Roundtable panel mostly bullish on NoCo in 2008

Editor’s note: On Dec. 6, the Northern Colorado Business Report convened its annual Economic Roundtable at the offices of the Northern Colorado Economic Development Corp. in Loveland.

Participants included:

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• Paul Brinkman, principal, Brinkman Partners LLC;
• Debra Leners, director, University of Northern Colorado School of Nursing;
• Mark Sponsler, executive director, Colorado Corn Growers;
• Patrick Brady, president, FirstBank of Northern Colorado;
• Mark Forsyth, executive director Rocky Mountain Innovation Initiative.

The five panel members took questions from Business Report editor Tom Hacker and reporters Kristen Tatti, who covers technology and banking, and Steve Porter, who covers health care, agriculture and environmental issues. The following is a partial transcript of that discussion.

Tom Hacker, question for Paul Brinkman: We’ve heard a lot over the last half a year or so, or beyond that, about this glut of commercial office space on the market in Northern Colorado. How do you see this oversupply, and how long is it going to take to absorb that?

Paul Brinkman: I think our market in Northern Colorado is somewhat eclectic. We’ve got such isolated pockets, and each pocket, at least in my opinion, probably has a different answer to the question. We’ve got Fort Collins. We have what’s happening at Centerra in Loveland, and at 2534 (a Johnstown commercial development at the southeast quadrant of Interstate 25 and U.S. Highway 34). We’ve got the Greeley area, and then you probably have that zone a little bit further south, which is probably a little bit more affected by things going on in north Denver.

Let me speak to Fort Collins and Loveland first. Obviously, a lot of you have seen what’s happening on Harmony Road. It’s staggering, you know, even compared to what’s going on at 2534 right now. We’ve got projects such as Bayer Properties’ Front Range Village at Ziegler and Kechter, our Harmony One project, with 60,000 square feet of office space, the MAV Development property, near where Intel is located currently, and then the Presidio Fort Collins project that Les Kaplan is moving ahead with.

Hacker: How much space are we talking about there?

Brinkman: If you look at that mass, there’s 3 million or 4 million square feet worth of projects, probably, in the next 10 to 15 years that could happen on the Harmony corridor. So I think we’re still very bullish on Harmony and its gateway status into Fort Collins. But there is going to be, we believe, a slowdown on the commercial office side probably starting now, and probably going into 2009. If you do good projects, high-quality projects, there’s still a demand for that. I think our project on Harmony is a good example, where we’ve almost got 75 percent of it full at this point.

But I also think in the next year and a half, it’s going be a stretch to be able to make those projects work, you know. I think we’re looking at 300,000 square feet of potential available supply there right now, between Centerra and 2534, and a few projects that are proposed. So I think that area, likewise, will take a couple of years to absorb. I think the push to get spec office product out there would probably fall by the wayside for the next couple years.

Hacker: Paul, give us your view of what’s in store for Greeley.

Brinkman: You know, Greeley is a unique market. What we’re seeing in the Greeley market is a lot of people, a lot of companies, being pulled from central Greeley to west Greeley. And now, I think they’re getting pulled even further out toward I-25 and U.S. 34. I think there are Greeley people who want to start trying to service clients in Loveland and Fort Collins, and 25/34 is a more central location for people who want to try to grab some of that market and still maintain their Greeley clients.

West Greeley is still an opportunity. We’re doing some work at the St. Michael’s project, where there’s a lot of commercial office going on. That’s considered west Greeley, but it’s still just 10 minutes from I-25. And that may be too far away for people to really collect from clients in Loveland and Fort Collins.

On the health-care side, we’re seeing a lot of people wanting to move from central Greeley out toward 25/34, where they can keep their clients in Greeley, but attract some clients in Loveland and Fort Collins, and even further south into Berthoud and Johnstown.

Kristen Tatti, question for Pat Brady: Pat, the issues with the housing market are on everybody’s minds. We know that a lot of the local banks didn’t hold on to those mortgage portfolios, so the direct impact isn’t necessarily as much there as it is for the larger national banks. But what impact has there been on local banks?

