Paradise for Progress

With an increasing year-round population, two state universities, and controlled growth, the Coachella Valley is capitalizing on its quality of life.

Bob Marra 0 Comments

Once a seasonal hangout for Hollywood’s elite, centered almost entirely on the Coachella Valley’s westernmost city, Palm Springs, retail-rich Palm Desert, and the other cities in this idyllic resort destination have matured into a self-sustaining regional economic powerhouse in many ways.

Attracting visitors from around the world — groups for business conferences and individuals and families for relaxation, rejuvenation, teeing up, or seeking adventure outdoors — the area is also a place where young families and retirees mix harmoniously — and the only place where both California state university systems coexist on the same site. It has also been transformed during the past decade into a more year-round economy, driven by a rapidly growing permanent population and part-time residents that are staying in the region longer than in years past.

Each year, the Palm Springs Life Progress Issue focuses on key categories of economic activity, including retail sales, hotel room sales and tourism, and building construction and examines how population growth impacts all of these categories. This year’s analysis of the desert economy uncovers opportunities and challenges that must be addressed by business and government leaders. If the economic expansion is to go forth with continued vigor, it must be managed very carefully and effectively to maintain the quality of life that is at the core of it all.

Population Growth

The Coachella Valley continues to experience the greatest rate of regional permanent population growth in Riverside County, which continues to grow faster than most counties in the state. Last year marked the sixth consecutive year that Riverside County ranked in the top 10 in all three key population measures: size, numerical change, and percentage change. The county saw the second fastest growth rate in the state — slightly behind that of Imperial County, adding 65,018 residents in 2006 and bringing its population to an estimated 2.032 million on Jan. 1, 2007.

While growing faster than the county and the state during 2006, the Coachella Valley was nevertheless touched by California’s overall slowdown in population growth, in large part due to the slumping residential real estate market. The local population expanded at a rate of 3.6 percent, down .7 percent from the previous year’s increase. An additional 15,020 permanent residents in 2006 raised the valleywide population to 429,319. The region boasted four of the top 10 fastest-growing cities in terms of percentage increase in Riverside County. Coachella, which grew at an exceptional 8.6 percent, was among the 25 fastest-growing cities in California. Indio ranked 31st in the state in terms of percentage growth, La Quinta ranked 35th, and Desert Hot Springs ranked 37th.

The valley has grown very rapidly over the past few decades. The permanent population has increased 251 percent since the 1980 census, when there were 122,196 residents. It has grown 86 percent since the 1990 census, when the population was 230, 865. And it has risen 35 percent since the 2000 census when the number of residents was 318,125.

Indio, which grew 6.9 percent last year, is the most populous city in the region, with a permanent population of approximately 77,000. Cathedral City is next with just over 52,000 residents, followed closely by Palm Desert with 49,750. Collectively, the population in the area’s eastern sector — from La Quinta to the Salton Sea — is growing much more rapidly than the region as a whole. It’s simply where the land is that’s developable and relatively unrestricted.

But if you think the desert is nearing its development and population capacity, think again. According to John Wohlmuth, executive director of the Coachella Valley Association of Governments, there are approximately 80,000 acres of land that have been developed in “an urbanized fashion.” He estimates that there are another 170,000 acres that are developable, which includes about 70,000 acres of land being used for agriculture that could be developed at a future time.

“Essentially every entity that provides population projections for the Coachella Valley, including CVAG, estimates that the area can accommodate between 1 million and 1.2 million permanent residents at build-out,” Wohlmuth says. “When that will happen is difficult to predict with a high level of confidence, but CVAG estimates it will occur sometime around 2060.”

In addition to the permanent population, the valley is home to a substantial seasonal population, estimated by various entities to be approximately 145,000 at the beginning of 2007. Combine seasonal residents with the permanent population and the number of people residing here during peak-season months is roughly 575,000. Add another 40,000 to 50,000 visitors on average during these same months and you have a raging economic engine for a large portion of the year when cash registers ring incessantly with sales.

Such rapid growth brings with it many economic opportunities, but also certain ramifications that could be quite unpleasant if development and infrastructure are not well planned and managed going forward.

“The biggest challenge is infrastructure,” Wohlmuth says. “We must aggressively mitigate traffic congestion so growth can occur in an effective manner. So we are trying our best to stay ahead of the growth by building roads and interchanges with the funding sources we have available.”

With development costs escalating rapidly, CVAG has altered its normal course of business in recent years by advancing funds to local cities for planning and engineering services to fast-track projects. Key infrastructure such as three modified I-10 interchanges that are desperately needed and the widening of Highway 111 to six lanes through Indian Wells have benefited from CVAG funding advances for design, engineering, and environmental review.

