Recovery and Transition

The economy is not only going through (or suffering through? – it seems like it sometimes) a recovery after a rather rough recession/depression/panic, it is also going through a transition that started with the invention of the World Wide Web, or really, with the invention of the computer itself. In truth, economies are almost always going through some sort of transition – innovations do not stop or start, but always seem to be trickling in. Computers and the internet, though, just like steam before them, are putting the global economy through a much larger transition than we might be used to. The effects are happening slowly; it takes time to find the next market efficiency, and most new market efficiencies are resisted by the existing major players and the congressmen they employ. But happening they are, and happen they will and your best bet is to get on board sooner rather than later.

Efficiency really is the name of the game. It is the reason capitalism, with its focus on competition, beats mercantilism (i.e. crony capitalism) and socialism. Efficiency in this regard means cutting costs – getting the most for the least – and commercial real estate is a great place to make those cuts. For one thing, values were forced to reset after the Great Recession. But more importantly, computers and the internet continue to change the way people work. Office tenants have been trending towards less office space per worker. Computers are only getting smaller, and smart phones and broadband allow more workers to be productive away from the office. So even when office firms are hiring and signing leases, it’s likely that they’ll be taking smaller spaces, relatively, than they did in the past, and this extends the time it will take for the office market to fully recover.

Medical office has been going through a similar transition. The day of the artisan doctor – one man in one office with his own receptionist and assistants – is over, and the new era of medical groups has arrived. Doctors become salaried employees who are not on call 24 hours a day, 7 days a week, several doctors share a receptionist and office staff, and ultimately take less medical office space per employee than they would have in the past. The reason for this transition is the screwed up world of health insurance and government regulations, of course, not technology, but it’s a transition just the same, and one that brokers should pay attention to. Moreover, healthcare providers are moving into retail centers to get closer to customers and, more importantly, to probably pay less for rent.

Retail has other problems though, in the form of online retail. Shopping online doesn’t cost more, and it’s often more convenient (two generations of rampant narcissism has done nothing to make the shopping experience more pleasant), so it’s on the rise. More online sales means less demand for physical retail real estate – witness mass closures of Staples and Radio Shack, and shrinking retail concepts from grocery to electronics.

The big winner in all this might be industrial space. If the trend is towards spending less on commercial real estate, industrial product, which tends to be less expensive than either retail or office space, becomes an option. This is particularly true when it comes to online retailers. While they do not need physical retail space, they do need physical warehouse space, and giants like Amazon appear to be aiming to have warehouse space in every major and minor city in the country to allow them to ship to their customers, and accept returns from their customers, as quickly as possible.

The slow post-Great Recession recovery is not just slow because it’s slow, it’s slow because businesses are forging a brand new identity and are finding brand new ways to do business. Commercial real estate will adapt to this transition, but only if real estate professionals recognize it. Those who do will likely reap the reward of being ahead of the competition.

Moving Targets

Think of the economy as a river. A river is water that is moving from a higher elevation to a lower elevation. If anything gets in its way, the water moves around it or, eventually, through it. There’s no thought process involved, or the act of a higher power. Water is driven by gravity to find the lowest ground it can.

Economies are likewise driven to be efficient. Producing the largest quantity at the lowest price. Why? Because human beings demand it. There is almost no end to what human beings want, and therefore producers want to produce as much of something as they can, and consumers, who have so many desires, want to pay as little as possible. Ultimately, the marketplace is where consumers and producers meet in the middle.

Hoover Dam, photo by Ansel Adams

Human beings can erect dams to manipulate the flow of water. Note that I said manipulate, not stop. The water cannot be stopped. Hoover Dam forces water through channels to spin dynamos, but it doesn’t stop the water from flowing. Other dams force the water into fields to irrigate crops, but they do not stop the water.

Likewise, human governments can erect regulations, taxes and other such things to manipulate an economy. They can make something artificially cheap or expensive, but eventually the market will work around those artifices to put that product at the “natural” market price.

I’ve recently read an article about innovations in healthcare. The supply of healthcare is, like a river, finding a way around artificial impediments. Because the old way of delivering healthcare, via individual doctors and surgeons, has been made artificially expensive with cost-sharing “health insurance” and government mandates, producers and consumers are finding a way to “meet in the middle” with medical groups, do-it-yourself treatment aided by handheld computers (let’s stop calling them cell phones – they’re really so much more), health clinics, etc. At the moment, the victim of this market-driven innovation is medical office space. Medical office space was designed to serve the old market of doctors and patients. At the moment, it is being negatively impacted by the change in healthcare delivery – a change initiated not by the free market, but by large public and private institutions.

