Sunday, February 24, 2008

The more I look at that 11 building permits in January, (and what looks as though will be a similar number in February), the more alarming it seems.

Just for giggles, I looked up 'General Contractors' in the Yellow Pages, and came up with 400. I don't believe this counts electricians and plumbers and roofers and all the other trades.

But, let's set the construction jobs aside, for now, and check the secondary effects.

There are 50 Furniture outlets listed in the Yellow Pages. Let's assume that all 11 permits are for houses and that everyone who is going to live in those houses is going to buy furniture locally (instead of bringing it with them, buying online or elsewhere).

So, each of you gigantic furniture stores get to furnish less than 20% of one new house per month.

So McMahan's, you get the sofa. Jacob's, how about the beds. Lazy boy, the chair.

Good luck with that.

Lest anyone think I'm over negative (who me?) let's take 'benefit of the doubt' elements out. I of course assume that 'refurnishing' is a big element of furniture business, but I assign that a neutral value, since that happens with or without new houses (though it could be argued, refurnishing is almost bound to slow down, too.)
I'm going to guess that at least a 3rd of those new building permits are commercial. So let's lower the total to 8. Then I'm going to assume that at least half of those 'new' homeowners are bringing their own furniture with them. That lowers the total to 4. Then I'm going to assume that half of those new homeowners will buy online or out of town. That lowers the total to two.

So 50 furnitures stores -- meet two new homeowners. May the best man win.

Not to mention home decor, drapes, carpeting, antigues, etc. etc. etc. In fact, look around and ask yourself how many businesses in Bend depend on new houses.

I think Paul-doh's F#@k laden rants may have been understated.

Jesus, someone tell me where I'm wrong.


Duncan McGeary said...

Reminds me of the megatonnage of nuclear destruction we had (have?) at the height of the cold war.

I read a study once that said after the first few hundred bombs went off, there would be so few survivors, that they could assign a nuclear bomb per leftover.

Duncan McGeary said...

Could someone tell me how to turn my spell check back on? It doesn't seem to work.


Duncan McGeary said...

I'm going to borrow from Bendbubble2' weekly post, if you don't mind.

"Even Duncan hopped on the Prediction Bandwagon, and NAILED IT!

So, I think we'll see the first battleground in the dining industry. Obviously, a lot of older restaurants are seeing the handwriting on the wall. The second battleground I'll predict -- with absolutely no inside knowledge, just a guess -- is in office space and condo's, especially on the west side. Third battleground are the outliers -- businesses and stores located in what may be zoned retail but not normally seen as retail.
BANG! The very NEXT DAY, the Bulletin runs this piece (and kudo's to them, I suppose, for running ANY sort of real estate piece... FINALLY):
Area’s industrial and office space vacancies rising

First off, lemme say that Duncan has been calling this for awhile. Personally I am fairly out of touch with commercial, except for a glimmer of personal knowledge that downtown is becoming wildly overbuilt, with unsustainable lease rates. I ultimately think that the credit/housing bust will affect EVERYTHING, but this was one of those things that's off my radar.

Second, note that business expansion as measured by office space absorption has dropped in half in 2007 vs 2006. And 2007 was not really supposed to be weak. In fact, EVERYONE seemed to state repeadedly that commercial was 100% IMMUNE from the whole crdit/housing bust, at least in Bend.

My Lord, they were building commercial space like crazy in 2007!

I actually drank the Commercial Immunity Kool-Aid, and thought Bend commercial would be OK. I did NOT understand the economics of how that could happen, because I personally thought the lease rates were insane, and I thought the "office condo" had all the appeal of the "home condo": Nice if you love living wall-to-wall with your neighbors and sharing in the financial pain of the weakest link.

That horrible abomination out near Colorado will probably end up on the RIP board. Office Condo's? Geez, that'll end up being another collective "What the fuck were we thinking?" head slapper.

Apparently Dunc was right, and the only thing collapsing (Yes, they are collapsing. I don't need a freakin' dictionary to figure that out.) faster than the Bend housing market, is now the imploding commercial market.

We are headed towards a mega-glut in commercial space in Bend. Nice high, double digit vacancy rates, and all that good stuff. All those pining for The Good Old Days, circa 1983, in Bend will soon have their wishes granted.

The most interesting quote in the Bulletin piece, to me, was this:

Is there more money to be made by investing in a building or by paying rent and investing the upfront cash back into the business?

Yeah! My "Rent And Invest The Difference" motto is starting to get some traction.

Of course it would be considered far more quickly in a purely financial setting like commercial. Rent & Invest The Diff is harder to implement with your wife & kids involved.
Ross' final quote about being "positive longer-term" is a continuation on the Elizabeth Taylor SMEAR IT OUT thesis. Everything will be fine if you take the 1,000 year view.

OK, I agree with that.

