If Rip Van Winkle fell asleep after the State of the Valley conference February 14, Joint Venture Silicon Valley CEO Russell Hancock thinks he would be shocked at how the economic outlook flipped 180 degrees in just two months.
Hancock sat down Thursday with Santa Clara County Assessor Larry Stone and Silicon Valley Central Chamber of Commerce CEO Nick Kaspar to discuss sobering statistics and predictions of how the global COVID-19 health crisis has brought financial uncertainty, instability and inequality. Among those statistics in recent months:
- Unemployment rates spiked from a 50-year low of 2.1 percent to Great Depression-level projections as high as 30 percent
- Developers are on pace to complete only half of the record 8.5 million square feet of commercial space finished in 2019, which was an 18-year high
- Santa Clara County is headed for a 15.7 percent plunge in economic value worth $15 billion, after a record 9 years of economic expansion
“I think it’d be so fascinating if Rip Van Winkle had been there and then fallen asleep immediately after,” Hancock said. “If he were to wake up now today, just imagine how astonishing all of this would be.”
“Prosperity is now over”
Stone has warned for years a recession is overdue. But his idea of a “soft landing” has turned into more of a “crash landing,” considering the deep drop in consumer demand, supply disruptions and sharp decline in job growth.
The travel and hospitality industry was hit first and hardest, as roughly 80 percent of hotel rooms now sit empty across the country, Stone said. Meanwhile small businesses without cash reserves will not survive long, potentially leading commercial mortgage default rates to increase from 0.4 to 8 percent, he estimated.
Most economists predict negative GDP growth in 2020, and real GDP will decline 7.5 percent in the second quarter.
“It is clear that a record-long period of prosperity is now over,” Stone said. “It will take more time to recover than most people expect or hope. The longer the slowdown of economic growth, the longer the bounce back to normalcy.”
Even as Silicon Valley’s residential real estate industry effectively reopens with more showings allowed than before, Stone predicted the mortgage finance system will collapse if loans don’t offset unpaid mortgages due to the coronavirus — similar to 2008’s aftershocks from subprime mortgage credit fraud.
That crisis led to residential property values dropping by half in some parts of Santa Clara County. When nearly a quarter of properties were reassessed, $27 billion was lost from the assessment roll, Stone said.
‘Survival and ruin’
Even after the federal government injected $2.3 trillion into the economy via a stimulus package, 10 percent of the entire annual United States economy, the consumer-driven market suffers as people don’t — or can’t — visit social establishments or host gatherings.
Once the medical aspect of COVID-19 is under control, Stone expects the economic bounce back to be faster than the seven-year recovery from the 2008 recession. But peak employment rates may not return until late 2022, as so many jobs rely on human-to-human service, like brick-and-mortar restaurants, stores and even health care, which will remain limited for some time, county and state officials say.
Hancock estimated 60 million of these jobs will disappear nationally. Those at-risk industries account for 27 percent of Silicon Valley’s workforce, which includes 250,000 leisure and hospitality jobs, 116,000 retail trades and 60,000 positions in transportation.
Silicon Valley’s tech workers – often white, affluent and college-educated individuals – have more smoothly transitioned to working from home, but Hancock said the job losses will affect all sectors, disproportionately impacting low-income, non-college educated and Latinx and Black residents.
“We were talking about tremendous chasms in the economy between the people that are thriving in the tech sector and the people that are not faring as well in the service economy,” he said. “Now, we’re talking about people’s actual ability to survive – we’re talking about survival and ruin.”
‘New perspective on life, on economy, on society’
The tech sector’s ability to continue providing jobs and services that the world requires will usher in continued prosperity for the already highly prosperous region, Hancock added.
While the rich get richer, he hopes the service sector emerges from the pandemic armed with increased respect, regard and bargaining power. But this crisis could also prove it’s too perilous to live on the edge in vulnerable industries, he said, leading to a mass exodus from California.
This could be an opportunity for local and federal investment in infrastructure, similar to the “New Deal” in the 1930s, Hancock and Stone said.
The pair advocate investing in high-speed rail, electric and sustainable retrofitting infrastructure, which would provide jobs for the community. Stone added the interest in these projects – particularly among younger generations – is palpable, as rental developments in walking distance from BART stations have 15 percent higher rents than other locations.
They also both insist the coronavirus does not necessitate giving up urban environments of dense housing and mass transit, but instead learning how to cope with infectious diseases through masks, vaccines and innovative new ideas.
“I don’t think that Silicon Valley would be permanently changed in the way that that phrase is being used today,” Hancock said. “But I do think we have the opportunity to come away from this with a wide range of really ingenious innovations for living and for working, that I hope give us a new perspective on life, on economy and on society.”
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