“The growth in our city’s population creates an exciting and dynamic time for us,” says Coachella Mayor Eduardo Garcia. “However, we are working very diligently to make sure that we plan as effectively as possible for the growth, because we want to ensure a future in which Coachella is a great place for people to live, work, and enjoy the best recreational opportunities we can provide.”

Retail Sales

The old adage that retail follows rooftops certainly applies to the Coachella Valley of late. In this case, retail is following more than 31,000 new homes built since the beginning of 2003. That’s a lot of people to feed, clothe, and entertain. Thus retailers of all types have converged on the desert in a big way in recent years.

A quick glance at recent statistics regarding retail sales and development of retail centers in the Coachella Valley suggests a dream come true for companies participating in the sector. A closer look reveals exciting opportunities throughout the desert region for essentially the full range of retailers, including major nationals, strong regional players, and emerging local multilocation outfits.

As a result, the Coachella Valley has seen retail sales expand at a rapid pace that has at times tracked at more than three times the impressive growth rate in California overall and mirrored strong increases in Riverside County as a whole. Retail sales in the Coachella Valley represent almost 26 percent of the entire market in Riverside County, while the valley’s population comprises roughly 21 percent of the county total.

Retail sales in fiscal year 2005/2006 (the most recent figures available from the state’s Board of Equalization) totaled more than $1.3 billion — an all-time record for the region and an increase of more than 7 percent over the previous fiscal year. Though it’s a healthy rate of growth, it is down from the double-digit pace seen in the prior two years.

The power of the Coachella Valley retail market has been boosted not only by the rapidly expanding population, but also by the influx of an estimated 3 million tourists that visit the region annually and the seasonal residents who bring enormous spending power with them for an average of six months a year. The combined impact of the permanent residents, tourists, and seasonal residents pushes the Coachella Valley’s per capita spending on retail to more than 25 percent greater than in Riverside County as a whole and approximately 40 percent greater than that of the state.

Because of the exposure the region has garnered within the retail industry based on such growth trends, a large contingent of major national retailers are either doing business in the Coachella Valley or have the area on their radar screens for consideration. We also are seeing a veritable siege on the region by mid-tier national and regional players that are following the big boxes and power centers that have come on line in the past couple of years.

Although there is concern about challenges in the housing sector of the desert economy spilling over to slow the pace of retail sales growth, the outlook for the future is very positive.

The valley’s fundamentals are still solid, with a strong service-job base in addition to population growth. Proven locations within the region will continue to be very successful and expand, as many desert locations exceed their chains’ sales averages. However, retailers are becoming significantly more prudent and selective to mitigate their risk, even in what they know to be growth markets.

“Retail as a whole is holding its own very well,” according to Maggie Montez, senior vice president and retail specialist for CB Richard Ellis in Indian Wells. “However, retailers are not pioneers like they used to be,” she adds, noting that retail center development in the region is predominantly focused in the more mature areas.

One exception is in Coachella, where numerous family-oriented neighborhoods recently completed and in the pipeline are proliferating.

“The rooftops are here in the city of Coachella, and many more are coming soon, so we continue to attract serious interest from a wide range of top-brand retailers,” Garcia says. “It’s especially exciting because retail center developers right now are finalizing several deals to bring in new amenities like movie theaters and nationally branded, sit-down restaurants that would all be firsts for the city.”

Garcia notes that it is a wonderful opportunity for the city’s residents to be in the position to shop in their own city knowing that they are boosting tax revenue that can be put to use for things such as expanded public safety services and parks and recreation.

A wave of activity also is taking shape in Indio, especially in the sector north of Interstate 10 commonly referred to as Shadow Hills. Thousands of homes have been built in Shadow Hills since 2004, but developers and retailers have waited until very recently to move forward with retail centers to cater to the new residents.

Several full-scale centers with well-known brands such as Home Depot, Target, Circuit City, Petco, and many others — as well as a state-of-the-art movie theater — are in the works. Hundreds of thousands of square feet of retail space have been approved for land along Monroe and Jackson streets just north of their I-10 interchanges. Some of it is already under construction.

Hotels and Tourism

Coming off an excellent year by most measures, the tourism industry in the Coachella Valley is maintaining the momentum it gained in 2006. Industry leaders are generally in agreement that, while it will be challenging to top last year’s excellent performance in a variety of key statistical categories by a large margin, it is likely that 2007 will see equal or slightly better results.

