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On-Demand: Real Estate Principals Series | Economic Outlook 2021

Jan 14, 2021

Our panelists took a closer look at the projections for the real estate industry and beyond, and how the market outlook may impact businesses in the new year.


Michael Morris:Welcome, everybody. This is our annual event, every year. We've been hosting this for the last three years now, where we have the economic forecast by the Bay Area Council, Patrick Kallerman, who's a friend and loves what he does. We're so looking forward to hearing you, Patrick. We cohost this with Wells Fargo, with Bay Area Council and with Kennedy Wilson. So on behalf of EisnerAmper and all of our cohosts, we welcome you to our event. And again, we have a special thanks, Patrick, to you. And I know you have a lot of slides, because I've looked through some of them and they're fantastic. And I'm so interested in hearing your forecast for the Bay Area because goodness gracious, it's been a tough year. So looking forward to hearing from you. So Patrick, why don't you take it away?

Patrick Kallerman:Thank you so much, Michael. Thank you so much for having me year after year. Thank you all who keep showing up. I know there's a lot of repeat folks. It's really great to be back. It has been, oh boy, since our last one of these, it's been quite a tumultuous time. I kind of jokingly last year struck through my 2019 title because us economists are always making declarations and saying things. And I thought it would keep me a little bit honest. But I thought it would also be a little fun to have my 2019 title there struck out when I presented in 2020.

And so, when I was revisiting this, I couldn't help but do it again, because we had 2019, best year ever, 2020, will the party ever stop, things just kept going. Seemingly no end in sight. And then now here we are presenting after 100s of 1000s of American deaths, half of our small businesses potentially being lost in the nine county Bay Area region. Just a harrowing sort of 12 months. And so, I also run the Bay Area Council's health policy work. And so, I'm increasingly actively involved in vaccine conversations. I'm hoping and I've titled this here, Light at the End of the Tunnel because I really hope that we can start getting back to normal, we can get the vaccine distributed, we can save lives, and we can reopen the economy for folks' livelihoods.

So, thank you again to EisnerAmper, Wells Fargo, and Kennedy Wilson for having me. Let's get started here.

Now, I don't always include, many folks follow the market, and so I don't always include market movements in my forecasts. And I will reiterate, like many of us do, the stock market is not the perfect measure of the economy as a whole. But here we are. I think it's pretty interesting to see how from January to January, what has happened. As the shelter in place orders took effect, the market was down significantly, obviously, as you can see here. But has sort of climbed back up probably more than anyone would have originally guessed, especially given our current shelter in place orders and everything else that's going on.

The Dow is up 6% from the first confirmed case in the US, the S&P is up even more. They're just data points, and many of the sort of organizations that make up these indices are doing very well. But I think it's just something pretty fascinating.

Meanwhile, GDP over the sort of last five years was chugging along nicely, and just took a huge hit. You can see here, just a 30 plus percentage point decrease. But has mostly recovered. Now, down 30% and up 30% doesn't mean it's completely recovered because the up 30% was from a smaller base. Kind of surprisingly, the economy is surprisingly chugging along here. Now, not for everyone, which is something that I'll get to shortly. There is still, I mean, and it depends wildly on which pocket of the country we're talking about. But you can see there was a massive spike in unemployment. And this doesn't even tell the whole picture because a lot of folks have completely left the labor force, which means that they're not even included in these figures anymore.

Michael Morris:Patrick, not to interrupt, but just to compliment this. Why is it that women are bearing the brunt of this thing?

Patrick Kallerman:You can see here with my title, last month, women accounted for 100%, actually a little more, the math is a little complicated there, but a little more than the total of 140,000 jobs that were lost. And what we're seeing is, over the past few decades, women have become an integral part of the US economy and labor force, but they're now once again, bearing the brunt of these pandemic related job losses because they're finding it too difficult to manage everything. You have kids at home, you have a lot of caregiving that's having to be done, you have a lot of caring for sick folks that has to be done. And we're seeing a very unequal treatment of this. And as such, women are dropping out of the labor force, or leaving their workplaces because they feel like they can't juggle everything.

And so, while the economy in terms of the market and GDP is moving along and has recovered, there's still a lot of struggle going on that we need to keep an eye on.

So let's get into some of the industrial, the sort of background numbers that I like to talk about a little bit when we're talking about what keeps the economy moving. One of the things I'd like to use is this measure of lightweight vehicle sales, because I feel like it's easy for folks to understand. If you're a general contractor or running a delivery service or you have any sort of business where you need vehicles, this includes lightweight pickup trucks, fans, deliveries, larger trucks. They're showing some signs of weakness here. Actually, over the last few years, they had kind of leveled off. And you can see that obviously, they really stalled out with the shelter in place orders. But they're kind of, you can see here, we only have a couple months of recent data. They're kind of trailing off even further.

