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ARCHIVED  January 1, 1998

Economic outlook bright for new year

Following is an edited version of their discussion.Editor˜s note:
The Northern Colorado Business Report assembled a panel of industry experts for its second annual Economic Roundtable, conducted Dec. 5 at the Greeley/Weld Chamber of Commerce conference room. Participants included: Bob Bischoff, president of the North Colorado Medical Center board of directors; Jack Calderon, president and CEO of EFTC Corp., a contract manufacturer with more than 800 employees in Greeley; Sharianne Daily, president of The Group Inc., a Fort Collins-based residential brokerage; Bill Kurtz, vice president of business banking for Norwest Bank in Fort Collins; Marie Livingston, chair of the Department of Economics at the University of Northern Colorado in Greeley; Andy Miscio, partner and broker with Miscio & Stroud Inc., a commercial real-estate firm based in Fort Collins; and Dave Sewald, purchasing manager for Ranch-Way Feed Mills Inc. in Fort Collins.NCBR: Marie, maybe you can give us an overview of where you think the Northern Colorado economy will be heading in 1998.Livingston: First I˜ start with the way things are. I feel really lucky as a member of the dismal science to be reporting on such a great economy. For the past at least five years, Northern Colorado, like the United States has had what we would consider a dream economy. We˜ve had high rates of growth, and we haven˜t had serious unemployment nor inflation.
In terms of the United States, unemployment has been about 5 percent. For Colorado, it˜s been 4 percent, and for Northern Colorado, it˜s more like 3 percent. We expect inflation to be about 2.3 percent for the country, 3.5 percent for Colorado and more like 5 percent for Northern Colorado, because of the high growth that we˜ve had.
In general, most economists expect growth to continue, but at a slower rate. The two flies in the ointment that people point to are the labor shortage É as you know, labor markets are really tight. And we keep thinking, well, how can we continue to grow, and grow, and grow when you can˜t find people to help you in the production process. We˜ve been astonished that wages haven˜t increased significantly, yet.
The other thing we worry about is the Asian flu. A lot of Asian countries are having financial difficulties, and that could reverberate here if they decrease their demand for American products that we happen to manufacture and export to those countries.NCBR: You mentioned the fact that wages haven˜t increased, even though there is a pretty severe labor shortage. About a month ago, a Norwest economist said in Fort Collins that one reason for that is that we have had such a high inmigration rate of people who have helped to soften the blow of the labor shortage, and also that there is a higher participation rate in Colorado among women in the labor force than is the national average. Is that a reasonable explanation as to why wages haven˜t gone up yet?Livingston: I think it is. I think in Northern Colorado also, for years, we˜ve heard about underemployment. We have a highly educated work force, and people like to stay in Colorado, and often stay in this area even though they don˜t have a job that challenges their full capabilities.
Any increase in wages has tended to come at the top income levels, where people in the lowest rung have declined. The high wages are in high-skilled areas, and what˜s happened across the country and here is that there is more and more demand for people with high skills. They can get great jobs, and at the same time you have not only migration into Colorado but migration into the United States of, especially from Mexico, lower-skilled workers who keep wages at the lower levels down. Plus, we can import things that are labor-intensive.NCBR: Jack Calderon, you heard what Marie said about the labor shortage, and you˜re very in tune with that, I would imagine. How do you see the labor shortage affecting your growth plans in Northern Colorado?Calderon: It˜s a very serious issue. We˜re in the business of manufacturing electronic products for major OEMs [original equipment manufacturers]. We build products for Hewlett-Packard. We build the majority of electronics that end up on Boeing airplanes and things of that nature. When I came to EFTC in August 1996 as their CEO, there was very much a Northern Colorado strategy of creating a mega campus here in Greeley. Fortunately or unfortunately, I started changing those plans, because of the growth issues.
What we˜ve done instead, is we˜ve actually expanded and now have facilities in Oregon, Arizona, Florida, Tennessee and Kentucky. Because we are such a high-growth business, you can˜t grow at 100 and 150 percent if you don˜t have the talent pool to be able to propel that level of growth.
When I came to EFTC, it was doing about $50 million [in revenues]. We˜ finish this year at $100 million. We˜ finish next year at a quarter billion. It˜s just tremendous opportunity and growth. But you can˜t be local in your thinking. You need to figure out, where do I need to put facilities based on where talent is. We actually moved the corporate headquarters to northern Denver because we needed just a crash infrastructure of information technology. It˜s very difficult to find Oracle programmers in this area, so we kind of went to northern Denver so we could load up on a lot of that type of talent. We˜re very much driven by where are these people, and where is the talent?