Will we, at some point, return to a more traditional model? Perhaps. As healthcare delivery moves away from the very institutions that sought to dominate it, they will have to adapt or die. In the meantime, the medical office will have to adapt to the new way of doing things. It may do this by clever redesigns to serve medical groups and health clinics, or by re-purposing itself to other uses.

Thus the ebb and flow of commerce continues. Keep this in mind when dealing with developers and building owners. The consumer (in this case the potential tenant or buyer) is always a moving target, and forces much larger than they are in the driver's seat. Spend some time understanding the macro-economy to better understand the micro-economies you deal with when you represent a landlord or tenant.

Income and Expenses

You might have read that incomes have been stagnant in the United States for the last 30 or more years. The rich are getting richer, of course, but all of us folks in the middle and lower class have been held in place, no growth, for decades.

Of course, for those of us who actually remember the 1980s and 1990s, this impression might seem a little off. My middle class life in the 1980s wasn’t nearly as plush as my middle class life is now, but perhaps I’m just mis-remembering things.

A look online shows up a median household income in 1982 of $18,801. Adjusting for inflation, that’s about $46,123 in 2014. Median household income in 2014 … $49,486. So there has been growth, but not much growth. The median income does appear to have been fairly stagnant over the past thirty years.

Focusing on incomes, however, misses the other side of the coin … expenses. Let’s look at groceries. I found a few prices from the 1980’s. We can adjust them for inflation, and then compare to modern prices I plucked from the internet.

According to this data, food prices are generally lower now than in the 1980’s. I remember eating lots of ground beef and tuna casserole in the 1980’s and not much steak, so this rings true to me. Steak was a treat when I was a kid. Heck, Shake-N-Bake chicken was a pretty big deal back in the day.

It’s not just food. In 1986, you could get a nice Commodore computer for about $400. In modern dollars, that’s about $864. A modern, base line Dell computer (with monumentally more computing power than that old Commodore) runs about $400 as well. A thousand times more computer at half the price. Not too shabby.

How about smart phones? A modern smart phone can replace all sorts of 1980’s technology – brick phones, the Sony Walkman, cameras, video cameras, digital watches, personal computers, GIS systems (to which nobody but the military had access). Add these together, and you’re looking at about $5,000 worth of tech (most of it from the mobile phone alone) in 1980’s dollars, and about $11,000 in today’s dollars. A new smart phone comes in at around $300 to $400.

Of course, this is not the case with everything we buy. Stamps in 1980, adjusted for inflation, were about $0.03 cheaper than then they are today. Comic books are more expensive (and smaller) now than then, but they’ve also shifted from being sold on newsstands to children to being sold to adults in boutique comic book stores. Books are also more expensive now than then (even on Kindle). A Camero Coupe in 1980 went for an adjusted $18,600. A modern Camero Coupe goes for $23,700 MSRP – a higher price, but for a superior automobile. Gas is cheaper at the moment (around $2.03 per gallon now vs. an inflation adjusted $2.96 per gallon in 1980), though that might change, and of course a year ago gas would have more expensive now than then. Note also the meteoric rise in the cost of education and health care – two segments of the economy with significant government involvement (just sayin’).

It is also enlightening to look at adjusting asking rates for commercial real estate. While I don’t have asking rates going back to the 1980’s, I do have asking rates going back to 2002. If we adjust those old rates to 2014 dollars, you realize just how inexpensive commercial real estate has become.

The story here is not just how much or how little incomes have changed, but the buying power of the dollar. The marketplace has knocked down prices on not only our day-to-day needs, but also on luxuries. Despite seemingly stagnant incomes, Americans today have much more buying power than they did decades ago, which begs the question … why are we so deep in debt?

Inside the Box

Cat in a box Calicocindy/ Public domain

We live in a world of “experts”. Many people opining every hour on the hour on every subject known to man ... and virtually none of them know what they’re talking about. Why? Because they’re universalists. Rather than just make statements about what they actually know, they take their limited knowledge and try to stretch it out to cover everything. Here’s where they run into trouble. Their reach exceeds their grasp.

