Local economy looks to nation

From ag to banking, region’s industries follow trends

Editor’s note: The Northern Colorado Business Report recently welcomed representatives from the Northern Front Range business community to “Economic Roundtable 1997,” a discussion of expectations for the region’s economy during the new year. The event was conducted at the OneWest Art Center in downtown Fort Collins.

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Participants included David Carson, president of CBW Automation in Fort Collins and co-chair of the Northern Colorado Manufacturers Council; Ann Garrison, professor of economics at the University of Northern Colorado in Greeley; John Green, also an economics professor at UNC; Darrell McAllister, chief executive officer of 1stChoice Bank; David Veldman, co-owner of Veldman Morgan Commercial in Fort Collins; Beth Wasson, executive director of WINhealth Partners of Cheyenne; and Gus Williams, president of Coldwell Banker Everitt & Williams Real Estate in Fort Collins.

Participants for The Business Report included Christopher Wood, editor and co-publisher, and Carol Wood, staff.

Question: Ann Garrison and John Green, could you give us your predictions for how Northern Colorado’s economy will perform during 1997?

Garrison: I think it’s going to be healthy, but it’s going to be growing more slowly. In terms of population, I would expect Larimer County’s population to grow about 2.3 percent, which is down substantially from earlier. It has been growing at about 3.3 percent. In terms of Fort Collins, I would expect it to grow about 2.18 percent, Loveland’s population about 2.65 percent and Greeley and Weld County growing more slowly. Weld County growing at about 1.63 percent and Greeley at about 1.23 percent.

I am expecting a healthy growth in per capita income. For Larimer County, about 4.87 percent, for Fort Collins about 4.7, for Loveland 3.97, for Weld County 4.87 and Greeley about 4.67. Those are really positive numbers.

In terms of employment, in Larimer County in 1995, trade, service and manufacturing were the most rapidly growing parts in terms of employment. And I would expect that next year, service would be more important than retail. I think that retail is about maxed out in Larimer County. In Weld County in 1995, durable manufacturing sort of spurred manufacturing employment so that manufacturing had the largest gain in employment, followed by trade and services, and I think again that service will be the most rapidly growing area in terms of employment in Weld County in 1997, followed by manufacturing and then finally, retail trade.

Wages are still very poor in Larimer County and Weld County. I guess I am amazed that market forces haven’t driven the wages up. Larimer County’s average wage is $24,983, or it was in 1995. Weld County’s is $23,467. The average in Weld County went up 2.35 percent in 1995, went up 3.15 percent in Larimer County. In neither county did wages go up to compensate for the higher cost of living. In both counties, if I look at the average wage in the state of Colorado, and I look at the average wage in Larimer or Weld county, the wage gap is growing, meaning that our wages are growing more slowly than the wages in the state as a whole.

Green: I think that both counties will continue to grow in 1997, but not as fast as they have in the last two years. ’95 and ’96 have been really good years in both counties, and especially in Larimer County. In general, I expect growth to be strong but slower.

Question What is keeping wages down? All we hear about is the labor shortage. Shouldn’t that be pushing wages up?

Garrison: I think a restructuring in the labor market. We’re relying more on contingent workers, temporary and part-time.

Green: We’re seeing a continuing influx of people in that (low-wage) category. So they move to Fort Collins because of the purported quality of life, and then they look for a job. And I think we’re seeing a serious slowdown in the number of high-income, engineering-type clean-industry workers moving in here because the growth of the industry has sort of slowed down or even stopped.

Garrison: Last year, when I did the survey for EDAP [the Greeley/Weld Economic Development Action Partnership Inc.], I guess I was rather surprised at the wages that the businesses themselves said they were paying. I guess what really surprised me was that when they said whether or not they were hiring unskilled, semiskilled, skilled or management, how little wage differential there was when you went from unskilled to semiskilled, what a small differential there was in hourly wage when you went from semiskilled to skilled. The lowest wage last January being paid in Weld County was $3.50 an hour. And I guess I’d find that hard to live on.

Carson: I guess we hire more technical and highly skilled people, and it seems like, to me, that it’s very very difficult to get the skills that we’re looking for, the technical skills. You were concerned that the wages are not rising that high. It seems to me that they really are in certain industries.

Garrison: In the industries that you’re thinking about, they probably are, so if I would break the wage data down by two-digit SIC code and look at the high-tech industries in both Larimer and Weld county, their wages are quite attractive. They’re pulling the durable-manufacturing average wage as well as the manufacturing wage up, and their rate of increase is very healthy. Unfortunately, the bulk of the people in both Larimer and Weld county aren’t working in high-tech manufacturing jobs at high wages. In terms of the retail sector, which is a very important sector for both counties, the average wage is substantially below $15,000 a year.

Question: David Carson, one of the most-often cited problems that this region faces is the labor shortage. What’s your perspective on that issue, given your own high-tech company and your position with the Manufacturers Council?

