Beneath the screaming headlines of bankruptcies, layoffs and foreclosures, fundamental economic shifts are occurring that will affect the growth of the regional economy over the next decade. Unlike past forecasts, I am sharing observations gleaned from the Clark County business community about the economic road ahead.
o The primary focus of banks will be to collect, not lend money.
o Residential, commercial and speculative industrial development will not recover for at least five years.
o There is a looming reset in the level of service from public agencies.
o A bright spot for local manufacturers is their growing competitiveness in export markets due to the weak dollar.
To understand the scope of local shifts, the Columbia River Economic Development Council did not go to the Wall Street Journal but to 130 business investors in the organization. Over a period of four weeks last autumn, 70 business leaders in 14 focus groups shared the following sobering observations.
o The primary focus of banks will be to collect, not lend money.
o Residential, commercial and speculative industrial development will not recover for at least five years.
o There is a looming reset in the level of service from public agencies.
o A bright spot for local manufacturers is their growing competitiveness in export markets due to the weak dollar.
• The primary focus of banks will be to collect, not lend money.
Banking (access to credit), especially for our regional community banks, will not return to normal in the near future. As our financial institutions repair tattered balance sheets, their focus will shift from loan origination/securitization to deposit acquisition, net interest income and fee generation. Credit standards will tighten significantly, loan-to-value ratios will decrease, and the personal guarantee will be the rule, not the exception.
The upshot is that credit for small and medium businesses will remain extremely scarce and when found, terms will be dear. You may rightly argue that banking is simply returning to standard practices. Regardless, credit will be a scarce commodity, and the lack thereof will hinder the local and national economic recovery.
• Development takes a sabbatical.
I take no pleasure in pointing out the obvious: Residential, commercial and speculative industrial development will not recover within the next five years. The ramifications of this trend will be far-reaching, from the collapse of fee and sales tax revenue for local governments to a significant reduction in construction employment and personal income. Construction jobs alone are down 1,600 in 2009.
We were fully aware that the regional economy was heavily leveraged to residential growth and development. But we did not know how deeply we were dependent (addicted?) on growth-related tax revenues to fund basic services. Growth was to pay for growth, and then some. There is a massive reset under way as local governments “right-size” to a new revenue norm. Government employment leveraged to growth-supported revenues will not return in the near future.
The housing sector will continue to be depressed by the overhang in foreclosed and underwater property, lack of development capital and lack of end-user demand. For the retail, office and industrial sectors, a combination of lack of investment capital and high vacancy rates will stall development. After the current commercial projects are completed, there are few projects in the development pipeline. And no one will predict when the pipeline will begin to refill.
• If you are looking for growth and revenue, follow the stimulus.
The development industry, from consulting to contracting, is focused (dependent?) on public sector projects. Firms that typically had a 50-50 mix of public and private business are now dependent on 90 percent public. Many are associated with stimulus money. It appears that the stimulus package is having the desired results. Conventional wisdom is that 50 percent of the architectural sector is unemployed. This will remain until private development returns.
• Whither liquidity?
With the collapse of the Commercial Mortgage Backed Security (CMBS) market and the stampede for the exits by traditional long-term financers (e.g. insurance companies) there is an almost total lack of capital for long-term development financing. This includes projects associated with credit-worthy clients looking to expand as well as relocate. The development council had several expansion projects by quality companies shelved due to lack of access to capital. The pessimistic case is that this situation could last for several years. The optimistic case is that “Wall Street will find a way.”
• Manufacturing for the niches.
Manufacturing will remain a component of the regional economy. Manufacturing for noncommodity and niche sectors, especially for “green” products, will be the rule. Rising commodity prices and lack of pricing power are constraining margins. One bright spot reported by local manufacturers is their growing competitiveness in export markets due to the weak dollar.
• Definition of incongruence: Public expectation of services versus willingness to pay.
Government has spent the past decade learning to do more with less. They have done an excellent (perhaps too good) job of managing without significant reductions in service level or quality. Without question, all public entities will be forced to compromise the quality of their products and services as revenues further decline. In that the public seems unwilling to increase support (read taxes), there is a looming reset in the level of service in the near future.
• Retail commercial flips upside down.
The Clark County retail market has moved from underserved to over-retailed in the span of two years. Coupled with a general downsizing of retail footprints and store reductions, we will see little if any retail commercial development and expansion in the near future. This will contribute to a slow recovery of retail sales/taxes.
• It’s chic to be cheap.
Consumers are purchasing down-market products because of necessity and because they are being affected by the negative consumer sentiment. Down goes retail sales tax revenue, which in turn further exacerbates tight state and local budgets.
• For health care, the jig is up.
For years, the solution to health care financing has been to shift uncompensated costs to privately insured clients. There is agreement among local health care providers that cost shifting has run its course and there’s not much more that can be done other than charge private, commercial plans more to cover the deficit serving Medicare and Medicaid patients. Health care reform is inevitable with the understanding that transaction costs for reform are unfunded.
• After reading the above. You may ask if there any positive trends?
The trends we’ve mentioned are neither positive nor negative — just trends. Money is made in up and down markets. Profits, job growth and economic expansion can happen under these conditions, but not with traditional economic development or business strategies. Our job is to develop those strategies to ensure the recovery and continued livability of our community in Southwest Washington.