“You should always think outside the box.” A universal statement. If we took these philosophizers at their word, it should apply to everyone in every situation all the time. Are you stuck on a roof and trying to figure out how to get down? Don’t climb down – that’s “inside the box” thinking. Try jumping off instead. It may get you inside the emergency room, but at least you’re “outside the box”. The statement was once meant to encourage finding new solutions to old problems, but I fear it has been transformed into pretending that old limitations no longer existed.

Wisdom is the synthesis of not just all of your own years of experience, but of thousands of years of human experience, transmitted through books, stories and, yes, sometimes cute little one-liners. Wisdom means taking in the current data, checking it against previous patterns, and then making a decision on how to proceed knowing full well that your decision may be wrong, and thus demands a “plan B”. When, during the early 2000’s, it seemed impossible that Las Vegas would ever stop growing, that the national economy would ever again experience a downturn, that land really should be selling for a bazillion dollars an acre, “outside the box” thinking was at play. The old rules, the old patterns – they no longer applied. Alas – some “inside the box” thinking would have helped quite a bit.

The universe is a very ancient construct, and it is governed by the same laws now as it was billions of years ago. Likewise, human beings. Irrational exuberance, greed and jealousy have been with us from the very beginning, and will always be with us. Every hundred years or so there’s a whole new humanity, but they’re constructed from the same old models and have to learn the same lessons their ancestors learned. The irrational exuberance of the 1920’s that resulted in people borrowing money to buy stock that would increase in value before they had to pay their loans was the same irrational exuberance in the 2000’s that resulted in people borrowing money to buy real estate that would increase in value before they had to pay their loans. The latest iteration might be large corporations borrowing money to buy back their own stock to juice the value of the stock.

When it comes time to predict the future of anything, crawl inside the box and see what those who came before you scrawled on the walls. You might save yourself some trouble (and money). You might even make a fortune.

Groping in the Dark

For the last couple weeks, I’ve been reading a book called The Horse, The Wheel and Language by David W Anthony. Once upon a time, there was no such thing as England and France, no such thing as the Roman Empire, and not even the ancient Greeks we know so well (or should know so well, if we paid attention in school). All of these people spring from a common source, or so the theory goes, a source they have in common with Iran and at least some people in India. This source is a group called the Proto-Indo-Europeans. These people were linked by language, and the book argues that they originated on the steppes north of the Black and Caspian Seas, gradually spreading west and south. Now, at this point, you’re praying that I’m getting to a point, and fortunately I am.

These Proto-Indo-Europeans I’m talking about, and most of the peoples living around them, had not yet invented writing, so everything we know about them we know because we dug it up and studied it. These people lived in and around the era called the “New Stone Age”, around 5000 to 3000 BC. Archaeologists have a tough time reconstructing these societies. For one thing, all they have to work with are shards of old pottery and other old artifacts of stone, bone and antler, the position of people in burials (unless the culture cremated its dead, in which case they don’t even have bodies to work with), and sometimes the foundations of the buildings. Try reconstructing the existence of rap music from the ash trays discarded during the early 1980’s. Not only difficult, but impossible.

It’s made more difficult, though, by the fact that you have to create wide, sweeping guesses about a people that might be completely negated when the next grave is dug up, or when somebody figures out how to track human movements thousands of years ago based on genetic evidence that we couldn’t read even twenty years ago.

Economists and researchers have a similar problem. Much of what we do is take disparate statistics – the number of jobs created (and what kinds of jobs were created), the amount of money spent, the number of visitors to Las Vegas, the vacancy of commercial buildings – and try to weave them into a meaningful narrative. The narrative has to be meaningful, because it must be utilitarian. Business people don’t read our reports out of a general interest in the history of commercial real estate, but because they want to use this information to become more prosperous. The problem is that those numbers we base our narratives on are often late, and sometimes change after we have already used them to weave a narrative.

If you visit the Bureau of Economic Analysis and look at a recent report on gross domestic product, you will note that it is titled something like “Gross Domestic Product: First Quarter 2015 (Advance Estimate)”. It is an estimate, in advance of the actual numbers. The actual numbers won’t be known for another quarter or two, which means to tell you what is happening now (which is what you want to know), we have to base our narrative on numbers that are, frankly, incorrect. They will change. We know they will change. Each year, the Bureau of Labor Statistics revises, sometimes dramatically, the job numbers of the previous year … the job numbers people like me have been talking about and using in our indexes and formulas to help you guess what is going to happen in the future. It may not be a matter of deducing how people lived based on a scrap of 6,000 year old pottery, but it is tricky and it all leads to this point: Take everything an economist tells you with a grain of salt. Economics is called the dismal science, but when economists tell you what is happening now, or what will happen soon, they are practicing not the dismal science, but the dismal art.