And so what this tells me is that business owners and those who make the decision to, they take a look at the economy and they decide whether or not they're going to invest further in their business or growth or replace used vehicles, they're really tightening their belts. They're making that decision not to purchase the equipment that they need or to make do with the equipment that they have for an unknown amount of time.

Industrial production was muddling along throughout 2019, which was also kind of fascinating given how things were going. But now with shutdowns, really are stalled out and down to 2017 levels. The number has ticked up over the past few months. I'm pretty uncertain as to where this is going to go. I think it's really going to depend on how vaccine distribution goes and as I'm sure many of you are following along closely. It's not going particularly well or not as well as we would have hoped. So that's pretty concerning. This could tick down again pretty soon.

Retail sales surprisingly though, and this is why a lot of these large organizations that are in the market indices I listed earlier are doing so well, retail sales are actually doing very well. Now, notice this excludes food services. A lot of the economy is home and still employed and buying the things that they need online, having them delivered all sorts of stuff. This being significantly higher than it was in 2019 is a very interesting data point.

Now, obviously, this is not true for all sectors of the economy. This excludes food services, as I mentioned, and those segments of the economy, which are largely privately owned businesses and so why you don't see it reflected in the stock market indices, are doing very, I mean, I'm sure we all know, doing very poorly. My in-laws run a small restaurant. And, again, there's a lot of struggle in the economy that we're not seeing in a lot of these measures that's kind of hard to pick up.

Here's another measure that I always like to point out to folks. The green line is what we call the employment to population ratio. It's how many folks, how many Americans are working are in the labor force. And then I have the unemployment rate there. Interestingly, the employment to population ratio has been decreasing in our country, which is not good. It means that the share of individuals, the share of citizens that are working or participating in the labor force has been going down. This is for a variety of reasons. Folks on disability, the opioid crisis has been huge. Folks unable to sort of future proof their careers or deciding to drop out of the labor force because they couldn't get retraining. And this is obviously, it's a little hard to see here with the crossing of the lines, but this has also dropped.

And so, each time we've seen a recession, you can see 2007 here, this has dropped, and not recovered particularly quickly. And that's worrisome to me.

Michael Morris:And are we seeing people, is there statistics on people taking early retirement, taking social security? Does it spurn movement geographically as people are unemployed fleeing?

Patrick Kallerman:Yeah. We'll get to some of the geographic movement later. But yeah, early retirements and other things are certainly part of this, as folks either, the shutdown happened and they decided that that was just enough for them and they were going to retire. But I mean, this is an even longer term trend in that. And so, I think we need to really keep an eye on this because if you have a large share of your country that's not working or being productive, obviously, that's a problem. And so, that's kind of why I always like to include this.

Similarly, this is related to the last few recessions. I think it's important to note that with each recession, the recovery has taken longer and longer and longer. Companies make do with less employees, employees do more work, employees drop out of the labor force. The 2007 recession, it took us 120 months for us to recover there. That's that teal line you see with 2007 written on it. And so, as we're thinking about these recessions and how the Fed reacts and how these stimulus bills react, this is important to note that quick, swift reaction, which we actually did have this time around is really important because otherwise, you get these lines on this chart here. And they get longer and longer.

The IMF, the International Monetary Fund, expects large drops in GDP across the globe, which is not a surprise. I always like to include a global slide or two here so we don't forget that we're just one piece of all of this. With varying recoveries in 2021. And I think that, this is a little bit of an interesting chart because they've even labeled it themselves a crisis like no other and uncertain recovery. And I think it will be very uncertain. I mean, take all of these with a grain of salt. Again, it's just going to be absolutely critical to focus on distribution and vaccinating folks as quickly as possible. There's really not going to be any other way to reopen swiftly without doing so. And here similarly, this is global consumer confidence. Again, with everything going on, no surprise that folks are not very confident in the direction of their economies or for the future. Again, a little worrying.

On to California, California's unemployment rate sits at 9.3%, down from a peak of 16, which is good, but still the fifth highest in the nation. You can see here only a few states are above us here. And so, we've got a long way to go here. Not good. A lot of this is that consumers drive more than two thirds of GDP. And while retail sales are up for things like eCommerce orders and others, a lot of other spending, spending going to movies, hair salons, restaurants, all of that stuff, sort of all of your daily out and about or weekend spending, entertainment spending, all of that stuff is still down double digits. And actually, I'm not sure that this even, if I had to guess, this is probably a little conservative here. I would estimate it was actually down even further, sort of a gut reaction.

The Bay Area unemployment rate is a little better but still 6.9%. Los Angeles is still in the double digits at 12. Regional nonfarm employment has fallen from 4 million to 3.7. And we have 150% increase on folks on unemployment insurance between February and October. Again, no surprise following the shelter in place orders. But some of this has recovered, which has been good, the stuff that we can recover safely. Some of this hasn't recovered. Again, the sort of all that discretionary spending stuff, the biggest being restaurants are now almost completely closed again.

