Market Report: October 2005

Globalization and Housing Prices, Part II by Jim Scott

Richard Sinkin lives in Mission Hills and is a partner of InterAmerican Group. Mr. Sinkin’s firm buys small to medium American companies that can benefit from manufacturing their product abroad, primarily in Latin America. This writer has long been concerned that globalization may eventually erode the value of local real estate. (Part I of this interview is available in Past Market Reports.)

JS:  Do we have political leaders who have the intellectual skill and vision to drive our City down the globalization road? In Part I you rated our political leadership 2-3 on a 10-point scale. What can our civic and political leaders do to derive more benefits than losses from globalization?

RS: Let me give you an example of where that’s going to happen. A lot of our bio-tech and high-tech companies are moving from the R&D phase into manufacturing. This is the critical juncture of a company – where the product becomes actually commercialized and revenues start coming in based on sales. We don’t have the infrastructure for manufacturing here.  In fact, we pretty systematically removed manufacturing from our economic equation. These companies are going to build their manufacturing plants elsewhere and when they move the manufacturing elsewhere the odds of moving the corporate headquarters go up. Other than an intense desire to live near the Torrey Pines Golf course, we run the risk of losing a lot of potential corporate and civic leadership from these maturing companies. That’s a real risk for us and we’re not doing anything about that. We don’t have adequate transportation here--the airport being the finest example of our civic failure. We don’t have a good rail-line that comes in and out of here and we don’t have a decent port at all. We’ve pretty much decided that the ports are going to be for tourism and the military. The result is we don’t have a viable commercial port. You’ve got to go elsewhere if you’re going to ship overseas.

JS: So in other words, we’ve ceded both manufacturing and shipping to Los Angeles and Long Beach. Is there a way to turn that around?

RS: Well they could and it’s a globalization answer. We need to be working intensely with Tijuana and Baja California to provide a manufacturing and transportation infrastructure. There are ports they can use that are expandable. They have the labor factor and a lot of these products are labor intensive. Medical devices are a good example of a product that is invented here and is going to be manufactured elsewhere-- it’s not going to stay here unless we act. But we have no discussion of this in our civic dialogue. We have tremendous resources right on our border, but San Diego tends to look at Mexico as a problem, not as an opportunity.

JS: So if we don’t adapt and create the opportunity, whether it’s in Mexico or in San Diego, what happens to the upper sixty-eight percent of the population that now own homes?

RS: We will still continue to have a strong base here. San Diego is not going to whither away, but it’s a question of whether we grow in terms of job creation and economic opportunity. Entrepreneurial start-ups are really engines of growth today, not real estate development. Those days are over as far as I can see and here in San Diego, we cannot prosper in the long term when real estate development is your only form of manufacturing.

JS: Moving on, another concern with globalization is the loss of knowledge jobs along with blue-collar opportunities. What happens when we lose, for example, computer-based jobs to India’s educated work force? Our price structure is supported by our wage structure so would it not follow that eventually our aggregate wages would not be high enough to support current price levels?

RS: My view on real estate is that there is very little upside right now and very high downside risk right now because the affordability index has widened so dramatically here. In the short term we are going to have an adjustment here, no matter what we do, whether it’s globalization or not because prices are not sustainable. In the long run what we have to do to sustain a viable real estate market and a viable community in general is to get our leadership focused on adapting to globalization.

JS: So what you’re really saying is that I am looking at the wrong problem. The problem is local and it is about leadership and vision, not necessarily overpriced homes.

RS: Absolutely,

JS: Assuming that we board the globalization train, you believe real estate will remain a viable investment going forward.

RS: Absolutely, and it (globalization) can be a real driver for real estate. What happens is that jobs linked to the global economy pay much, much better than jobs linked solely to the domestic economy. Manufacturing jobs, technology jobs, software, you name it and not all of that is…some of it is going to go off shore, but not all of it and our job is to keep what we can here.

JS:Assuming San Diego embraces the opportunity of globalization, is that software engineer working for two dollars an hour in India is going to drive down the price of local real estate?

RS: No, not going to happen here.

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