Brady: We portfolio a lot more money than most lenders, but we’re pretty conservative underwriters, so out of probably 600 or 700 mortgages, we have two in foreclosure, which is really good for us. We also buy, on the investment side, commercial mortgage obligations, or CMOs, which is what you’re hearing a lot about, too. But you can buy different notches of those. I think banks that invested in CMOs that were high-quality really don’t feel a lot of pain now. Specifically, that’s where we stand.

But as an industry, the offshoot of the defaults and foreclosures is affecting the psyche of the market, and the operation of the market as it got used to operating for the last 10 or 20 years. Since there’s less of a market, because people are more frightened of that investment, that causes many shortages, which gets into that credit crunch that you hear about. That is problematic for the consumer, and it’s problematic for banks that don’t generate their own deposit growth very well. If they’re not growing deposits, they can’t sell the loans they’ve made. So there is a ton of issues.

All of us have heard of the supply and demand, and if supply is down – which in theory is what I just described as a downward push on money supply – rates should go up. What’s interesting now is that rates aren’t going up. There’s this tug of war and schizophrenia in the financial markets – less money, less supply, rates up, right? Wrong. The Fed is lowering rates to stimulate the economy. But those are short-term rates, not mortgage rates. But mortgage rates traditionally key off of Treasury rates, and Treasury rates shouldn’t be going down, but they’re very, very, very low, historically.

Steve Porter, question for Mark Sponsler: How has the growing market for ethanol affected Colorado’s corn farmers, and has that boom had a negative effect on other segments of agriculture in terms of other crops and ranching?

Sponsler: Yes, no, and sometimes. It has had a very positive effect for Colorado corn producers. But I want to be careful to qualify that. I think it’s important to understand a little bit of background to that picture. Yes, it looks like the first sustainable alternative market for the corn commodity that we have ever seen since hybrid corn production began back in the 1950s.

Unfortunately, for about 50 years, producers were selling corn for roughly the same price that they did in 1950. Then, you could buy a bushel of corn for about $1.96. As recently as a year and a half ago, new crop corn was trading for under $2, in the range of $1.90 to $2. That’s a tragic testimony to what producers have been facing. Many have not survived. Thousands of producers can tell the casualty story over recent decades of why they are no longer in business.

But you don’t see any lack of production as you drive through the country, because there have always been those willing to take on the risks and expand, and step up to the plate, and take on the challenge of being more efficient, using the technology that’s available, using the resources that they have to try to make these things happen. It’s very exciting for a corn producer to have this alternative market that’s truly making a difference in the commodity price. We think that, generally, the ethanol demand across the country has probably added about 80 cents to a dollar to that commodity price average.

What’s also important to recognize is that the supporting industries, like the fertilizer and equipment dealers, the fuel distributors – the many, many supporting industries that make up the ag sector – have also struggled. Because producers have been plagued with low commodity prices for that long, they have not been able to enjoy increases in their supporting industry prices. They’ve been forced to deal with some of the same struggles. They see this as an opportunity to heal up, as producers are seeing for the first time in many decades. The price of land is also reflecting that, in terms of cash rent, in terms of crop share agreements, in terms of purchase price.

In terms of the other crops, most of the other row crops have also benefited. Because of short production in other parts of the nation, this year wheat prices were good. We’ve seen a very positive impact on dry beans, on soybeans, on wheat, on sunflowers, virtually everything that we produce in Colorado.

Porter: How about the livestock industry?

Sponsler: That is a different story. There’s no doubt about it. Livestock producers feel a pinch because of the increase in their feed costs, and that translates directly to their bottom line. I’m not going to try to gloss over that. But what I’m told by people in the feedlot industry is, “Mark, we’re OK with $4 corn.” We’re not at $4 corn now. That was the spike we had roughly six to eight months ago. Things leveled off, and now we’re more in the range of $3.50.

What really does give the cattle feeders heartburn is wild fluctuations. So a year and a half ago, when we went from $2 corn to $3.50 corn, then there were some people who were caught.