Here you see employment change by sector, which is pretty interesting, I could have made many of these charts because there was a lot of nuance, and when the shelter in place happened, and when different industries reacted and were triggered in a little bit of a different way. Construction, financial services and professional services are nearing a full rebound. Like I was saying earlier, there's sectors of the economy where folks quickly adapted to working remotely or to making job sites, in the case of construction, safe. And they're in environments where they can space out and have protocols to keep folks safe and monitor for the virus. While information and government job losses came later, and are still down quite a bit. And I think, especially in the case of government, could be down even further to come. I think there's going to be a lot a of budget shortfall discussions you'll be seeing soon.

The Bay Area trails the US and California in terms of the jobs it has recovered. Los Angeles is doing a little worse as I had mentioned, but we're still not doing very well here. I think there's a few ways to look at this, if we're completely honest. The Bay Area shut down earlier and more swiftly than other places and I think that was a smart move. If you look back at newspaper headlines, I said many times I think a swift shutdown was important to get the virus under control and to allow us to reopen earlier, the idea being, it's either pain now or pain later. And I believe that the Bay Area made the right move early on.

But the virus has proven pretty unpredictable and people's patterns have proven pretty unpredictable. So even though we've remained relatively shut down, and that's why these job losses have only recovered coming up just over a third, we've still got a long way to go. And virus cases are still spiking, ICUs are still very close to full, all that sort of stuff. The story is playing out a little differently than I would have guessed earlier on.

Michael Morris:Why do you think the difference between LA and San Francisco on that unemployment, I'm stepping back a couple of slides and even the last one. Is there more professional services in the north part of the state or what?

Patrick Kallerman:Yeah, really great question, Mike. I think it's a few things. There are a variety of differences both in the industry makeup and also sort of culturally that have led the Bay Area and Los Angeles to have different experiences. I have some slides showing later here that, yeah, the Bay Area does have a large share of its jobs that can be done remotely. And so, that has helped us. But then we did shut down earlier and harder than other places so that hurt us. LA still has a lot of folks who are unable to work because more of that is in-person work. And they also have a much larger and more diverse population in all senses of the word. It's interesting to follow. I mean, there's lots of articles of folks trying to figure out what these differences are, but it is fascinating to have two places in our state experiencing such different trajectories.

Although, I think it's important to note that we are up here in the Bay Area, again, experiencing a spike that you wouldn't really have expected given how shut down we remained, and how good folks have been at wearing masks. So it's kind of a conundrum. The virus has proven unpredictable. It's proven that if you crack the door, it's going to find a way to get in. And we're still seeing community spread, we're still seeing ICUs fill up up here. Now, it's not quite as dire a situation as down south, but it's tricky.

Here's what I was talking about a little earlier. We're already seeing municipal budget projections with many billions, this is actually even a couple months old now, these are projected two year budget deficits by Bay Area City. As you can imagine, these shelter in place orders are going to have a pretty significant impact probably for years to come. This also holds true for the state budget, for transit agency budgets, for the services that can be delivered. It's going to hamper our infrastructure upgrades and our social services programs and our public health departments. So, it's a pretty significant and worrying direction, but not really a surprise. And so, again, back to the pain now or pain later, I originally thought that the Bay Area swift shutdown would have us sort of around now in a better place than we are. But again, the virus has proven unpredictable.

Okay. So, this is something that the council and the newspapers and your friends and family, especially for folks like us in sort of the business world, who keep close tabs on these things are increasingly talking about. There have been some high profile, very large exits from the Bay Area. And so, the question that I'm frequently asked these days is the Bay Area facing an exodus of businesses and residents? The answer is, I mean, obviously, yes. You can see here Hewlett-Packard Enterprise, Hewlett-Packard, one of the kind of cornerstone tech companies that started the valley. Oracle as well. McKesson, a very large medical supply company, departed.

And so, the question is, why, how many, for how long? All the sorts of questions that you're seeing in these newspaper articles. And I think that the Bay Area was already kind of at an inflection point. The economy kept going up but things, you heard rumblings, gosh, how much more expensive could it be? How can we find office space? Where do we go? What do we do? Competition for talent was through the roof. So all of these friction points were finally, I won't say brought to the surface because we were all aware of them, but I think that the shelter in place orders really gave business leaders and residents a moment to reflect on the why of being here. And some of them have decided that it's not worth it anymore.

And so, that's something that we need to really thoughtfully consider moving forward as we're planning our recovery and response, because without these organizations, the Bay Area is not going to be the same place, and it is not going to be the best place to live and work, which is the core fundamental beliefs of the Bay Area Council.

Michael Morris:Is the exodus of the residents, because I have a lot of pals that have moved all over the western US, is this a permanent thing?

