California Legal Market

Fall 2002 California Economic Outlook

Attorney employment rates are directly related to the state of the economy. When there is more economic activity, and more deals and transactions of various types are being done, more lawyers are needed. Conversely, when businesses are hurting, lawyers have time on their hands, or worse—are let go. Thus, it is important for lawyers to keep abreast of economic developments.

While both Southern and Northern California are continuing to suffer from the economic downturn, the Southern part of the state is in better shape due, in part, to the greater diversity of its economy. A recent San Francisco Chronicle poll found that 49% of Los Angeles County residents, as compared to 73% of Bay Area residents, believe that California is experiencing a bad economic period. According to projections by UCLA economists, Los Angeles’ economy should bounce back from the economic slowdown next year, and is expected to outperform the Bay Area, if the rest of the nation does not enter a double dip recession.

In contrast to the recession of the early ‘90’s when Southern California relied heavily on the hard-hit defense industry, there now is a broader base of industries and occupations in the region. Information and materials technologies developed through the aerospace and defense industry, along with the presence of medical research facilities in the area, have contributed to the growth of San Diego and Orange Counties as biotechnology centers. In addition, the region also maintains a variety of manufacturing, entertainment, and apparel industries. And cross-border manufacturing ventures from Mexico have been an economic boon to San Diego. Furthermore, population growth in the Southland, from Santa Barbara down to the Mexican border, has increased the demand for homebuilding, retail, and related services.

Ironically, the tragedy of September 11, 2001 had a positive economic impact on a few Southland industries. With the increase in defense budgets following the terrorist attacks, there has been an upturn in aerospace and related component supply work. For example, several Southern California companies will handle the Joint Strike Fighter project. Also, clothing manufacturers have moved some of their foreign operations back to the Southland because of concern over unrest in countries such as India and Pakistan, and because of new anti-terror customs regulations that could impact the movement of goods from overseas. In addition, there has been an increase in port and airport traffic and hotel occupancy in the past year.

Southern California’s Inland Empire has seen dramatic growth due to relatively inexpensive land and homes as compared to other parts of the state. Satellite offices and new headquarters of various companies are being established in San Bernardino and Riverside counties and engineers and skilled workers are relocating from other economically depressed regions of the country. There are plans, for example, to establish a distribution center for domestic cars from across the US and imported cars arriving from the ports of Los Angeles and Long Beach, to be shipped by train to a former Air Force base inland and, from there, be distributed to dealerships throughout Southern California. In addition, Southern California’s expansion is extending over the Grapevine into the southernmost portion of the agricultural Central Valley towards Bakersfield with the build-out of Tejon Ranch with industrial parks, retail establishments, and several housing developments.

With this diversified economic base, Southern California is better equipped to withstand these economic hard times. In contrast, Northern California’s dramatic rise during the economic boom was based almost exclusively on the high technology explosion. Therefore, when that sector deflated, the region was hit hard. And since Silicon Valley was flying higher than just about any other region in the country, it had farther to fall. The fortunes of the law firms that served the “new economy” mirrored that rapid rise and fall. However, while economists do not expect Silicon Valley to completely return to its spectacular heights, it will make a recovery. However, in the opinion of several economists, this recovery will take a year or more.

A dramatic indicator of the economic woes in Northern California is the high office vacancy rates. While only a couple of years ago office space was at a premium, San Francisco and Silicon Valley now are, comparatively, ghost towns. The vacancy rates have been estimated as being as high as 30-40%. Silicon Valley lost 8% of its jobs, or approximately 100,000 from December 2000 through May 2002. There have been mass layoffs of attorneys from law firms. Even the largest companies, such as Intel, Sun Microsystems, and Hewlett-Packard have had significant layoffs.

Despite these depressing statistics, business leaders in Northern California remain optimistic. The core ingredients of Silicon Valley’s previous success—universities, venture capitalists, and entrepreneurs—remain in the region, sustaining the hope of regeneration. Business leaders have come together in organizations such as Silicon Valley Manufacturing Group and Joint Venture Silicon Valley to get things moving. They have been lobbying for tax breaks, infrastructure improvements, and public assistance with education, transportation, and housing in order to compete in recruiting and retaining the businesses and people needed to fuel the next boom.

These leaders also are looking for the next new technology to spark the region’s comeback. For example, they cite the emerging nanotechnology (manipulating molecules) and see its merger with the region’s existing strengths in information technology and biotechnology. In fact, at least one national law firm recently established a nanotechnology practice group, pulling together attorneys with a variety of expertise in all offices, and with its department head located in the firm’s Palo Alto office. This kind of interdisciplinary brainstorming worked well for Silicon Valley ten years ago in backing pilot Internet projects, one of which led to the founding of Netscape. It was Netscape’s IPO in 1995 that ignited the Net boom, which set the region’s economy on fire.

During the economic expansion of the ‘90’s, Northern California’s unique concentration of universities, venture firms, technology companies, bankers, and lawyers was studied and replicated elsewhere in places such as Boston, San Diego, Texas, Denver, and Northern Virginia. Many of those new tech centers have found that recruiting businesses and employees away from Northern California is not difficult because of the lower land and housing costs and good schools. So now, even when tech businesses bounce back, Silicon Valley business and its lawyers will find that they have competitors elsewhere.

