The Economy and GR

[d8alterego]

As I'm sure you all know, we are in a bit of an economic crisis. That being said, we have been hearing about more and more projects being scaled back or discarded into the project graveyard. Such dead developments include Hyatt place on Medical Mile, 275 Fulton, and Tall House on Ionia. But my question to all of you is: could it be possible that the economic situation could halt current projects like 38 Commerce and Gallery on Fulton? Do we all feel like this is just a bump in the road or, to use a popular political phrase, a crash into the ditch?

[davidb]

The availability of credit and the cost of raw materials will affect all of these projects.

[d8alterego]

Yes, but is it possible that this economic downturn could be big enought to actually halt the construction of the projects? Does the project's insurance cover the credit crunch? Is there enough credit to keep these projects going for another year or more? I'm no economist, but it just doesn't always seem possible for huge building projects to get done in bad economic times. We have not seen an economic disaster like this since the Great Depression (which most of us have never personally experienced) and I'm curious as to how many hugely expensive, privately funded building projects got built during that period? Most projects seemed to be government backed during that period and thus private construction nearly halted till after WWII. Does anybody know? Any economic historians out there? Or am I bringing up a thought no one wants to consider because they want to see these projects finished?

[Gorath]

The Great Depression began on October 29 1929 (Black Tuesday) and lasted until 1939

Construction on The Empire State Building started January 1930 and finished May 1931. Much of the building remained mostly unrented due to the Great Depression and the building was given the nickname The Empty State Building. Many other buildings in New York were also constructed at this time including the Chrysler Building.

I think projects that have already stated will be finished. That money should already be set aside by the lender. New projects may be put on hold. If, for example, the condos at the Riverhouse/Fitzgerald continue to sell then I would expect more luxury condos to be built downtown. Why? Because their would be a market for them. But if they don't sell then banks would hold on to their money.

[GRDadof3]

What I have been told is that 38 Commerce and Gallery on Fulton both have their financing packages in place. One thing that I wonder is that both involve publicly owned parking garages (financed through bonds I believe). If the city has already obtained their end of the financing, then I don't see any hold up to having them move forward. But banks can't just stop lending money. That would exasperbate the problem.

BTW: The Gallery on Fulton developers closed on the property May 30, 2008.

[d8alterego]

I completely forgot about the Empire State Building, but it is a good example. I tend to think that our current building boom is over and the last few projects will be starting soon (ie. Monroe North hotel, 38 Commerce, and Gallery). Actually, does Monroe North hotel have its financing in place? Or is that project in jeopordy of halting? I also believe that without the streetcar and BRT systems up and running, I don't think we will see another construction boom for another decade or more.

[mgman]

It still is possible for projects that have lined up funding to fail. If for some reason the banks that have agreed to fund the projects go under or if there are cost over runs in a project and the builders cannot find any financing for the overruns, than the projects may not get built. Whether or not that is possible with or without any type of resolution trust or other plan, I do not know. In this climate anything is possible.

[tamias6]

I think the projects that are at or close to starting construction will be completed. We will also see the completion of the Health Hill construction and other current projects. However we will see a lull in construction that will last for as long as the economy remains stagnate. But if the city manages to pull off things like the BRT rout on Division and the Streetcar line we might see some projects pop up along those new transit lines.

[GRguy]

It still is possible for projects that have lined up funding to fail. If for some reason the banks that have agreed to fund the projects go under or if there are cost over runs in a project and the builders cannot find any financing for the overruns, than the projects may not get built. Whether or not that is possible with or without any type of resolution trust or other plan, I do not know. In this climate anything is possible.

[jbr12]

This is off topic, BUT, the Spire is not on hold. Here's some quotes on another forum from a construction insider a month ago:

-They recently completed the last whaler in the core area.

-Utility/sewer work will be starting soon if it hasn't already

-We should hopefully start to see the structure rise in the 1'st quarter of 2009

[Yankee Fan]

I may be in a unique position to talk about this subject because of what I do.

Here is what I am hearing in West Michigan (as of this past Friday):

1. In terms of capacity planning, most of my large and mid sized companies are planning to add additional permanent headcount to their technical workforces as well as to their support workforce (i.e. admin staff).