Patrick Kallerman:Yeah, that's a great question. I mean, obviously, for the businesses that have announced these moves, yes. For the residents, I think that that'll be interesting to see. I have some data on these moves coming up here in a few slides, and it'll be interesting to see if these moves were folks temporarily relocating to rentals and other cities to try it out while they're working remote for a year. Was this like, I'm is midway through my career or at a point in my life where now that I can work remotely, I want to take a break, and I want to try Austin or Miami or Boise or Bozeman or wherever it may be? Or are these folks gone forever? And their companies gave them sort of the word that we're going to transition you to remote if you want to be. Some of them are adjusting salaries, some of them aren't.

I think the verdict is still out on that. When the economy fully opens back up and we've reached herd immunity, do a bunch of these folks come back? Maybe, maybe not. Maybe they sort of have gone on to greener pastures with lower tax rates, better quality of life. It'll be very interesting to see.

Small businesses are also, and this is something that makes this such a great place to live and work is our sort of plethora of small businesses. These are restaurants, retail shops, all the stuff that kind of gives this place its character and makes it such a lovely place to live in, small business revenue in our metro is down basically the same as New Orleans. New Orleans is down to touch more. But we are at the bottom of the pack. And so, early on, I would have defended this a little bit, saying, again, pain now, pain later, if we shut down quickly and swiftly and hopefully it doesn't have to last for as prolonged a period of time. And then we can reopen once we've sort of flattened the curve quickly. That hasn't proven to be the case. We've had to remain shut down. I fear that many of these businesses aren't going to come back.

With the last shelter in place, order, you saw a wave of folks saying, I can't do it anymore. I held on, they told me we were going to reopen in a couple months. These folks have run out of PPP money months ago, they've run out of sort of their savings and their unemployment. So I fear that a lot of these are lost. And that'll be another sort of, that's another scary point for the sort of competitiveness in our region. If we lose this vibrancy and diversity in places to eat and go and shop, it's not going to be good.

So here's what I was talking about, Mike. Redfin searches show the SF Metro was the second largest net outflow. People quickly and early on, when they sort of their companies said they were going to be remote, or folks figured that they could be remote, or folks lost their jobs and needed to go somewhere more affordable, folks quickly started to leave.

And so, second only to New York. We had a very large portion of local users searching elsewhere. Some of them were looking actually not that far from home. Some of them looked in the North Bay; Sacramento was the top destination to look for. Maybe this bodes well for what the Council and Institute call our mega-regional economy. Some of them looked further. Some of them looked to Seattle, which is a little surprising because it's still a pretty expensive place to live. And then a lot of them, we're hearing a lot of Austin, we're hearing a lot of Miami, both for sort of residents and companies. A little scary.

Again, with a residence, some of these folks could come back potentially relatively easily, if these were folks working remotely and with the means. For the companies, those that have announced they're leaving, that's a lot harder to reverse. Those folks are probably gone. Here we go again, top 50 cities that gained movers during the Coronavirus and the top 50 cities that lost movers. Again, we lost close to 30,000 households.

Interestingly, despite all of that going on, the Bay Area metros, which is San Jose and San Francisco, still, we have higher shares in tech than ever, and we've had some pretty high profile IPOs last year. And so, I've kind of tempered folks' expectations with is the exodus happening, is it going to be massive, is it going to happen in six months? I think no. I think it is happening and we need to be careful and thoughtful and we need to plan policy responses appropriately. But it's not going to happen all at once, hopefully. And so, we still have a pretty good tech ecosystem here, a pretty good biotech ecosystem here, a pretty good life sciences ecosystem here. And so, we still have the kind of highest concentration of tech in the nation.

I also tell folks that it's popular to think of tech now as social media and some of this other stuff, but a lot of these other organizations are harder to move. There are still chipset manufacturers and others doing kind of basic research here. That stuff's a lot harder to pick up and move. The same kind of goes for the life sciences and biotech and laboratories and other things. So, that's kind of a bright spot. Now, that doesn't mean that we should take those for granted either, they still can be moved. And so, we do need to be thinking about this as we plan for an equitable and efficient recovery. We do still receive sort of the largest share of venture capital in the nation. In some years, we receive over 50% of all venture capital to our nine county region. And so, that's still a bright spot.

Now, it has been increasingly on larger and a smaller number of larger deals. So, that's a little bit concerning too because we do want to see the smaller future Googles and Facebooks and Intels grow here, not just the behemoths. So, this is also a little bit of a nuanced data point. Are the smallest cutting edge companies deciding to start and grow here? If you don't start here, the likelihood that you will grow here is maybe not as high. Sure, some companies move here, but as opportunities for remote deal-making increase the longer we're shut down, this is going to get a little tricky for us.

