Section Title
Road to Recovery: Sacramento awaits next growth wave
January 17, 2010
STATE GOVERNMENT, DEVELOPMENT REMAIN AREA'S FOUNDATIONS
- Today's story is the first in an ongoing series, Road to Recovery, reported by The Bee in partnership with Capital Public Radio. Look for stories during the next several months that reveal the industries, companies and people likely to pull the region from recession and provide new jobs.
- In Monday's Bee and on Capital Public Radio, we will report the potential for growth in green-tech jobs.
Behind emerald-tinted windows in a Folsom office building, a company called SynapSense Corp. has crafted a breakthrough: a wireless green-technology device that helps customers such as Facebook and Yahoo slash their energy usage.
Co-founder Peter Van Deventer calls the product "the next big wave." Some Sacramento business leaders hope pioneers like SynapSense can help lift the region out of an epic recession, and diversify its economy beyond the traditional mainstays of government and suburban development.
But in reality, Sacramento's next wave might look like more of the same.
SynapSense's neighborhood on Iron Point Road is a sea of big-box stores flanked by residential cul-de-sacs named for pop musicians. Even in a weak economy, the real estate machine grinds on: Palladio at Broadstone, a major open-air shopping mall down the street from SynapSense, is set to open this fall. Folsom officials are working to annex thousands of acres on the other side of Highway 50, setting the stage for the next wave of growth.
"The housing industry is really what pulls the economy out of recession," said Russ Davis, a vice president at Elliott Homes, which has developed much of the neighborhood. "Always has, probably always will."
There's no mistaking the power of development and real estate in Sacramento. Not only did housing construction account for much of the job growth locally during the past decade, it spread its tentacles throughout the economy – driving demand for retail, restaurants and services.
Despite the recession, with thousands of construction jobs lost, development remains a major component of the economy, employing more than 55,000 people in the region.
But real estate development is a volatile business subject to bubbles and bursts, and Sacramento needs to find more stable long-term sources of job creation, leaders say.
The building binge of the early 2000s has left Sacramento with a significant economic hangover. Although the market seems to be bottoming out, analysts say construction activity in Sacramento won't resume in earnest for another couple of years or so.
That's not to say the near-term future is without glimmers of recovery. Public money is driving some substantial construction work, from the new terminal at Sacramento International Airport to the early phase of the overhaul of downtown's railyard. Federal stimulus dollars are being poured into roads and highways.
Other industries are showing strength, too. Thanks to an aging and growing population, Sacramento's health care industry has been largely inoculated against the recession. It has added about 3,000 jobs in the past two years and employs more Sacramentans than state government (89,000 vs. 82,000). Analysts expect steady growth going forward.
Health care will be "the bright spot for the region," said Ryan Sharp, head of the Center for Strategic Economic Research, a Sacramento think tank.
Public sector payrolls cut
If health care is the bright spot, state government is the black spot – at least for the time being. Facing a $20 billion deficit, Gov. Arnold Schwarzenegger is seeking $1.6 billion in personnel savings in the upcoming fiscal year. He has proposed replacing "Furlough Fridays" with 10 percent pay cuts. There could also be layoffs or attrition via an executive order.
The state's problems are rippling through the rest of the public sector. Local governments and school districts, starved for cash in part because of reductions in state spending, have imposed extensive layoffs.
No one's suggesting Sacramento turn its back on government, though. Despite its ills, it remains a solid economic anchor long term. "It will eventually turn around," said Chris Thornberg, an economic consultant in Los Angeles. "The budget will start growing again."
For now, though, government's troubles are contributing to an acute job shortage that has driven the region's unemployment rate to 12.4 percent.
Realty boom went bust
Compounding the pain from government cutbacks is the severe contraction in real estate, a sector on which Sacramento had grown increasingly dependent during the housing boom.
It's an issue that in some ways has been building for years. During much of the 2000s, significant chunks of the economy essentially went into a stall. The tech sector, for instance, shed jobs following the implosion of the dot-com industry.