Miscio: What is your criteria for finding a site? Does it have to have a university community? Calderon: Our areas are dictated by, really, two things. One is, we like to have proximity to a customer base. So where high-tech communities are, that˜s good for us. And obviously, Northern Colorado certainly fits that. And the other thing is where either there˜s a university concentration or a concentration of high-tech companies because people tend to gravitate towards those high-tech centers. And that˜s helpful. That˜s very, very helpful. There˜s also a downside to that, in that there˜s a revolving door that˜s created. But we˜d rather take the revolving door and be competing with someone else dealing with a revolving door than just trying to find talent.
In certain areas, we have increased wages in the last year to lure people, not for the low-skilled jobs but for more-skilled jobs. One of the other things that we did is that we significantly raised wages of engineers — significantly. We˜re not talking 10, 15 percent, we˜re talking 30 percent-type wage increases. So it˜s a battle. It˜s just a battle.NCBR: Dave Sewald, please give us your assessment of what lies ahead for agribusiness in 1998.Sewald: Basically, in agriculture, or agribusiness, we˜re coming off two good years. And we˜re looking at ˜98 as being another good year. What makes a good year? No. 1, supply and demand is what˜s going to make or break agriculture. If you overproduce, prices go down, and the farmer is a loser at that point in time. Who benefits? Cattle-calf men, feedlots, dairy people, hogs and poultry So there˜s always a tradeoff there. But right now we are in a balance to where all segments — crop prices, commodity prices —are at a number where the end user can afford to buy them, can afford to feed livestock and make a profit.
As far as the growth, as we look into ˜98, you talk to implement dealers, you talk to fertilizer people, seed companies, anybody involved, everybody is expecting a 5 to 10 percent growth in 1998.
Where is this growth going to come from? Obviously, we don˜t have more land to farm. When we talk about biotechnology, that is one of the segments that we will see increased yields coming on, through better seed varieties, better genetics, precision farming.
We˜re just on the verge of cracking the shell of the egg on biotechnology. The growth in that field is phenomenal, and the results that we˜ll see from that as far as crop production, livestock production, is just going to be astronomical. We˜re starting to see a little bit of that happening in the Midwest right now, where biotechnology, or what we refer to as GMO, genetically modified organisms, are increasing yields of crops 10, 15 percent without any additional inputs.
As far as we are concerned locally, obviously Weld County and Larimer County continue to lose acres but continue to see a strong economic base in the ag business, with ConAgra˜s presence in Weld County. That˜s going to continue to benefit basically anybody that˜s in ag production.
In Larimer County, farmers have got to contend with continuing growthNCBR: Bob Bischoff, what forces are at work within the health-care industry, and what changes will we see in 1998?Bischoff: Let˜s begin with the idea that managed care has not come as rapidly to Northern Colorado or northeastern Colorado as we anticipated. However, that is just a short-term delay. Managed care companies are going to continue to be aggressive, but there are other organizations that provide some of the same functions, such as physician hospital organizations, which we have and Larimer County has.
All of this is headed toward integrating health care in a more efficient way. The great concern and great public hue and cry is how will this affect quality … and costs.
[For providers such as the hospital], revenues are controlled to a great extent by the federal government. They set the price, so instead of looking at your costs and saying, "This is what it costs to deliver the service, and we˜ll have to add a small margin for profit," we now look at it and say, "This is what we will receive. How are we going to deliver the care within the bounds of that revenue?" And that˜s becoming increasingly difficult.
Last year, every hospital in Colorado had good results and some had exceptional results. But when you get into examining where that came from, you quickly realize that they had more people go through the same operations, but people stayed [in the hospital] a shorter period of time. And when you add that whole thing together, it produces a pretty good return.
That isn˜t going to be true in 1998. At NCMC, for example, we have already pared over $5 million out of our revenue expectations because of price concessions we have made and because of certain increases in cost pressures we see coming our way… The tremendous challenge we have is to make sure quality of care is there. Of course, the judge of that care is the patient and the consumer.
Most of health care is driven by the senior-citizen group. That˜s where half the revenue comes from and where the greatest needs and challenges are.
But all tied up with that is intense competition … large groups of physicians are coming together and forming large clinics as they see that this is an area where they can increase their return.
From the standpoint of Northern Colorado, the most intense competition we see is going to be coming from Denver, where most of it is managed care, and they˜re feeling the pinch of oversupply.NCBR: Sharianne Daily, one of the things that has been most noticeable in Northern Colorado the past several years has been the incredible growth in housing. What can we expect next year in residential sales and new construction?Daily: What we˜re looking at is probably not as drastic of an increase for ˜97 as has been previously. The increase from ˜95 to ˜96, in the residential market, we had about a 10 percent increase in number of homes from ˜95 to ˜96, and I think that it will probably be pretty close to 2 or 3 percent this year. Our new-construction industry has continued to boom. Resale still ends up with about 73 percent of all of the residential sales. New construction is about 27 percent.