Home prices, however, in the Bay Area, there are still folks making a bet to be here and stay here. As I can attest, Mike and I were talking just before this, I recently acquired a home in the area, and I can tell you that prices are high. San Francisco up 17%, San Rafael up 35%, San Jose up 25%, Oakland up 22%, on and on and on and on. Much higher than the rates of Seattle and New York and Chicago. So this is interesting also.

Now a lot of this is because our single family home inventory is so low. And so, obviously, you have less supply, prices go up. So, this could be in absolute terms not a massive amount of people, but it's still interesting. However, like I was talking about earlier, rents have seen kind of extraordinary declines. So, if you had asked someone will San Francisco, will rents for one bedrooms in San Francisco go below $3,000 a month, I think people would have said never again. But here we are. And so, this one for me is kind of a wait and see. I'm very interested to see if folks took a kind of gap year where they could be remote and explore or try a new city, and they're coming back once their companies say you need to be in the office for a little while. I don't know the answer to this.

I think it will largely depend on the number of companies that say, there's a big difference between having to be in the office one, two or three days a week, and being fully remote. If you have to be in the office one or two days a week, you can't live in Boise. So, this will be a wait and see. I'm fascinated to see what happens if folks move back when we reach herd immunity.

Michael Morris:You and half the people on this call.

Patrick Kallerman:Yeah, I know. Here we have another measure of, this is rents by how expensive they were. So, the lower right hand corner is the expensive cities experienced the largest pandemic related rent declines. And so again, the question is permanent or not. But San Francisco you can see way out in front there.

Michael Morris:We're number one I guess.

Patrick Kallerman:I guess. The Economic Institute did an analysis of the types of occupations that we have here and the type of work that they do and kind of ran this all through an algorithm to determine how remote eligible they are. And unsurprisingly, nearly half of all Bay Area residents have an occupation that is remote work eligible. This is a big chunk of the reason, I shouldn't say a little bit, a big chunk of the reason that we are able to have a little bit better unemployment situation than down in Los Angeles, you can see Los Angeles County down there is just in the 30% range. It'll also however mean that if we have the highest share, for now, this is a good thing. Going forward, it means that we have a good number of folks who are eligible if their employers decide to go fully remote to go somewhere else. And so, again, something that'll be very interesting to follow, very important to take a look at. It's an asset until it's not in this case.

Michael Morris:But I think it's so important to have face time with people, to mentor people. I know it's a concern of many of my friends. I think you've got to have some face time with people. And remote is great, but I still think for advancement in your career, being close to the office or in the office on a fairly regular basis is going to play out. I just believe that personally.

Patrick Kallerman:Yeah, fantastic point, Mike. I do think, again, we're going to get back to the question of, how many of these organizations are going to go fully remote. Some of them might, but I suspect a hybrid approach is going to be wildly popular. And so, that's a lot different than being fully remote. You can't up and leave, you can't distribute your company across the nation if you're in a hybrid, you still have to have an office, you still have to have folks able to commute, you still have to be able to meet folks. I do think that relatively few companies will go full remote.

And speaking of remote work, the inequality of remote work, I mean, again, this is what we're seeing across the country really, the pandemic has been not the best of times for some, but it has absolutely been the worst of times for some. Your education level determines, to a huge degree, if you're able to be remote. It determines to a huge degree if you have to do your work in person. It determines to a huge degree whether your employer stayed open. And so, we have sort of two economies running right now. And it's getting really worrisome. And so, I think that this is something that, this is even more reason why the vaccine distribution needs to be dealt with in a more swift manner than is currently happening. We need to get this figured out quickly because this is really impacting the most vulnerable among us to a significantly larger degree.

Kind of back to the folks moving around, I should have probably had this one slide forward, you can see the yellow bars to the right are net domestic migration. And so, Bay Area residents are increasingly choosing different regions, again, to a record degree in 2020. Sort of 63,000 households that we had leave the Bay Area for another domestic location. Little worrying. Again, will this be, in the case of this year, temporary? I don't know. It's going to be interesting to watch. And sort of here is the sort of accumulated result of that, the blue line is the change. Population change in the Bay Area is decreasing. We're kind of on a negative trajectory here. Folks are choosing other places and that's something we need to keep an eye on.

So that's kind of my US, global and Bay Area snapshot. I do think there is good news, though. I've been saying, because we've been. The news has been reflecting recently that we have more doses, significantly more doses than we have given out. That said, we do still have two vaccines that are being distributed. Again, I manage the council's health policy work, and this is a slide from the good folks at UCSF, Bob Watcher, kind of an estimate of when we think the sort of different groups are going to be vaccinated and where that gets us sort of on a population front. You're hitting a herd immunity threshold here some time August, September.

This slide was put together about a month ago. I think that we thought we were going to be a little bit better at the early phases of distribution. I think we're seeing a little bit more hiccups than we had hoped for, which is worrying. So hopefully, that trend does not continue and we can get back sort of on this trajectory here. And if we do, we could maybe salvage the last half of this year.