Tom Hacker, question for Debra Leners: We’ve all heard about the crunch in the health-care sector labor markets, and how we’re going to need more people in the industry and more educators to get them there. How is the School of Nursing poised to keep up with that?

Leners: Well, first of all, I guess I want to preface with something. That is that we, in health care, live in a different world. I would defy any of you to look at any curriculum in the United States for medicine or nursing and find an economics course that’s required. I can remember when I got my first management position I was in charge of a $2 million budget. I came home and told my husband, and he said, “Are you kidding me? You must be kidding me,” because I had no background in that kind of thing. And so we live in a different world. The business model has been forced on health care, and it’s been forced on academia.

So things like productivity and bottom line outcomes don’t fit, now, with what we do. So we have to turn our perceptions. And I don’t think the business world understands that, or comes to the table with the understanding that they need to help us with that piece.

We’ve been educating nurses the same way for a hundred years. I don’t know if that’s the model that’s good for the 21st century. Historically, there are those in our discipline who have said in the last 10 years that there isn’t a shortage of nurses. There’s a shortage of people, licensed nurses, who want to work in a place called “hospital.”

In the last five years that has changed dramatically. Just look at Medical Center of the Rockies. I can tell you horror stories about the first hospitals I worked in. But you look at MCR and North Colorado Medical Center and the Poudre System you just have to walk in to see how dramatically that’s changed. So nurses want to work there now.

If you think the shortage that you hear about in staff nurses is big, you have six times of a problem in nurse educators. Before you can have more nurses, you’ve got to have more nurse educators. Colorado is 50th – dead last in the nation – for dollars given to higher education. How am I supposed to grow and recruit faculty? Even if the Governor gave me millions of dollars tomorrow, I couldn’t beat the bushes to find doctorate-prepared nursing faculty, which is what it takes, accreditation-wise. I couldn’t bring them here, because I can’t pay them.

Hacker: What’s the solution for that?

Leners: We need to be more entrepreneurial. We need to get out and find creative ways to do things. We’ve looked at partnerships with Aims Community College to deliver new ways to do the old kinds of things. And we’ve got some fantastic partnerships with the hospitals where they are paying us to deliver a program just for them. Poudre Valley system and the Banner Health system each pay the costs for 18 staff nurses to be produced every year. It’s a fabulous entrepreneurial partnership. It’s been wonderful for them and wonderful for us. When I talk to the CEOs, they’re not feeling that crunch, because they have been very foresighted and worked with us to do this partnership arrangement. Northern Colorado is doing very well in terms of meeting that need.

Kristen Tatti, question for Mark Forsyth: Could you describe what role small tech companies and startups are going to have in the Northern Colorado economy versus what we’re used to with Hewlett-Packard and Agilent and all these other large companies?

Forsyth: Well, several years ago our technology industry was mostly made up of a few large employers, like HP and Agilent and others, and that made up most of the growth in our sector. And we also saw a point near the beginning of the decade where those companies started transforming and restructuring, and caused a huge negative impact because our tech economy was solely dependent on those few large employers.

What we’re seeing more of, now, is the emergence of new entrepreneurial companies and new industry clusters that I think will really make up the foundation of our future technology industry. For the coming year, things are starting to look very positive in the industry. It’s been really lean for the past six or seven years.

Startups have found it very difficult to get capital financing to get their companies going, but just in the last six months, we’ve started to see a big change. Interest from investors is suddenly reemerging. We have a group of high-net-worth private investors right here in Northern Colorado that are organizing to form an Angel Investor Network. That’s a very positive sign. I’ve been contacted by a number of venture capitalists around the state that are really interested in our local companies, and that’s another positive sign.

Another really good sign is a recent event we co-sponsored with several other organizations in the state called the Angel Capital Summit in Denver. It was a forum for startup companies to come and ask for money. That attracted 380 attendees. It was sold out. More than 100 people had to be turned away.

