During the housing bubble, a wholesale mortgage company based in the Twin Cities offered Dave Ouradnik a new mortgage product to peddle to his customers. The loan product, called an option ARM, would have given Fargo-area homebuyers the choice of making their monthly house payments based on a 30-year-fixed, 15-year-fixed, interest-only, or negative amortization mortgage. If a homeowner were to choose negative amortization, which allows for the payment to be less than the monthly interest owed, unpaid interest would get tacked onto the balance of the loan.
“We refused,” Ouradnik recalls. “If you are going to offer that program, you better have homes that appreciate at a very rapid rate.” Today, that Minneapolis company is out of business, while Ouradnik’s Fargo-based company, Executive Mortgage, is thriving. “We’re mashed potatoes and gravy,” he says. “We don’t offer caviar.”
Ouradnik also hesitated to offer alt-A loans, which are a step above subprime products. These loans required homebuyers only to state their income, not actually verify it. Ouradnik says mortgage companies generously offered alt-A loans in Phoenix, Florida, Las Vegas, and elsewhere. The resale of both alt-A and subprime mortgages into the financial system has led to one of the deepest U.S. recessions since the Great Depression.
Neither product is available today. “I am glad they are gone,” Ouradnik says. “Alt-A loans are called liar loans.” He estimates that about 97 percent of the loans he has provided his customers over the past 15 years have been conventional mortgages, and that 90 to 95 percent of his clients have credit scores of 740 or better. “We kind of block and tackle,” he says. “We don’t do a whole lot of Hail Marys.”
Ouradnik’s type of conservatism is touted throughout North Dakota as one of the main reasons that the state had yet to officially enter a recession as of February. Nearly every economic indicator put North Dakota ahead of most states. It has a $1.2 billion budget surplus and a February unemployment rate of 5.1 percent (compared to Minnesota’s 6.9 percent and the nation’s 7.2 percent). North Dakota also had one of the lowest home foreclosure rates in 2008, at 1.2 per 1,000 households. That compares with 8.9 per 1,000 in Minnesota (and 72.9 per 1,000 in Nevada).
In terms of population, North Dakota is a small state—641,481 people in 2008, roughly as many as Minneapolis and St. Paul proper. “We are certainly feeling the pressures of the national economy,” says Shane Goettle, commissioner of the North Dakota Department of Commerce. “But [the state isn’t] making cuts. We aren’t under pressure to raise taxes. We aren’t laying off.” Goettle attributes his state’s strength to a strong farm economy, steady energy industry, conservative banking practices, and growing trade.
Expert observers and business owners say that the state inevitably will slide into recession. On the other hand, many North Dakota–based business owners are expecting this year to be a prosperous one. Ouradnik is one: “We expect 2009 to be very good, a big improvement over 2008.”
As of late March, the effects of Red River floods on North Dakota’s economy have yet to be determined. But given its economic foundations, the state should ride out the recession better than most others.
The Pasta Factor
According to the North Dakota Department of Agriculture, farming and related businesses account for one-fourth of the state’s economic activity. A majority of the state’s population in 2008 (53 percent) was rural, compared with only 27 percent in Minnesota. North Dakota farms are large, averaging just a little more than 1,300 acres each, compared with 340 acres in Minnesota. “The eastern part of the state is highly dependent on cash grain sales, wheat, sugar beets, potatoes, and, more recently, corn and soybeans,” notes Cole Gustafson, an agricultural economist with North Dakota State University in Fargo.
As Goettle notes, “As people try to live on less money, they turn to pasta.” That’s been good news for eastern North Dakota. Pasta and other value-added food products, along with farm machinery, have become big export categories for the state. From 2004 to 2007, according to the U.S. Department of Agriculture, North Dakota’s exports of raw commodities have increased by 43 percent from $1.795 billion to $2.565 billion. Exports of farm-related equipment, value-added food products, and other goods have nearly tripled over the same period, from $1 billion in 2004 to $2.8 billion in 2008, according to the state’s Office of Trade and Industry Information.
In the western part of the state, the basis of commerce is altogether different. While farmers there have cow-calf livestock operations and grow some cash crops, including wheat (for pasta) and barley, the economy shifts to energy. Oil from the Bakken Formation, a petroleum-rich shale deposit that extends from far western North Dakota into eastern Montana, is a big driver of economic activity in the western half of the state.
A 2008 study by the U.S. Geological Survey estimated that with current technology, recoverable oil in the Bakken Formation was between 3.0 billion and 4.3 billion barrels. North Dakota’s estimated share of that is 2.1 billion barrels. According to Roger Cymbaluk, who owns Basin Brokers—a Williston real estate firm that services ranches, farms, and the businesses that support the oil industry—last year’s 70 percent drop in oil prices has dramatically slowed business activity in the oil industry. In August, September, and October of last year, more than 80 oil rigs were drilling in North Dakota. By mid-March, that number had declined to 58. “It gives us a chance to catch our breath,” Cymbaluk says. “We were going crazy for a while.”
