Boom-and-bust corner of California sees new hope

RIVERSIDE, California Tue May 19, 2009 10:41pm EDT

1 of 3. A Starbucks Coffee shop which closed its doors is seen in Riverside, California, February 5, 2009.

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RIVERSIDE, California (Reuters) - If the U.S. recession has an epicenter in California, it may be the sprawling, working-class neighborhoods of an area east of Los Angeles known as the "Inland Empire," full of boarded-up homes, vacant storefronts and jobless workers.

Now locals see signs that Riverside and San Bernardino counties, one of the fastest-growing U.S. regions during the housing boom and one of the worst affected by the housing crash, may have hit bottom and started the long road back.

The area still faces tough years coping with overbuilt neighborhoods of foreclosed homes, jobless rates over 10 percent, a poorly educated workforce and scores of empty warehouses built for a once booming trade industry.

But experts say there is room for optimism for the twin counties, with a combined economy larger than some U.S. states and a population that grew 26.5 percent from 2000 to 2008.

The Inland Empire, 50 miles east of Los Angeles, is now home to more than 4 million people, the country's 14th largest metropolitan area.

"The fact that things are pretty crummy in the Inland Empire right now doesn't mean they are going to stay that way," said Jerry Nickelsburg, senior economist at the UCLA Anderson Forecast. "This is not Detroit. There is no big structural adjustment happening. This is a recession."

Among the positive signs are rebounding home prices and sales, driven partly by investors but also young families finding they can afford a home for the first time. In March, home sales rose 64 percent in Riverside County and 89 percent in San Bernardino County compared with a year earlier.

"The interest rates and the market are now such that it invites people who have jobs to buy homes," Riverside Mayor Ron Loveridge said. "You are seeing the first major increase in house-buying out here" since the subprime meltdown in 2007."

But the poor job market makes that trend tenuous.

"That's the confounding thing in trying to sustain home ownership, the unemployment out here," Loveridge said.

Lower-middle income families flocked here to buy four-bedroom homes at affordable prices, at least compared to nearby Los Angeles or Orange counties. But with bad loan terms and then job destruction, the Inland Empire became a foreclosure nightmare.

There are more than 4,000 foreclosed homes in the city of Riverside alone and more defaulting all the time.

WAREHOUSE FOR WORLD TRADE

San Bernardino Mayor Pat Morris says some new jobs will come in transportation with the expansion of a major freeway and a planned redevelopment of the city's downtown, both made possible with federal stimulus money.

San Bernardino was a 1850s Mormon settlement that staked its fortune as a transportation hub and rail link, its mountains serving as a backdrop for the 1940 film "The Grapes of Wrath." And it has had its share of economic woes.

The 1994 closure of Norton Air Force Base and the loss of its 10,000 jobs was a defining moment. But Morris says the completion of a 15-year project to transform the shuttered base into a major international airport will provide new jobs.

With affordable housing and the largest tracts of undeveloped land in Southern California, he says the area has not lost its appeal.

"We will stand tall when the economy turns and people want to get into the business of home ownership again," Morris said.

Meanwhile, commercial real estate has begun to show signs of life. In April, Hong Kong apparel distributor IDS USA signed a five-year lease on a 645,000 square foot warehouse, one of the largest leases of the year in Southern California.

IDS chose the Inland Empire because its location makes distribution possible to Southern California, Phoenix, Las Vegas and San Diego from a single hub.

"In the last 60 days, maybe coincidental to the signing of this lease, the activity level has really picked up," said , said Kim Snyder, managing director of AMB Property, which owns the building. "We've seen that pressure valve that was turned really tight toward the end of last year, a little steam being let out now."

FEEDING NEW STOMACHS

But with demand for consumer products down during the worldwide economic slump, warehouses built in the Inland Empire over the last decade stand empty, and it may take several years before the goods start flowing again and workers are hired.

The Inland Empire has a massive 366 million square feet of warehouse space, built to handle the 43 percent of all U.S. imports that arrive at the ports of Los Angeles and Long Beach and flow across the country. But the industrial vacancy rate has tripled over the past year to more than 12 percent.

Despite the area's strong link to the world economy, it lacks the skilled and innovative workforce to compete for investment with other regions.

"Slightly over 50 percent of the adult population has not had a single college class. That basically dictates what kind of economy you can grow out here," said John Husing, chief economist for economic consultants Economics and Politics Inc.

"Being a poorly educated community in an America that was protected by vast oceans, where manufacturing was an option, is different from being a poorly educated community (now)," he said. "Today our poorly educated workers are competing with someone in India, and that's a sea change."

While that education deficit may take decades to disappear, local business is content for now to see new people coming in and spending money.

"My job is filling stomachs, and the problem out here was that you had a lot of new homes built that fell into foreclosure, and the stomachs left," said Jack Brown, CEO of Stater Brothers supermarkets, the area's largest private employer.

"Now investors are coming back in and they are putting stomachs back in the houses. The best sign I have is those families moving in to the empty houses."

(Additional reporting by Lisa Baertlein; editing by Alan Elsner and Mary Milliken)

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