pinterest; Instagram or Google; Intel or Oracle; Cisco or Intel; Qualcomm or HP; LinkedIn or Twitter; PayPal or Craigslist; Northrop Grumman or General Atomic; Jack-in-the-Box or Taco Bell; Agilent Technologies or Adobe; Pandora or iTunes; Illumina or Amgen; Samsung Media or Yahoo; Isis Pharmaceuticals or 23andMe. We could keep going. Some are household names while others are unfamiliar to you. Some are subsidiaries of multinational giants while others are upstarts and the landscape changes constantly though mergers, buy-outs and spin-offs. Here’s the takeaway. These are all California companies that are at the leading edge of their respective industries.
Now add to this the California universities that are connected to these industries and the immigrating international students that want to change the status quo and are attracted to this connected system as their method of choice. “In a widely followed ranking of world universities that emphasizes the sciences, six California institutions were ranked among the top 20. Stanford, Caltech, UC Berkeley, UCLA, UC San Diego and UCSF all made the list.
The 2015 Academic Ranking of World Universities was just released by the Center for World-Class Universities at Shanghai Jiao Tong University, a public research university located in China. There are many other rankings, but this one is considered one of the most authoritative, especially for the sciences. The U.S. leads the list overall, accounting for 16 of the 20. The United Kingdom boasts three, and New York and Massachusetts each count two. But California stands head and shoulders above the rest of the United States and the world with nearly a third of the top institutions.
California has a history of public and private investment in higher education, openness to immigrants and an innovation economy. As a result those bright minds have real opportunities for future employment and entrepreneurship. From Silicon Valley to Hollywood to San Diego’s biotech mesa, companies are learning from the state’s world-class universities and eagerly employing each year’s graduates.” California’s Amazing Worldwide Lead in Higher Education, an opinion piece by Chris Jennewein.
Is California in Crisis?
While there is no doubt that we are in crisis all around us we should add some perspective. In many cases we are facing challenges similar to other states but in proportion due to our relative size and/or growth momentum. California consumers are often more educated, more travelled, demanding and impatient. Such consumers require more value, cost-benefit and faster fulfilment, delivery and service after sale. In a social context we are facing big problems: the cost-benefit of government programs at all levels; delivery of public health and safety; multi-cultural and generational approaches to career, education, immigration and transportation. Then there are essential costs that stayed fixed and dependable for so long such as energy and water resources, environmental considerations, infra-structure and housing alternatives that no longer can be taken for granted.
The stage is set to confront difficult problems needing honest discussion among rivals, strategies that include adversaries, and determination to serve interests other than our own. The good news is that such problems attract the best minds, encourage innovative solutions and create new opportunities. Big problems pave the way for discovery, bi-products and leadership. This is an ideal lab for scientists, engineers and entrepreneurs. Due to the dominate position we hold and the upside potential we enjoy, forward is the only choice for #1.
What’s the Urgency?
We cannot procrastinate or cling to nostalgia for yesteryear. We can look forward with an acceptance of our state’s singular position in the country and the world. We must conform to our duty to lead. We must recognize the challenges of the present as a means to the strategic result of maintaining and extending our success into this new millennial century. Then, the path forward will include vision, devotion to purpose with willingness to risk capital and careers.
As the saying goes – the only thing to fear is fear itself. We need to re-discover our future. California has thrived on diversity – geographically, culturally, socio-economically, politically and ideologically. Some things seem urgent to a few while other essentials are needed by all. We must sort out the difference and manage our expectations realistically.
“Rent Sense” is an informative series for Rental Owners or those looking to become R.E. Investors. This monthly insight is brought to you courtesy of Neil Fjellestad and Chris De Marco, Principals of FBS Property Management in San Diego, CA. The goal of “Rent Sense” is to educate individuals with correct expectations for investment performance; inform about trends and concerns for Rental Owners; give thoughtful consideration of “best practices” now possible due to technology advances being made by our company and other industry leaders. We are investors, responsible Rental Owners and entrepreneurs that have started, grown and sold a dozen real estate-related businesses. Currently FBS operates rental properties in 69 zip codes within southern California. Now in our 5th decade we report to 800 clients. All of this daily exposure provides us with a variety of topics to discuss. Neil, Chris and the rest of the FBS team is available at 619-286-7600 or www.fbs-pm.com.