And now I have to get back to telling you what is going to happen in 2016, provided I can find my deck of tarot cards.

JMS

The Impact of Cheaper Fuel

Will lower fuel prices cause a spike in visitation to Vegas this summer? More importantly, will lower fuel prices give a boost to commercial real estate?

Generally speaking, when prices fall, people buy more, and when they rise, they buy less. Nothing ground-breaking in that statement, and suggestive that lower fuel prices will mean more people driving and flying to Las Vegas in 2015. But let's take a closer look before we commence dancing in the streets.

According to AAA, Las Vegas’s average gas prices have fallen by from $3.44/gallon one year ago to $2.896/gallon today, a drop of $0.544. Los Angelino’s have seen a $0.52 drop in gas prices, year-over-year. Let's assume a $0.53/gallon drop in fuel prices. The trip from Los Angeles to Las Vegas is about 270 miles. The average car in the United States gets about 21 miles to the gallon, so with the current savings in gasoline prices, you can now make the round trip with a whopping savings of ... $14! I cannot imagine that many road trips to Vegas have been derailed for the lack of $14. Some have, I'm sure, but probably not many. I also wouldn't bet on airfares dropping too much either. Airlines do not seem too generally not inclined to pass savings on to their passengers these days unless they absolutely have to. I don't think lower gas prices will have a major impact on visitation to Southern Nevada.

The effect of lower fuel prices on local consumers is where the potential for a benefit lies. Less money spent on gasoline means more money available for other things, the likely beneficiary being non-gas station retail stores.

In 2014, gas stations took in an average of $23.8 million per month. In of 2013, gas stations took in an average of $23.6 million per month. So, Las Vegans spent an additional $0.2 million per month at gas stations, year-over-year, while fuel prices dropped an average of $0.11 per gallon. Not suggestive of money flowing away from the gas stations, and lower prices at the pump may stimulated non-fuel spending at the convenience stores connected to gas stations, keeping that money "in the family".

Other retail stores took in $1.436 billion per month in 2014, versus $1.348 billion per month in 2013. So, Las Vegans spent $88 million more per month in other retail stores in 2014 than 2013. Perhaps this represents more spending on retail because of lower fuel prices, but then perhaps not.

The big retail boost in Las Vegas was in nonstore retail (i.e. online and, presumably, mail order sales). Now, these numbers are for such businesses paying taxes in Las Vegas, so the money spent does not necessarily come from Las Vegans. Still, taxable sales in nonstore retail climbed from a monthly average of $30.7 million in 2013 to $48.3 million in 2014, an increase of $17.6 million per month.

Many interesting figures, but nothing solid to indicate the impact these lower fuel prices might have on non-fuel related businesses in Southern Nevada. Let's take a different tack. Imagine if the percent reduction in fuel prices from March 2014 to March 2015 (16.3 percent) translated in a 16 percent reduction in spending at gas stations. That would free up $45.7 million dollars, annually, to be spent in other sectors of the economy. That represents just one-tenth of one percent of the total taxable sales in Southern Nevada in 2014 ... and it's probably significantly more money that will actually move from gas stations to other retail.

My prognosis: Don't expect any major impact on commercial real estate from the lower fuel prices we are not experiencing. Fortunately, commercial real estate is in a recovery, and it now appears to be a solid, sustained recovery. A boost from lower fuel prices would be welcome, but at this point it is not necessary to keep commercial real estate growing.

JMS

Real Estate Among the Bubbles

Commercial real estate does not exist in a bubble. A well-worn phrase, yes, but what does it mean? In this instance, it means that commercial real estate is one of a spectrum of investments, and must compete with all of the other investment vehicles out there – stocks, bonds, Hummel figurines, scarves bearing the sweat of the sainted King of Rock n Roll, etc. – for the money of investors. In other words, it’s not enough that you’re selling the best Class B office property investment in Las Vegas, or even in the world – that office building must compete with every other investment vehicle in the world as well. On some level, your building needs to compete with Microsoft stock, pork bellies and Elvis' scarf.