Oil drilling is a costly enterprise. Goettle notes that crude oil prices need to range between $30 and $65 per barrel for horizontal drilling to make economic sense. “We would be happiest if it settled around $70 per barrel, which would allow for exploration,” he says. “But there’s enough diversity in the economy to absorb some of the shocks associated with volatility in energy prices.” As crude oil prices strengthen, Goettle and Cymbaluk expect activity to pump up again.
From 2000 to 2008, the population of Fargo, the state’s largest city, grew 9.5 percent, to 99,200 people. Add the across-the-river city of Moorhead, Minnesota, and the greater Fargo-Moorhead area has a population that tops 175,000. Besides being an agricultural hub, Fargo-Moorhead serves as a medical, banking, education, manufacturing, and media center. Fargo itself is also a regional retail center for northwestern and west-central Minnesota, eastern North Dakota, northern South Dakota, and even southern Manitoba. “When the value of the U.S. dollar is down, there are many weekends when you drive to the mall in Fargo and one-fourth of the license plates will be from Canada,” Gustafson notes.
Fargo’s Hector International Airport just completed a two-year expansion that began in October 2006. “We put on 40,000 square feet,” says Shawn Dobberstein, executive director of the Municipal Airport Authority, which oversees Hector International. “TSA needed more space at checkpoint. We needed another gate. We needed an additional baggage claim.”
Last year, the airport’s total passenger count hit a record 648,137, up 8.2 percent from 2007. Hector International does not track whether those passengers are business or pleasure travelers, but Dobberstein estimates that between 40 and 70 percent travel for business during any given month. “Within 120 miles of the airport, there are 800,000 people that we serve,” he adds.
Fargo has traditionally drawn workers from that same radius. Dobberstein himself is a transplant from Herman, Minnesota. Today, however, with unemployment growing nationwide and jobs readily accessible in North Dakota, the state’s reach has expanded. “Before, people were moving here because they had roots here,” says David Karels, who heads up the Fargo office of Nor-Son Construction. “But now the economy is bringing people to where the jobs are.” Karels notes that job seekers are coming in from as far away as Colorado and California. “If we didn’t have such brutal winters up here, the secret would be out,” he adds.
Workers are not alone in their migration. Companies are also moving in. Microsoft is now one of the Fargo area’s largest employers. The Washington-headquartered software developer moved into Fargo in 2001 after purchasing Great Plains Software, a developer of accounting programs, for $1.1 billion. The sprawling Great Plains campus on the south side of town employs just under 1,000 people, who develop business software and support other Microsoft products. Another 500 people employed by vendors to Microsoft work with the company’s Fargo employees.
Microsoft’s Fargo location is currently undergoing a $70 million expansion that is expected to be complete this summer, but whether new jobs will be created and how many is still uncertain, says Katie Hasbargen, a company spokesperson. Microsoft’s recent company-wide staff reduction of 1,400 positions did hit the Fargo facility, but Hasbargen declined to say how many positions her facility lost.
When Nor-Son, headquartered in Baxter, Minnesota (just west of Brainerd), was looking to expand, Fargo seemed a good fit. The company had been working on commercial construction projects in the Fargo area since 1999. In 2006, Nor-Son officially opened an office on the west side of the city. “We had established some relationships, so we decided to put up a shingle here,” Karels says. “There is more growth in Fargo [than Baxter] in the retail and commercial sector. It’s pretty vibrant here.”
The company has carved out another niche: high-end lake homes, which it builds in the Detroit Lakes area, about 50 miles east of Fargo, and the Brainerd lakes area near Baxter. Karels says that while the high-end lake home business near Brainerd has slowed, it hasn’t in Detroit Lakes. “There are some pretty well-off people in the Fargo-Moorhead area,” he adds.
To Jeff Schlossman and Jim Buus, brokers with Goldmark Schlossman, a Fargo-based commercial real estate services firm that helps companies relocate to the area, it’s pretty clear why companies want to set up shop in Fargo. Very simply, Schlossman notes, “It’s affordable here.”
Buus says that the cost of real estate was one reason Navteq consolidated its production operations in Fargo. Navteq, a Chicago-based subsidiary of Finnish communications technology giant Nokia, provides digital map data for in-vehicle navigation systems. It opened its first Fargo office in 1996 and then expanded, opening a second office in 2008. “We have had nearly 40 percent growth in our Fargo work force in the last three years, and currently employ over 350 people full-time in our Fargo facilities,” a Navteq spokesperson says.
Fargo-based Ulteig also is expanding rapidly. The engineering firm—which has offices in Fargo, the North Dakota capital Bismarck, Minneapolis, Denver, Detroit Lakes, and Sioux Falls—has 425 employees, with 185 of them in Fargo. The firm has doubled in size in the past five years, and expects to double again over the next five. Ulteig’s work includes energy, civil, land, and building services.
“We had revenue growth in 2008 in addition to adding 50 staff,” says Eric Michel, Ulteig’s chief operating officer. “We’re looking for more growth in 2009.” Energy, both wind and solar, will be the firm’s leading growth category this year.