2. While we hear the doom and gloom of unemployment in Michigan (something like 8%), I can tell you that if you look at engineers, technical folks (i.e. computers, infrastructure, and the like), the unemployment rate in those areas is more like 2%. In my line of work, anything under 3% is darn near no-unemployment. Why? We are not graduating as many computer science majors and engineering majors as we were 5-10 years ago. People are leaving and retiring, and there are very few left to backfill with.

3. Companies that I am involved with that have capital projects planned are actually looking to spend more in 2009 than in 2008. They are not slowing down; they are speeding up.

4. My understanding is that, although financing tends to be the linchpin in a building project getting off the ground (actually with anything in business happening), the biggest factor in this is having clients that want what you are selling. Keeping that in mind, any project can get off the ground if someone wants to invest in it. For example, if you want to build an apartment building, then you need to pre-sell X number of units before you can get financed by the banks.

Because so much of Michigan is hurting, my clients are beginning to do the exact thing that we are constantly hoping they will do: Reach outside of Grand Rapids to attract tenants, companies, etc. who want to invest here. This takes longer than getting a company from one of our suburbs to relocate downtown. But make no mistake, they are a lot of gears in motion that will help us to continue to grow, albeit at a slightly slower rate.

Believe it or not, our region is poised to grow because so many areas around us are contracting. To give some credibility to this, my office in Grand Rapids has had a 1500% increase in interest from companies on the east side of the state looking to relocate over here. 1500%!!!!! That is huge!

The only other thing that I would like to add is that I believe Rich DeVos is correct: We will have to grow our own economy. It is very rare to see a big company relocate away from its roots. And, even with all of the recent investment in Grand Rapids, our biggest employers are still home grown. And, the new names that we throw around (i.e. Van Andel Institute, Wolverine) were also started here. We can gain from others joining our bandwagon, but it is us, you and me, who will walk down the street with someone already here in town and later in life tell our kids that we knew them before they hit it big.

Funny thing is, we have been in a recession for years in Michigan. It just so happens that the rest of the country now feels our pain.

[mgman]

All of these things underline the fact that West Michigan is in a better position than the rest of Michigan at this current moment but that is the problem, it is at this current moment.

1. In terms of capacity planning, most of my large and mid sized companies are planning to add additional permanent headcount to their technical workforces as well as to their support workforce (i.e. admin staff).

[superNOVA]

Credit will tighten - but not be impossible. If you can show demand and the ability to pay back, as well as secure the credit or insure it, you will be OK. I would not expect the banks to go back to loaning anyone money for anything anytime soon. I would expect it to tighten more on the consumer side than the commerical side where projects are well secured and capitalized.

The goal on the consumer side of getting more people into homes by loosening credit requirements obviously did not work well - some people just cannot afford a home. Let alone with greedy banks pushing them into buying way more than they could ever afford.

[GR Jackson]

I would think a shift to a more local focus would be helpful at this point. Smaller scale projects focusing on smaller areas will do well. There may not be financing for large projects trying to draw tons of tenants, but it is easier to find tenants for smaller less expensive projects. People still want to open businesses and pursue their dreams.

[GRDadof3]

I would think a shift to a more local focus would be helpful at this point. Smaller scale projects focusing on smaller areas will do well. There may not be financing for large projects trying to draw tons of tenants, but it is easier to find tenants for smaller less expensive projects. People still want to open businesses and pursue their dreams.

[Cabot]

Exactly. If companies have new business contracts in hand, a solid business plan, and need to expand, banks will lend them money. There's not going to be much speculative financing any time soon (which pretty much dried up a few years ago anyway). Look at the recent news with Legett & Platt expanding three of its West Michigan operations, Bissell's expansion, and Sequenom buying and expanding the CMM lab.

With that being said, I don't think we're going to see any new highrises downtown any time soon. Although I hear a big local company is toying around with the idea of a downtown "campus" type setting.

And in conjunction with what YankeeFan said, I've read a private study that shows people with Bachelors degrees in Michigan have a 99.5% employment rate.

[GRDadof3]

Where would we be able to find that "private study"?