Why is this important? Because the goings-on in those other investment worlds has an impact on Southern Nevada’s commercial real estate. We might wonder why more money isn’t flowing into Southern Nevada’s CRE market when that market appears to be on the mend, but if you consider all the other places that money could go, its absence in our market is not so surprising. If investors can make more money in stocks, money is going to flow into stocks. If they can make more money in commodities, money will flow into commodities. Granted, the time frame of the investment matters as well, as does the investor’s expertise in various investment vehicles – an investor who knows commercial real estate, but who doesn’t know a pork belly from a jelly belly might not want to put money in commodities, even though that market might, on paper, look better than commercial real estate. Still, in aggregate, investment money tends to go where the yield is best.

At the moment, yield appears to be hanging around those aforementioned stocks and commodities. Why? There might be numerous reasons, of course, but the loose money policies pushed by central banks is probably one of those reasons. All of that money must go somewhere, and the folks placing it want to realize a profit on their investment now, rather than later. Commercial real estate is usually a “later”, not a “now” in terms of investment. If we are in a deflationary mode at the moment, long term investments like real estate are more attractive. If inflation is looming on the horizon, as some people fear, those long term investments are less attractive.

Still, things do change. The latest intel suggests that stocks and commodities might be overvalued. Some corporations are taking on cheap debt to make themselves look more profitable than they really are, thus goosing their stock value. As with all unorthodox business strategies, some businesses are going to get away with it, others will not. Eventually that debt must be paid. Meanwhile, Japan’s central bank seems to have decided that Thelma and Louise had the right idea, and it’s now going pedal to the metal towards one heck of a cliff. The term kamikaze might be politically incorrect in this context, but it is probably appropriate nonetheless. What Japan is doing now will lead to currency wars in Asia and then worldwide, and then who knows? Our own Janet Yellen seems determined to keep things loose in the U.S. of A., but Fed chair-people don’t often serve for long these days, so there’s always the possibility that three years from now, our own central bank may start tightening things back up (then again, maybe not – we should be overdue for a cyclical recession right about then).

The point is that if commercial real estate is not the most attractive option today, it might be tomorrow. If you see the stock and commodity markets turn bearish, expect to see the smart money head once again towards the commercial real estate market (except for the smart money that’s shorting those other markets). Hopefully this shift, if it occurs, will occur while Southern Nevada’s market still looks healthy, so we can capture a share of that money. Listen to your clients and understand their investment strategy, and where commercial real estate might fit in. Property prices are still relatively low in Southern Nevada, and that should make them more attractive to long-term investors. Short term investors are probably slowing down for the time being, unless we see that new wave of foreclosures finally break on our shores.

Oh - and when you see the stupid money head into commercial real estate, cash in your chips and batten down the hatches, because it means our 3 hour tour is just about over.

JMS

Moving Targets

Are traditional doctors offices going the way of house calls?

Think of the economy – any economy – as a river. A river is just water that is moving from a higher elevation to a lower elevation. If anything gets in its way, the water moves around it or, eventually, through it. There’s no thought process involved, or the act of a higher power. Water is driven by gravity to be as low as it can be.

Economies are likewise driven to be efficient. Producing the most possible at the lowest price. Why? Because human beings demand it. There is almost no end to what human beings want, and therefore producers want to produce as much of something as they can, and consumers, who have so many desires, want to pay as little as possible. Ultimately, the marketplace is where consumers and producers meet in the middle.

Human beings can erect dams to manipulate the flow of water. Note that I said manipulate, not stop. The water cannot be stopped. Hoover Dam forces water through channels to spin dynamos, but it doesn’t stop the water from flowing. Other dams force the water into fields to irrigate crops, but they do not stop the water.

Likewise, human governments can erect regulations, taxes and other such things to manipulate the flow of an economy. They can make something artificially cheap or expensive, but eventually the market will, by hook or by crook, work around those artifices to put the product at the market price.

I’ve recently read an article about innovations in healthcare. The supply of healthcare is, like a river, finding a way around artificial impediments. Because the old way of delivering healthcare, via individual doctors and surgeons, has been made artificially expensive with cost-sharing "health insurance”, producers and consumers are finding a way to “meet in the middle” with medical groups, do-it-yourself treatment aided by handheld computers (let’s stop calling them cell phones – they’re really so much more), health clinics, etc.

