As real estate investors, we always want to guess what the future will bring so we can position our budgeting and assumptions and better manage our investments. In an effort to prepare investors I have abridged a recent update regarding the Oregon economy published by the Oregon State Department of Administrative Services, Office of Economic Analysis, released November 14, 2018. I have highlighted text that I think is particularly important.
In short 2019 looks great for Oregon real estate investors, but the demographic and growth picture is slowing and changing. This overview will be helpful for both commercial and multifamily investors. Please read the detail below.
Oregon’s expansion continues to outperform the typical state due to our industrial structure and ability to attract and retain young, working-age households. That said, job growth continues to slow as the regional economy transitions down to more sustainable rates. Oregon today is growing just a notch faster than the average state. This slowdown is not driven by one or two industries in particular but has been broad-based across different sectors and regions within the state. Encouragingly, job growth remains strong enough to keep up with population gains and to absorb the workers coming back into the labor market.
In the near-term economic outlook, our office’s forecast calls for ongoing, but slowing growth in the coming years. Like most national forecasts, Oregon employment growth in 2019 will be above potential or more than the amount needed to keep pace with population gains. In 2020 job growth slows to around potential, while in 2021 and 2022 growth slows to below potential.
This forecast is not a recession hedge. It is more in-line with slower growth due to an economy reaching capacity and running into supply-side constraints.
In the event of a true recession, and once economists can see the whites of its eyes in the data, the outlook will be downgraded accordingly. Right now, this is simply not the case. Leading indicators and the data flow remain healthy. The outlook calls for ongoing growth.
Economists are articulating the risks to the outlook. There are no clear bubbles, or imbalances in the economy today. As such, this has many forecasters thinking the next recession will be different than the last two where there were clear issues in overinvestment in technology in the late 1990s and housing in the mid-2000s. Many are pointing at the 1990 recession as a plausible past example.
As a case study, the 1990 recession in Oregon is unique. It is the only post-World War II recession in which Oregon’s job losses were less severe than the nation. The question then becomes, is this replicable? Unfortunately, the answer is likely no. Back in 1990, Oregon’s natural resource and manufacturing industries were hit every bit as hard, if not more than their national counterparts. This is typical during downturns where Oregon’s goods-producing industries are hard hit and help drive Oregon’s larger losses.
However, the sectors that outperformed the nation were largely consumer-driven, and population-led industries. Construction in Oregon during the early 1990s really didn’t experience job losses, nor did retail. Now, these industries flattened out and didn’t grow for a couple of years, but overall, they did not see declines like one would expect during a downturn.
One reason for the strength in these sectors is migration flows into Oregon at this time were as large as the state has ever experienced. Typically, people hunker down during recessions and do not move unless in search of better job opportunities elsewhere. This pattern is clearly seen in Oregon’s experience in the early 1980s, early 2000s and again in the aftermath of the Great Recession. But not so in the early 1990s. The large influx of new residents offset some of the underlying economic declines, helping propel Oregon forward faster than in the typical state.
In the event of a future recession, migration flows like those seen in the early 1990s are unlikely to repeat. It is possible, however, 1990 is the outlier and not the typical recessionary pattern of population growth. When combining slower population gains with hard-hit goods-producing industries, a generic recession forecast for Oregon would include larger losses than those seen in the typical state.
All told, and despite the higher risk of recession over the next few years, the current outlook for Oregon remains positive. The labor market is tight, helping to drive wages and overall household incomes higher. As the recently released 2017 Census data shows, the feel-good part of the business cycle is here. It only comes when the economy is at or near full employment. More Oregonians are working but an even larger gain has been seen in the number working full-time. Additionally, poverty rates continue to fall while employment rates rise. These improvements are seen across all racial or ethnic groups and all age cohorts in recent years. Oregon’s economy is expected to continue to hit the sweet spot between now and whenever that next recession comes.
Oregon’s Labor Market
The Office of Economic Analysis has examined four main sources for jobs data: the monthly payroll employment survey, the monthly household survey, monthly withholding tax receipts and the quarterly census of employment and wages.
