December 1, 2009

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Washington and Iron Counties: Reviving a Stalled Economy

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Southern Utah: Washington and Iron Counties

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Southern Utah: Washington and Iron Counties

December 1, 2009

We’d like to give a special thank you to Russ Behrmann, president of the St. George Area Chamber of Commerce, for moderating the discussion and the Entrada for hosting the event. Utah is in the midst of an economic crunch and Washington and Iron counties are no exception. Local business leaders share their plans to keep the area’s economy moving. Our experts also discuss what Southern Utah has to look forward to, such as the new St. George Municipal Airport, enhanced educational offerings and tourism opportunities including the Ironman Marathon. Participants: Kelly Stephens, Sun River; Brennan Wood, Cedar/Iron Economic Development; Tracy Ence, Ence Homes; Linda Baker, Workers Compensation Fund; Travis Parry, Commerce CRG; Scott Hirschi, Washington County Economic Development; Sandy Thompson, Axiom Financial; Roxie Sherwin, St. George CVB; Doug Watts, Watts Construction; David Watson, SunFirst Bank; Brent Drew, Quantum Development Group; Mike Thompson, SkyWest Airlines; David Clark, Zions Bank; Russ Behrmann, St. George Chamber of Commerce; Ray Rosenthal, Commerce CRG; Terri Kane, Dixie Regional Medical Center; Brian McCann, Ram Company; Russell Clove, Marriot; Chris Peterson, Riverwoods Mill Residential real estate has been at the heart of much of Southern Utah’s economic troubles. Discuss how the industry is faring today. ENCE: Residential construction is not dead by any means, but it is very slow. If you look at how many permits have been pulled each week, there’s not very many. Most builders are building about seven or eight homes a year. In past years, they’ve been building between 20 and 30. We’re down probably 50 percent of what we normally do, so it’s slow, but not dead. There are sales out there and they’re good sales. The good thing is that the people who are coming to look at the model homes are looking for a home. And in many cases they have the ability to finance one. So it’s not doom and gloom, but it’s definitely tough to make a living. STEPHENS: I agree. We’re down between 50 and 65 percent. We service a little different buyer—our buyers are 55 and older and usually don’t have as many financing problems as younger people seem to have. We’ve been fortunate to not have a lot of foreclosures at Sun River, again, probably because of our age group, which has been able to keep our prices more standard than areas that are having lots of short sales and foreclosures. We feel fortunate about that. And, we seemed to slow later than everyone else. It was about eight or 10 months before we really started feeling it. THOMPSON: There are still a lot of foreclosures on the market and there’s a lot more to come. Interest rates are good, but it’s hard for people to get qualified. Everything is credit score driven—everything. It’s good, though, because we’re getting back to the basics of having to have a down payment and good credit. I still think it’s a wonderful time to buy. There’s such a good price range right now. And, St. George is absolutely a gorgeous place to live. I look outside and I know why I came down here. Have the federal and state home buying incentives been effective? ENCE: The first-time buyer programs have been great. The reality of it is we get more people looking for a home who wouldn’t have been looking in the first place, whether they buy or not. If we don’t get people out there actually seeing the product we’re building, nothing is going to move. You might not sell to those who are looking, but you might sell to their friend or their neighbor who lives down the street. As far as we’re concerned at Ence Homes, the first-time buyer programs have helped dramatically. Not just a little bit, but dramatically. So the tax incentives taken with the very low price, plus low interest rates, are really attracting people. In my market, I’m selling to retired people, I’m selling to first buyers and I’m selling to people wanting to move up. People are going out to look and then they’re going to make a decision. Without the incentives, they wouldn’t have looked in the first place. In the St. George area, most of the buyers are coming from the Wasatch Front. California is a minor market now—it is not the major market it was five years ago. I think people in the Wasatch Front are able to move because they still can sell their house. I also think that Utahns who want to move down here will move down here no matter what. If you live in Utah, in most cases, you want to stay in Utah. Utahns getting ready to retire still want to retire in a warmer climate, so that’s always been a big draw to St. George. Years ago, most of our sales came from the Wasatch Front. That changed during the boom because investors were coming from out of state to invest in the area. Now there aren’t as many investors, but there are people wanting to buy a home. So, we’ve got more coming from the Wasatch Front again. STEPHENS: The Wasatch Front is currently our biggest market, but we’re also attracting buyers from other