Volume 3, No. 11
January 2008


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Avian Flu Pandemic
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Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Regional Economic Forecast
Indicates Slow Growth And
Positive Change In 2008

David Lutton

David Lutton, President Charles Reinhart Company Realtors

By Sarah Swanson

Local consumers, home sellers, and businesses will likely have to wait a little longer to escape the hard economic times Michigan has faced recently. Washtenaw County, while somewhat insulated, has suffered its share of hardships as well. However, a highly educated community, new start-up businesses, and a strong will to move forward are helping the Ann Arbor area look ahead to gradual relief starting in 2008.

According to Dana Johnson, Chief Economist for Comerica Bank, 2007 was the fourth year in a row that Michigan has operated in a one state recession. He says, "I always start from the point of view that Washtenaw County can't escape what is going on in the state, and the state can't escape what is going on in the nation." Johnson predicts the nation may eke past a recession. Whether the nation continues to experience cyclical weakness or an actual recession, Johnson believes, "Growth is going to be sluggish. It's going to be pretty challenging." With some encouragement he says that if a recession is indeed avoided, the economy may see an upswing in the second half of 2008.

David Lutton, President of the Charles Reinhart Company, Realtors, says the consensus on whether that recession will occur is about 50-50.

"I see '08 as a year of improved economic conditions. We're operating with a favorable interest rate," says Lutton. "The big unknown is whether the national economy will slip into an economic recession. If it does, that won't be good for Michigan."

One of the main concerns in all of Michigan is the unusually high unemployment rate. In their annual Michigan economy forecast report, University of Michigan economists George Fulton, Joan Crary, and Saul Hymans recall the 700,000 jobs created during Michigan's prosperous years between 1983 and 2000. However, the State of Michigan lost around 400,000 jobs in the next seven years, many of which were in the automotive industry. Unfortunately, this unemployment trend continues.

Johnson says, "Through December 2006 to October 2007 there was a decline of 80,000 jobs by comparison to the same time the year before (December 2005 to October 2006) where Michigan lost 51,000 jobs." He says the area's medical centers, the Universities, and other entities somewhat help to stabilize employment regionally, but again the county is intimately connected to the state's economy.

The announcement of Pfizer's closing in January 2007 meant a loss of 2100 to 2400 jobs in Ann Arbor, according to Elizabeth Parkinson, Director of Marketing and Public Relations for Ann Arbor SPARK.

Looking on the bright side, Parkinson says, "Pfizer created opportunities. Although it was negative news, it still put Ann Arbor on the radar for business." The national news coverage quadrupled inquiries from other businesses interested in the old Pfizer location.

"The Pfizer campus with 177 acres and two million square feet of very specialized space is not going to sit idle. Rumors are abounding; someone is going to bring new business," predicts Lutton. "Not only were they (Pfizer) important economically, they were important psychologically for the market. Hundreds of families had to make decisions about transferring to other Pfizer locations, finding new local jobs, or working with competitors. The good news is many local start-up companies benefited from these employees."

Parkinson confirms that a number of companies, such as Barracuda Networks, Inc., a worldwide leader in email and Web security and firewalls, and Metabasis, both out of California opened offices in Ann Arbor when they learned that competent former Pfizer employees needed jobs, but didn't want to leave the area.

SPARK was formed as a consortium of local business people two years ago as a way to help start-up companies and to attract high technology businesses to the area. Eventually SPARK merged with the Washtenaw Development Council, which handled more traditional development issues such as assisting companies relocating to the area, hiring new employees, and retaining current businesses.

Factoring in that the region once seemed immune to economic hardships, Lutton says SPARK is much more effective in local economic development than any previous programs were.

"Washtenaw County had been somewhat complacent," he says. "We're not complacent anymore."

Today SPARK helps start-up companies with seed funding, business "bootcamp" programs, incubation including help with some space needs, business accelerator programs, business planning, legal counsel, and plans for future funding. Staff members work on retaining and helping current businesses expand, attracting new companies to the greater Washtenaw region, and identifying talent pools.

"We are the only economic development organization that I am aware of that has a talent professional on staff," says Parkinson. Amy Cell, Director of Talent Enhancement, is charged with networking and maintaining a comprehensive database to match local talent to new jobs.

Lutton agrees that Washtenaw County has a significant amount of talent in biosciences, medical sciences, and venture capital. Having the University of Michigan, Eastern Michigan University, and Washtenaw Community College within the county lends for a highly educated community.

"All of these things give us a platform to build on, and I think we are going to see a more diverse, technology driven economy than we have seen in the past," says Lutton. He also believes the research and development (R & D) coming from the automotive engineering field will be "a huge economic driver."

Although unemployment rates are higher in Washtenaw County than they have been in the past, SPARK has assisted in retaining over 1300 positions and gaining over 1400 jobs in the area during 2007, says Parkinson.

Still, despite Google's new presence in Ann Arbor where about 150 to 200 of the predicted 1000 employees are currently based, the new Toyota Technical Center, and other firms opening, Johnson says, "Overall, it's going to be a slow population growth. We'll be lucky to hold steady."

Lutton agrees that a major regional change takes time, "but we've gotten through the key bench marker events." He notes that the State of Michigan is basically "reinventing" itself, a process that could take years.

