Saturday, November 22, 2008

Bigger keeps the difference.

Bigger does not give back to smaller.

I challenged BEM to give me some positives in the Bend economy. I'm writing this before he answered, but the only one I could come up with is that commercial rents might get lower.

At least in theory.

But I ain't counting on it. In fact, I expect an increase.

Never in 28 years have I had a rent decrease, good times or bad.

Nor have I had my interest rates on my cards lowered.

Or my bank fees lessened. My electric bill goes up no matter the economic conditions. My health insurance rises so much, that it's become a bad joke.

Lately, my shipping costs were getting so extreme, that I stopped 'direct shipping.'

Wait a minute. Oil has dropped from 200.00 back to under 50.00 a barrow. Should I expect my shipping to go back down?


Bigger doesn't seem to give back to smaller. Once the price hikes take place, they are never rescinded.

I recently decided to quit pre-ordering from a supplier I've used for 25 years. Up until recently, he had a flat 3.00 shipping charge. He raised that to 10.00.

Not much of an increase, except I could order one or two times a week at the 3.00 rate, order as little as 100.00 worth without feeling as though it was affecting my margins.

My only options that I can see are fairly passive aggressive; as the little guy I have very little power. So....I don't use my credit cards. (I know, I know. Good.)

I stop ordering as much or as often.

I try to find someone who hasn't decided to raise rates yet. My game wholesaler is likely to get more orders, because he has free shipping above a certain rate.

It may seem to make little sense. Higher rents? But if the landlord can get them, and he wants the 'going rate,' then who can argue?

From what I'm hearing, rents not only aren't going down, but are still going up. It would take several years of drastic downturn, I believe, to make a difference. I think wishing for that is like wishing for an amputation to cure a papercut.

I believe we are at the point in commercial rents that we were circa early 2007 for housing costs, when the bubble was bursting and housing was slowing, but people were still asking higher prices. Prices are going to be sticky for awhile yet, especially if the downtown locations keep being snapped up.

Not trying to sound bitter about this. It's the way of the world. Caveman kicks the dog, walks out the cave and gets kicked by the wooly mammoth.


BilboBend said...

Rents can't go down.

Legitimate landlords have seen drastic rise in insurance, I'm looking at YOY 2X.

Property taxes only go up.

By legitimate landlords I'm talking about people who do it as a business.

Then there are all the REIT ( out of town investors ) that pooled their money to build the TOXIC over-supply. These people pass back losses to the 'investors' ( docs,lawyers, ... ) eventually its comes back, in the short term you get a tax shelter. The REIT's don't care if a project sits idle.

A 'legit' landlord can't tolerate a property to sit idle.

It's so far out, going past 2012 to predict how much stuff will be empty or boarded up.

Certainly nobody is going to 'reduce' your rent while you appear to be surviving. The next tenant may pay more or less. It all depends on the market. I know what I do is check 'craigs-list' and see what everybody else is 'asking', and then ask 10% less.

From day one I have told you to buy your own property.

There is so much 'stupid' money in Bend, there seems to be an infinite number of people that want to buy a wine-bar, or food place, or hair-salon.

A lot of downtown stuff can also let you live in the basement or up-stairs, many folks will live at work, that way they can write-off all their expenses of living.

Look at the remote siberian STD tract development rental values that will go down, over-supply, and Suburbs are over. People want to be close-in.

I always try to make rent as cheap as possible so tenants don't move, it takes 3mo on average to get a new tenant back in, thus that 3-mon lost rent, most 'legit' landlords are already renting at a good price. Over-priced property's don't keep tenants.

I see a trend right now in Bend, to become more Vegas like, the old Grove, now Village... is now going to become a Vegas act, more martini bars clubs, night-life, more of the 'Starz' 3RD-AV lifestyle coming to downtown, that's what I see, 'adult entertainment' coming to downtown Bend.

Yes, the rents will not go down.

Bend Economy Man said...