Michael Morris:Is the Bay Area Council involved in the logistics around this and helping strategize the distribution of this vaccine because it's much slower than what they projected? Even the president to be, Biden, has said that he's downgrading his numbers. Are we in worse shape or better shape in the Bay Area or California around this?

Patrick Kallerman:Yeah, it's a really great question. Bay Area Council members, especially our health care providers are very active in these logistic conversations. Bay Area Council staff has been engaged in the, pretty significantly, and are working with our public health officials and our public health officers sort of on a daily basis to help figure this out and figure the messaging out. It is a huge logistic effort, though, for already overworked and underfunded public health agencies. And so, the magnitude of this just makes it a pretty difficult problem.

Michael Morris:Patrick, that was fantastic, and thanks for that recap. We're now opening this up for questions. And I want to encourage everybody on here, and I know there's some very sharp individuals on this webcast, so I want to encourage you to send a question in to keep the momentum of this happening, but we do have one from my buddy. I'll keep it anonymous, Mark. It says accountability is a big concern for employers in a remote work. Technology advancements like retinal recognition will help you increase confidence that employees are really working. I don't know if that's a question or a statement, but I guess how are they accounted for productivity in this remote environment I guess would be a question?

Patrick Kallerman:Yeah. I think, again, this really depends on the type of work we're talking about. I think it depends on the type of work that you do, the level of seniority you have. I think the more task-focused work, the more back office type of work that you're talking about, this is definitely a problem. I don't see this as much, I know that this was originally a concern of all employers, and certainly still is, but I think when you're talking about the sort of higher level, white collar remote work, I think employers are starting to get more and more comfortable with it. I think they're starting to realize that their employees do care about their work and do want to do the best job possible. Some of them are working more hours than ever. Some companies have figured out that you take away two hours of commute, you actually get two more hours of work out of folks.

I think this can go both ways. I really think that there's an upside to this. There's companies who've been doing remote work for a while. And so, I encourage folks on the call who are thinking about this type of stuff, there's a lot of really great resources out there now on how to collaborate digitally, how to ensure folks are working. And so, I think that companies who, this is what companies do. When you face a challenge, you figure it out, and I think a lot of the best companies are rapidly figuring out how to make this all work.

Michael Morris:I know that when we did the shelter in place at our firm, EisnerAmper, there's about 2000 of us spread around the world. I'm definitely an office guy and our whole infrastructure of our public accounting firm is to go in the office, everybody's in the office, we go have coffee and meet. We literally went remote 100% right out of the gate, I guess it was March 16th, 2020. I was just thinking, how is this going to work, I can't imagine it. I have to say, it literally was like a switch got flicked, and we completely went remote. And it was honest to goodness, almost flawless.

And our marketing team has, this event is one we'd host in our office, we usually get about 100 people every year at our economic forecast, and we host a nice lunch in our office in San Francisco. And now we've gone remote with all of our events to fill the gap, we didn't want to lose the momentum. So, I would say productivity, just to answer that question, at least at our firm is definitely, our firm is doing great as a firm. And our workload is definitely being taken care of and accomplished.

I've got another question here. I'm going down the line from my, friend, Diane. What's the Bay Area doing to make it less business hostile environment? I mean, that's a great question.

Patrick Kallerman:That's a great question. And something that the Council's increasingly working on every day. It depends on what you mean by the Bay Area. The region, one of the, despite being such a fertile environment decades ago for business, despite being such a great place to live because there's so many places to go and things to do, despite having great weather, one of the things that has always kind of hampered the Bay Area has been that we have 101 municipalities. And so, when we talk about the Bay Area responding to either budget crises or business climate issues, it's tricky because the cities kind of are all taking their own approaches. Some of them continue to sort of put in place policies that are going to make the business climate even worse. And so, the council is actively trying to help these cities understand why that's a bad idea.

The state has realized this, and a couple weeks ago, the governor and his team announced a pretty large initiative to help improve the business climate and to help these companies stay, to stay here and keep individuals here and keep working here and keep their offices here. But it's tricky. I mean, especially given our fragmented system of dealing with these things. And so, that's what makes it a little scary for us, is that it's kind of a collective action problem, because there are 101 cities, but folks are commuting across the region. Workforces are living in dozens and dozens of cities, if not more. Companies have locations in several different cities. All of this stuff.

The Bay Area Council has always been an advocate of regionalism, but that's just not how our structures are set up. So it's complicated.

Michael Morris:Yeah. And that question came from a developer friend of mine and have a number of developer clients on this call in San Francisco. I talk to him many, many, many times about the hoop jumping they have to go through to get a deal done, and economically, it costs so much that at some point, the deals don't pencil.

