KC Conway is part of a contingent that wants to rebrand the so-called “Rust Belt” into the “Trust Belt.” Part of that initiative includes convincing the Federal Reserve to combine the Great Lakes and Plains regions of the country into one, which he says would have large economic benefits for a part of the United States often considered flyover country. The senior vice for credit and risk management at Atlanta-based SunTrust Bank was in Grand Rapids last week to deliver a keynote speech during an annual economic forecasting event organized by the local office of Colliers International Inc. Conway spoke with MiBiz about how the Trust Belt movement could benefit West Michigan, as well as other key economic trends in the region.
What exactly does the Trust Belt offer for the region?
The Bureau of Economic Analysis divides the U.S. into seven regions. The southeast is number one because we have 12 states. But if you put the Great Lakes and the Plains states together, you get $6 trillion in GDP. Because in this region you don’t have as many big MSAs concentrated, your jobs and GDP are more dispersed so it doesn’t get as recognized. But when you put it together and look at the infrastructure — railroads, ports, interstate systems, Right to Work states — those are all part of this. If people start to think of this as a ‘Trust Belt,’ you see a much better economic story.
If the Fed went along with that plan, would that be positive for everyone or would we be taking away from other states and regions?
It’s already happening. It’s just a way quantify. It’s really not taking away but it’s helping people realize why this area is doing so well, why manufacturers are moving here, why auto is still doing well, why furniture and logistics companies are moving here. I think logistics is a big part of that story.
West Michigan companies often complain of labor shortages. If the region is basically at full employment, do you see a silver bullet that can help companies find workers?
Whenever you have labor issues, they’re not short term. If it’s a shortage in medical or engineering, it takes 10 or 15 years to get kids through the training and education at the university system. If you require apprentices, that takes time. This isn’t going be alleviated in two or three years. We’re seeing a couple ways people are dealing with it.
What are some examples?
They’re pushing out their construction cycle, whether it’s the lender or the end user. They’re not going to get a place to live in 12 or 18 months. It might be 24 or 36 months. They’re building that in. The other thing: They’re seeing if there’s other counter-cyclical regions where they can draw that labor out. As other markets get really frothy — say in a Nashville — projects pull back. Then workers say, ‘Where do I go?’ It’s staying ahead of that and looking at where markets are getting overbuilt kind of quickly and then going and getting that talent, marketing it, providing incentives to say ‘Hey, come here, we’ll keep you busy.’ It’s going to take time.
Speaking of construction cycles, Grand Rapids is known for having short lead times. Would you imagine that changing?
It has to. It’s part of managing expectations all the way through. People won’t get their house in 120 days. Now it’s six or nine months to get your project. In an economy where there’s no inventory, you don’t lose a customer. They stay. But you have people sitting on the fence for a while thinking money is free, (and) now it’s very clear the Fed is moving interest rates upward. They’re worried about full employment, wage inflation.
Cities like Grand Rapids had an influx of new mixed-use apartment projects in recent years, but that seems to be slowing down. What does that say about where we are in the economic cycle?
It is slowing down. If you look at the latest real estate reports, we were starting to ramp up, and we were building over 400,000 apartment units a year. At the end of the last year, that slowed down to about 260,000.
Why’s that happening?
It was a combination of two things: One was a recognition that we were building more units than the five jobs needed support one unit. We’re not in a massive overbuilt situation. The jobs-to-permits ratio nationwide is about seven-to-one. Nationwide, we’re still creating seven jobs for every one unit. … So in growth-restricted markets — Silicon Valley — they can’t stuff get permitted. But Houston, D.C. — it’s like one-to-one. Same in south Florida, Nashville. There are pockets that are way ahead of themselves. But overall, we’re not headed for a problem.
What’s the other reason development is slowing down?
That’s because of high volatility commercial real estate (HVCRE) on the (part of) banks. Many of the banks that had been funding this stuff had gotten into concentration issues with this stuff. So yeah, we are seeing slow down pretty dramatically. On the single-family side, that’s not the case anymore.
What’s worrying you right now?
What happens to the cap rates, converting that net operating income into a value, if the Fed raises interest rates too quickly and those cap rates migrate up? That’s (why) I think we’re seeing … more aggressive concessions because developers are saying, ‘Let’s get this thing leased up.’
Interview conducted and condensed by Nick Manes. Courtesy photo.