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UC Berkeley report explores future of California as state's prosperity begins to fade
17 May 2001

By Kathleen Maclay, Media Relations

Berkeley - As California's prosperous glow tarnishes, a new report from the University of California, Berkeley, warns that the state could face sharply escalating unemployment rates, a leveling off or decline in home prices, rising office vacancies and reduced construction over the next two to three years.

These are the conclusions of professor Dwight Jaffee and California economist Cynthia Kroll, both of the Fisher Center for Real Estate and Urban Economics at UC Berkeley's Haas School of Business.

In the center's spring 2001 research report, Jaffee and Kroll point to the vulnerability of California, and particularly of the San Francisco Bay Area, as the U.S. economy slows. Looking at the state's experience in the recessions of 1975, 1982 and 1991, they conclude that a two- to three-year adjustment period is likely before the state resumes expansion.

The researchers say that the major stock price adjustments that occurred earlier this year reflected real changes in the economic factors driving California's economy. Driven by expansion of dot-com and high tech sectors, computer programming employment alone grew by more than 90,000 jobs in 2000, with much of this increase found in the San Francisco Bay Area.

Even under a soft-landing scenario, the researchers say the bursting of the dot-com bubble and subsequent lay off announcements leave this sector and the San Francisco Bay Area economy- vulnerable.

The real estate market will also feel the effects in coming months, and the impact on the office real estate market is likely to be substantial. Office rents are already dropping. Rents could decrease this year by at least 10 percent in San Francisco's downtown area and perhaps as much as 50 percent in the areas most heavily affected by the dot-com bust. Rising vacancies, on the other hand, may be filled by companies previously forced out of the market by sky-high lease prices, and now looking at reduced rates.

The residential real estate market will also be affected by the economic adjustment. Kroll and Jaffee expect the high-end residential real estate market, previously fueled by stock market gains, to contract the most as fewer buyers seek luxury, overpriced homes. Lower and mid-range markets will see more moderate price adjustments.

Based on past history, the researchers maintain that job losses and declining real estate prices could continue for two to three years. However, they say that in the longer term, both Silicon Valley and California as a whole have shown economic resilience and the ability to resume expansion after a slowdown or recession.

"The report should not be read as a prediction of doom for California in general, or for the San Francisco Bay Area in particular," say Jaffee and Kroll.