Like the tortoise, many Fargo-based businesses, as befits their fundamentally conservative nature, believe in slow, steady growth to get them to the finish line. That hasn’t always been possible. Jonathan Eggers, general manager of U Motors, in Fargo, says his company saw record sales in 2008. U Motors sells ATVs, snowmobiles, motorcycles, scooters, trailers, and jet skis. He’s hoping to keep sales flat in 2009.
“I don’t want any more sales,” Eggers says. “I want to improve efficiency and profit margins. We don’t want to become a big-box discounter.” In a similar vein, North Dakota auto sales were 27 percent higher in 2008 than in 2007, compared with an 18 percent drop nationally.
Still, even North Dakota–based businesses aren’t invulnerable to national trends.
North Dakota’s Business Conditions Index, monitored by the Economic Outlook Group at Creighton University in Omaha, dipped below “growth neutral” in January for the first time since August 2002. It dipped again in February, from 49.2 to 44.4. (“Growth neutral” is 50.)
As Creighton University Economics Professor Ernie Goss wrote in Economic Outlook Group’s February report, “North Dakota and Oklahoma are the only two states in the region that have yet to experience the recession. Our survey indicates that this is likely to change in the months ahead. However, the downturn will be much more shallow for North Dakota than for other states in the region. North Dakota’s agriculture machinery- and parts-manufacturing industry has been a pillar of the state economy. However, with farm income weakening, it has come under economic pressure.”
Take Dakota Specialty Milling (originally part of the Roman Meal Company), a manufacturer that produces and sells more than 200 products, mostly whole-grain and multi-grain blends to bakers and other food producers. Joel Dick, the company’s chief operating officer, notes that business in 2008 was good, but challenging.
“One of the biggest challenges we’ve faced is the volatility in the price of commodities,” Dick says. “It’s been difficult to budget, prepare, and predict. We’ve done relatively well, but we have to work hard to stay competitive.” Dakota Specialty Milling sells its value-added food products nationwide and into the Asian and Mexican markets. “Because our ingredients are used in upscale products, we are not totally recession proof,” Dick says.
Fargo-based Bobcat, which manufactures farm and construction equipment, has been hurt by the global construction slowdown. Last December, Bobcat temporarily shuttered its North Dakota plants in Bismarck and Gwinner, citing a lack of orders. As of mid-March, those plants were not fully operational. (In March, Bobcat and Medina-based Polaris Industries announced an agreement in which Polaris will produce some work vehicles for Bobcat. The deal will eventually involve the co-development of vehicles and technology sharing between the companies.)
Fargo’s housing market remains relatively stable. Its home prices fell only 1 percent from the fourth quarter of 2007 to the fourth quarter of 2008. While McMansions were popping up in the Twin Cities metro area during the housing bubble, more modest twin homes, or duplexes, were the hot housing product in Fargo, particularly since they provide good investment opportunity as rental properties, according to Fargo-based homebuilder Dan Lindquist.
According to a January survey conducted by the Fargo-Moorhead Area Chamber of Commerce, 51 percent of the chamber’s members felt optimistic about the economic outlook for their businesses. Only 14 percent were pessimistic. Thirty-five percent expected to add jobs in 2009, while 8 percent were planning layoffs. Still, nearly a fourth of businesses surveyed had implemented some type of capital spending cut.
Economist Gustafson says as long as the agriculture and oil industries remain healthy, North Dakota should emerge from the downturn pretty much unscathed. “Land values have not dropped,” he says, and that’s a pretty good indicator that farmers are still doing okay. “We’re in very volatile times, but there is optimism that high [commodity] prices will return as the economy picks up.”
One doesn’t need to be locally born and raised to be upbeat. A transplant from Florida and an underemployed restaurant consultant, Tim Sutton moved to Fargo to help a friend. He now waits tables at HoDo, a fine dining establishment in the upmarket Hotel Donaldson in downtown Fargo. The harsh winters, lack of abundant seafood, and landlocked windswept prairie landscape have not yet deterred Sutton from seriously considering making Fargo his permanent home. While serving up entrÃ©es of bison and elk, Sutton sounds a lot like any city booster. Businesses travel great distances for conferences at the historic, stylish Donaldson, he says, and most nights the restaurant is humming. Fargo has been good to him, so far.
A little more than a decade ago, Fargo-area economic development efforts focused on attracting large numbers of jobs in order to keep local young people from moving out of state. That’s changed. These days, the city is looking to help local entrepreneurs develop high-paying jobs.
“There isn’t as much effort to recruit a big bank center that will employ 800 at $8 an hour,” says Jim Buus, vice president and managing broker with Goldmark Schlossman, a commercial real estate services company in Fargo. “We aren’t seeing that anymore. Now we are bringing in five to 50 jobs—smarter jobs, entrepreneurial-based jobs, higher-paying jobs.”
Part of the impetus behind this new approach is the fact that the area’s labor base is not big enough to meet the demand that a bank center or other large start-up would create. And Fargo area residents are overqualified for those jobs anyway, boosters say.
Census data support that claim. Among people over age 25 in the Fargo-Moorhead metropolitan area, 48 percent have either a two-year, four-year, or advanced degree, compared with 34.4 percent nationally, according to the U.S. Census Bureau’s 2007 American Community Survey.