The year 2006 was a good one for hotels, attractions, tour operators, and special events in the desert. As tourism goes, so goes much of the valley’s regional economy, as all sectors are at least touched by the impact of tourism and many rely on it exclusively to generate revenue.

In the big picture, the national economic fundamentals are generally good, but are being impacted substantially by the slumping housing market. Thus, corporate earnings and cash positions at the large companies beyond the housing sector are in good shape, which bodes well for meeting and convention business. Additionally, the trend is that independent travelers and their families are tending to vacation closer to home — a good thing for the Coachella Valley, within a three-hour drive of more than 20 million people. With the global picture generally the same as in 2006 (although it is definitely uncertain), the table is set for continued success for tourism and hospitality.

According to the national tourism research company Smith Travel Research, the occupancy rate for the Coachella Valley region for 2006 stood at approximately 64 percent — an impressive increase of almost 4 percent over 2005. The average daily room rate was up roughly 8 percent — another sign of strength in the sector.

During 2006, the eight desert cities with hotels collected a total of $42.73 million in transient occupancy tax on hotel sales of $413.8 million. That’s up more than 6 percent from the prior year. The nearly $43 million dollars in local tax revenue goes directly to the general funds of the cities, providing a critical injection of cash that bolsters their budgets and helps fund evergrowing needs for public safety and a wide variety of amenities for desert residents.

At La Quinta Resort & Club, Director of Sales Mike Islava forecasts solid increases for occupancy and RevPAR (revenue per available room), even with a lot more hotel rooms available in La Quinta with the opening of Hilton Homewood Suites and Embassy Suites. “The new limitedservice properties will attract new visitors to the area, especially Southern California residents who have loyalty points and want to give the desert a try,” Islava says. “Our revenue and occupancy forecast for 2007 is definitely up from 2006, which was an exceptional year,” he adds, however noting that the valley still lags somewhat behind the performance of the meetings and conventions business nationally because “it’s tough to get here” based on air-travel challenges.

For future growth to occur, Palm Springs Hilton General Manager Aftab Dada points to the Palm Springs International Airport as the No. 1 factor in determining the potential for expanding the region’s tourism industry, especially with regard to the meetings and conventions component.

At the Palm Springs Convention Center, General Manager Jim Dunn projects a “pretty even year.” He sees similar results going forward, even though he notes that associations and companies often book meetings with much less lead time than in the past. Dunn notes that the future beyond 2007 will likely provide a much better opportunity for attracting large group business based on the potential of greatly expanded capacity with the expected development of a Hard Rock Hotel and the upscale Mondrian Hotel very close to the center of Palm Springs.

In terms of air traffic, there were more than 1.5 million passengers served at Palm Springs International Airport last year — an increase of more than 7 percent over 2005. That compares to airports throughout the nation that combined have posted a decrease in air traffic of .4 percent. The airport set monthly passenger-traffic records throughout 2006 and has continued to break records in 2007, with an increase of 7.3 percent through the first half of the year with 970,000 passengers served.

An exceptionally positive note regarding the airport is that the months with the highest percentage increases in passenger traffic in 2006 were July (up 16.7 percent) and August (up 13.1 percent). The boost to summer business was well received by local hoteliers and others in the hospitality business, as it added important slow-season revenue at exactly the right time. “We have been getting more business than ever in our shoulder season based on some larger groups for citywide events that have come to fruition from [Palm Springs Desert Resorts Convention and Visitors Authority] leads, including some of the sports-oriented groups,” Islava says. “Our July and August occupancy has been soaring.”

Special events continue to grow in attendance and scope across the Coachella Valley. Throughout the year, beginning with the ever-more popular and highly acclaimed Palm Springs International Film Festival, high-profile, quality events draw visitors from near and far and provide incredible media exposure of the region’s distinctive attributes for the world to see.

With the new Classic Club and municipally owned SilverRock Resort course in La Quinta being added in January 2008 and with George Lopez attracting more A-list celebrities than in recent years to the Bob Hope Chrysler Classic, the annual tournament will be able to attract and easily accommodate more visitors than ever with ample parking and a variety of hotel properties nearby.

Some quality new events, such as Palm Desert’s The Art of Food & Wine festival, were added in 2006 and will likely attract more attendance in 2007. A new country music festival with some of the nation’s top acts took place at the polo grounds in Indio a week after the massive Coachella Valley Music and Arts Festival in April and attracted a whole new audience of visitors to the desert, many perhaps for the first time.

Events such as the Pacific Life Open tennis tournament and the Coachella Valley Music and Arts Festival have been actively selling hotel rooms in packages with tickets in recent years, thus boosting occupancy with the type of people that will spend more dollars in the market for a longer period than day visitors.