Right now, all four measures of the labor market are improving. Jobs are being added, albeit at a slower rate. Wages are rising, both in aggregate and for each worker. The unemployment is under what would historically be considered full employment for Oregon.
No question, standard measures of the labor market like the unemployment rate suggest the Oregon economy is healthy. However, the underlying figures behind the headline suggest even better numbers may lie ahead. For one, current estimates of the labor force in Oregon are declining in recent months, in large part due to a falling participation rate. We know the population overall is increasing with migration flows, but on the other hand, Baby Boomer retirements are also currently at their peak. It is likely that Oregon’s labor force is increasing overall and participation rates are at least holding steady. Employment rates by age cohort are still looking solid, as are overall job openings, so a drop in participation is somewhat unlikely. All of this suggests that the unemployment rate would be even lower than current estimates.
Wages in Oregon remain relatively strong, although different measures of wages have diverged a bit in recent years. As previously discussed, expectations were the U.S. Bureau of Economic Analysis (BEA) would revise up their Oregon estimates and growth rates. The BEA recently did just that, however, their figures still trail withholding collections and wages as reported through the unemployment insurance system (QCEW).
Now, measures of economic wages remain below withholding, which does include revenue from bonuses, stock options, retirement accounts, and the like. Withholding is more than just wages. However, this gap never existed before the last couple of years. It remains an important issue for our office to track. Overall, getting a handle of the health of Oregon’s labor market is being somewhat complicated by technical issues within the underlying payroll jobs data. For this reason, the employment data in our office’s forecast is adjusted for two important technical purposes: seasonality at the detailed industry level and the upcoming benchmark revisions. Specifically, our office uses the benchmarked, or revised employment data through 2018 q2 and imputes the 2018 q3 employment data based upon the available preliminary Oregon estimates, national data, and our office’s economic forecast model. As such, for this quarterly forecast, the first pure forecast period is 2018 q4.
In the third quarter, total nonfarm employment increased 1.8 percent over the past year with the private sector growing at 2.1 percent and the public sector growing 0.7 percent. These rates of growth are a clear step down from the full-throttle rates seen in recent years, however, still remain faster than needed to keep pace with population gains so far.
Increasing Job Growth
So far in recovery, the large service sector industries have generally led job growth in terms of the number of jobs added and with above-average growth rates. These include jobs in professional and business services, health services, and leisure and hospitality industries. These three industries have gained 13,400 jobs in the past year and account for 39 percent of all job gains across the state. The good news is that this share has fallen as the expansion continues and other industries add jobs, which was not the case earlier in the expansion.
Currently, ten major industries are at all-time highs. Private sector food manufacturing, education, and health never really suffered recessionary losses – although their growth did slow during the recession. Professional and business services and leisure and hospitality have each regained all of their losses and are leading growth today. In recent quarters retail employment, other services, transportation, warehousing and utilities, and construction, in addition to the public sector have surpassed their pre-recession levels and are at all-time highs. The nine private sector industries at all-time highs account for 64 percent of all statewide jobs. The public sector accounts for an additional 16 percent of all jobs.
With the Great Recession being characterized by a housing bubble, it is no surprise to see wood products, construction, mining and logging and financial services (losses are mostly real estate agents) among the hardest hit industries. These housing and related sectors are now recovering, although they still have much ground to make up. Transportation equipment manufacturing suffered the worst job cuts and is likely a structural decline due to the RV industry’s collapse. With that being said, the subsectors tied to aerospace are doing better and the ship and boat building subsector is growing again. Metals and machinery manufacturing, along with mining and logging, have shown the largest improvements since the depths of the recession.
Coming off such a deep recession, goods-producing industries exhibited stronger growth than in past cycles. While all manufacturing subsectors have seen some growth, they are unlikely to fully regain all their lost jobs. The good news, certainly in the short-term, is that much of the manufacturing sector has returned to growth in recent months following declines a year ago. All told, Oregon manufacturers typically outperform those in other states, in large part due to the local industry make-up. Oregon does not rely upon old auto makers or textile mills. The state’s manufacturing industry is comprised of newer technologies like aerospace and semiconductors. Similarly, Oregon’s food processing industry continues to boom. All told, each of Oregon’s major industries has experienced some growth in recovery, albeit uneven. As the economy continues to recover there will be net winners and net losers when it comes to jobs, income and sales.