We’re seeing a larger number of our startup companies get funding recently, and from a variety of sources, which is really, really good news. Some of our companies, especially in the new emerging bioscience and clean energy clusters, have really gotten some significant grant funding in the past year, and we expect that to continue. Some notable examples are Inviragen, working on vaccines, and AVA Solar, that not only received significant grant funding, but also is going to be adding a huge number of manufacturing jobs to our economy in the coming year. Those are good signs.

In addition, we’ve got a couple of companies that are getting funded through partnerships with significant multinational corporate partners that see so much value in their expertise and their technology.

We have some really innovative startups, like Solix Biofuels that is working to develop biodiesel fuel from algae. We have companies like Envirofit, and a more recent addition to our economy, C Zero, that are working on helping reduce emissions worldwide and contributing to global sustainability.

I’m also really excited about our GIS or Geospatial Information Systems cluster. We pulled together, for the first time, a group of companies in that industry, and it turns out we have a real critical mass in this area, and along the whole Front Range, of GIS companies. They’re starting to get to know each other, and collaborate on some projects, and have some wonderful ideas on how they can promote that industry going forward.

In general, I’m seeing a tidal shift in the startup industry, and expect to hear a lot of good news in the coming year.

Tom Hacker, question for Paul Brinkman: I know the residential market is not what you are principally engaged in with, but I also know you’ve got your eye on that. What do you see ahead in the next year for the Northern Colorado homebuilding industry?

Brinkman: Obviously, our company is focused on a lot of the commercial side. We are currently working on a 30-acre residential entitlement project, so we’ve got our finger on the pulse of the residential market.

You know, I think there are certain areas in Northern Colorado where we continue to see fairly moderate activity. We’re still seeing, in southeast Fort Collins, home prices are still holding their values and they’re actually still building new homes.

But there are other areas of Northern Colorado where we’re really seeing the market fall off, and prices declining dramatically, and no new construction. In general, in Northern Colorado, I think we’re going to see the oversupply and the problems in the credit market still need another year to shake out.

It’s probably going to be early ’09 before we start to see some new construction come online throughout Northern Colorado, as a whole. Those homebuilders who are doing projects in isolated areas are still having some success. The market, as a whole, I think is faring better than the national market. If you look at some of the home prices in Fort Collins, for example, we’re actually still seeing a 1 to 2 percent increase, year over year, in average home price, and the supply is probably 8 to 9 months for the average-type house. You get into Greeley and other areas of Loveland and that supply almost doubles. And prices are coming down 5 to 10 percent.

We’re also still seeing a lot of people from California, Arizona, Florida and so forth who want to come live in Northern Colorado. And I think that will help us turn around a lot more quickly than some of the other markets.

Steve Porter, question for Mark Sponsler: Given the ongoing drought and the recent water court ruling that’s apparently going to limit well pumping along the South Platte, what does the water situation in Northern Colorado look like for agriculture in 2008?

Sponsler: I think we’re dealing with two issues. One, where are we in relation to the drought? The drought that we are hopefully coming out of spans five to seven years, depending on how you look at the data. What really started in the late ’90s, and reached its peak in 2002 was one of the most significant droughts in irrigated high-plains history. That had a devastating effect on water supply for all uses, but particularly for irrigation.

We’re optimistic, after last year, that we may be pulling out of that, because it was the first significant change in that trend for about seven years.

The other question is will producers, who own water rights, be able to use those water rights? This is the tragic irony in ag production that we’re going to be battling over for quite some time. For the first time in about 50 years, it looks like we’re moving to a sustainable commodity price levels for all of the irrigated crops in Colorado. But at the same time, the most significant resource in producing those crops is being threatened because of this argument over who has the right to the water.

Part of what aggravates that whole scenario is the ever-increasing demand for municipal and industrial water. Each household needs, roughly, an acre-foot of water per year to take showers and flush toilets and do all the things that we expect to do. Businesses also require a lot of water. The future of our supply – not only for 2008, but for a longer term – depends on how we address meeting those needs. The trend is municipal and industrial water use increasing and agriculture decreasing. We need to find ways to solve this so that we don’t devastate those rural economies, and there are ways to make that happen.