Carson: The skills in manufacturing have become so much more technical. You just don’t have a machinist, you have a machinist who must understand how to program computers. Through a broad spectrum, from welders to programmers to engineers to electricians, my feeling is that it’s more and more difficult for us to find the people that we need.

When I first moved my company here seven years ago, I looked at the national chamber of commerce cost of living index. We looked real favorable at that time. We don’t look so favorable anymore. It’s real difficult for me to get somebody to believe that their quality of life is going to increase if they come out here.

One of the big things they look at is housing. And they’re wondering what am I going to have to pay for a new home, and it scares them to death.

Question: In recent months, we have seen layoffs at Advanced Energy, Electronic Fab, Teledyne, the closure of Innovative Cos. Do we have reason to be concerned about our manufacturing base, or are these just minor corrections in the markets?

Carson: I think that it’s just a temporary correction. There are so many other companies that are expanding that overall I hope it’s losses in a wave that’s going forward.

In the case of Innovative and Advanced Energy, something went wrong with the overall market. At Innovative, their sales were just to the point, or sales vs. cost, that they just had to go out of business. At Advanced Energy, their industry is just going through a change. Sales are dropping throughout the industry.

Question: Darrell McAllister, Given the intense competition in banking that exists in all of our communites here in Northern Colorado, what are your expectations for 1997?

McAllister: I think most banks would probably be saying that 1997 will be a good year. I’m predicting that. We put our budgets together, and we still think that we’ll be growing next year. At the same time, competition is tremendous in Northern Colorado.

You have a couple of things affecting banking this next year. First of all, branching in Colorado becomes legal. It has been legal but sort of with some of what I call “games” involved. Those games disappear Jan. 1 here, so anybody in Colorado can branch anywhere in the state.

Also, on July 1, you get national branch-banking laws affecting us. What you have already, I think you see, is we’ve got new de novos wanting to start in Greeley. We’ve got some banks coming into the area here in Larimer County, a lot of branching going on. So it’s going to be competitive. I joke that we’re a little bit like a few years back when we had a gas station on every corner. We’re getting close to that right now with banking.

Question: What effect will the impending interstate branch banking have on Northern Colorado?

McAllister: Good question. I think everybody would like to know that one. You get a lot of people thinking there’s going to be mega buyouts … more people seeing the name of their bank change. I don’t know which ones will and won’t, but there is this consolidation going on, so you’ll see some of that. Initially, you might see more locations, more different names out there, with people trying to gather part of the market share.

Question: Would you anticipate that banks will be more conservative on loans next year?

McAllister: I think so. We call our goal for 1997 “asset quality.” Growth is in there, but asset quality also. I think everybody is trying to make sure that when the slowdown comes, whichever bank we’re seeing, that they’re not way too far on the leading edge of that. So you’ll see a lot of, I think, continuing just a little more conservative approach to some lending.

Question: Dave Veldman, what are you predicting for the various commercial real estate segments, retail, office, industrial for 1997?

Veldman: You’ve had a real healthy commercial market. Most segments of the commercial market are relatively full, industrial, retail, office.

In retail, especially, I think there’s very low vacancies out there. We’ve had a lot of increase in retail and service in our economy. So spaces that five years ago when we were 30, 40 percent vacant, have all really filled up, and we’ve started to see some retail construction.

The cost of construction, both because of the city permit fees and just general construction costs, as well as the increased land values, has really pushed up what retail rents in the new locations have gotten. Along Harmony Road, we see $17 a square foot net rents for the brand-new retail space. The Everitts have put up a nice 22,000-foot center that is fully leased now. Bogaard Construction has done a couple of developments that have done real well and have achieved those type of rents.

You used to anticipate building a retail center in that $80 a square foot range, including the hard and soft cost and some tenant finish, and we are now in the $130 a square foot range. So, really, to get a $14 or $15 rent only achieves the investor an 11 or 12 percent return, which is not a stellar return in the real estate business.

In office, we’ve really had a full but relatively flat office market. We haven’t had a lot of new office space developed really over the last four of five years, again other than a few user deals and really not many of those in the office market. We were involved in the development, originally, of the building in front of the Marriott that Bogaards built, and as that came up, we thought, the market’s been full for three years, rents are edging up, there should be some pent-up demand for spec office-space people to come out of the woodwork, and it really took longer to get that leased than before.

My view on the office market is that we’re going to see a real decline in values over the next three or four years. You’re going to see Symbios moving into their new plant, and they’re going to dump about 130,000 square feet of B-plus office space on the market. The government is proceeding with bids to build its campus-type government center, which will dump about 300,000 square feet, typically of B-plus, in some cases A space. In our market, to dump a half-million square feet over the next three years is a huge amount. Most of those buildings require larger tenants, and we’re not a market of larger office users, other than some of the semi manufacturing guys like a Hewlett-Packard or a Symbios.