places. We do about 45 percent of our sales by referrals, so we’re drawing people in from all over the United States. We have people moving in from virtually everywhere—Minnesota, New York and California. We probably have 10 families from Canada that live in Sun River. But we still get most from the Wasatch Front. PETERSON: I always ask people why they’re moving to St. George. I’ll bet half of them are not from California—they’re from back East or the Northwest. They all say that they came here on vacation and decided this is the place they want to live. ENCE: A few weeks ago we had people from Iowa looking at our properties. They were here to see Zion and loved the area and decided to stay. We get a lot of people who come first for the recreation and then want to live here. We have Zion and the other national parks. We have the mountains. We have Snows Canyon. I think it’s still a retirement destination any way you look at it. WOOD: Although Cedar City might not be a retirement destination like St. George, we see a lot of people who are visiting Cedar City and then later decide to move into town. And the first reason they came was through tourism and they decided to stay. Discuss commercial building. How is this sector of the local economy handling the economic slowing? WATTS: Not much of [commercial building] is going on. It’s pretty tough. Most of the stuff we’re doing is out of state, in Arizona and Nevada. It’s been said that commercial construction follows residential construction—I think it’s going to take quite some time, I think beyond a year, before commercial real estate catches up here. ROSENTHAL: A couple years back, we had a waiting list of companies wanting lots. There’s no list at this time. Fort Pierce Industrial Park was where most of the activity was, but we’ve had no sales this year. We’ve had a few companies interested in the location, but everything is on hold. People are interested in the area and they want to be here, but we keep hearing the same story—that it’ll be about a year before they make a move. On some of the properties, we’re seeing people who are holding on to their properties for dear life. They came out to build and they like the area, but some of them have just had to bite the bullet and give up their properties. PARRY: Most of the activity that is occurring is on distressed assets. We’re seeing an increased volume of commercial properties that are bank owned or are in defaults and going through the process. We’re also seeing fewer companies coming into our new market. Most of the activity that’s taking place is from companies that are already established in the St. George market who are moving around to take advantage of lower lease rates or other opportunities that exist. We’re seeing a significant decrease in lease rates, but it’s getting to the point where it’s become very attractive to some of these users who might move into our market or at least get those already there a better lease rate that allows them to continue operating their business successfully given the challenges they face right now. DREW: We see a lot of local and regional companies leasing. But buildings have to be creative to attract tenants. They’re competing against an idea that there are a lot of empty buildings for a company to go out and make a deal on, and that’s just not true. There might be two or three large buildings in a small market, but none of them fit exactly what everyone is looking for. We’ve found people are interested in leasing now with an option to purchase down the road. From my perspective, though, it’s definitely been a better market for us this year, especially on the leasing end. We’re seeing a lot of people saying it’s time to start taking market share from people who aren’t paying attention, and we’re seeing some pretty interesting growth. An industry that is starting to get attention in our area is the high tech industry. We have 54 high tech companies in Cedar City right now, and some of them have 30 to 40 employees and they’re still hiring. For example, we have a company that makes software for Union Pacific. We have a company that makes software for casinos. It’s hard to make people aware within the Wasatch Front what’s going on here, but I think both St. George and Cedar have strong high tech companies that would really blow your mind when you walk into their little space and see the guts of some machine that’s spread all over the floor that they’re selling off all around the world. Some of the companies are homegrown, some are from outside the state. We have some people who came and visited the area and moved their company in. HIRSCHI: Cedar is starting to see a lot of high tech companies, too. Two years ago we began a program that we call SEED Dixie, which stands for Stimulation of Expansion of Entrepreneurial Development in Dixie. Utah’s unemployment rate is now at 6.5 percent. Discuss Southern Utah’s workforce trends. CLOVE: I think everybody is feeling a pinch. We’re down 15 to 20 percent from last year and unfortunately had to lay off some people. We’ve had cut backs across the board in every different division. ENCE: Builders aren’t starting to hire back, yet. Pretty much every firm or every construction company out there is getting by with the minimum amount of employees that they can. The