“Capital Insights” with Jack Kern: California to be Listed on eBay

“And now, of course this is another thing I didn’t count on, that now as the Governor of the state of California, I am selling California worldwide. You see that? Selling.” Governor Arnold Schwarzenegger, State of California

With little fanfare and a huge amount of criticism, the state of California is suffering in an unprecedented way. With budget shortfalls estimated as high as $42 billion dollars, the state announced recently that approximately 20,000 employees could be furloughed and countless other projects in process, including the construction of bridges and roads, will be stopped completely. The unavoidable conclusion from all of this is that Schwarzenegger’s comments about selling California may have become prophetic. Even with the prospect of a new budget bill under consideration by the state Senate, it is very probable that mass layoffs will take place, and future layoffs aren’t off the table. A budget bill intended to forestall this unprecedented personnel action may help avoid those measures now, but it is only a matter of time before the state succumbs to the financial pressures that cause it to wreak havoc on an already severely depressed economy. With economic power in California rivaling many small countries, demise of adequate state funding will have a ripple effect. It may mean additional privatization of state owned facilities, delays in paying income tax refunds and loss of massive amounts of future investor capital.

It’s also pushing apartment rents to low levels not seen in the past ten years in many primary markets. The complete evaporation of demand in both northern and southern California has begun to show up with properties offering reduced rents, higher levels of concessions and better terms overall. Property owners with major operations in the state can expect to see deteriorating fundamentals as the state collapses, and even with TARP II and other federal bailouts, there isn’t a $42 billion solution that will allow Arnold to balance the books.

Most pundits are fond of making fun of the governator, as he’s called, but his tagline now begs the question: “I’ll be back.”

I’m not so sure.

(Jack Kern is the Managing Director of Kern Investment Research and will be participating on a panel at the NAHB Pillars in San Diego. Please stop over and say hello if you happen to attend. He’d love to meet you and chat.)