The Portland region continues to experience transformational growth. When compared with the other big metro areas around the country, Portland’s growth in high-wage jobs, increases in educational attainment, and household income gains all rank in the Top 5 among the 100 largest metros. Portland’s median household income now ranks 16th largest and is 18 percent higher than the typical large metro.
The rest of the Willamette Valley are likewise experiencing strong income growth in recent years to accompany their underlying economic improvements. Corvallis and Salem are at historic highs for median household income, while Albany and Eugene are close. The gains in Lane County (Eugene MSA) are especially encouraging given the severity of the Great Recession and restructuring of the regional economy after the permanent closure of two major manufacturing sectors.
Bend continues to defy expectations in the aftermath of one of the nation’s worth housing bubbles a decade ago. Relative to the 20 typical housing bust metro, Bend’s income gains rank 5th best and is at an all-time high
Population and Demographic Outlook
Oregon’s population count on April 1, 2010, was 3,831,074. Oregon gained 409,550 persons between the years 2000 and 2010. The population growth during the decade of 2000 to 2010 was 12.0 percent, down from 20.4 percent growth from the previous decade. Oregon’s rankings in terms of decennial growth rate dropped from 11th between 1990-2000 to 18th between 2000 and 2010. Oregon’s national ranking, including D.C., in population growth rate was 12th between 2010 and 2017 lagging behind all of the neighboring states, except California. Slow population growth during the decade preceding the 2010 Census characterized by double recessions probably cost Oregon one additional seat in the U.S. House of Representatives. Actually, Oregon’s decennial population growth rate during the most recent census decade was the second lowest since 1900. As a result of economic downturn and sluggish recovery that followed, Oregon’s population increased at a slow pace in the recent past.
However, Oregon’s current population is showing very strong growth as a consequence of state’s strong economic recovery. Population growth between 2016 and 2017 was 10th fastest in the nation. Based on the current forecast, Oregon’s population of 4.14 million in 2017 will reach 4.63 million in the year 2026 with an annual rate of growth of 1.2 percent between 2017 and 2026.
Oregon’s economic condition heavily influences the state’s population growth. Its economy determines the ability to retain existing work force as well as attract job seekers from national and international labor market.
As Oregon’s total fertility rate remains below the replacement level and number of deaths continue to rise due to ageing population, long-term growth comes mainly from net in-migration. Working-age adults come to Oregon as long as we have favorable economic and employment environments. During the 1980s, which include a major recession and a net loss of population during the early years, net migration contributed to 22 percent of the population change. On the other extreme, net migration accounted for 76 percent of the population change during the booming economy of early 1990s. This share of migration to population change declined to 32 percent in 2010, lowest since early 1980s when we actually had negative net migration for several years. As a sign of slow to modest economic gain, the ratio of net migration-to-population change has registered at 88 percent in 2017 and will continue to rise throughout the forecast horizon. By 2026, nearly all population growth in Oregon will come from net migration due largely to the combination of continued high net migration, a decline in the number of births, and the rise in the number of deaths among elderly population associated with increasing number of elderly population. With Oregon’s favorable economic and environmental conditions, high level of net migration into Oregon will continue.
Age structure and its change affect employment, state revenue, and expenditure. Demographics are the major budget drivers, which are modified by policy choices on service coverage and delivery. Growth in many age groups will show the effects of the baby-boom and their echo generations during the forecast period of 2017- 2026. It will also reflect demographics impacted by the depression era birth cohort combined with changing migration of working age population and elderly retirees through history.
After a period of slow growth during the 1990s and early 2000s, the elderly population (65+) has picked up a faster pace of growth and will surge to the record high levels as the baby-boom generation continue to enter this age group and attrition of small depression era cohort due to death. The average annual growth of the elderly population will be 3.4 percent during the 2017-2026 forecast period.