At the moment, the victim of this market-driven innovation is medical office space. Medical office space was designed to serve the old market of doctors and patients. At the moment, it is being negatively impacted by the change in healthcare delivery – a change initiated not by the free market, but by large public and private institutions.

Will we, at some point, return to a more traditional model? Perhaps. As healthcare delivery moves away from the very institutions that sought to dominate it, they will have to adapt or die. In the meantime, medical office will have to adapt to the new way of doing things. It may do this by clever redesigns to serve medical groups and health clinics, or by repurposing itself to other uses. Thus the ebb and flow of commerce continues. Keep this in mind when dealing with developers and building owners. The consumer (in this case potential tenant or buyer) is always a moving target, and forces much larger than they are driving that movement. Spend some time understanding the macro-economy to better understand the micro-economies you deal with when you represent a landlord or tenant.

JMS

Happy Days Are Here Again ... I Hope

The human mind is a funny thing, not only because it apparently has the consistency of chilled pudding, but also because of the way it snaps between despair and ecstasy (though bear in mind that ecstasy is a strong term for what I’m about to discuss).

I was under the impression that net absorption was going to be lower in the third quarter than it turned out to be. It is good news that it wasn't, and though I’ve been a little leery about the industrial market due to weak job numbers and the large impact of build-to-suit projects on that net absorption, I’m almost ready to declare the industrial market completely healed, throw the confetti, toot the horn and start being an optimist.

When a person is expecting bad news, good news has a greater impact on their mood than it would have had had they been expecting good news. The reverse is true as well. It’s important for us to check our optimism and pessimism at the door when prognosticating, and instead look at the data and the trends it suggests, draw on our experience with past trends, and come to a reasonable conclusion.

A full year before the beginning of the Great Recession, I noticed that industrial vacancy rates were on the rise. Gross absorption was slipping a bit, but we were adding tons of new space that was not pre-leasing well. While the trends suggested to me that demand was flagging, the market had conditioned itself to expect strong demand, and proceeded on that assumption. Why let the facts get in the way of a good story, after all. That being said, I certainly did not expect demand to suddenly fall off a cliff at the end of 2007.

Now we’ve been engaged in the Great Recession for nearly six years. Gross absorption is healthy but not really on the increase, but net absorption is very strong, suggesting that existing tenants are no longer downsizing or closing their doors. The lack of new industrial jobs would tend to corroborate this impression on the market, as a lack of closures and downsizing does not necessarily translate into job growth. This is good news, and yet I’m having a hard time expecting it to continue.

So, what’s the story in Southern Nevada’s commercial real estate markets? As much as I fear admitting it, I think Southern Nevada has finally entered the recovery phase (I’m crossing my fingers right now hoping that the fourth quarter doesn’t make me look like an idiot). While job growth is not terribly strong (though this might have something to do with how the data is collected), most economic measures are leveling off or improving, and the real estate numbers have been pretty strong across the board.

The industrial market looks poised to absorb more space in 2013 than it absorbed through the entire Great Recession, and if net absorption remains somewhat constant, the industrial market will be ready for new speculative construction in about 12 months. Retail has been in positive net absorption territory for about two years, and though office is still seeing declining asking rents, its net absorption has been pretty strong for the past year-and-a-half. Office is not doing well in 2013, but that has something to do with continued weakness in the financial services sector (including real estate) and the health sector (health services companies tend to take space in professional office space more than medical office space these days, much to the regret of medical office landlords).

Office notwithstanding, the Great Recession appears to be over. Go ahead and throw some confetti - get it out of your system - and brace yourself for 2014.

Whither Diversification?

Photo by Lasvegaslover, found at Wikipedia

Another meeting of economists and business people in Las Vegas, and another mention of economic diversification, the mirage of our desert home that always seems a bit out of reach. We rely too much on hospitality and tourism, it is said, and if our economy does not diversify, we’ll continue to suffer disproportionately from recessions as we have for the last 5 years. We must diversify.

Of course, this raises a few points.

First and foremost, we’re suffering more than others in this current Great Recession because of our (formerly) huge construction sector. Perhaps too much of our local economy was invested in construction and mortgage financing (though wouldn't that count as diversification? and didn't it exist because there was a demonstrable need for it to exist?), and the loss of 80,000 construction jobs has no doubt put a bit of a hitch in our giddyap. But through most of the city’s history, we’ve entered national recessions late, left them early, and suffered far less than other communities while the recessions lasted. This latest recession simply hit us where we lived.