Good job Dunc, on nailing this one!"

To which I said:

I guess I see commercial and housing as two sides of the same coin.

People work in buildings and live in houses; people live in houses and work in buildings. You know?

And the money they buy and build these buildings and houses are from the same institutions; in fact, I think from what I'm reading, the financial shenanigans were even worse with the bigger commercial projects (bigger money, more ways to hide it).

I would also point to the number of 'new business filings' in Deschutes County going from 41.9 in 1997 to 468 in 2005.

Houses have dropped merely to 1997 levels.

Business filings have only dropped to 332.

Disaster in the making. And no surprise to anyone who's been in business in Bend for longer than, say, 5 years. A RIDICULOUS number of new businesses.

People seem to see the overflow of restaurants, but not see the insane number of stores. The stores exist, therefore they must belong, right? Exceptionalism is alive and well in retail.

Country wide, independent bookstores can drop from 7500 to 3000 over the last six years, but Central Oregon can jump from 2 to 7 and no one thinks thats....unusual?

But that's no more true than saying all these houses exist, therefor people must be living in them

Anonymous said...

Anonymous said...
I can't think of anything funnier than the Riche business in Bend going out of business HA HA HA

All of the furniture stores have used the "going out of business" signs as come ons for years..Now it will be for real. Interior design boutiques have kept some rich women with "taste" busy..HA HA HA NO MORE !
Lexus, BMW and Mercedes dealers...HA HA more
Yes Yes ..I see the humor in this all. I will try to be more fun from now on. Thanks for the tip.


February 24, 2008 11:17 AM

Looks like a few of us were on the same page this AM.

Being in RE for 20+ years many people bought houses from me a later ask what kind of business's were needed. They wanted to create a good job for themselves.
My general speech 1st included was" If you have 20 grand and borrow another 60 grand or more and spend 7 days a week working 10 hours a day, you will be no better or worse off in a year. All the money will be gone, you will have huge debt, your landlord will charge you to get out of the lease and the inventory and business assets will be woth 10 cents on the dollar".
"Why not just take your 20 grand and go on vaction til the money runs out, come back to Bend a get a minimum wage job and you will be way ahead of the game".
Some of those folks did it anyway and are really badly in debt. Guess they thought my advice was not sage.

Duncan McGeary said...

At least real estate people don't have their money tied up in inventory and borrowed money -- unless they drank their own cool-aid and bought houses.

Yeah, Bend is really good at taking that equity money and spreading it around.

Duncan McGeary said...

I realize I have a reductionist tendency, and I've probably lost credibility with all these assumptions.

I'm willing to see if the news catch up to my wild eyed guesses.

And I call again for someone to try to figure out the retail and commercial footage in Bend.

Duncan McGeary said...

All this talk of commercial real estate gets me to thinking about what Bend was like in 1990, to try to get some perspective.

NOTE:(I've decided to delete this entry, because it's just too smacks a little too much of the scientist proving the bumble bee can't fly.) I decided to post it in the comments section, instead.

Fred Meyer got built in 1990, before that we had a decade with little or no commercial building. A few renovations, later in the decade. Two half dead malls, a half dead downtown, little or no retail on the West, South, North, or East sides. Third Street, blight that it was, was probably the most active part of town.

The population was around 20,000.

O.K. Flash forward. We now have a population of 80,000.

I can only try to visualize square footage, but if we don't have at least 6 times more retail footage, and in my own opinion, up to 12 times more square footage, I'd be surprised.

Huge increase per capita, and certainly per capita income.

I know that makes no sense. It makes no sense to me, either.

I don't know that I would trust any 'official' statistics not to underestimate the amount of footage.

Pure number of stores? Same thing.

It's all pretty crazy.

And no one seems to see it. At all.

So, I've been in business in Bend for 28 years, I have a fairly good grasp of expenses, cost of goods, and so on. I can make a pretty good guess looking at any store what might be going on, especially smaller stores. The only thing I can't really guess at is sales level.

But, even when I compute the lowest costs I can come up with, and the highest sales, I'd still have to say that the majority of stores in Bend don't pencil out. Especially over a five year span. might say, half of all businesses don't last 5 years in any case. Here's where I fall back on what I really think, but can't prove. Most of these stores are probably actually spending more than I estimate and making less.

So, my baseline for over-retailed is twice as much square footage as we need, (which isn't a crazy number when you realize most of American is over-retailed) but a firm guess is 4 times as much as we need, and I have a wild-eyed suspicion that we have upwards of 5 to 8 times more retail footage than we need. Even taking into account the tourists and the regional shopping hub concepts, that's just nuts.

That 8 times more figure is just crazy, Duncan has lost it, he's full of shit number.

Still....I wouldn't be surprised. But still. I have to back down from that estimate. Because it isn't possible, right? I mean, all these stores exist. Stupid to think that only 1/8th of them are necessary.

