The constellation of star technology companies scattered along the Ventura (101) Freeway Corridor have gone into a freefall, jeopardizing what has been one of L.A.’s fastest-growing areas. While economists and others say it’s too early to pronounce a Silicon Valley-like meltdown along the corridor which stretches from Woodland Hills to Camarillo there are signs that the tech pileup is beginning to ripple through the area’s economy. Ten of the area’s top tech companies have lost more than half their aggregate value, as their combined market capitalization plunged from more than $140 billion to below $70 billion as of late last week.
Meanwhile, the area’s office vacancy rates more than doubled during the first quarter, vs. the year-ago period, according to statistics released last week by Grubb & Ellis Co., while home sales have softened markedly in the tony neighborhoods in Calabasas, Agoura Hills and Thousand Oaks. Sales of luxury vehicles at the area’s numerous car dealerships have fallen off, and the multitude of businesses that had thrived by supplying the tech industry are now suffering slowdowns. “The whole tech sector is dealing with overcapacity, and you’ve got to be concerned,” said Jack Kyser, chief economist for the Los Angeles Economic Development Corp.
While the Tech Corridor may have a somewhat more diverse business base than the Silicon Valley has, it has a higher concentration of technology than virtually any other area of Los Angeles, and that makes it more vulnerable to a downturn, Kyser added. “If the tech sector catches a cold, the (whole corridor) is going to get a fever,” he said.
In many ways, the Tech Corridor is a microcosm of the Silicon Valley. The last decade has been marked by explosive growth as engineers fled the ailing aerospace industry to launch their own startups. Commercial real estate activity took off as the tech entrepreneurs scrambled to add capacity to keep pace with seemingly unstoppable demand for everything from software to semiconductors to bio-engineered drugs. Home prices along the corridor followed suit, advancing into the $1 million-plus range in the gated enclaves of such cities as Calabasas and Thousand Oaks. But like the rest of the nation, the local tech sector is struggling with a hangover caused by too much growth over too many years.
Market values nosedive
As sales fell off and inventories began to mount, tech companies up and down the corridor have seen their stock values plummet. Among those caught in the downturn are Vitesse Semiconductor Inc., California Amplifier Inc., Tekelec, Semtec Corp., MRV Communications Inc. and Xircom Inc. Conexant Systems Inc., which makes chips for cell phones and other communication gear, recently laid off 1,500 people, including 100 employees at its Newbury Park production facility, in the face of a sharp decline in sales. This just a few months after the Newport Beach-based company was offering $3,000 to $5,000 bounties to any employee who brought in new hires.
The company initiated the layoffs after key customers such as Cisco Systems Inc., Lucent Technologies Inc. and Nortel Networks Corp. cut their level of purchases to cope with their own huge inventory buildups. Conexant’s stock price, meanwhile, has declined tenfold from a 52-week high of $79 a share on April 10, 2000 to $8 as of late last week. Even Amgen Inc., the biotech powerhouse, has been on the skids. The Thousand Oaks-based company has seen its stock slide from a 52-week high of more than $80 a share last July to about $56 as of late last week. The company’s market capitalization declined from $83.6 billion last summer to $59.2 billion as of late last week. That’s more than a 40 percent haircut in less than a year.
Feeling poorer
Like workers at most companies up and down the Tech Corridor, employees at Woodland Hills-based Vertel Corp. have seen the value of their stock options sink deep beneath the water. Vertel’s share price slid from a 52-week high of $25 in April 2000 to $1.19 as of late last week. “People were extremely disappointed,” conceded Craig Scott, chief financial officer at Vertel. “But the reality is they get paid to do a job. Stock options shouldn’t be the only reason for working at a company.” Besides, Scott argues, options are largely paper wealth because they can often take years to vest. “It’s not like it’s gold,” he said.
While that may be technically true, the loss of paper wealth can have a profound effect on consumer spending, several studies have shown. And that suggests workers at Tech Corridor companies will be more likely to put off big-ticket purchases such as homes and cars, said Kyser. It may be coincidence or simply a result of the slowing economy, but luxury car dealers along the Tech Corridor are beginning to feel the pain. Calabasas Motor Cars, for instance, has seen a 15 to 20 percent decline in Mercedes-Benz and Volvo sales this year. “It’s obvious people aren’t as aggressive with their purchases as they were,” said Mike Kusmuk, a sales manager. “A lot of customers mention how much they lost in the stock market over the last 12 months or so, and that usually has an impact on major purchases.” Silver Star Mercedes-Benz in Thousand Oaks is seeing a similar decline. The dealership sold 155 cars in March, down 20 percent from the same month last year. Pat Elder, who runs a machine shop out of Camarillo called Hi-Tech Engineering, has noticed his customers becoming more price sensitive.
In the past, the company did a lot of work for Xircom, a maker of modem cards for notebook computers, but Xircom recently switched to a Taiwanese machine shop. “They’re getting stuff done offshore for about one-third the price of what we can do it,” he said. The tech downturn, meanwhile, has broader implications for the corridor’s economy. The office vacancy rate in the Conejo Valley more than doubled to 13.7 percent in the first quarter, compared with 6.3 percent a year ago, according to Grubb & Ellis. The amount of Conejo Valley space being absorbed by office tenants, meanwhile, decreased sharply from 161,142 square feet in the first quarter of 2000 to 91,379 square feet in the just-completed quarter. Further softening conditions is the additional 1 million square feet of office space that has come on the market since last year. “The market is slowing down, especially along the Tech Corridor,” said Jeff Nasrallah, research services manager for Grubb & Ellis. “The problems in the (technology) industry are definitely contributing.” Brian Hennessey, a vice president with Grubb & Ellis, said that most tech companies are putting expansion plans on hold as they attempt to ride out the storm. A division of IBM Corp., for instance, was about to lease 18,000 square feet in the Conejo Valley, but the company put its plans on hold.
Old Economy stability
Tom Festa, a senior vice president for Grubb & Ellis, agreed that 2001 won’t set any records for absorption, but he doesn’t believe the year will be a total bust either. While technology companies are retrenching, Old Economy players are stepping up. Baxter International Inc., a maker and supplier of medical products, is looking for a headquarters building for one of its subsidiaries. And despite Conexant’s woes, the company recently paid $3.03 million for a 43,600-square-foot industrial building in Newbury Park and bought an adjacent parcel for $1.6 million as part of its long-term growth strategy. “We’re not going to see the same frenzy, but it won’t be a bad year either,” Festa said.
Still, the volume of home sales has softened, with upscale neighborhoods in Calabasas, Agoura Hills and Thousand Oaks seeing declines of 26 percent, 24 percent and 14 percent, respectively, in the first two months of 2001 compared to the same period last year, according to DataQuick Information Systems. “We’re seeing the biggest slowdown in the high end of the market,” said Leslie Appleton-Young, chief economist with the California Association of Realtors. “The affordable end is still extremely hot.” So far, there haven’t been widespread layoffs along the Tech Corridor, but the evaporating value of employee stock options and the general meltdown of the stock market are likely both factors contributing to downturn in home sales, she added. Still, Kyser and others say there are key differences between the Tech Corridor and the Silicon Valley that should buffer the area from hard times. The corridor enjoys a more diverse economy, and while there is a widespread perception that the area grew overnight, Kyser said the corridor has been growing quietly but steadily for several years. “It developed under most people’s radar,” he said. “It didn’t blossom that quickly, and it’s not going to fade away. There’s a solid underpinning there.”