Patrick Kallerman:Yeah. Something that, as you know, who's normally with me on these presentations when we're all hanging out in the room together enjoying that lovely lunch you were describing, Matt Reagan, our senior vice president of policy for housing, this is something that we're always talking about and that we've always been dealing with in the Bay Area. That stuff is made extremely difficult. And so, that's just the example of new development is just one of the biggest problems facing our region. If we can't start to get stuff built, we are going to irreparably harm the climate, we are going to irreparably harm our citizens who are increasingly spending larger and larger shares of their income just trying to squeak out a living here. The biggest chunk of that is going to housing. We're going to push people away to other regions who just can't do it. I mean, folks have dreams and ambitions, and if they decide that this is not a place they can accomplish those, that's bad.

Michael Morris:Yeah. How about homelessness? We haven't really addressed it at all. And prior to the pandemic, we're a big sponsor of the JP Morgan conference with our biotech group. We had comments that San Francisco's like a third world country when you walk down Market Street, which truthfully I've locked down Market for years, and it has really gone down dramatically. How is the city looking at this, the region looking at homelessness? And it's not just San Francisco, because it's eked out all over the Bay Area. There's 10 cities in many areas. I hate to say it's appalling. The appalling part is that there doesn't seem to be a solution around it.

Patrick Kallerman:Yeah. An extremely difficult problem that the council has started working on in recent years. And this is a good opportunity for me to plug the various committees and membership in the council because we've got teams working on many of these difficult problems, one of which is sort of new early last year maybe late 2019, is our homelessness committee. Sort of kicked off and chaired originally by the late Bernard Tyson of Kaiser. They're doing fantastic work. It's a very difficult, very tricky problem, Michael.

Again, the sort of Bay Area's fragmented municipalities make it even more difficult to coordinate care and logistics and keeping track of folks across these 101 cities. The institute did a report on homelessness, kind of trying to, and we're going to do a follow up report trying to identify what are the key drivers and what are some key solutions. Money's not always the answer but now, as that chart I showed, the looming budget crisis for many cities is going to cause a lot of the homelessness funding and other solutions that they were starting to put into place to really deal with this, it's going to cause those to crumble. It's a vicious cycle and it's very difficult.

I mean, it's also tied into our nation's drug crisis and other things. Very, very difficult. But I do encourage folks, please; if you want to get engaged, reach out to me or Mike, who can send you to me or the other, Matt and my other colleagues. We're only going to solve these problems together, and so, we'd love to have you join a committee and help us roll up our sleeves and work on this, because these are things that are deeply important both for our citizens who are living out on the street, but also for our business climate, and also for our quality of life. It's all tied together.

Michael Morris:You're a gentlemen, and I appreciate you handling that question the way you did. And you mentioned membership, and I don't mean to make a horrific plug for it, but I will, because you're a not for profit, and we are a member, and we're a proud member of the Bay Area Council. I think we started, I don't know how many years ago, but we've been a member for a number of years now. And you do get all these different committees, it's all the business communities are involved. And if you really want to have your voice heard and make a difference, I agree with Patrick here, to get involved in some of these committees. And Matt Regan, as you mentioned, who's a buddy, is quite an advocate in the real estate space for all of us out there. So, it's good to see Matt.

The other thing that's really confused me, and I don't know if it's the stimulus package that's been coming out of Washington, but just the fact that this economy has continued to, the stock market has continued to stay strong, the housing market continues to stay strong, even though it seems like we should be in some sort of recession, I'm not sure we actually are, even though people are dying left and right economically. I'm confused by that. I look at the numbers, and I live up here in Marion County, and our real estate continues to go up, it's not going down. I guess supply and demand. It's very confusing to me.

And then I also look at, not to weave this together, is that most recessions hit every 10 years, there's that economic cycle. And I don't feel like we've had that economic cycle. What are your thoughts on that, Patrick?

Patrick Kallerman:Yeah. I think you and everyone else, Michael. We were really kind of expecting, I mean, even before the pandemic hit, you saw the title of last year's forecasts that I did is, will the party ever stop? It's pretty interesting. Some folks point to the fact that going back to how long the recovery took following the financial crisis, one way that the economy might have been remaining so stable was that it was, it didn't overheat quickly. And so, we were kind of chugging along nicely there, not into a sort of dangerously overheated, and then bursting situation. However, now with the pandemic, mass unemployment, mass casualties, untold 10s of millions of American families on the brink of bankruptcy, it is interesting and surprising that we're not in a bigger tailspin.

I do think Chairman Powell said yesterday, one of the things we learned from the financial crisis was, I'm paraphrasing here because I don't remember his exact quote, but was, act early, act decisively, and keep acting until it's not needed anymore. You can't give up. So I think that these rounds of stimulus, I wouldn't even, I'm kind of not even calling them stimulus anymore, because stimulus is something that you do after the sort of structural problems have been eased or dealt with to stimulate the economy back into an upswing. But what these have done, they've kind of allowed our country to push the pause button in areas of the economy where we had two as a result of the pandemic. And then many of sort of the largest sectors of our economy have been allowed via technology tools and platforms and remote work to keep going. And then other sectors that have to be done in person have adapted well.