Local real estate has been hit hard by the economic slump as well. Lutton explains that 2002 and 2003 were strong years for the Ann Arbor area where housing prices were very strong and made for an excellent sellers' market. In 2004-2005 the market evened out, and by July 2006, "we found ourselves in a full-blown buyers' market," says Lutton. "Historically in Ann Arbor that was an unusual event. In the past 30 years that only happened four or five years during the so-called Great Depression of '81-'82."

The Pfizer announcement truly ended Ann Arbor's immunity from the rest of the Michigan real estate slump. Lutton says, "That took the market to the extreme. 2007 has been the most difficult year in my 33 years (in real estate)."

According to the Dec. 17, 2007 Associated Press story "No housing bubble popped in Ohio, Michigan," Michigan is ranked number one on mortgage finance company Fannie Mae's list of states with the largest credit losses through Sept. 30. This statistic is led by a loss of manufacturing jobs, a declining population, and a lack of willing and qualified buyers. Besides the glut of homes that came about due to the Pfizer closing, the market has also been inundated with foreclosure homes. In Michigan this is primarily due to job loss as opposed to the overbuying that has been seen in states such as Florida, Arizona, and Nevada, says Lutton.

"It's an unnatural force in the marketplace because it's adding property that wasn't expected," says Lutton. "In 2008 we'll be through the Pfizer inventory, but now we're getting more foreclosure property." However, Lutton predicts in the next two years prices will begin to stabilize and finally swing higher. Prices have not improved in 18 months, and Lutton says housing price declines range from 10 to 25 percent locally. Fortunately mortgage rates continue to be low with recent rates being between 5 5/8 to 6 1/2 percent, according to Lutton.

The real estate industry is taking a stand against foreclosures by strengthening underwriting standards. Buyers will once again need to verify qualifications such as viable employment, and sellers will need to provide property that is decently maintained. Additionally, loans types will return to more traditional formats with less emphasis on the many types of adjustable loans, interest only loans, and no down payment loans.

"All of the wretched excess and foolishness is getting squeezed out by more stringent buyer standards. This is a direct result of too many loans going bad," says Lutton.

The real estate trouble ripples back into the issue of employment. The local Board of Realtors membership is already down ten percent this year, and one or two local title companies as well as a few mortgage companies have gotten out of the business. Lutton says new construction in Washtenaw County has slowed by 90 percent in the last two years and although remodelers are faring better, some builders are moving into that field making competition for work tighter. The slowdown in new construction also negatively impacts architects and subcontractors such as plumbers, electricians, and roofers. The U-M economic forecast report estimates 27,000 construction jobs will be lost between 2007 and 2008. However, as the housing market stabilizes, the report also states the construction business will regain ground, thus leading to a better outcome in 2009.

With the employment situation bearing so much weight in the region's economic health, organizations such as SPARK have a high order to fill, and Parkinson says they recognize the challenges in attracting investors to kick-start the area's financial stability.

"Even though Ann Arbor is diversified, Michigan is still thought of as being in the automotive business," she says. "We struggle with the fact that Michigan is traditionally thought of as old manufacturing. We continuously get out and talk about the companies that are growing." This is one tactic that SPARK uses to get their investors, who are typically located on the West and East coasts, to fund in the state and the region.

Having the Universities present is a big bonus from many angles. The University of Michigan was heavily involved in the start up of SPARK, and U-M, Eastern, and Washtenaw Community College are important "from the funding standpoint. They also sit on the Board, and they help with business attraction and retention," Parkinson explains.

The University of Michigan's School of Engineering helped host Spanish company Aernnova Engineering, one of the biggest suppliers to Boeing, by sharing information about the resources available through the University for this type of company. Parkinson says, "It was important (for Aernnova) to be located by one of the top five engineering schools. They wanted to meet with others to learn about the R & D standpoint, recruiting students, colleagues' standpoints, and sharing and collaborating information." Aernnova plans to open its $10 million research and development center in Pittsfield Township, bringing 400-700 engineering positions to town within five to seven years.

Besides being instrumental in developing SPARK, Lutton says, "The University (of Michigan) has been very important for the local economy. I am very high on the University. The University is more engaged in local economy and community than in any time in my recollection." Lutton sites new hires for increasing faculty and research staff positions at the University. Additionally, aggressive renovation and new building at the University has provided jobs for contractors, architects, engineers, trades people, and others throughout Ann Arbor and Southeast Michigan.

As Michigan struggles with the loss of the automotive jobs, other employment interests such as tourism will continue to grow. However, even that has been affected by high gas prices in the past few years. People are often committed to homes, jobs, and even vehicles, making for expensive commutes for workers, parents, and others. Johnson says, "It's a headwind all over the country, and it's one of the things that threatens to slow growth. When gas prices go up, everyone has to cut back, and that's why it spills into the rest of the state's economy-shopping, travel, eating out, entertainment."

Johnson states that a steep decline in crude oil prices is needed in order to keep gas prices where they were in 2007. Otherwise, prices are likely to soar another 25 percent higher in 2008.

Despite the fact that economic change is not going to be "brilliant", according to Johnson, there are reasons to be hopeful.

"We all know we have terrific quality of life here. We've made so many top ten lists and that hasn't changed, but the reinvention is a big task that takes time," Lutton says. "The bad times will pass. It is going to be a very gradual recovery, but I expect more good news than bad in '08-'09, and that's going to be the foundation for a recovery."