California Trends Look Favorable – Just Don't Move There

It was good talking to California rental people in preparation for this month’s cover story. As you’ll read on page 20 things are better now, but it’s not all champagne and roses, especially considering how far down it was before it started to get better. John Wetherholt of Fagan Equipment in Newark (in the San Francisco Bay area) told me he had much of his aerial fleet parked and stored across the street from his rental center for a few years and had made the decision in late 2011 that he would shut his company down if things didn’t pick up by June of 2012. Fortunately things did and now he’s rolling and actually taking a salary again after not doing so for a long time.

Dennis Turner of PDQ Rentals in Santa Fe Springs (near L.A.) saw his company’s revenue drop 40 percent a few years back. I heard similar numbers from others I spoke with. Tony Berenger of Baker Rents in Costa Mesa talked of double digit revenue growth coming back as did John Grill of A-Action Rents, based in Windsor.

California is a great place to live in many ways, but nice weather comes with a price. The cost of doing business – like the cost of living -- is very high, with challenging regulations of many kinds. And in addition to the EPA regulations the industry is facing all over the country, there are California Air Resources Board rules on top of them, a topic for another article.

Almost everything is more expensive in California. And while the highs may be high – not a reference to its biggest cash crop -- the lows are low and the business cycles are far more dramatic and pronounced than just about anywhere in North America.

The CARB regulations, like EPA regs, might have a hidden benefit in that while leading to higher costs of purchasing equipment for rental centers, the costs are higher for customers as well, therefore driving contractors to rent more. Contractors are also faced with difficulties obtaining capital after the lean years they’ve been through.

Oil and gas business is good, like everywhere right now, if you have the good fortune to be near it; road repairs have been strong in some areas. Remodeling has been the primary driver of the rental recovery for many. It’s not as exciting as a housing or commercial construction boom, but for now there’s enough of it to get the wheels turning more than they have for a while.

There are uncertainties for sure. Seemingly endless budget concerns are always lurking in California and a recent survey of small business owners indicated that revenue and cash flow are the leading issues that trouble them. There is uncertainty in the health care and trade sectors, two of California’s most important economic drivers. From a national perspective, California is unique and its geographic location and strong technology sector are reasons its success might not easily translate nationally.

For the most part, economists are upbeat. According to the Christian Science Monitor, the addition of hundreds of thousands of new jobs in the last two years and a booming real estate market are leading an economic recovery in California. Unemployment is now at 8.5 percent, ninth lowest in the United States.

Although California’s recovery is being felt in pockets by the rental industry, for the most part the wheels are turning statewide. For example, in the extremely hard hit Inland Empire, local businesses have recovered 26 percent of the jobs lost in the downturn. That’s not dramatic, but the unemployment rate in the area has dropped from 14.5 percent in the first quarter of 2010 to about 10 percent now.

While the state’s recovery is generally classified as sluggish, it is forecast to experience 2.1 percent growth in real gross state product in 2013, the fourth consecutive year of roughly 2-percent growth. Beacon Economics forecasts that growth to accelerate to 3 percent in 2014 and 3.2 percent in 2015, with more than one million new construction jobs by 2017. That sounds pretty exciting until you realize there would still be fewer construction jobs than before the recession.

The agricultural-focused Central Valley, which has gone through a very rough patch the past few years, is expected to catch up with coastal area growth rates by next year, with better than 2 percent job growth in Stockton and Modesto in 2013, while in the current booming San Francisco Bay area job growth will decline from near 4 percent in 2012 to 2 percent in 2014.

While numbers vary depending on which economic forecast you read, the trend definitely looks upward for California. Just don’t all of you decide to move here. The traffic is insufferable already!