Brinkman: How do you see the role of conservation impacting that in the next year or two?

Sponsler: I think conservation is absolutely critical in the conversation of how we meet the needs of both agriculture and urban users. The more focus there is on conservation from an urban standpoint, the more time that we have to figure out how to sustain the rural economy at the same time we provide water for urban and municipal users.

There are places where conservation can play a very valuable role. I think the ag sector has to really embrace it as well as the municipal and urban water users.

Steve Porter, question for Debra Leners: Do you think health-care professionals generally fear or look forward to a more universal care system in this state?

Leners: You know, I think it depends on what you mean by “universal,” how you define “universal health care.” You’ll find health-care providers interested in quality. And the fear is that a universal health-care system would change quality, and not necessarily for the better. I’m not saying we have the perfect system, but we do have a fairly high-quality system. Access is a problem. But I don’t think lawyers and politicians are qualified to tell us what “quality” is in health care. There needs to be more input from the health-care providers themselves.

I’m a pediatric nurse practitioner, so my business is, or was, pediatrics. I practiced for 25 years, and I got out of practice, because the last five years, I spent a lot of time on the phone demanding from insurers to pay for things that were basics. I got tired of that. I could have spent 100 percent of my time, as a provider, just doing nothing but that.

There is this continuing discussion of universal health care. Does that mean everybody is going to get a blood pressure screening? Or does that mean that everybody deserves and is entitled to, say, a coronary bypass or a hip replacement? I don’t think so. We don’t have the dollars for that. If you look at our system, and you look elsewhere, sure we’ve got problems. But, we have very high-quality care. Access is clearly an issue that we need to work on.

Kristen Tatti, question for Mark Forsyth: Looking into the next year, what do you think we’ll see come out of this new organization that has formed and that you head, the Rocky Mountain Innovation Initiative?

Forsyth: We’re constantly speaking with entrepreneurs in the different fields, and trying to understand what their greatest needs are, and trying to look at how we can best fill those gaps. We’ll continue to work on access to capital, which I think is one of the big areas that will be a huge success factor for the entrepreneurial companies in the coming year.

We’re also excited about bringing together the whole region and all the assets we have. We now have UNC in Greeley involved in helping one of our startups write a business plan. And we’re looking at opening an innovation center in Loveland. We have lots of participants in our activities from Loveland, but having a focused effort right in the city is going to be huge.

We’re working with a lot of local developers in Fort Collins to look for some more state-of-the-art facilities for incubator companies, including some wet-lab facilities for biotech companies. We’re also recruiting some new companies here.

In general, we’re going to focus on connecting the resources we already have here, trying to get entrepreneurs and researchers more connected, so that some of these building innovations coming out of the labs can be more quickly commercialized and turned into both jobs and good things for the world. I’ve gotten several calls from companies that were kind of flying under the radar in basements and labs around the region that are now getting plugged into the community, and participating and getting connected with the local institutions and other companies to look at some joint projects.

Kristen Tatti, question for Brady: Paul has fielded a couple questions about vacancy rates, and if there’s a glut on the market of new commercial space. Do you think banks are backing off of spec lending and tightening up their lending standards?

Brady: I don’t think many banks, if they’re thinking rationally, have tons of appetite for new spec space. But that doesn’t mean no speculative space. I think a reasonable project that can show leasing and pre-sales still gets banks interested.

The most interesting thing about banking is that the guarantors come back into the picture. You’re seeing a lot of non-recourse type of lending that was not traditional to commercial projects, in particular. It didn’t really matter, just because the market was good enough, and pre-leases and pre-sales were holding together.

I don’t think the spigot is all the way closed, but it is tightened up a little bit. And I think the guarantor becomes a real important part of the loan decision again which, historically, they have been.

Tatti: Do you see that changing in the next year?