Second – Diversification is, to some extent, a wild thing not easily raised in captivity. If we haven’t diversified yet, it might be because other than a permissive attitude to booze, gambling and questionable taste in the name of a good time, Southern Nevada has very few natural resources. We have a river close by, but that’s already been dammed. We had wide open spaces up north, but those are already filled with atomic bomb craters and UFO research facilities. What, precisely, does Las Vegas offer to the world that the world is not already aware of? If somebody can find the cure for cancer in caliche or find a way to squeeze power out of the sun without the need for massive government subsidies (sorry kids, it's a profit and loss system and that isn't going to change any time soon) we’re all set, but otherwise we don’t have much to work with.

Third – I know, in the age of the internet, many businesses can operate anywhere, so why not operate in Fabulous Las Vegas? Well, Las Vegas does have a few things to offer the modern web-savvy business – the greatest internet connectivity in the world, a tax structure that favors start-ups and gazelles and the presence of Tony Hsieh come immediately to mind. On the other hand, the density of people living on the coasts suggest that, if a person can live and work absolutely anywhere, they will probably choose San Francisco, Los Angeles or Seattle before they will set up shop in Las Vegas.

Some folks will point out that the reason we don’t get our fair share (there is no such thing, by the way) of tech companies is that we don’t have the greatest education system in the world. Of course, Steve Jobs and Bill Gates didn’t have the most stellar careers in higher education in the world and managed to do pretty well for themselves in the world of tech, but I concede the point. We could invest in churning out highly educated people, of course, but ask Iowa how well that’s worked out for them – wonderful higher education system, and tons of educated Iowans now living and working outside of Iowa. The problem for Las Vegas is that, like agricultural Iowa, it has no need for a highly educated work force right now. We would be faced with the problem of producing the supply to attract the demand, and the supply (educated human beings) couldn’t very well wait around for the demand to show up – once they’re out of school, they need a job, and I fear they would find that job elsewhere.

At the heart of the problem, I think, is that Las Vegas, as it exists today, should probably not exist as it does today. Given the resources of the area, Las Vegas should probably be about the size of Bakersfield or Barstow, California – a stop on the road for people heading out to the beach. A weird series of circumstances, including legalized gambling and a number of government construction projects (Hoover Dam, Nellis AFB, the magnesium plants in Henderson during the Second World War, etc.) have conspired to place a remarkable number of people in the middle of the Mojave desert, and this has created the illusion that this city of 2 million people is just another large American city. Of course, this is not the case – we’re a rather strange, large American city, and the economic diversification one finds elsewhere may be tricky to achieve in Las Vegas, at least in the way some folks want to achieve it.

Perhaps the greatest resource of Las Vegas is its laissez-faire attitude. New rules in California governing the adult film industry could send more film makers to Las Vegas. "Great," folks might say, "let's add porn to our resume of sin." But the adult film industry is an industry, and it might have a compelling reason to relocate some production to Las Vegas. Jobs are jobs, right?

Likewise, we’re seeing more and more holding companies springing up in Las Vegas, since people want to own California businesses, but they don’t want to own California businesses in California because of the heavy tax burden in that state.

Medical tourism seems to be a possibility, since it allows us to play off our strength – serving tourists – and perhaps there are other ways to spin our expertise in hospitality into other industries.

That being said, none of the above are likely to ever rival leisure and hospitality in terms of employment in the Valley, and maybe that’s okay. For all its diversification, Houston is still dominated by the energy industry. Maybe the best plan for Las Vegans is to relax and let nature take its course. Given the resources at our disposal, Las Vegas has beaten all the odds to become the city it is today, and the same human genius (i.e. greed and ambition) that inspired Bugsy Siegel to build a resort in the desert south of Las Vegas may well find a way to diversify its economy in the future without having to resort to the horrors of convening a committee of experts.

Still Arguing About Taxes ...

Via Wikimedia Commons

Some things never change, huh? I'm wondering what the other paths represent?

Of course, Congress will probably end up compromising and using them both ...