But it was hardly noticeable as thousands of new jobs were generated in real estate, construction and related fields. Sacramento rode the real estate wave like few communities in the country: For a while, one-third or more of all new jobs came from development. The property boom fed an explosion in retailing.
"So much of what drove Sacramento was growth itself," said Mark Friedman, head of Sacramento developer Fulcrum Property. "The very act of building new neighborhoods and new buildings created job growth, which increased demand for shops and restaurants."
Now that the bubble has burst, many policymakers say Sacramento needs a new direction.
"We can't mistake the next subdivision as our economic development strategy," said Mike McKeever, executive director of the Sacramento Area Council of Governments, a regional planning agency.
Green-tech firms sought
The region's business leaders are casting about for tech-related growth industries. One promising candidate is medical devices. Above all, there might be a golden opportunity in green technology, a field that takes in such areas as solar energy and biofuels.
The reasoning is that green-tech companies will want to locate in Sacramento to gain access to the state policymakers and elected officials in charge of California's various climate-change and renewable-energy mandates.
While there's no official census, Bee research and a survey by the Sacramento Area Regional Technology Alliance suggest there are at least 70 green-tech companies doing business in greater Sacramento. An advocacy group called Next 10 says the industry employs 13,000 workers in the area. Although some companies have fallen by the wayside, early success stories include SMA Solar Technology and Mecasolar, two European companies that planted their U.S. headquarters in the Sacramento area.
"Half of everything we're doing is clean tech, and the bulk of that is solar-related," said Bob Burris, deputy director of the region's nonprofit business recruiter, the Sacramento Area Commerce and Trade Organization. Last year Burris racked up thousands of air miles visiting green-tech conferences from Anaheim to Munich in an effort to lure companies.
Some of the most promising companies are homegrown. SynapSense was created when Van Deventer, a former employee at Intel Corp. in Folsom, teamed up with Raju Pandey, a computer scientist at the University of California, Davis, with expertise in the field.
Their main product is a wireless temperature sensor, about the size of a deck of cards, that could be used to regulate electricity consumption in energy-hungry data centers.
Though Van Deventer won't discuss the company's size, outside sources say SynapSense employs 40 workers. The company shows up on a couple of national "hot" lists of up-and-coming green-tech companies. He said building a green hub in Sacramento is possible.
"There's no reason Sacramento can't be there," he said.
Slow growth expected
Yet history suggests it won't be easy. The tech sector, despite the presence of big employers like Intel and Hewlett-Packard, has declined in recent years. The region largely missed the biotech bonanza even though Davis was home to one of the pioneering companies, Calgene, which was taken over by Monsanto.
"We're looking extensively at the green-tech sector as being the next new thing, the thing that's going to goose the economy," said Jock O'Connell, a Sacramento economic consultant. "It's not going to happen overnight."
That suggests that once the recovery begins, real estate development will once again dominate much of the economic landscape.
"Housing clearly plays a part – I think it always does," said Chris Cady, president of the regional division of giant home builder Pulte Homes. "That's going to be a large catalyst."
That doesn't necessarily mean a repeat of the last housing boom. Tighter lending conditions will mean construction of homes and commercial buildings will proceed at a more orderly pace. Builders will be more conservative.
"Projects will be built on the basis of their fundamentals rather than on the basis of cheap money," said Friedman, the Sacramento developer, whose family owns Arden Fair mall.
New houses will be smaller and more densely packed. There will be more infill development, including the massive overhaul just beginning at the former Union Pacific railyard north of downtown Sacramento.
But there will be plenty of suburban development, too.
"We have a lot of lots available in South Placer, a lot of lots available in Elk Grove, a lot of lots available in Rancho Cordova and Natomas, when they get their flood stuff squared away," Cady said. "That's the next wave."
By Dale Kasler
dkasler@sacbee.com
Bee staff writer Jim Downing contributed to this report.
Read his blog on the economy, Home Front, at www.sacbee.com/blogs.