Friday, October 18, 2013

Seattle Economic Forecast

Yesterday I attended the Third Annual Economic Forum, sponsored by Pacific Continental Bank. Generally, the Seattle economy is stronger than most other metro areas, ranking very high in job growth and housing recovery, while overall the national economic recovery is tepid at best.

Here are my notes from that event:

Tapering and Booming in a Tepid Economy
John Mitchell, Economist

...the game of Congressional chicken about the US deficit is the most dangerous game in the world today. US leader in hydrocarbons.

Fifth year of half speed recovery, minimal inflationary pressures, 1.92million jobs below the 1/2008 peak; uncertain monetary policy; intellectual property, housing leading the recovery at about 14% for the second quarter; investment leading GDP growth during the second quarter; job growth in leisure and hospitality is up quite a bit, with declines in federal and state government

Headline unemployment rate 7.3% in august, 37.9% of unemployed 27 weeks and over; avg. workweek for all employees rose, but the labor force was down by 312K for the month

Energy and gas prices cause great volatility in inflation index. Overall, core inflation fairly stable at 1.5%.

Interest rates still under 4%, although increasing on speculation that Feds will taper off their buying spree. Conventional mortgage rates ending 10/04/13 was 4.22%. "Never in recent economic history have interest rates been so low for som many for so long." Economist  4/6/13

Forecasts are for modest continued growth in GDP. Inflation is expected to stay low through 2015. Balance sheets are stronger, world economy looking better, housing making a contribution.

Fiscal policy actions
Fear of Monetary shifts
Real wealth loss
Global shocks
Diminished confidence
Aging population

Housing Upturn
Stock and Housing prices
Rising income and employment
Balance sheet health
Hydraulic fracking
Monetary policy
Credit standards easing
Europe/China stabilizing

Net worth of households up 45% from real estate in Q2 2013.

Housing permits up over 8% in last year in Seattle, loss five years ago down almost 18% (vs. 1% increase in Bremerton, 27% loss five years ago in Tacoma). The closer you are to employment centers, the quicker and higher the recovery, and more cushion on the downturns.

Deferred household formation was down during recession. Affordability index is down from record levels, but returning to more normalcy in historic terms.

Consumer debt is increasing (car loans, student loans, etc.). This bodes well for growth moving forward.

Fiscal policy is a drag on performance of the economy. Long term unsustainability of fiscal policy. Cuts proposed for 2014-2023: in discretionary spending for military and health.

"Economic policy mistakes were the primary cause of the Great Depression." - Ben Bernanke

Fed is buying $45B of treasuries per month with maturities 4-30years and $40B mortgage packed securities per month. total $85B/mo.

When will tapering on buying bonds begin? No data as long as the government is shut down. therefore tapering is delayed again.

"the job of the Fed Reserve is to mind the punch bowl so the party doesn't get out of control."

How will the experiment of affordable health care play out?

Some argue that there will be an explosion of entrepreneurial activity, since anyone can buy health care.

What are young people going to do? Young people's premiums go up dramatically under Affordable Health Care. 1% of income penalty if they don't buy - or should they just buy insurance when they need it?

We will become re-acquainted with the Law of Unintended Consequences.

Washington is ranked #7 in job growth; N Dakota is #1 in the country. Washington ranked 4th in the nation for real GDP in 2012.

36% of 18-31 year olds live at home, up from 32% pre-Recession.

Washington is still short 266000 jobs to get back to peak level.

Ron Busse
, President, Pacific Continental Bank
Opportunities exist now for growth, but be forewarned: Poorly managed growth or expansion led to trouble pre-recession.

Credit market is strengthening to level not seen in last 5-7 years. Cash flow is king, but stable/improving trends ok. More opportunities for commercial real estate and business formation.

Owner occupied, multifamily and solid commercial real estate projects are areas for bank lending. Non performing loans are now below 1%; healthier banks now willing to lend. Bank capital in the PNW is overall some of the strongest in the nation.

Cash flow stacking issues are a problem for businesses that accept long-term financing for assets that need to be replaced in the short-term. Avoid unnecessary amortizations. Easy growth or expansion can be risky; best credit risks are those with a business plan.

Dan Peyovich, Howard S Wright Construction

What is it like a day in the life on a commercial jobsite? Primary goal is for construction workers to be safe.

How to be effective in the long term strategy? How are developers getting money? What are the primary commercial real estate market opportunities?

Delivery models are changing in the industry. What is the contract that construction company holds with owner, and how does that affect product?

Contracts do not identify price upfront, but figure out what price options are. Private sector tends to be better able to meet budgets, bring projects in on time and on budget. Latest major shift using construction managers onboard with designers earlier to have better impact on timing and pricing. Typically do not require hard bids upfront as in the past,  new contracts with design-build contracts which tend to lead to better pricing and timelines.

Big shift is to bring the contractor on early, to impact architecture and design. Multiparty agreement that ties all parties to success of the project is dependent on trust and collaboration. Metrics show that there is a direct correlation between cost effectiveness and trust/collaboration. Trend today is for more partnerships and strategic alliances between designers and contractors.

Financing solutions and trends -
New academic growth in construction and real estate education. There are some emerging trends in public private partnerships to get capital needed to develop projects. This allows owners to get the capital they need to move forward quickly, perhaps using bond measures. Some contractors will provide financing for owners, e.g. for energy efficiency retrofits, etc.

Follow the yellow cranes down to a lot of apartments. Apartments are leading the way in terms of profits. Oversupply of apartments? In two more years, expecting more continued building and growth. More and more apartments are being built, and rents are increasing. More highrises in downtown Seattle and Bellevue. Most developers are waiting for anchor tenants before building starts.

How does technology affect the construction business?

Tablets are now the norm for drawings and plans, vs. old school rolls of blueprint. contractors are now using technology in design, safety and constructability on the jobsite that increase productivity and drive costs down. This is a major paradigm shift on the construction jobsite.

Relationship with architects has changed as well; closer relationships emerging between contractors and architects. This leads to efficiencies in safety and cost, time-savings, accountability for owners.

Technology is making construction more efficient, resulting in savings in time and money for owners, investors and tenants.

Happy Investing!

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