Well I think that it's not so much that there's a "sunny side" of the Bend economy that needs to get emphasized now, just that there's not so much of a real societal need right now to point out that the economy sucks, because that's obvious. As I'll discuss in more detail below, the most optimistic thing I can say is that Bend's not such a bad place to live during a bust because as a community we've done it so many times before.

In my previous post I was trying to say just that I see what some people mean when they say they don't see the point in reading blogs with a negative economic outlook. I read them, I post on them, my own outlook is negative, but I don't expect my views to be a cold splash of wake-up water in anyone's face because it's now abundantly clear what's going on, and I don't blame people for not wanting to hear more about the downside of things since it's already a reality for them.

Whereas - in 2005 and 2006 I DID blame people for not wanting to hear about the unsustainability of the RE boom because it was a disaster waiting to happen. I felt insightful and prescient. But now the disaster IS happening, and I'm kind of fresh out of ideas.

Bend's like a lot of its residents: dealing with the aftermath of a lot of poor choices made on faulty assumptions about the future. If your friend took on huge debts and his income is going down, the only thing you can say is that you empathize. And you can hope, and maybe even say after a few beers, that he's learned his lesson. But what else is there to say? Bend's in the same position. There's probably no "good" exit strategy - probably just a "least bad" exit strategy. And maybe "exit strategy" is the wrong concept - people just have to come to grips with what happened, let go of what's been lost and start looking for opportunities in the new reality.

Right now it's probably too early to expect people to just move on and accept the notion that just about everyone's standard of living is going to suffer for a while. Factories will have to accept a lower level of production, workers will have to accept lower wages, stores will have to accept a lower level of sales, landlords will have to accept less rent, lenders will have to make deals with borrowers and accept a hit on their balance sheets. But the "sunny side," if you can call it that, might be that this is inevitably what will happen.

And when people stop focusing on what they've lost or what they might have had, and start talking about other things and looking for opportunities, that's the beginning of the recovery.

I was too young to be involved in many economic discussions back in the '80s, and in any case I spent my formative years in the Deep Recession Bend so I didn't know any different. When I saw faded storefronts, long-unrenovated stores (think Wetle's Shoes and later Mogul Mouse) closed shops and empty malls, I figured that's the way it was supposed to be. But I think that even the adults, once the mills closed down and people sort of came to grips with the fact that Bend wasn't such a prosperous community, they moved on and lived their lives and it wasn't so bad, because everyone was in about the same boat, to varying degrees.

So the most optimistic thing I can say about Bend is: we're out here pretty much in the middle of nowhere, and we're all in this together, and people have done it before. Whether you're a construction worker or an orthopedic surgeon, just about everyone's going to make less money in 2009 than 2008. No one in this town is gonna get rich off this downturn (at least, you won't get rich doing honest work), so there's no need to stress any more. Talk to the bank and find a way to stay in your house if you can, sell your Hummer and buy a beater, sell off your toys, find a way to make ends meet however you can (living simply), and around you you'll see people doing the same thing, and helping each other more than they used to. Take your kids cross-country skiing at Swampy Lakes instead of downhill skiing at Bachelor, camping instead of Disneyland, have potlucks instead of restaurant get-togethers, use babysitting co-ops and in-home childcare instead of state-licensed daycares, do more bartering of goods and services. That's what my parents and their friends did in the '80s, and the kids barely noticed the difference. And if you hang in there, eventually things will get better, like they have every time before.

Duncan McGeary said...

You'll buy my Hummer!?

I know what you're saying, but I thinking your underestimating the delusion that's still pervasive.

I was 10% Below my Worst Case sales scenario in Sept and Nov.; that's never happened before.

Jan. and Feb. are almost always worse than Sept. Oct. Nov.

What I'm saying is, I don't think the businesses are ready yet. There is an exorable logic to it all that they just don't want to stare in the face.

You can't go from 400 building permits a month to 25 building permits a month, and keep the same level of business.

The businesses in Bend really, really NEED to read those negative blogs. Read them all. Read them everyday. Christmas is your chance to clear the decks. Really.

I've penciled out that I could sustain a 60% drop in sales and survive. How many businesses can do that?

I suspect most can't sustain 20% drops over the long haul.

