An economics expert’s latest forecast anticipates Oregon and the central part of the state will continue to see slow growth until the end of 2012 – though his sobering view was countered somewhat by a grassroots business coalition’s unveiling of an initiative aiming to make Bend the destination for a major annual energy efficiency technology conference.
Bill Watkins, an associate professor with Cal Lutheran University Center for Economic Research, was at Brasada Ranch recently, as part of an ongoing analysis and informational program organized by the Deschutes Economic Alliance, to deliver his third quarter Economic Forecast.
He said job growth will be anemic and the real estate market would likely remain soft for a while, adding: “There’s been some output growth – output is about what it was before the recession, but jobs have come back much weaker.
“We have not seen job creation and all these things are necessary to have a robust recovery.” He also observed that home foreclosures in Oregon are declining, but they still remain at high levels and probably will for the foreseeable future.
Watkins said he expects Oregon’s economy to grow very slowly throughout the remainder of 2011, only achieving solid three per cent growth in 2012.
The modest forecast reflects continued weakness among small business and in the real estate sector.
WEAK REAL ESTATE SECTORS
He predicted that all real estate subsectors are likely to be extremely weak throughout the forecast horizon, which was “something of a problem as real estate transactions drive a large amount of economic activity.”
Every transaction required the services of several professionals, including appraisers, lenders, real estate brokers, title people, and more generally with commercial transactions, attorneys. Real estate transactions also often generate activity in many other sectors with economy-wide impacts.
But real estate’s collapse has also diminished small business’s prospects. Small business owners tend to own much more real estate than average Americans.
Consequently, this has decimated their balance sheets, making it much more difficult to finance the sort of strong and sustained growth that would drive vigorous job gains.
Watkins added: “Small business owners’ financing challenges are exacerbated by continued weakness in the financial sector and by changes over the past couple of decades in the way banks lend to small business.
“In the past, bank lending to small business was what is called asset-based lending. Business financed growth by pledging business assets, such as inventory and receivables. Over time though, attitudes about pledging homes to support business borrowing changed. It lost its social stigma.
“Both banks and borrowers embraced real estate secured loans as cheaper and safe, as everyone knew that ‘real estate prices always go up’. Eventually the situation reversed itself. Pledging real estate to support the loan became the norm and asset-based borrowing came to be seen as a weakness. This makes it more difficult to finance job-creating business growth.
“The prospects for economic and job growth would be significantly improved if lenders and borrowers were to embrace a return to more asset based borrowing.”
RISKS
Risks to the forecast included continuing disturbances in the Middle East, with our economy extremely susceptible to interruptions in our oil supply and a consequent potentially devastating economic impact. Financial turmoil in the Euro zone is another source of uncertainty.
As with the United States, Watkins said he was still “very worried” about the fundamentals of the Oregon economy. These fundamentals include: a household sector that is over-indebted, a housing market that still has a home-ownership rate that is too high, and a financial sector that is still characterized by large charge-off losses, restricted credit, and limited loan demand.
The housing buildup in the 2004 to 2008 period caused a “mis-allocation of resources” into ownership residential real estate.
This imbalance has yet to work itself out, and has created high levels of unemployed construction workers, depressed housing prices and diminished construction activity. In addition, since the economy is still mostly weak, the commercial real estate sector is also experiencing relatively low prices, slow leasing activity, and subdued construction activity.
BRIGHTER NOTE
On a brighter note, the healthcare segment has performed well, even during “the Great Recession”. However, Watkins observed “it is not an easy thing to retrain a construction worker into a healthcare worker”.
In Oregon, foreclosures and delinquencies, while showing some signs of declining, remained at extraordinary levels. Prices are generally still declining, indicating that the transition to the new equilibrium still has a way to go and Watkins expected most Oregon residential markets to be soft throughout the forecast horizon, implying continued low residential construction volume.
He said commercial real estate is also undergoing a long-term transition, but for entirely different reasons, with the internet driving some commercial property market changes.
Watkins speculated that the success of online retailers means that, on a per-capita basis, we need less retail space. Going forward, online sales will continue to grow, likely driving the transition to less retail space for years.
He said: “We expect vacancies to increase most dramatically in lower-end properties, as remaining brick and mortar retailers migrate to the best locations, attractive centers with large numbers of shoppers.
“Even the attractive centers, except perhaps the most upscale, will probably have to reduce lease rates to maintain the low vacancy rates necessary to attract shoppers and retailers.”
He added that changes in office markets are in the very early stages, but companies are moving toward increased telecommuting and less office space. Businesses are strategically decreasing leased space and encouraging employee telecommuting.
He said: “This trend will only get stronger as relentless competitive pressure and equally relentless communications-technology innovations combine to make telecommuting an increasingly attractive alternative.
“Again, the resulting price changes will likely result in the highest vacancy rates in less desirable buildings. As will likely be the case with premier shopping centers, the more desirable buildings will see less vacancy, but at the cost of lower lease rates.”
Industrial space is at an even earlier stage of its transition but cutting-edge innovations such as “3-D printing” could also see a decreased need for traditional manufacturing environments.
TERRA CONFERENCE
Following Watkins’ talk, DEA Chair Keith Rivera, of the Rivera Wealth Management Group, and his colleague, fellow board member Bill Caram, struck a more positive note during panel discussions by announcing a major initiative geared towards attracting a world-class “TERRA” conference to Bend to create a forum for high quality discussion and promote an image as an energy efficient capital.
Rivera said; “With escalating consumption, a crisis is fast approaching in managing the world’s natural resources.
“We are going to need energy-efficient technologies for our very survival, and what better place than Bend, Oregon, to hold a state-of-the art green conference and national summit?”
The initiative envisaged a high-quality slate of attendees – including alternate energy corporate exponents, acclaimed speakers, academics and venture capitalists – enjoying a naturally beautiful setting in a variety of venues, such as the Les Schwab Amphitheater and Riverhouse Conference Center, to discuss energy efficient solutions and unveil latest technology innovations. The event would also showcase all Central Oregon has to offer visitors.
An exploratory group was analyzing logistics and funding to launch a model that could grow from a relatively modest start into an internationally recognized forum putting Bend squarely on the world map in a state renowned for taking independent and sustainable leads.
