So far, 2022 has been a year of economic red flags. The Federal Reserve approved a dramatic increase of 75 basis points to combat a colossal 8.6% inflation rate, the highest since December 1981. The NASDAQ is down 3,000 points from the same time last year—and almost 1,000 points since May.
Taken together, many economists agree that these things point to a potential recession looming, just two years after COVID-19 caused its own recession. But the quick turnaround offers insight into how the development picture in Long Beach could be impacted.
After seeing record-breaking numbers for permits issued in 2017 and seeing similar numbers in 2018 and 2019, the city went from around 12,600 permits in 2019 to 10,300 permits issued in 2020—a decrease of over 18%.
Long Beach’s Development Services Department is also concerned about the valuation of those permits, which can reflect the size of projects decreasing during a recession.
“A permit for a high-rise is different from a permit for an addition to a single-family home,” the department’s Director Oscar Orci said. “The value of those permits dropped, which tells the story that even though we issued over 10,000 permits in 2020, they’re largely for smaller projects than what we had encountered in the previous three years.”
Overall value of the permits dropped 30%—significantly more than the actual number issued.
Luckily for Long Beach, though, projects don’t just suddenly stop when economic factors are looking grim and new permits aren’t being issued. When banks commit funding to a project that takes multiple years, they can’t simply pull out of their obligations if they see a recession coming.
“It’s not as though when you’re in the middle of a development, even if a recession hits, you can just stop,” Eric Sussman, adjunct professor of accounting and real estate at UCLA, said. “You’re already out of the ground, you’ve gotten commitments for financing and contracts with subcontractors presumably, so you move forward with the development and finish where the economy is.”
This system has allowed for development plans to continue, even through the pandemic. Projects like SilverSands—a mixed-use development on Cherry and Ocean—and the Aster on Broadway and Long Beach were projects that started prior to the pandemic are still moving forward, albeit slower than originally planned due to COVID-related delays.
“Those are projects that were slowed down, but they have their financing, and now they’re moving forward,” Orci said. “We have a lot of that activity here in the city.”
Still, according to Richard Green, director and chair of the USC Lusk Center for Real Estate, the housing market typically will be the first sign of recession—and of the recovery that follows—while commercial projects tend to lag behind because of the length of the process to approve and construct such developments.
Long Beach is not immune to this trend. Development is still able to move forward, Orci said, but the complexity of larger housing and major commercial projects made those options unattractive during the recession.
“We did see a transition to those smaller projects that have potentially less value,” Orci said. “One of the realities of the world is the guy that’s replacing your roof, as an example, needs to feed his family. And he’s not going to slow down because of COVID.”
Looking forward, it’s hard to predict exactly when the next recession will hit—and that’s because the factors that go into a recession are complex. The National Bureau of Economic Research’s definition maintains that “a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months,” but it uses a swath of criteria to determine when exactly those conditions have been met.
For Sussman, the technicalities may be beside the point.
“We have already experienced and are going to experience a significant slowdown in consumer spending, and that is going to result in a significant slowdown in GDP growth,” he said. “Whether we slip into a recession and go negative or it’s anemic and there’s one or 2% economic growth, you’re way behind inflation, so the real growth is negative.”
As for whether or not long-term losses for the economy are coming, Green and Sussman both project that there is a strong possibility for recession in the next year. But Sussman said trying to calculate the exact probability is not productive.
“A couple of weeks ago Goldman Sachs were handicapping the odds of recession at 35%. OK, I could say it’s 68.7%. It’s ridiculous,” Sussman said. “No one can predict a recession with certainty, but that’s not exactly the right question.”
Whether there is an official recession or economic growth continues to stagnate, this isn’t the first time Long Beach has faced such adversity. Orci has worked through multiple recessions over his over 30 years of experience, giving him the experience to know what tools Development Services will need to tackle another recession.
The department is not reliant on the general fund, instead generating money through its services. That has allowed it to create a reserve fund to help protect itself from shortfalls.
Monitoring and forecasting projects has also become an important part of Development Services’ routine to ensure the city is prepared for a rainy day.
“We monitor our permit activity, our valuation activity, our revenues and expenses on a quarterly basis,” Orci said. “There’s a lot more careful review.”
On the side of projection, Orci said that the city takes a modest approach to ensure that money is available during the inevitable stretches of economic struggle.
“It’s foolhardy to think that there won’t be [tough periods], because that’s the nature of the economy here in the United States,” Orci said. “We are very conservative in our forecasting, so that we’re ready for the next recession if and when it hits.”