I'm thinking of, early on the construction industry with the help of developers and others, were able to put in protocols, temperature checks and distancing and others to keep folks working. So it is, on one hand, surprising, on one hand, not surprising. I do think that we're not out of the woods, however. I mean, I do think that there are 10s of millions of American families who are probably right on the brink. And so, I think that's something we need to keep an eye on. There's no sign of inflation yet. Some folks are warning that we're doing too much, that the balance sheet could get too big, that inflation could get out of control. We haven't seen much of that yet, although always something to keep an eye on. But I do think that to the extent we have to keep doing these rounds, it's so far working because you would have expected us to be in a significant tailspin by now given these closures of vast portions of the economy. At least in one sector of our country, we learned our lesson from last time around.

Michael Morris:Yeah, yeah. One area.

Patrick Kallerman:Yeah.

Michael Morris:The other thing I'm just dumbfounded by is, the ferry system, all our bridges, and the lack of revenue coming into those, and how long we can sustain that, the beating of zero cash flow into those with pension obligations and everything else. I really question it.

Patrick Kallerman:Yeah. Again, a very, I mean, a very tricky situation. A looming crisis really, because, as you said, you're an office guy, I'm an office guy. I think that most of us are going to go back to these hybrid systems. And so, we need these large pieces of infrastructure going forward. So, the question is how do we shore them up so that they're there when we come back. The latest round of stimulus had some money for these types of things, I suspect that future packages will have more money, the early packages did not have any money for transit agencies or city budgets. Yeah, really interesting question, how long can they stay afloat here with dwindling ridership. I think the answer is, not much longer without some sort of intervention and without an egregious plug yet again. Transportation and housing are kind of our two biggest issues. And so, our transportation team is thinking about these things and working away on this sort of day in and day out.

Michael Morris:I know that every major employer in the Bay Area is a member or should be a member of the Bay Area Council. I believe they are members, as it's been set up from the 40s when it launched after World War II. Are you getting a sense from the major employers that they're going to be opening their offices at a targeted date, because we have a lot of folks that own apartment buildings on here, and I know they're interested in knowing when employees can start to segue back. Obviously, that happens with the inoculation piece of this, but is there any talk amongst the major employers?

Patrick Kallerman:Yeah. We're always talking with our members and we've been running focus groups recently. I think that had you asked me this question, Michael, let's say three months ago, four months ago, I think there were a lot of plans in place. I think folks had target dates, I think folks were ramping up to sort of figure out how to get everyone back in the office, all that type of stuff. But now, I think a lot of that is put on hold as we've seen how unpredictable the virus can be, how slow the distribution of the vaccine has been going. I think that, you know, as the director of your office, human capital in the Bay Area is really, our companies value their human capital very highly. It's part of what makes this such a great place to live and work and part of what makes our economy so productive.

And so, I think that in this space, companies are pretty risk averse, and I think that they're only going to open back when they know that things are safe and when they know they can protect their employees. I think that they've now been sort of working remotely for close to a year. So if it's worked that long, what's a few more months? I think that a lot of that's been put on hold. I think we're in a lot more of a wait and see pattern now. I think that the light at the end of the tunnel is that we do have to vaccines. And so, hopefully, the hiccups in distribution will be solved here pretty quickly. And then we can start getting to a little bit more of that planning.

Michael Morris:So, in other words, there's light at the end of the tunnel in 2021?

Patrick Kallerman:That's the moral of the story here. I think there's light at the end of the tunnel, I think we've done a good job learning our lesson from the financial crisis and previous recessions. I think that these packages have kept our economy afloat, they've kept as many people employed as they can. That's not to say that we don't have large sections of the economy hurting pretty badly, and really truly American families, many of them are through their savings and other stuff, folks less fortunate than us. But I do think that our world class healthcare system and biotech companies, many of them which are here, responded to this crisis. We had sort of these new novel mRNA vaccines. I mean, never before really used and deployed up until a few years ago, really theoretical stuff. I mean, just the stuff you would hear on science podcast for decades ahead. Developed, tested, deployed in record time with great efficacy rates.

So I do think that there is light at the end of the tunnel here. I do think that we'll be able to see each other again before the year is over. We've just got to hang on, keep doing the right thing. And yeah, hopefully we get this all solved.

Michael Morris:Patrick Kallerman, excellent job. Excellent job, one more time. One more time. Appreciate it, Patrick, very much. And on behalf of EisnerAmper, Wells Fargo, Kennedy Wilson and Bay Area Council, we want to thank everybody for attending.

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Michael Morris

Michael Morris is a Director of Business Development, specializing in accounting, tax, and consulting services across a broad range of industries including financial services, real estate, and family offices.

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