California Legal Market Fall 2002 California Economic Outlook Attorney employment rates are directly related to the state of the economy. When there is more economic activity, and more deals and transactions of various types are being done, more lawyers are needed. Conversely, when businesses are hurting, lawyers have time on their hands, or worse—are let go. Thus, it is important for lawyers to keep abreast of economic developments. While both Southern and Northern California are continuing to suffer from the economic downturn, the Southern part of the state is in better shape due, in part, to the greater diversity of its economy. A recent San Francisco Chronicle poll found that 49% of Los Angeles County residents, as compared to 73% of Bay Area residents, believe that California is experiencing a bad economic period. According to projections by UCLA economists, Los Angeles’ economy should bounce back from the economic slowdown next year, and is expected to outperform the Bay Area, if the rest of the nation does not enter a double dip recession. In contrast to the recession of the early ‘90’s when Southern California relied heavily on the hard-hit defense industry, there now is a broader base of industries and occupations in the region. Information and materials technologies developed through the aerospace and defense industry, along with the presence of medical research facilities in the area, have contributed to the growth of San Diego and Orange Counties as biotechnology centers. In addition, the region also maintains a variety of manufacturing, entertainment, and apparel industries. And cross-border manufacturing ventures from Mexico have been an economic boon to San Diego. Furthermore, population growth in the Southland, from Santa Barbara down to the Mexican border, has increased the demand for homebuilding, retail, and related services. Ironically, the tragedy of September 11, 2001 had a positive economic impact on a few Southland industries. With the increase in defense budgets following the terrorist attacks, there has been an upturn in aerospace and related component supply work. For example, several Southern California companies will handle the Joint Strike Fighter project. Also, clothing manufacturers have moved some of their foreign operations back to the Southland because of concern over unrest in countries such as India and Pakistan, and because of new anti-terror customs regulations that could impact the movement of goods from overseas. In addition, there has been an increase in port and airport traffic and hotel occupancy in the past year. Southern California’s Inland Empire has seen dramatic growth due to relatively inexpensive land and homes as compared to other parts of the state. Satellite offices and new headquarters of various companies are being established in San Bernardino and Riverside counties and engineers and skilled workers are relocating from other economically depressed regions of the country. There are plans, for example, to establish a distribution center for domestic cars from across the US and imported cars arriving from the ports of Los Angeles and Long Beach, to be shipped by train to a former Air Force base inland and, from there, be distributed to dealerships throughout Southern California. In addition, Southern California’s expansion is extending over the Grapevine into the southernmost portion of the agricultural Central Valley towards Bakersfield with the build-out of Tejon Ranch with industrial parks, retail establishments, and several housing developments. With this diversified economic base, Southern California is better equipped to withstand these economic hard times. In contrast, Northern California’s dramatic rise during the economic boom was based almost exclusively on the high technology explosion. Therefore, when that sector deflated, the region was hit hard. And since Silicon Valley was flying higher than just about any other region in the country, it had farther to fall. The fortunes of the law firms that served the “new economy” mirrored that rapid rise and fall. However, while economists do not expect Silicon Valley to completely return to its spectacular heights, it will make a recovery. However, in the opinion of several economists, this recovery will take a year or more. A dramatic indicator of the economic woes in Northern California is the high office vacancy rates. While only a couple of years ago office space was at a premium, San Francisco and Silicon Valley now are, comparatively, ghost towns. The vacancy rates have been estimated as being as high as 30-40%. Silicon Valley lost 8% of its jobs, or approximately 100,000 from December 2000 through May 2002. There have been mass layoffs of attorneys from law firms. Even the largest companies, such as Intel, Sun Microsystems, and Hewlett-Packard have had significant layoffs. Despite these depressing statistics, business leaders in Northern California remain optimistic. The core ingredients of Silicon Valley’s previous success—universities, venture capitalists, and entrepreneurs—remain in the region, sustaining the hope of regeneration. Business leaders have come together in organizations such as Silicon Valley Manufacturing Group and Joint Venture Silicon Valley to get things moving. They have been lobbying for tax breaks, infrastructure improvements, and public assistance with education, transportation, and housing in order to compete in recruiting and retaining the businesses and people needed to fuel the next boom. These leaders also are looking for the next new technology to spark the region’s comeback. For example, they cite the emerging nanotechnology (manipulating molecules) and see its merger with the region’s existing strengths in information technology and biotechnology. In fact, at least one national law firm recently established a nanotechnology practice group, pulling together attorneys with a variety of expertise in all offices, and with its department head located in the firm’s Palo Alto office. This kind of interdisciplinary brainstorming worked well for Silicon Valley ten years ago in backing pilot Internet projects, one of which led to the founding of Netscape. It was Netscape’s IPO in 1995 that ignited the Net boom, which set the region’s economy on fire. During the economic expansion of the ‘90’s, Northern California’s unique concentration of universities, venture firms, technology companies, bankers, and lawyers was studied and replicated elsewhere in places such as Boston, San Diego, Texas, Denver, and Northern Virginia. Many of those new tech centers have found that recruiting businesses and employees away from Northern California is not difficult because of the lower land and housing costs and good schools. So now, even when tech businesses bounce back, Silicon Valley business and its lawyers will find that they have competitors elsewhere.	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