Brady: I think it would just hold steady. Based on what Paul said earlier, there’s a lot of space to be absorbed, and a lot of residential product to be absorbed. Some positive news on the residential front is you’ll notice that inventory is actually starting to decline in most sectors in Colorado. It kind of had a peak sometime last year. But, of course, because some of the tightening, and the builder restraint and other market restraints, the number of new permits and new projects slowed a bit.

From a lender perspective, next year will be kind of a stable environment. Not necessarily more tightening, but I think the volume, the lending volume available to banks, generally, will be less, just because of the work-down of the inventory and the absorption issues. None of the banks have gone away. It’s still highly competitive.

We have a statewide loan committee at First- Bank. It’s very interesting, because you look at things from around the state. Downtown Denver is still doing well, and there’s a lot of energy there. It’s location, location, location, you know. That, and the right developer. I don’t think it’s shut off or down to zero anywhere, but it’s much more rational than it had been for about the past five years.

Tom Hacker, question for Paul Brinkman: Back in the roaring ’90s, the construction industry was afflicted by major labor shortages. Could you address the current labor market in the construction industry and how that is related to U.S. immigration policy?

Brinkman: Obviously, in the construction business, we’re very heavily dependent on the labor. We haven’t necessarily been hit by a labor shortage. I think what we’re seeing is more a shortage of labor quality in the crafts and the trades that we deal with than labor quantity.

From the standpoint of solving some of the immigration issues, that shortage of labor isn’t there, per se. But solving the training and the quality of the labor is really what I think is immediately at hand for our business. I think some of the immigration policy requirements are actually being pushed off on the businesses and creating, at the subcontractor level, issues with enforcement. It’s an additional cost for a subcontractor. I think what we’re seeing is a start of trickle-down and the potential for additional costs for some of the subcontract trade.

What I feel like our industry really needs to solve is the quality issues. I think we need to figure out how to solve immigration, but also solve training. And that goes as deep as the universities and community colleges, and ties in to some other things that some of the other businesses are doing in the market.

Tom Hacker, question for Mark Forsyth: It was Debra who pointed out earlier that Colorado is dead last in funding for higher education. How confident are you that Colorado State University can continue to be an engine that drives the tech economy forward?

Forsyth: Well, I’m hopeful they can. I think CSU is really one of the pillars of our economic future and economic development in the tech industry right now. And I think there are two aspects to it. One is the institutional funding from the state government and from tuition. But they’re also doing phenomenally well in tracking research grants. And I think the research they have going on in bioscience and formation of the super-clusters and proximity in national research labs all bode well for that continuing. I’m hopeful that legislatively we can solve the funding issue, in general. Because I think without the higher education institutions and strong research efforts, and the development of the work force they provide, that we’re going to see that being a limiter in the future.

Kristen Tatti, question for Mark Forsyth: Do you feel that the number of the highly skilled tech employees that lost their jobs in the past few years is being absorbed, or do you think that there’s still kind of this quiet mass of people who are waiting around to get back into some of those companies?

Forsyth: I think there are still a number of people in the area that are underemployed, that don’t feel like they’re using their full skill sets and potential. I also see, though, a shift in what the industries need in terms of skill sets. I think, to be frank, there needs to be some training. I think some of the skills that served them well at the large corporate employers are not as well suited in some of the technology industries and the entrepreneur jobs.

But I do see a significant number adapting very well. In fact, a lot of our startup economy is coming from former employees of large corporations, some of whom were underemployed for several years, doing some consulting and various other things to just kind of stay in place until things started emerging.

But now I see a lot of them flourishing and starting to be really successful companies. I also think the new industry clusters are also providing homes for a lot of that talent. And that’s one of the goals we have, just to see the whole talent work force we haven’t fully utilized. I think we’re making a lot of improvement there, and I think we have a ways to go to have everyone feel like they’re fully meeting their maximum potential.

Brady: Are the HPs of the world going to stay in Northern Colorado? What is the status of big high tech?

Forsyth: I think in terms of the massive layoffs, things have stabilized. There are still some early retirement programs and things going on, some adjustment and restructuring, but most of that