And the long haul is coming. One or two years, at least.

It's not only that sales are going to be lower, but how many will lose money chasing the bottom? You have to make the necessary steps BEFORE the drops, not after, if you don't want to go into the hole.

That means they have to believe the negative instead of harboring illusions.

In shouting distance of me, I've seen several new stores open. An art gallery, a clothing store, a new jewelry store, a candy store, and word is -- a used bookstore/coffee shop is coming in the Book Barn space.

I sit down with my calculator and try to figure out how some of these spaces could possibly pencil out. (I have a downtown store, after all, as well as my wife's bookstore.)

More power to them, you might say. Except this will keep the rental rates artificially high.

I'm really thinking that people aren't being pessimistic enough for their OWN GOOD>

I don't see this as any different than buying a house.

Wait a couple of years, get a space at the inevitable lower rates, closer to the inevitable upsurge.

Instead, they jump into the pool just as it's about the empty out.

Methinks the commercial bubble in Bend is not yet burst.

Duncan McGeary said...

When the comic business shrank from 12000 shops in the mid '90's to 3000 shops by 2000, everyone noticed the same phenomenon.

It because so common that it was distilled into a single sentence.

"No one ever went out of business selling out."

Almost all the shops went out of business because they over ordered. Bought too much. Tried to get too big too fast. Overspent.

9000 shops went out of business because they couldn't lower their expectations.

Duncan McGeary said...

Take your typical downtown 1000 sq. ft. location.

Let's say it costs 2.25 a ft.

Let's say the owner works all the hours and takes only minimum wage home. (There are vanishing few of those.)

Let's say he has no loan costs or credit card debt. (How did he manage to open the store?)

Let's say he gets only the basic phone, internet, electric, yellow pages, gas, insurance. No frills.

Let's not count the 'opportunity costs' or the amount he spent on fixtures and set up. (Again, is that money gone forever? Does it ever get paid back?)

Let's even give him the initial inventory. (How does that happen? It doesn't. But let's just say it, to keep costs down to the absolute minimum.)

Lets say he does no advertising, and buys no frills; just the basic scotch tape, stapler.

The costs per month of this rock bottom store are going to be somewhere in the neighborhood of 5000.00.

The average profit margin for a specialty store is about 40%.

So this mythical store, that costs nothing to open, where the owner works every hour and scrounges his pennies on used shopping bags and no ads and threadbare carpet, has to earn 5,000.00 divided by 40% or 12,500.00 a month, or about 420.00 a day.

Every day.

Ten people spending 42.00; or 100 people spending 4.20, or some combination thereof.

That means, with the occasional blizzard or war or just beautiful spring day, there will be days he does half as much as other days, so he'll need to do 600.00 or 800.00 on a regular basis.

Pretty much 50 to 100 people a day, minimum, all of who want to spend money in YOUR store and not somewhere else. Who are willing to buy YOUR stuff at 40% margins instead of online or at Walmart.

(Not counting damage, theft, and mistakes, of course.)

This mythical store can't grow. (without borrowing money, or getting higher profit margins). It can't hire employees. Any broken fixtures, or burned out lights have to be paid outside the budget.

Remember this is for minimum wage.


You still want to do it?

Buy yourself a clicker. Bundle up and sit on the sidewalk outside the location you want to open on a cold Tuesday in November or February.

Count how many people walk by.

Or, wait outside on a beautiful summer day, count how many have shopping bags.

All I'm asking, is. Do the math.
Be realistic.

bruce said...

Dunc, that last comment should be required reading for anyone thinking of buying into retail. It's the truth.

Keeneye said...

My folks own a business in Bend -- over 6,500 sq.ft. of showroom.

They negotiated their lease and are paying less than they have in the past two years.

Just saying....

Duncan McGeary said...

I suck as a negotiator.

But I do have Linda's store to move to if need be. In fact, it probably would make sense to take the viable part of my store (Comics are half my business, and have the best margins, and I could probably take most of my customers over.)

I'd want to do it because of it's advantages, though, not because I have to do it.