Rising energy costs hit state’s competitiveness

Summer is about to begin. So where are we in terms of the regional economy, trends in commercial real estate and prospects for the second half of the year?

A recent survey of New Hampshire businesses taken at the beginning of the second quarter showed a more upbeat outlook, which should translate into better sales, a higher gross state product (3 percent-plus, vs. the 2.5 percent predicted at year’s end) and perhaps even more hiring.

This is good news, especially given rising interest rates, rising energy costs and rising taxes. Currently, commercial mortgage rates are well above 7 percent, a steady inching upwards over the last two years. How much higher will they go? Probably another 1 percent or so over the next 12 months. What is the big deal — another 1 percent? Well, when you are financing a $5 million or $10 million building, 1 percent is a big deal, especially when construction costs are nearly double what they were eight years ago.

How much elasticity is in our New England regional economy? My home heating bill was $105 for April, doubled last April’s bill. My real estate taxes are up 27.5 percent. No, the rate did not increase that much, but the combination of a 21 percent increase in assessed value and a 9.5 percent increase in tax rates (city, school, state and country). It all adds up. Did I mention health-care costs?

I can cover these costs, not without effort, but many of my neighbors, especially older citizens, retired or semi-retired, are really being squeezed. I also suspect younger folks are having trouble making their weekly budgets as well. Despite assurances to the contrary, there is real inflation in service (health care is one), government and energy. However, our ability to raise prices for our services or goods is limited. Consumer prices are still edging down, except perhaps for food, but consumer debt is up (way up), and those higher interest rates are going to hurt.

I paid over $3 per gallon for gas the other day. The first time ever for me. I drive a lot, working on projects throughout the region. Two-and-a-half years ago my monthly gas credit card edged over $100. Last year, $160, and this year, nearly $250 and climbing. The IRS mileage reimbursement rate of 44.5 cents per mile is barely break-even, and my car gets 30 miles per gallon on the highway.

Two weeks ago, I chaired an arbitration panel in Boston. I took the bus down three days in a row. On the bus you are sitting up above the cars and pickup trucks, where you can see things over the guard rails. Along I-93 there is continued residential development in Woburn and Burlington, but the traffic congestion is everywhere. Nine out of 10 vehicles have only one occupant. Concord, N.H., to Boston is essentially 70 miles. At 30 miles per gallon, that equates to 5 gallons of gas. Remember the congestion factor. At $3 a gallon, that is $15 in gasoline. Add in parking, not to mention wear and tear on the vehicle, and why doesn’t everyone take the bus for the $17 round trip? The simple answer is not everyone is going point to point from Concord, Manchester or Londonderry to downtown Boston. Those going to Route 128 or I-495 have to drive. Some day there will be some form of bus service to these job markets as well.

What about trains? A romantic pull exists. (I still have my HO trains from 40 years ago!) But the costs to establish rail connections are huge, the point-to-point limitations are significant, and the time of travel is an issue. Given that southern New Hampshire thins out so quickly, collecting enough people at one point to get on a train is challenging. Where are they going to park? At what cost? Gasoline at $3.50/gallon will prompt a lot more discussion about transit and viable options to the single-occupant vehicles.

Why all this discussion about transportation costs? Because it is a significant factor in our economic competitiveness. Did I mention freight? How long before UPS raises its rates when diesel tops $3 a gallon? New England, in the northeast corner of the country, will be hit by the rising energy costs, not just gasoline and transportation, but heating and cooling as well as electrical power. It all adds up.

Higher energy costs are here to stay, so as we spend more on energy we will spend less on something else. If that something else is lattés and fast food, we will be healthier. But if it is charitable giving, we will be poorer for it. Remember, for every action there is a reaction!

Bill Norton, president of Norton Asset Management, is a Counselor of Real Estate (CRE), a Fellow of the Royal Institution of Chartered Surveyors (FRICS) and a member of the board of The Initiative for a 20/20 Vision for Concord. He can be reached at wbn@nortonnewengland.com.