One of the misnomers is that we have a great deal of relocation business. And, truly, our relocation business, people moving into the area, consists of about 25 percent. That probably will increase. We˜ see, once figures come out for 1997, a little bit of an increase with that.
Recent reports show that there will be demand for 1,488 single-family homes and 279 townhomes. That would drive that demand. That˜s just in Fort Collins. What we˜re also seeing is that this is truly one market. Northern Colorado is truly one market, much more so the last two years. A lot of what˜s driving that is the quality of life that people are wanting. I-25 is heaven compared to what some of these people are used to in commute times.
It˜s still 30 minutes from Fort Collins to Greeley. The commute from Fort Collins to Loveland is 10 minutes.Home sales? We˜re probably talking about maybe an increase of 3 to 5 percent. Five would be really optimistic. I think that our purchase price probably won˜t increase more than 2 percent. Probably another repeat of what we˜ve had this year. It˜s not a doomsday, by any means. We˜ve got too much job market to make it a doomsday. And that˜s good news for Fort Collins, because the job market is moving in at all income levels, which helps the resale market.
NCBR: Andy Miscio, we˜ve seen numbers to the effect that there˜s a couple million square feet of commercial space that is under construction or proposed in the Fort Collins/Loveland market. It seems that there˜s no end in sight to the commercial construction boom. Do you think that a lot of those projects will actually break ground and come to fruition?Miscio: No. In October, a list of development proposals was printed in the paper, and there were 47 of them. And of the 47, there˜s eight or 10 of them that are on hold. Most of those were in the residential area. The interesting thing is that, of the 47 proposals pending right now, 20 of them were for retail.
The strongest market we have in Fort Collins is the retail area. The lowest vacancies we have are in retail. There˜s a great indicator of how good the retail market is in Fort Collins in terms of real-estate values, in terms of rents, etc.: when we start filling up the periphery.
College Avenue in Fort Collins tends to probably have a zero vacancy rate, with a couple of exceptions like when Best [Products] went out of business. They˜ve got that big building that is owned by some investment company back east. But with some rare exceptions, College Avenue has about a zero vacancy rate for retail.
Now as we go beyond College Avenue É when we have vacancies, that˜s where they start to appear. Well, in the periphery of the core area, the vacancy rate for retail — my best guess — is less than 7 percent. That˜s at the periphery. And that˜s traditionally, in Fort Collins, where you have a 10 to 15 percent vacancy. Retailers want to be where the action is, where the traffic is, where there˜s great exposure. Well, there just isn˜t very much available for them, so now they˜re going out in those areas.
In retail, I˜m hearing numbers that for the life of me make no sense at all. The new shopping center on Harmony Road is asking $24 a square foot in rent. That˜s triple net, which means there˜s another $3 on top of that, at least, in cost. And there are people that are doing that. I˜m a very, very conservative guy. I cannot imagine a retailer paying $24 a square foot and having sufficient sales volume to support that rent. It˜s just beyond my comprehension.
The rent rates for new construction, excluding the $24, is generally around $12 a square foot triple net. That˜s going to be along the College Avenue area. As we go beyond that area, the rents drop down to about $9 a square foot.
The best we˜ve got is the retail market; the worst we have is the office market. Office vacancy rates are starting to escalate, the rents are coming down, and property values are dropping in the office market. In 1997, according to one appraiser, there was over 500,000 square feet of office space built. The prognosis for the future of office space is that there˜s going to be a glut.
Right now, the most difficult thing I could lease out is an office. The high-end office space seems to be doing better than the average to low-end office space. Higher-end rents in Fort Collins for offices are around $17 a square foot. The average rent for Class B space is around $12 a square foot. These are triple-net numbers, and what triple net means is that the tenant pays all operating expenses on the building.
Industrial is the next area that is not doing real well. Vacancy rates are going up, and values have dropped, and now they˜re more sustainable.
A year ago, some of the small industrial space was selling at $60 a square foot. We were involved in a couple of developments, and we were selling the space at 60 bucks a foot. The same space today is $50 a foot. The most reasonable price range for office/industrial space is between $40 and $50 a foot depending on what ratio you have of office. The vacancy rates are around 9 or 10 percent for industrial.NCBR: You mentioned the coming glut in office properties. Are developers putting on the brakes yet in terms of new construction?Miscio: I think they˜re not going to have much of a choice because I˜m not so sure the banks are going to make loans on speculative office buildings. And if they are, they should not.NCBR: How about that, Bill Kurtz?Kurtz: I think that is one of the biggest risks in our economy, is how we avoid becoming overbuilt. That can happen by exuberant developers, but developers by nature are optimistic.