owners are backing up swinging hammers. Everybody is just trying to survive. The upswing in the sales, if you can even call it an upswing, is just enough to keep everybody going. HIRSCHI: There’s a silver lining in every cloud, even every black cloud. Some of the biggest challenges we’ve had in the past three or four years is the fact that we’ve had almost no unemployment. Our labor force has been highly limited, and we’ve had no inventory available for industrial space. So it’s kind of been a double hit for us in that when we had a company look at relocating or expanding into one of our communities, we had nobody to work for them and we had no space for them. This turnaround in the economy does have a silver lining for us because we now have workforce that’s ready, trained and productive. And, we’ve got lots of space for companies. Whether it’s in Cedar or in the greater St. George area, we’ve got industrial space that’s immediately available. We don’t have to build buildings—companies can move in literally tomorrow. So there are some positives to the challenges that we’re currently facing. HIRSCHI: Manufacturing seems to be doing better. For example, Viracon has applied for $12 million for the stimulus bonding to install new equipment in its existing plant, which will allow the company to compete better in the specialized glass market that they’re a part of and industry they’re a part of. So, that will bring more jobs here. PARRY: There are some really great opportunities out there. We’ve got the exit that’s been finished off by Fort Pierce allowing for freeway access at Fort Pierce and space available at Millcreek Industrial. Businesses can come in right now and take advantage of the unemployment rate and take advantage of the value they get in the real estate from a leasing or acquisition standpoint. Businesses could come in and get a good foothold in the market. BAKER: At Workers Compensation Fund, we’ve had a 10 percent reduction in force. Workers compensation is based on a couple of facts, one being payroll. We’ve had about a 32 percent reduction in premiums, mostly due to reductions in payroll and some businesses simply going out of business. Almost every single renewal I’ve done this year has had lower payroll than they’ve had in the past. One good thing, though, is that we’ve had about a 24 percent reduction in our claims as well. Health care is said to be recession proof. How is the area’s health care industry doing? KANE: People think that hospitals are recession proof, but they’re really not. One of the things [Dixie Regional Medical Center] saw was our birthing volume decline significantly. For many years, our birthing volume was growing between 10 and 15 percent. I think many of the people who lost jobs, particularly in the construction industry, were forced to leave the area to find work. The other thing we saw, which was a huge surprise to us, was our emergency room volume went down significantly—sometimes as much as 20 percent. We think it’s because people are not recreating in St. George as much as in previous years. So, things have slowed down, but we’re looking at this time as an opportunity to catch up and prepare for the coming years. We’ve been working with Dixie State College because it’s been important for us to grow our own workforce here rather than recruit. We’ve asked the college to bring on programs for us and increase the number of nursing students that they graduate. But this year we didn’t have the turnover that we’ve had before, so we couldn’t hire those students. So the economy has stabilized our workforce, but it didn’t give opportunity for growth in the community as we’ve had before. The concern I have is that, because of the recession, many people are going back to school to pursue additional training. Then they graduate and we can’t place them. That causes the colleges to limit enrollment. Then, when the economy picks up, there won’t be enough graduates to fill our positions. So, we’re really trying to encourage the college to not slow down its enrollment. Are there any industries that are growing? PARRY: Green technology is growing. Anything that has to do with the environmental factors is growing. We’re seeing companies exploring space options, dealing with solar power and other alternative energy. I think green technology is going to be an area where we’re going to see significant growth in. WOOD: I agree. I’m seeing a lot of people who have been laid off from their positions—they’re skilled, educated individuals and they have the ability to manage their own business. What they’re doing is looking for these opportunities. I think education, sciences and renewable energy are going to be three major players in the years to come. People have been forced out of work, but those people have the opportunity to create something of their own, and I think we’re going to see a lot of the fruits of that over the next five to 10 years. McCANN: Ram Company is an aerospace company. Not many local companies buy from us, but economically we put a lot of money back into the community. Our company is doing really well. We’ll have our best year this year in 35 years. As far as a future goes, the owners have become very conservative. They’re looking to grow and invest, but they want to be smart about it. We