Look for more visitors to The Skins Game in November than ever before as the City of Indian Wells takes over sponsorship and puts its great marketing machine together with its four hotels to boost attendance and enhance the city’s brand as a world-class tourist destination. Certainly there also will be positive impacts from the event for both Palm Desert and La Quinta properties and many other businesses.

In addition to even more outreach aimed at key convention, meeting, and tour clients, the Convention and Visitors Authority has boosted its efforts to attract more independent travelers to the region. A new cable TV program and advertising campaign with a “Give in to the Desert” theme featuring the desert’s top “product lines” was launched throughout Southern California. A combined print and radio ad campaign in tandem with airlines was launched with great success in Portland, Seattle, Chicago, and San Francisco.

The aggressive marketing is good, because numerous hotel and condo/hotel properties have been announced for sites throughout the desert — with estimated valuations of more than $1 billion — and a couple of them should be open for business for the full year in 2008.

New Building Construction

Nothing lasts forever; and in the case of the Coachella Valley housing development boom, things have changed drastically. The drop in activity precipitated in fall 2006 and continued throughout 2007, with housing starts and building permit valuations for single-family homes hovering at about half of the levels in 2006.

Housing starts in the single-family detached category were down 15 percent in 2006, but the situation worsened significantly during the first half of this year. The number of permits pulled by local home builders was down more than 65 percent, as companies worked to pare their standing inventories in a slow sales environment prior to moving forward with construction.

In terms of building permit valuation, single-family residential construction again represented the lion’s share of construction activity in 2006. The category accounted for $1.15 billion or 64.5 percent of the total, but it was a substantial decline from the 2005 tally of $1.43 billion, when singlefamily housing comprised more than 71 percent of the valley’s building activity.

Through the first half of 2007, building permit valuations for single-family housing were down an alarming 190 percent.

“The housing market is experiencing a pronounced correction in sales that we believe will last for the next 18 months,” says Fred Bell, executive officer of the Building Industry Association, Desert Chapter.

While Bell is concerned about the near-term future of the housing market geared for families in the desert region, he sees a silver lining in the business locally. “The local building industry is still optimistic overall, primarily because the Coachella Valley is a top destination of choice for retiring Baby Boomers and second-home buyers,” he says.

Commercial projects, which recently have been the bright side of the building industry, accounted for approximately 13 percent of new development in 2006. In the first half of 2007, commercial construction accounted for 26.3 percent of the action, which is an impressive increase of 95 percent compared to the same period in 2006.

“Fortunately, despite the downturn in residential construction, the commercial development sector is robust and should stay that way for the next couple years,” Bell says.

It’s a good thing, too, that commercial construction, which has been well diversified in terms of the type of product (industrial, office, and retail), is active, because it is absorbing a lot of the jobs that have been pared down by the residential market after a three-year expansion.

According to Michael Meade, an associate with Wilson Johnson Commercial Real Estate in Palm Desert, a massive amount of commercial office and industrial space is coming to the market in the near future. The new supply of space will create a variety of opportunities and challenges.

“In the next year, we will really see what can be absorbed in the Coachella Valley market,” Meade says. With roughly 1 million square feet of new space coming, “we will probably also see a variety of incentives — and more valuable ones — being offered by developers to attract tenants,” he adds.

More new office space is being offered as finished and build-to-suit products, compared to delivered “shells” in the past couple of years, according to Meade. There also is more flexibility in what building owners are offering in today’s market, meaning they are more willing to provide choices among available lease, purchase, and lease/purchase option deals.

Meade, who represents approximately 250,000 square feet of space in Palm Desert and La Quinta, notes that leasing prices have been changing also. “The norm for office space peaked at roughly $2.25 triple net about a year ago, but it is now hovering closer to $2.10.

“The down market in housing we have been seeing is having a considerable effect on new office product, because most of the home builders and ancillary businesses such as escrow, mortgage, and title companies have been downsizing considerably or at least delaying or canceling moves to new space,” Meade says. “In addition, some recent office projects have leased out to large percentages of housing-oriented companies; and now, many of the tenants are trying to sublease significant amounts of space.” Such an environment naturally puts downward pressure on prices.

However, Meade says, “We are not seeing a huge decline in demand for office space as much as we are experiencing a surplus in inventory.” He predicts that the development of speculative space has stopped precipitously and vacancy and perhaps lease rates will adjust with time.

While the valley seems immune to adversities that strike many urban areas and small rural communities, residents should demand smart planning from city leaders. Then, paradise will not be lost.

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