But, I won't retreat too far from the 4 times figure. Cause, nationwide, I've read estimates that we're way over retailed everywhere, and I'd just add that Bend is even more over-retailed.

It's such a crazy figure, I wouldn't mind in the slightest if someone could prove me wrong. Really, it would be a relief. Because otherwise, it's a scary number to contemplate going into a mild recession, much less a major one.

Anonymous said...

I can tell you the RE folks were some of the first and last flippers. All believing it would never end. Many that I know are still trying to refi into other loans. One has jingle keyed a lot in Brasada. One had 3 rentals on OP arms, that is yet to be played out. It will come and bite her though. Another has a Westside spec that I told them to sell 6 months ago...but noooo..they pulled more out $"s to buy another lot. How long will they look through the rosey glasses and keep giving poor advice to buyers. Some are saying I am a Doomer. Do ya think? Doomer or realist cover your asses now.

RDC said...


While I think it will be serious it will not be quite as bad as the picture you paint. After all even though real estate accounted for a good share of the jobs it did not account for all of them. You can probably expect a drop in purchasing in Bend in the 30% range. I would expect up to 50% of all non-major chain retail or service business (dining, laundry, auto, etc.) to shutdown during the next 2-3 years. I expect the big box stores will stick through it and pick up substantial market share. They are the ones positioned to compete on price and price will be king.

Duncan McGeary said...

I think a 30% drop would be devastating. Actually, 50% falling away if a really high number, unless you figure they'll be replaced.

My own guess is that we'll limp along. Businesses will just sort of quietly disappear, to be replaced by businesses a little more down to earth.

Duncan McGeary said...

I know I probably sound like I'm contradicting myself. After telling everyone how bad it's going to be, now I'm saying most businesses won't just disappear.

But it's almost never clear cut. People seem surprised these days when I tell them that there are less than 1000 sport card shops left. It happens when they aren't paying attention or looking. It happens slowly. It happens under curtains of misleading information.

The same illusion that leads people to open businesses that can't make money, makes even less smart people to copy them. At the end of every boom there are the ragamuffins who watched in envy and now see their chance.

I've always used the term, 'leaving a beautiful corpse' for these buildings and businesses that trade hands after the initial money is spent.

Linda came up with an even better analogy the other day. She said it like a beautiful shell that gets inhabited by hermit crabs.

So, when you take the long slow process, the many sleight of hands going on behind the scenes, it won't appear that everything is falling apart.

Duncan McGeary said...

I was going to make the following, tomorrow's entry, but I've decided it's way too negative. So I present it here.

So I must believe, based on yesterday's entries, that businesses are going to die like flies around here. Right?

Well, no. Most of the business changes will happen behind the scenes.

I've never heard this before in any business books I've read, so I may be all wet. But I tend to believe that unprofitable businesses simply change hands, or move, or in some other way obscure what's happening. The truth is hidden behind a curtain of misinformation.

In every fad I've ever been involved with, it always reaches a height of illusion just before the end. So there are plenty of people left over who are interested in keeping the illusion alive. They still have enough money to hope for a turnaround. They fall away very, very slowly.

The smart money gets out while they still can, but there is very little smart money. They invest inordinate amounts of money on unprofitable businesses, but they may be breaking even right to the end (not making money, mind you, but not losing it either.) They may even have got back their initial investment. So they sell out.

I suspect the rich have always managed to extricate most of their money by taking advantage of others.

Slightly less smart money will hang on too long, lose money, and end up getting hired by someone else. (No business ever quits because it isn't making money. Code words for failure -- losing their lease, finding another opportunity, moving because of family, etc.)

Others will lose their equity and have to find a job.

But these all happen on different timelines.

In every fad, their have always been the 'wannabe's, the come-latelies and the ragamuffins.' They watched with envy, and when they see a chance, they emulate the store they liked.

I don't exclude myself from this. Mike Richardson unloaded Pegasus on me, and probably expected me to fail rather quickly. But I was fortunate enough to hang on. But I'm not sure I ever would've had the gumption to start a business on my own.

Anyway, these new buildings and businesses storefronts at least will leave a beautiful corpse, as I've always said. My wife Linda came up with an even better analogy. These storefronts are like beautiful shells, which become inhabited by hermit crabs.

I expect Bend to be infested by hermit crabs.

Linda had a woman come in the store today who had moved to town six months ago. The woman had just passed her real estate exam. When Linda expressed surprise, the woman didn't understand. Linda just dropped it.

But....well, there's your wannabe, your ragamuffin, your come-lately. Ready to be fleeced.

Jason said...

So, we can try to tell the Emperor that he has no clothes on, but if he didn't listen earlier in the year, he sure isn't going to care now.

I get the feeling he's all too aware of his own nudity. Maybe he likes making kids cry or something.