see a really bright future for our company. The aerospace industry has a bright future and we’re excited to grow. It’s just a matter of when the climate is right. HIRSCHI: Our manufacturing sector is not dead by a long ways. We continue to have significant activity there. And while we don’t have a lot of growth, good news is there’s a lot of stability in the manufacturing that’s going on in Southern Utah. And that’s a very stabilizing influence on our local economy. Financial institutions have obviously been hit hard by the economy. How have the area’s banking and other financial institutions been impacted? WATSON: The trouble banking has is we’re really interconnected with everyone. It doesn’t matter whether you are in construction, tourism or retail, banks are a partner with everyone. I think the smaller banks, the community banks, are getting kicked around like stepchildren by the regulators. We are not too big, so it’s OK for us to fail—we’re on our own. Regulators tell us to bring in more cash. The dichotomy of what’s going on is the politicians are saying: “Let’s get more money out there, let’s stimulate, let’s try to get more lending going.” And the regulators say just the opposite: “Don’t make the loan, shrink your bank.” Most of the community banks here are strong, but there are a few in very bad trouble. The big problem with a lot of the local community banks is we don’t have a lot of places to get inventory, so when a single industry goes down and that industry is where most of your loans are, it’s a real problem. Overall, though, it’s just very rough for the banking industry right now, from big banks to little banks. CLARK: As difficult as the days are that we are in, I would not trade places with any of our neighbors. Utah has prepared itself to be the best a state it can be from a budgetary and political standpoint. But, we’re not immune from the problems. It seems that most of the housing market trouble is now in the rear-view mirror than out in front of us. Though we’re not out of the woods, most of it has passed by. But in the commercial real estate market that’s not the case—we’re right now in the middle of the worst storm taking place. The market right now, obviously, is going backward, and the regulatory issues are horrendous. From a local standpoint, Zions Bank has money to lend, and we’ve loaded a billion dollars new since the beginning of the year. But the requirements by which the regulatory bodies are allowing us to lend are an entirely different criteria. It is far more challenging to tell an existing client who used to be able to do A, B and C that they can only do A and B. We’re trying to be good financial partners, but the regulatory environment is squeezing us, and that’s impacting the market. As a lender, another impact affecting us and particularly affecting the state institutions, is the spiral effect that’s been created with this regulatory environment. A loan may be performing, but we might have modified the payments to get through a 24-month period. Regulators are saying, “You modified that, that’s a bad loan. You take that and reserve the entire amount.” So instead of finding a program to help through this, it becomes a self death spiral on this. So we set that aside and we’ve got less money to lend. Then the businesses are out there saying, “Wait a second, I need to have more money.” So they’re having more trouble, more trouble reserves more troubled loans; more troubled loans leads to less capital; less capital leads to less loans. You can see the spiral that we’re in right now. I think we’re getting closer to the bottom of that spiral, but that what’s been happening the last 18 months. Utah continues to maintain its Triple A credit rating—which means that the state is very safe and sound economically. We continue to be the best managed state in the nation. Having a Triple A rating is significant to everyone in Utah. We’re going to guard that rating very carefully. We have been issued the largest bond issue in the history of the state of Utah in the last few months. We have $1.5 billion in interest rates and we’re at a slightly lower rate than 2 percent, which is a historic low. The borrowing costs are also at record lows. So hopefully we’re wisely preparing and putting the structural investments in place. When the economy does come back, we should continue to be poised to have a strong recovery. The new airport is slated to open in 2011. How do you think it will impact the local economy? THOMPSON: SkyWest’s passenger traffic from St. George to Salt Lake was down between 20 and 30 percent for the first six months of the year. We felt the same economic impact that every other industry felt. For the last few months, the service level has only been down about 6 percent, but that’s more indicative of the fact that in September of 2008, we saw a pretty substantial decrease of traffic as well. The traffic in terms of what we’re seeing coming into St. George is starting to bottom out. We are, however, excited about the new airport. I think it’s going to be a good thing for the community. Right now, though, we’re going to make decisions about service and aircraft type based on passenger demand. All service decisions are based on the utilization of the existing service. We’re excited, though, because the