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Economy endures in housing slump

Central Oregon’s employment levels remain strong, but concerns still linger

By David Fisher / The Bulletin

Published: September 23. 2007 4:00AM PST

No doubt about it — the pace of new home building in Central Oregon, as in the nation, has sagged badly this year.

But has trouble in the third-largest segment in Deschutes County’s economy, behind government and health care, spread to the overall economy?

Evidence suggests that it hasn’t.

At least, not yet.

Despite job losses in mortgage lending and real estate, employment levels in industries related to tourism, manufacturing, banking, retail and other key sectors continue to remain strong in Central Oregon this summer, as do — oddly enough — employment levels in construction, various government data sources show.

People who sell cars, furniture, and other expensive items that would be expected to feel pain in a weakening housing economy say business has been fine this year, if not as easy as it was when houses were selling like iced drinks on a hot day.

In fact, a cool-down in the formerly red-hot housing market seems to be helping some of the nonhousing-related industries that struggled when real estate values effectively priced many workers out of the market. That’s a factor that could preserve an underlying economic diversity that the sudden real estate boom threatened to smother.

A case in point: Bill Moseley, president of GL Suite, a software company that designs regulatory programs for government agencies around the world.

Moseley’s Bend-based business has 42 employees, making a median wage of around $42,000 per year. He’s already looking for 10 more, and he’ll be surprised if the company doesn’t employ 100 people by the end of next year.

Will they do it in Bend?

That was an open question a year ago, when housing prices forced most of the company’s workers to locate in Redmond and Prineville, and speculative prices on industrial land in Bend forced Moseley to think about looking elsewhere to do business. But with the drawback in overall industrial real estate prices, the company is actively considering a new location in NorthWest Crossing’s industrial space, Moseley said, and some of his workers are actively talking about moving to Bend, where home prices have started to drop back into their range.

For him, in other words, weakening in real estate prices is good news.

“The builders, I understand their frustration, and their importance to the economy. But to someone who is in manufacturing and production, like we are, high housing values are not in our interest,” Moseley said. “It puts too much pressure on wages. Our customers don’t care what it costs to buy houses in Bend. We have to keep that in mind.”

Super-sized

Building houses in Central Oregon became a super-sized industry during the boom years of 2004 through mid-2006.

Construction and real estate accounted for 17.3 percent of all the jobs in Deschutes County in 2005, the last year for which federal numbers are available, according to the U.S. Department of Commerce’s Bureau of Economic Analysis — about 70 percent more than those sectors’ proportions in the state and national economies.

Construction paychecks alone pumped a little more than $309 million into the Deschutes County economy in 2005, according to the BEA, or 11.5 percent of all paycheck dollars earned.

That bit of economic clout was exceeded only by health care, which accounted for about 12 percent of the county’s $2.7 billion in paychecks that year, and government, which accounted for 17.5 percent.

Then came the slowdown.

Through August, the number of new building permits issued in Central Oregon stood at about 43.2 percent of the 2006 level, according to numbers tracked by Cascade Central Business Consultants President Don Patton.

That’s the lowest level in the 10 years of data sets that University of Oregon Assistant Professor Tim Duy has compiled for the Central Oregon Business Index, a project he runs in conjunction with The Bulletin to track the performance of the local economy.

Similar numbers reflect a construction slump that is statewide and national, Duy said Thursday. But, so far, there are few indications in the national, state or local economies that trouble in the construction industry has spread through the broader economy.

In fact, there are few indications at this point that the construction industry has shed many jobs.

“You’ve seen an overall slowing,” Duy said, “but nothing that is in line with what you would expect, given the downturn in construction numbers.”

Internal reasons

Why?

Part of the reason may have to do with the construction industry itself, and how its various decision-makers have reacted to the downturn in home construction, Duy said. Among the factors:

• Commercial construction. The construction of new office buildings, stores and industrial buildings is up locally and nationally, Duy said, picking up some of the employment slack from the housing sector.

• Hour-cutting. Construction workers who were putting in 60-hour weeks to keep up with the pace of boom-time building are now back down to normal working hours or less, but they haven’t been laid off.

• Labor-hoarding. Some contractors, particularly in the highly skilled trades, are hanging onto employees any way they can for fear that they won’t be able to replace them quickly if the pace of business picks up again.

• Immigration. No local numbers exist to prove it, but suspicions are that undocumented workers may have been brought into play to keep up with the boom. But if they were, they have since disappeared into the rest of the economy, leaving no trace in employment counts or unemployment records, Duy said.

Those factors may help explain why slumping building numbers have not translated into a significant shrinkage in jobs and why the slump has not spread in a significant way to other sectors, like retail, Duy said. But the economic support seems likely to be temporary unless building numbers pick up.