Don't Page the Fat Lady Just Yet

The last couple months of 2011 were a bit sobering. After those heady days of mediocre growth in mid-2011, Southern Nevada was once again reminded that the post-recession hangover wasn’t over just yet.

In January, the slide in our Recovery Index ended, and the index has sat at 89 for two months now. Flat, but marginally better than December and a clear improvement over Jan/Feb of 2011, 2010 and 2009. Unfortunately, the index is about 10 points lower than it was in Jan/Feb 2008 (when the recession essentially began).

The bright spots in February 2012 was the fact that almost all of the components of the Recovery Index were up year-over-year, with the big boosts being in New Residents (very important for the local economy), Gaming Revenue and Taxable Sales (is retail ready for some growth?) Only one measure was flat – Commercial Occupancy – which is linked to Employment, which was only up 1 point (or 2,200 jobs) year-over-year, and most of those jobs were in Leisure & Hospitality, not in industries related more directly to the occupancy of commercial space.

The good news is that the local economy is, in a slow, measured way, improving. The not-so-good news is that it could still be a while before we really see that improvement in commercial real estate. Jobs is the thing (I might have mentioned that about 3,000 times since 2007), and right now we’re waiting for jobs in the Resort corridor to translate into jobs in the suburbs. The best model I could construct suggests that we should already be seeing that suburban job creation – the lag should be about 6-9 months and hotel/gaming employment began rising about mid-2011. The fact that we’re not suggests that Southern Nevada, like the United States in general, is experiencing a drop in labor force participation related not only to the Great Recession, but to long-term demographic trends and a skill set mismatch between unemployed workers and available jobs.

Demographically speaking, we could be seeing an ebb in the tide of of “two-worker” households. Much of the decline in labor force participation is in the male demographic, so it could be that women are simply displacing men in the job market now, rather than supplementing them. More worrisome is the extension of “childhood” (i.e. living at home and playing video games) into the mid- to late 20’s. A similar phenomenon can be seen in Japan and Europe, and this lack of productivity in the young does present a major problem for nations that seek to redistribute wealth from the young to the old. It might also represent a rational decision by the young, who don’t see much benefit from participating in a society that redistributes money from young folks in the bottom quintile of earners to old folks in the upper quintiles of earners.

Job Creation and Other Fables

There are currently two competing theories on how jobs can be created to rescue the economy. Both of them are wrong. One side would have us spend more stimulus dollars to create jobs, dollars for infrastructure (mostly unneeded and hard to put your name on, so unpopular with politicians) and for “green jobs”. Spain undertook major government investment in green jobs a few years back and managed to drive their unemployment rate nearly to 20 percent as a result. About one trillion dollars of stimulus managed to create, well, nothing, but certainly a trillion more will do the trick. Why, just recently I hit myself in the head with a hammer ten times in order to learn to speak Spanish. It didn’t work, but another ten hits will probably get me there.

The other side believes tax cuts will stimulate hiring. If a company has more money to spend, they will naturally spend it to hire people because, you know, it would really help the politicians out. Less regulation and lower taxes could make the prospect of hiring less daunting, but taxes and regulation really aren’t the impetus for job creation. After all, most European nations have significantly lower corporate taxes than the United States, and they’re not exactly swimming in jobs.

Let’s get back to basics. Jobs are not “created” in the same way works of art or sandwiches are created. Jobs exist solely to serve a need. Necessity is the mother of invention, and she’s also the mother of job creation. Why does an employer hire an employee? To satisfy somebody’s demand for a good or service – and this next part is important – while making a profit. The employer hires an employee because they think will get earn more money from that employee’s labor than they have to pay the employee. Lowering taxes might help push a few potential hires over the line from “loss” to “profit”, but probably not on a large scale unless those tax cuts are significant. Stimulus funds might pay for an employee temporarily, but when the stimulus funds run out, so does the employer’s ability to pay his new employee.

Massive debts accrued over the past two or three decades by individuals, businesses and governments have caused what some economists call “The Great Contraction”. This boils down to less spending for goods and services than in the past. This reduction in spending, coupled with the need for businesses to increase efficiencies and hold their bottom line, means that there is less profitable work to be done. The one thing that will solve our current situation is time. This is cold comfort to the unemployed, who demand action. Politicians have little choice but to heed those calls to action, so they will keep on pushing the fable and leave future generations to pay the bill.

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Illustration by Arthur Rackham from 1912 edition of Aesop's Fables.