airport provides for future growth for this community. HIRSCHI: We live in a world of instant gravitation and I’m afraid that has been our attitude toward the airport. So many people think that somehow on January 13th, 2011, our entire economic structure is going to have a rebirth because the first airplane is going to land at the replacement airport. I’m here to tell you that is not going to happen. Airports are a very long-term economic investment in a community. It’s taken 20 years to get where we are. Airport planning doesn’t happen overnight and the impacts are not overnight, but they’re very long term and they’re very substantial on a long-term basis. CLOVE: The airport is great, but it’s not going to have a significant impact on us right off the bat. I think there will be some investors who will come in and put in a slew of hotels along that new parkway. That will definitely impact the city as far as bringing hotel rates down. Hotels will see that their occupancy isn’t as high as they’re used to and rates will be discounted. The hotels need to realize that it doesn’t matter what the rate is, even if the occupancy goes down 10 percent, if you keep your rate the same occupancy rates aren’t going to affect us. That’s what’s hurt the industry the most this year—occupancy is down a bit, but the discounted rates are really hurting us overall. SHERWIN: Tourism is it’s a mixed bag. I recently surveyed our tourism outlets and the answers I get back are all over the place. Some are down 10 to 20 percent, others are up 20 percent—it’s all over the page. Part of that is because we have areas that are popular during the winter and areas that are popular in the summer. St. George’s properties have a downtime in the summer, and that’s when Zion is off the chart. So, we level out pretty well. During the first quarter 2009, we took a big hit. We were down January, February and March. But for the most part, we’ve been up the rest of the year. In August we were down about 5 percent from last year—not a huge decline. One trend we experienced all year long was business travel is down. The big business travels and the big incentive trips aren’t happening. Overall, 2010 is looking great for tourism. Of course, we landed the Ironman, which was huge. It’s projected that we’ll see 10,000 room nights booked from the Ironman. To date, I’ve booked almost 4,600 room nights and we’re still six months out. The majority of the people coming are staying for five days. Utahns who are coming are staying an average of three nights, four days. So far, we’re seeing tons of people from California—California is by far the biggest market. We’re also getting a big contingency from Puerto Rico, the UK, France and Japan. And the majority of those people are first-time visitors. They’ve already started requesting more information from us, so it’s really good business for us and we expect a lot of spinoff business. There are training camps already scheduled that will bring people here early. Many people are coming here early to train. Overall, we think it’s going to have a long-term effect on the area. We signed the contract for five years, but we hope it will continue on beyond the five years. CLARK: The Ironman is going to bring millions of dollars into this community. But that impact pales on the aspect that the Ironman is televised, recorded and sent around the world. The market buy in advertising that will come from showing the vistas of these folks running through our country here will be 10 times whatever the impact the market is here. The Ironman is a tremendous next step in the outreach around the entire globe. HIRSCHI: We’re going to see an economic impact from Beaver to Mesquite. The marathon, for example, is talking about being able to add more than 2,000 additional runners by involving Cedar and having those runners stay in Cedar and be bussed from Cedar rather than from St. George. So the impact is large and it’s spread to adjoining communities. And I see the impact happening not only from the marathon, but also the triathlon, softball tournaments and soccer tournaments. The Summer Games in Cedar and the World Senior games are also great for the community. WATSON: In the tighter times, people have to do without. But most people just can’t do without their vacations, so instead of eliminating the vacation, they cut back. So instead of flying to Europe, they fly to New York; instead of going to Orlando, they’re going to San Diego; instead of going to Disneyland, they’re coming to St. George. People are cutting back one level. I’ve talked to people who have lived in Utah now for 30 years and have never been to Zion Park. All of the sudden they’re finding their own backyard, and that’s the strength of Southern Utah. People are discovering that they can have a vacation for less money in the great outdoors of Southern Utah, and it’s every bit as good as the expensive ones at some of the high level distant resorts. CLARK: Recessions come and go. There will be another day and it will be brighter. The tools that will lift us up out of the recession are just as vibrant and strong as they’ve ever been. And I anticipate that the sunshine we enjoy down here 300-plus days out of the year will soon be back in the economy.
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