Bank competition has increased significantly. The number of locations and the number of banks in Fort Collins has probably doubled in the last six years. That creates a climate which is real good for consumers and for businesses because the rates we pay on CDs [certificates of deposit] are some of the highest in the nation. The rates that we loan money at are very competitive because we have a lot of banks that want to make good loans. You can go a little too far. If you go a little too far, then you have banks that become a little bit too exuberant about lending money to developers and creating an overbuilt situation. That can create greater volatility if banks ease up credit too much. So it˜s important that banks remember the fundamentals of credit and don˜t get too caught up in the competition. NCBR: Are we in danger of becoming overbuilt with banks? It does seem that we have one on every street corner now. Kurtz: I think that danger is there, although I don˜t think it˜s a real significant problem. While our national economist may see a national recession by the year 2000, I think locally, I doubt we˜re going to see that. We have too much good job growth. We see that H-P is going to be expanding. Celestica is going to become the third-largest employer in Fort Collins in the next five to seven years. Advanced Energy is adding jobs. Anheuser-Busch is adding a new line and adding jobs. Heska, as we all know.
We˜ve had fundamental, strong job growth, which is going to drive population growth. which, whether you like population growth or not, that˜s what˜s going to drive economic growth. So those signs are all positive, and that˜s going to create a good environment for banks.
You also see banks diversifying their product mix. They˜re not just delivering loans to people. They˜re delivering investments, and they˜re delivering cash-management products for businesses. They˜re delivering insurance. They˜re delivering a whole variety of financial services. We try not to be a bank anymore. We try to be a financial-services organization.
I˜d say the biggest impact we˜ve seen of local banks is just the rates that are paid on CDs. If you listen to KOA, and you hear the highest CD rate in the nation, its a quarter to a half-point below what you˜d get in Greeley or Fort Collins. You really have the same thing happening in Fort Collins and Greeley from a banking standpoint. You˜ve got the same players across the board. That˜s had an impact on the banks˜ margins, but on the other hand, the economy has been so strong that asset quality is tremendous. The losses on loans are almost nonexistent, especially in the commercial area. So that˜s offset some of that higher cost of money, and banks are still profitable, and that˜s why they˜re adding locationsNCBR: How is the competitive situation right now between a bank such as yours, Norwest, one of the larger bank-holding companies in the country, vs. a smaller bank that may be either locally owned or owned by a smaller bank-holding company out-of-state?Kurtz: Different banks are looking at different strategies. Those are probably the two ends of it; it is the smaller, locally owned bank that wants to be what people remember in their bank 20 or 30 years ago. There˜s also the larger banks that are trying to deliver a wider variety of services. And the market is beginning to settle some. You˜ve got some banks that are focusing on consumer banking. You˜ve got some banks that are focusing more on small business and commercial business. For ourselves, we are a large holding company, but our strategy is to balance the control of the decision-making locally. All of our business bankers have lived the majority of their life in Northern Colorado. So we have a local flavor and local control of the decision-making, and at the same time, to try to bring in a competitive differentiation, a competitive advantage, by having the products and services that you get with a national organization. That˜s how we˜re trying to compete with the small, locally owned bank. We try to have the people and control locally and at the same time have the services and product mix that can only be [garnered] from a larger organization.
But banks are segmenting up the market. You see banks trying to fill in niches. They don˜t necessarily try to be all things to all people.NCBR: Will we continue to see a lot of new branches in 1998?Kurtz: They keep popping up, so I think you˜re probably going to see an increase. I think banks are going to continue to look at different avenues for delivery of service. So, rather than the brick-and-mortar bank on every street corner, you˜re going to start to see more banks in the retail strip malls that are going to be store-front banks. You˜re going to continue to see them go into grocery stores. You˜re going to see delivery electronically. You˜re going to see a whole variety of different banks trying to find new ways to deliver their services.

Following is an edited version of their discussion.Editor˜s note:
The Northern Colorado Business Report assembled a panel of industry experts for its second annual Economic Roundtable, conducted Dec. 5 at the Greeley/Weld Chamber of Commerce conference room. Participants included: Bob Bischoff, president of the North Colorado Medical Center board of directors; Jack Calderon, president and CEO of EFTC Corp., a contract manufacturer with more than 800 employees in Greeley; Sharianne Daily, president of The Group Inc., a Fort Collins-based residential brokerage; Bill Kurtz, vice president of business banking for Norwest Bank in Fort Collins; Marie Livingston, chair of the…

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