Question: Beth Wasson, your organization, WINhealth Partners, being the first locally owned HMO in Wyoming, is an example of managed care coming into this whole region. What would you anticipate happening in 1997 in the managed-care arena?

Wasson: I think we’ll continue to see more growth in managed care, without a doubt. We’ll probably see more consolidation of organizations. Right now there are 20 HMOs in Colorado. Actually that was last week. There could be more by now.

But I think we’ll see those types of companies start to merge and come together as we’ve seen already over the past year with TakeCare becoming Comprecare, becoming FHP and being purchased by Pacificare. That will continue.

We’ll also see more consolidation of provider organizations. Hospital systems integrating with health plans and physician groups. And I think we’ve already started to see that in Fort Collins, with the hospital here being part owner in HSI’s HMO. I think that’s a natural movement.

We’ll also see more consumer participation. We need to see more consumer participation. We’ve already seen a little bit of it, with consumers going to the Legislature and asking for protection against managed-care companies, resulting in bills like the Kennedy-Kassebaum law, which does multiple things like requiring HMOs to cover up to 48 hours of a maternity stay, trying to equalize mental-health and medical benefits. I think we’ll continue to see consumers be more equal partners. Managed care really has resulted in some positive things this year. The inflation rate in health-care services has been only about 2.1 percent, which is much less than other goods and services. The inflation rate for health services in government has been 11 percent, however, so there continue to be some major problems in that area of Medicare and Medicaid.

Question: Gus Williams, what’s the outlook for residential real estate in 1997?

Williams: I have an opportunity to travel around the country with the National Association of Realtors and look at other economies, and we are very, very fortunate in Northern Colorado in general to be where we’re at with the diversity of our economy.

With the retirement community growing, and our national newsletter said the other day that every seven and a half seconds, a baby boomer turns 50, and that’ll happen for the next 15 years. That’s pretty amazing. We’re at an economy now that’s probably be going to be moving away from the square-footage values. I know that we get down on the city a little bit for some of their delays in the process, but there may be some truth to the concept of downsizing a little bit and getting more units per acre, — a little more density, because that’s what the market is going to demand. I think as we grow in the senior-citizen population, the market is going to demand those things.

I think we’re getting probably less movement nationally and probably locally. In the ’60s, we probably had 20 percent of the population moving in any given year, and I think that’s probably down to, I think the latest statistic was 17.5 percent. So there’s probably going to be less movement, and most of that movement comes internally. I think in the Fort Collins market, we found about 75 percent of those moves are within the community. With that going down, it’s kind of offset by population growth. So we should remain fairly steady. Our average price, this is resale and new-home construction combined, went from about $147,000 to $154,000 this year. And 73 percent of that market was from $100,000 to $220,000. The housing affordability issue is something that we’ve got to think about.

Someone mentioned maybe they have bigger mortgages than they can handle and maybe bigger homes than they can handle. That’s going to be interesting to see what happens in the next decade, with who buys those move-up homes. Because I think there’s going to be a little bit of depreciation. We have not had a year of depreciation in Fort Collins in the 16 years that I’ve been here. We have had some years that have been flat, maybe 1 percent. This last year was 4.3 or something. Looking at 91 to 94, when we had 41 percent appreciation, that 4.3 doesn’t look quite so good, but it’s still pretty positive. But when those homes are not desirable, what’s going to happen to the marketplace?

Question: Ann Garrison, what is your prognostication for the agricultural industry?

Garrison: Hopefully, the cattle feeders do better in ’97 than they have. For every dollar in Weld County that’s earned in agriculture, about 82 cents is connected to livestock. So it’s really important for Weld County that the livestock industry does well. The decrease in the price of corn ought to help cattle feeders, certainly over an extended period of time.

The dairy industry, surprisingly, is growing very rapidly in Weld County. We’re in fact becoming one of the leading counties in the United States in milk production.

I expect the sheep industry is going to continue to have problems. Weld County is also the leading grower of vegetables in the state. And even though most of the crops are not vegetable crops, that is of growing importance.

Even though the federal government now has the Freedom to Farm Act, I don’t think that Weld County is going to be affected by that nearly as much as the counties located to the east of us. I would expect that Weld County would continue to rely on cash crops like grain corn because of the grain corn’s connection to the livestock industry.

In terms of the crops, it’s very volatile, and whether or not 1997 is going to be a good year or a bad year, who knows? Between the weather and the markets and the government … to be a farmer, you have to be a born optimist.

Green: This ag situation and the Freedom to Farm Act is going to cause a lot more volatility in food prices. And so that as we look at the Consumer Price Index & the next major increases in the Consumer Price Index are going to be driven by food costs, not energy costs.

Garrison: And it’s sort of astounding, because one of the things our economy, nationally, has been founded on is cheap energy and cheap food. And I see cheap energy as something as something that’s going to become history and cheap food as something that’s going to become history. And that’s going to change the structure and the functioning of all the local economies.

writer. Following are excerpts from that discussion.