With Housing Market Ebbing, Commercial Building will Steer the Economy in '07

Mark Palas and his wife, Christine, are at odds over the housing market.

She'd like to buy a home now. He'd like to wait for prices to come down further after the big run-up of the past several years.

"Do we rent again and see if the market falls?" asked Mark, 50, a San Clemente roofing contractor. "Or do we go ahead and make our stab and hope that the market levels off after we get into it?"

Their decision -- and those of thousands of other potential buyers on the sidelines -- could make a big difference in whether Orange County's housing market rebounds in the next six months or continues to stagnate. In 2006, many would-be buyers held off purchasing homes, waiting for price drops.

But what of Orange County's economy as a whole? How important is a strong housing market to job growth, and what other sectors might take up the slack?

As it happens, commercial construction is booming in Orange County just as the residential real estate market has cooled off. That fact is key to understanding why the county is expected to see continued -- albeit slower -- growth in jobs next year, economists say.

The relationship between real estate and jobs is a complicated one. On the one hand, a lack of affordable housing can hurt growth, as economist Mark Schniepp wrote in the UCLA Anderson Forecast's 2007 Orange County Outlook.

"Housing poses the largest constraint to significant job creation and net migration in Orange County," Schniepp concluded. "To the extent that affordable and available housing is present, economic growth in the form of job creation would expand."

But as Anil Puri and Mira Farka of Cal State Fullerton said in their 2007 economic forecast for Orange County, housing prices take time to show up in the job picture.

"Higher housing payments require that more jobs with higher salaries and value be created," they wrote. "The supporting jobs, mostly in the population-serving categories such as restaurants and recreational activities, building maintenance and related areas, will also increase but these tend to be towards the lower end of skill level and consequently lower-paying."

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Commercial construction is booming in Orange County at just the right time.

The boom is injecting money and jobs into the economy just as other work opportunities are being drained by a drop in homebuilding and other residential real estate industries.

Forecasters at Chapman University's A. Gary Anderson Center for Economic Research, for example, expect nonresidential construction in the county to outpace residential next year -- reversing the norm of the housing boom.

Nonresidential construction should rise 4 percent in value next year to $2.4 billion. That compares with an 8.7 percent drop in housing construction to $2.1 billion.

Even so, Chapman forecasts a drop of 2,000 jobs, or 0.8 percent, in Orange County's construction and financial-activities sectors next year, mainly due to the slowdown in the housing market. Without the commercial construction boom, the job declines would be worse, Chapman economist Esmael Adibi says.

The mitigating influence of commercial development on construction and financial job declines should help the county post positive job growth of 1 percent next year, down from an estimated 1.4 percent this year and from 2.3 percent last year, according to Chapman.

In an illustration of how interconnected the local economy is, job growth in another sector, business and professional services, is partly fueling the boom in office construction. This sector, which includes lawyers, accountants and temporary-help companies, added 7,100 jobs in Orange County in the 12 months through November.

Developers are building 5 million square feet of larger office properties -- the equivalent of 135 floors -- according toVoit Commercial Brokerage. That's enough to increase supply by 5 percent.