However, the youngest elderly (aged 65-74) has been growing at an extremely fast pace in the recent past and will continue the trend in the near future exceeding 4 percent annual rate of growth due to the direct impact of the baby-boom generation entering the retirement age and smaller 31 pre-baby boom cohort exiting the 65-74 age group.
This fast-paced growth rate will taper off to one percent by the end of the forecast period as a sign of the end of the baby-boom generation transitioning to the elderly age group. Reversing several years of slow growth and shrinking population, the elderly aged 75-84 started to show a positive growth as the effect of depression era birth-cohort has dissipated. An unprecedented fast pace of growth of population in this age group has started as the baby-boom generation starts to mature into the 75-84 age group. Annual growth rate during the forecast period is expected to be unusually high 5.7 percent. The oldest elderly (aged 85+) will continue to grow at a slow but steady rate in the near future due to the combination of cohort change, continued positive net migration, and improving longevity. The average annual rate of growth for this oldest elderly over the forecast horizon will be 2.0 percent. An unprecedented growth in the oldest elderly will commence near the end of the forecast horizon.
As the baby-boom generation matures out of oldest working-age cohort combined with slowing net migration, the once fast-paced growth of population aged 45-64 has gradually tapered off to below zero percent rate of growth by 2012 and will remain at slow or below zero growth phase for several years. The size of this older working-age population will remain virtually unchanged at the beginning to the end of the forecast period.
The 25-44 age group population is recovering from several years of declining and slow growing trend. The decline was mainly due to the exiting baby-boom cohort. This age group has seen positive growth starting in the year 2004 and will increase by 1.7 percent annual average rate during the forecast horizon mainly because of the exiting smaller birth (baby-bust) cohort being replaced by baby-boom echo cohort. The young adult population (aged 18-24) will remain nearly unchanged over the forecast period. Although the slow or stagnant growth of college-age population (age 18-24), in general, tend to ease the pressure on public spending on higher education, college enrollment typically goes up during the time of very competitive job market, high unemployment, and scarcity of well-paying jobs when even the older people flock back to colleges to better position themselves in a tough job market.
The growth in K-12 population (aged 5-17) will remain very low which will translate into slow growth in school enrollments. This school-age population has actually declined in size in recent past years and will grow in the future at well below the overall state average. The growth rate for children under the age of five has remained below or near zero percent in the recent past due to the sharp decline in the number of births. This cohort of children will see steady positive growth after 2016. Although the number of children under the age of five declined in the recent years, the demand for child care services and pre-Kindergarten program will be additionally determined by the labor force participation and poverty rates of the parents. Overall, elderly population over age 65 will increase rapidly whereas population groups under age 65 will experience slow growth in the coming years. Hence, based solely on demographics of Oregon, demand for public services geared towards children and young adults will likely to increase at a slower pace, whereas demand for elderly care and services will increase rapidly.
As we inch closer to an expected slowdown in the economy, Investors need to contemplate their strategies regarding lease renewals, tenant improvements and rent increases. These decisions will vary depending on the location and type of real estate investments, the temperament of the property owners and the financial success of tenants. Remember too that office space demand will change to smaller spaces. This is driven by the significant increased cost of new Class A office space, and the increased flexibility in working conditions demanded by employees.
As strategic advisors, we would probably suggest making key decisions in 2019 regarding capital improvements not already completed. So, you can complete upgrades while you have tenants in your building. As Californians continue to migrate to Oregon (as economic refugees) the pool of employees will stay consistent. At the same time older Oregonian Baby Boomers will be retiring, which leaves room for the next generation to take their place. The fastest growing population as forecast will be older Oregonians. They will need housing that they can afford and that is age appropriate.
As you review the national population distributed by age below, you can see a longer lifespan for many Oregonians and a significant lower birthrate. Based on the current forecast, Oregon’s population of 4.14 million in 2017 will reach 4.63 million in the year 2026 with an annual rate of growth of 1.2 percent between 2017 and 2026.
This is a slow but steady growth rate, which bodes well for Oregon, but should remind investors that we are out of the boom of the last 8 years.
Age Distribution United States 2017
Information for the above notes was culled from the attached report from the Oregon Department of Administrative services, Office of Economic Analysis.