December 14, 2001

Immigrants: A Real Estate Bulwark in the Recession

By: Joel Kotkin

At a time when American concern about foreigners may be reaching a historic high, real estate professionals may have their own reasons for monitoring the flow of immigration. With recessionary forces driving occupancies and rents downward, the presence of large numbers of newcomers-who, including their children, now account for over 60 million Americans-could prove an important, even critical, counter-cyclical force.

Immigrants matter more in a recession, notes a recent study by the Selig Center at the University of Georgia School of Business, in large part, because their growing numbers, higher rates of child-bearing and relative youth boost their propensity to spend on basic retail items, particularly food and household goods. At the same time, immigrants are less likely to be dependent on stocks and other investment instruments, which had fueled the inflationary real estate boom in many Anglo-American communities.

This trend can be noted in a host of communities, from the Silicon Valley of Northern California and the San Fernando and San Gabriel Valleys of Southern California to greater Houston and New York. In each of these areas, high concentrations of new Americans seem to be buttressing certain areas with new investments and tenants that might otherwise be feeling the full brunt of the recession.

"The recession hasn't effected me at all," says Jose de Jesus Legaspi, a prominent Los Angeles-based real estate developer. In the San Jose area, for example, Legaspi is currently developing new retail properties in the city's heavily Hispanic areas at a time when vacancies are rising in the upscale, Anglo-American areas that were devastated by the "tech wreck" in the Silicon Valley.

"The Silicon Valley Anglos have had a hard time, but the Latinos are doing as well as they were before," Legapsi suggests. "They never were working [in the] dot-coms or cashing big IPO checks."

Indeed, in areas like San Jose, where roughly half the population is either Asian or Hispanic, the immigrant-driven markets may well prove the most resilient in what has been an increasingly tough environment for local developers. In some areas, Legaspi notes, immigrant-led growth has been so strong that it is almost impossible to tell that there is any economic downturn at all.

This is particularly true in areas such as the San Fernando and San Gabriel Valleys of Los Angeles, which have become increasingly attractive to newcomers over the past decade. Once the prototype of an Anglo-American suburb, roughly half of the over 1.2 million residents of the San Fernando Valley are now Latino or Asian; the percentage is even higher in the San Gabriel Valley, which is located east of downtown Los Angeles.

"We're not seeing much of a recession in real estate here," notes Brian Paul, a spokesman for the San Fernando Valley Board of Realtors. "The immigrants are fueling growth here that contradicts most of the negative forces."

The impact of immigrants is most notable in the retail sector. Rents in the heavily Latino-dominated districts around Van Nuys Boulevard, for example, have grown over the past five years from $1.25 psf - $1.75 psf to as high as $3.00 psf. Developer Legaspi points out that these rents can be as much as 50% higher than in tonier, predominately Anglo, areas such as Sherman Oaks or Studio City.

Housing, too, has been impacted by immigrants, not only in the Valley but throughout Los Angeles County, where housing prices have continued to surge amidst the recession. Today, of the ten most common names for new homebuyers, seven are clearly Latino-Garcia, Rodriguez, Hernandez, Lopez, Gonzalez, Martinez and Perez-and two, Kim and Lee, are Asian. Nationally, immigrants tend to buy houses the longer they stay in the U.S.; after fifteen years, their rate of homeownership surpasses that of "native" Americans.

Immigrants are also emerging as an important force in financing new real estate development, both in the inner suburbs and the lower-cost areas near the downtown historic core, at a time when many mainstream financial institutions are cutting back on lending. This same pattern, recalls Dominic Ng, President of East West Bank (based in the heavily Asian-populated San Gabriel Valley east of Los Angeles), also emerged during the last, far-more-severe, Southern California recession of a decade ago.

"When recessions hit, the immigrant population continues to grow and their deposits also increase," notes Ng, whose bank has emerged over the past decade to become the third-largest bank based in the Los Angeles area. "This happened before and it's happening now. Our branches in immigrant areas are doing more business than the others."

Similar patterns can be seen in other regions, according to local banking and real estate executives. Perhaps two regions, in particular, that bear watching are New York and Houston, both of which have taken serious economic hits over the past several months. Houston, which was riding high early in the year, has been buffeted by falling energy prices and the impending collapse of Enron, a major force in both local hiring and the downtown office market.

As a result, notes Bill Gilmer, chief economist for the Federal Reserve Branch in Houston, there are prospects that downtown vacancy rates could skyrocket from five to over fifteen percent almost overnight. Other areas, including the Northwest suburbs, where hard-hit corporate icon Com-paq is in trouble, could suffer large-scale layoffs as well as rising vacancies.

In contrast, real estate insiders note that immigrant-oriented areas-such as the Belaire Road section located just outside the central 610 Loop-and the Harwin Corridor, which boasts a major collection of trade-oriented low-rise offices, warehouses and stores, seem to be holding up somewhat better. Although these areas, Gilmer suggests, may eventually feel the impact of a downturn in the energy or technology sectors, they seem somewhat more resilient than the once red-hot traditional Class A markets.

Indeed, Houston's immigrant community-the city enjoyed an 84% boost in newcomers of the 1990s, the highest of any major urban area-may well become the critical counter-balancing force to keep the city from repeating its historical boom-bust cycle. Focused largely on trade, domestic manufacturing and services, the Houston immigrant economy may prove a steadying force on the city's now-shaky real estate economy.

A similar, largely unrecognized phenomena might also be seen in the New York area. Devastated both by the after-shocks of the 9/11 disasters and a turndown in such key industries as financial services, tourism and advertising, the city's often-ignored immigration center of Queens seems to be withstanding the downturn far better than Manhattan.

Once predominately a white middle-class neighborhood, Queens has now replaced Manhattan as New York's quintessential "melting pot". Still heavily middle class, Queens County-representing a population of over two million-is now also the most heavily immigrant-populated borough, with nearly fifty percent of its households being headed by someone born overseas. This migration from abroad has made the borough the leader in the demographic rebound of New York City, with a population growth rate of more than 14% over the 1990s.

Queens' economic vitality, suggests Marine Nahikian, President of the Queens Economic Development Agency, rests largely on its clusters of immigrant entrepreneurs, including Latinos in places like Jackson Heights and the bustling Asian community of Flushing. Unlike the economy of Manhattan, commerce in these regions-tied to international trade, manufacturing and local services-has held up better than that in nearby Gotham in the current business environment.

Of course, Queens' immigrant communities will not escape the impacts of the recession entirely. The decline in air travel and the aftershocks of employment layoffs in Manhattan, where many Queens residents work, will surely take their toll. Yet early indications show that the borough is weathering the recessionary environment better than other parts of the city, while the real estate market, particularly the office sector, remains tight with rents that continue to climb.

Ultimately, as the immigrant economies in Queens and elsewhere grow, even in the face of harsh economic times, it makes sense for investors and developers to look more closely at these often overlooked communities. Americans may be more suspicious these days of foreign names and influences, but for business, the newcomers are likely to prove one of the key growth opportunities both in this recession and beyond.

Joel Kotkin is a Senior Fellow with both Pepperdine University's Davenport Institute for Public Policy and the Milken Institute, as well as a Research Fellow in urban policy at the Reason Public Policy Institute.

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