On the surface, commercial projects in Deschutes County are booming, particularly in Bend and Redmond.

On Bend’s west side alone, seven new office buildings with a total of 160,600 square feet were under construction in the second quarter this year, according to a quarterly survey done by the local commercial brokerage Compass Commercial Real Estate Services.

Individual companies are hopping to keep up with the demand.

Craig Palen, Pacwest’s senior project manager for commercial projects, said his company alone has 14 projects either under construction or in the planning stages.

Still, there are signs that a cool-down is on its way, Compass Commercial Principal Broker Bruce Kemp said. Based on the current level of construction, Compass believes that vacancy rates in Bend’s office market are poised to climb above the current 7 percent as the year forges on, Kemp said, and some potential projects have already been shelved.

“If you own a business and you’re reading the paper, do you really want to pick this time to step forward and expand your business?” Kemp said.

“... Most people are looking at it with some cautionary vision, and I think that’s wise.”

Other factors, like labor-hoarding and hour reductions, could convert to layoffs if the pace of construction fails to pick up next spring — a quick recovery that Duy considers to be unlikely.

The effects are already working their way through the building industry itself.

Top Notch Electric owner Gary Richards said he got a call last week from another electrical contractor trying to find local work for two of the electricians they planned to lay off. He said he has kept his own seven-person staff working this year, but with a lot less overtime expense — a factor that he said has led contractors to trim bid prices by 10 percent to 15 percent, starting last winter.

“You are beginning to see layoffs, and that will eventually have a ripple effect,” Central Oregon Builders Association Executive Vice President Tim Knopp said. “But you won’t see the entire effect until we get through the Christmas season and into next year.”

So far, so good

The number of licensed mortgage brokers in Deschutes County dropped from 319 at the end of March to 257 by the end of August, according to the Oregon Division of Finance and Corporate Securities, as business was pinched by a slowdown in home sales and by credit jitters on Manhattan’s Wall Street.

On Bend’s Wall Street, the news hasn’t been that bad, Mountain Comfort Furnishings and Designs owner Dee Dee Keith said. The boom years raised sales for everyone to unsustainable levels, she said, but traffic is still coming in at levels that fit her business plans, and she and her staff continue to key on service.

“I don’t think we’re going to have people walking through the door and dumping huge amounts of cash anymore just for fun, but that’s OK,” Keith said. “We’re willing to work for it.”

On the higher end of the buying scale, business has been up this summer for the Porsche, Audi, Volkswagen and BMW salespeople at Bend’s Carrera Motors, owner Tom Anderson said, bucking trends in the nation’s auto industry.

“I’m sure everyone is looking over their shoulder because I’m sure a decent part of our business is tied to the real estate community, whether it be developers or buyers or sellers or Realtors or contractors, or what have you,” Anderson said. “They are an important part of our economy, so in that respect we are looking over our shoulder. But so far it hasn’t had any effect.”

One factor that has helped to buoy the local economy lies in the structure of its income, Duy noted.

About 21.7 percent of total personal income in Deschutes County comes from dividends, interest and rent, according to the Bureau of Economic Analysis. That compares to 18.2 percent in the statewide economy and to 17.1 percent in Portland-Vancouver, its largest metro area.

Another 14.3 percent of Deschutes County residents’ personal income came from government transfer payments, composed largely of Social Security checks, according to the BEA, bringing the total share of local income provided by investments and retirement payments to around 35 percent.

Along with investment and retirement income, new, mostly small businesses have continued to flow into the region this year, Economic Development for Central Oregon Executive Director Roger Lee said, and more are expected to come in future years, bringing diversification beyond the housing and real estate industries.

ODS, a dental insurer, is building a new Old Mill District building to house the 100 employees it eventually expects to locate in Bend, Lee noted. Smaller businesses who have relocated here from other areas include a manufacturing company that makes wire harnesses and other electronic devices that moved from Texas; a company that packages medical devices that moved from the San Francisco Bay Area; and a company with four employees that specializes in packaging prepared foods.

In the eight years that Moseley’s company has been in Bend, he said he has seen the cost of doing business go up as wages have risen and the cost of land has shot up, erasing most of the cost advantages the region once held over GL Suite’s original location, Portland.

On the other hand, the region’s swelling population has made it easier for the company to grow from its original staff of two — Moseley and a partner — to the 42 it has today, Moseley said. And with the cost of industrial land easing downward this summer and the housing market cooling to the point where his workers can think about buying in Bend again, he said he’s happy to stay.

As long as the boom stays quiet.

“If Bend goes through another skyrocketing trip on housing prices, it will make it very difficult to continue to do business here,” Moseley said. “We sustained it one time, but a second time would send signals that this isn’t a very good longer-term strategy.”

David Fisher can be reached at 617-7862 or at dfisher@bendbulletin.com.

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