City Faces New Challenges, Economist Warns

By Blair Clarkson
Staff Writer

Jan. 7 – Santa Monica faces stiff competition from neighboring cities and must become more “strategic” if it expects to continue to prosper, LA’s economic guru told a gathering of civic and business leaders Wednesday.

Jack Kyser, chief economist at the Los Angeles Economic Development Corporation, addressed the specific economic issues affecting both the city and state, the financial challenges and opportunities facing local businesses and the unique trends that will determine Santa Monica’s future.

“The bottom line is that the economy is going to get better,” said Kyser, during the 2004 Santa Monica Economic Conference at the Civic Auditorium. “And 2005 will be even better.

“But Santa Monica has got some challenges that you’ll have to think about to maintain economic health and vitality,” he cautioned. “You’re not defenseless, but you’re going to have to be strategic.”

A self-proclaimed “urban psychologist,” Kyser believes that such strategies will come from understanding Santa Monica’s “SWOTs” -- strengths, weaknesses, opportunities and threats.

Santa Monica’s popular tourist draws -- such as the beach, its wide array of hotels and restaurants and the Third Street Promenade -- are unique and vital assets and must be promoted, Kyser said.

But at the same time, he added, “businesses must think about which adjacent cities are hungry. Competition for the consumer dollar is growing.”

The city will face stiff competition from new retail developments in Culver City, new multiplexes in Century City and the Westside Pavilion and proposed changes to The Grove, Kyser said.

The competition already is having an impact, he said, noting that Santa Monica’s taxable retail sales have “flattened out” over the last three years. In fact, the city’s sales as a percentage of total LA County sales have slid since 2000, Kyser said.

“This tells me that competition is biting, and demand for Santa Monica retail is off,” Kyser said. Newer shopping destinations like The Grove are taking retail shoppers from malls like Santa Monica Place, and local business leaders need to consider ways to liven up these locations, he said.

The development of shopping districts in the Downtown LA area will also impact Santa Monica retail, Kyser warned. “Competition is heating up, businesses are moving back to the center of LA County.”

In addition, it will become increasingly difficult to get to Santa Monica, Kyser said. No new freeways are going to be built, and the proposed light rail lines face increasing acrimony and funding problems.

“Look at the population growth,” he said. “We need to look more seriously at mass transit, or we’re going to have gridlock, especially on the Westside. And that is a deterrent.”

The California Department of Finance reports that Santa Monica has seen slow and steady population growth, adding 1,400 new residents last year, which brought the population up to 90,700. LA County as a whole is growing by about 170,000 residents a year, thanks to both home growth and migration.

On the labor front, local jobs have held steady for the past two years at around 70,000, after declining from a near-term peak in 2000. According to the California Employment Development Department, Santa Monica’s unemployment level has fallen to 6 percent, compared to 6.8 percent for LA County and 6.4 percent for the state.

Santa Monica’s three largest industries last year were professional and business services (with about 12,000 employees), leisure and hospitality (11,000) and education and health services (10,000).

Retail trade followed close behind, with 9,000 jobs, and manufacturing, although not nearly as prolific, “is still alive and well in Santa Monica,” Kyser said.

A high-wage community, Santa Monica felt the sting of the economic downturn, but wages are “still well above LA County levels,” Kyser said.

In addition, “the number of business establishments is holding steady,” and there has been a surge in new business at the state level, he added.

In response to a hotel owner’s query about tourist spending, Kyser put a smile on many faces in the room. “Tourism,” he said, “has one of the best outlooks of any industry this year in Southern California.”

Contributing to tourism’s sunny forecast is the declining value of the U.S. dollar, which will help draw increasing numbers of visitors, particularly from Europe.

The bad news is that competition for the tourist dollar from other states and countries is growing, and over recent years the state has cut back on tourism promotion. Kyser also noted that many business travelers are still quite cost-conscious.

However, “Santa Monica has held up fairly well in the tourism industry.”

The city maintained a 74 percent hotel occupancy rate last year, compared to 68 percent for the county as a whole, Kyser said. He predicts occupancy will increase this year to 75 percent.

“The good news is that Santa Monica has been able to hold its daily room rate up at about $200,” which is well above the LA County average, Kyser said.

On a state and national level, the economic indicators are improving. In California, “personal income is coming back,” Kyser said, citing the state’s 3 percent growth rate.

As for the U.S. economy, “it’s going to be decent (this year), about a 4 percent growth rate. You are going to get a good recovery. Inflation is under control and not a threat. And all measures of technology are looking better, which is very important to the state of California.”

Yet, with all the improvements in the U.S. economy, there are still some dark clouds on the horizon for California. The California Legislative Analyst’s Office forecasts that state operating deficits will continue to loom large on the Governor’s books.

“We have structural deficits that are going to go out for quite a long period of time, as far as the eye can see,” Kyser warned. “Electric energy costs are still high, and we’re not competitive with surrounding states.”

And with changes to employment cost packages, worker’s compensation, paid family leave, and mandated health care starting in 2006, it has become very expensive for businesses to hire in California

Competition from other states and foreign countries continues to rise and Kyser is concerned that many California cities “don’t look outside their borders to see what’s going on.”

Kyser advised local business leaders to keep an eye on the important trends affecting the nation and the state, since they will help determine Santa Monica’s economic recovery.

But “we have to remember that we’re not in a bubble,” he said. “A business in California can go to a surrounding state, or offshore. This is a global economy.