Coping with uncertainty
Cuts spark discussion about diversifying area economy
Two decades of traveling to every state and living around the country ultimately drew Kevin Murphy back home to Hampton Roads.
“I got a good grasp of what goes on around the country and a greater appreciation of where I was from,” he says. Returning home, he moved into downtown Norfolk, purchasing a 100-year-old building where he lives and operates his business, Basketball Products International, which sells basketball equipment for competitive play.
He’s glad to be back in Hampton Roads and participating in the revitalization of downtown Norfolk where he serves as president of the civic league. “There’s diversity of opportunities here for both recreational and professional activities. It’s a cross section of America here.”
Stories like Murphy’s resonate with Hampton Roads civic and business leaders who are trying to attract a new breed of entrepreneurs to the Southeast’s eighth largest metropolitan region. That’s especially critical in the face of sequestration. With cuts looming, there’s a sense of urgency that Hampton Roads can no longer count on the massive defense industry to power its economy.
Home to the world’s largest naval base, Naval Station Norfolk, and a multitude of defense contractors — as well as the nation’s largest concentration of active-duty and retired military personnel — Hampton Roads already is feeling the pinch of sequestration. Amid budget uncertainties, some companies are downsizing and delaying expansion plans. Forcing more than a trillion dollars in automatic budget cuts to defense and domestic agencies during the next decade, sequestration could damage a region where 46 percent of the economy in 2012 came from defense spending.
New ODU economic forecast
Old Dominion University’s 2013 Economic Forecasting Project initially projected sequestration could trigger the loss of more than 17,500 jobs across Hampton Roads this year, with the total impact to the region’s spending power estimated at more than $2 billion.
Recent budget changes, however, are expected to reduce the severity of sequestration in the region. They include $670 million for the overhaul and continued construction of aircraft carriers at Newport News Shipbuilding and $287 million for the maintenance of other Navy ships at local shipyards. ODU’s new forecast is a loss of almost 6,900 jobs and a nearly $800 million reduction in gross regional product.
That’s still a large hit to the region, says Gary Wagner, an ODU economics professor, who worked on the project. “Defense is such a big component of what makes up Hampton Roads that I’m not sure any other sectors of the economy can pick up that much slack. It would take a pretty remarkable growth in non-defense activities to make up for sequestration.”
That’s a tall order, acknowledges Norfolk Mayor Paul Fraim. Nearly 730 defense contractors in Norfolk conduct business at some level with the federal government, receiving 17,600 federal contracts worth $15 billion from 2000 to 2011. “No other segment of the economy contributes more than 17 percent to the city’s economy,” Fraim notes.
With that in mind, residents throughout the region are becoming more cautious about spending. “Less spending by citizens means less tax revenue,” Fraim adds. “That comes at a time when we’ve already done considerable belt tightening. There’s not a whole lot more we can do other than cut services.”
Some retail businesses have begun to see sales fall. A survey of the 3,000 members of The Retail Alliance of Hampton Roads taken shortly after sequestration went into effect on March 1 found that 87 percent of respondents expect a negative impact on the region from sequestration, with 52 percent already seeing a drop in sales. In addition, 52 percent expected to reduce their budgets, while 27 percent anticipated having to lay off employees. Retailers report the belt tightening was based on the threat of sequestration, not the actual impacts, Ray Mattes, president and CEO of the Retail Alliance, says.
Diversification pays off
Some regional companies have been through this type of federal downsizing before. When the U.S. Joint Forces Command closed its Suffolk operation in 2011, Johnny Garcia knew it was time to diversify. Garcia, founder and president of SimIS, a Portsmouth modeling and simulation company, branched out from the defense industry into health care and manufacturing. The move appears to be paying off. “We’ve formed great partnerships with health-care companies and medical schools,” he says. “That’s where the growth has been.”
Although SimIS also has an office in Northern Virginia, Garcia plans to keep his home base in Portsmouth. “I love being in Hampton Roads,” he says. “It’s a rat race in Northern Virginia. Down here it’s family first, and the people are more approachable.”
Nonetheless, he acknowledges that the region must make better use of its resources, starting by weaning itself from government dependence. “We have to learn to adapt. Our environment isn’t run by the government,” he says. “Innovation is done by businesses and communities.”
That’s a message the Hampton Roads Partnership has been broadcasting since its inception 16 years ago. Bringing private and public sector leaders from the area’s 17 localities together, the partnership focuses on building Hampton Roads’ assets through cooperation. “We have unique things in Hampton Roads,” says Donna S. Morris, the group’s interim president and CEO.
Ticking off a list that includes a natural deep water harbor, a plethora of historical attractions, the oceanfront and agriculture, Morris says the region does not need to focus on comparisons with other metropolitan areas. “If we just build upon the assets we have, we will not have to compete with our peers.”
Better regional cooperation
Fraim believes that regional cooperation is improving as localities’ economies become more intertwined. “City boundaries are less meaningful,” he says. “The competitive edge between cities is not as sharp as it once was, and we’re seeing that we’re only as strong as our weakest city.”
Norfolk has formed a partnership with Virginia Beach and Chesapeake to explore sharing city services. The initiative has the potential to save the cities more than $15 million annually. “It could be purchasing equipment or employee benefits,” Morris says. “It gets down to efficiency, saving money. By bringing them together, they’ll start talking about other opportunities to work together.”
That’s easier said than done in a region where no one organization or municipal government speaks for Hampton Roads’ 1.7 million residents. “Cooperation among governments is very difficult for us because we’ve got cities adjacent to each other. It’s not like we have one dominant city within a county,” Morris notes.
Leaders, though, are coming together to discuss issues important to the region as a whole. According to Fraim, that includes relieving the area’s congested roads, bridges and tunnels, improving education, supporting the Port of Virginia and building an arena to attract a major league sports team. “As it becomes more apparent how closely connected all our economies are and how our wellbeing depends on each other, cooperation is important.”
Along with encouraging cooperation among the area’s cities and counties, the Hampton Roads Partnership also advocates growth of locally owned businesses, along with technology-based economic development. Projects, such as the Economic Gardening Program, target entrepreneurs with the intent to stimulate new industries in Hampton Roads. “We’ve got a pocket of neat things going on,” Morris says.
Programs in Norfolk and on the Peninsula have brought together entrepreneurs, engineers, designers and business people to develop viable startup businesses. “Hopefully we’ll see more companies grow out of this region. We want them to stay here and grow here and grow new jobs.”
And lessen the region’s dependence on the defense sector. “We always have a threat in the region when we become very heavily dependent on the federal government,” Morris says. “We have to look at growing other major economic drivers to make ourselves less dependent. I wish we could say we’ve done a real good job over the past 16 years, but it’s 46 percent of our region’s economy, and it was less than that when we formed the partnership.” In fact, Hampton Roads’ dependency on Department of Defense spending was only at 26 percent in 1996.
While some contractors are gravitating to the private sector, many provide specific services unique to the defense sector. UHP Projects Inc. in Newport News is one of only six companies in the nation with the expertise to maintain the nonskid deck coating on Navy ships. “We can’t take our expertise and go into private industry to do this,” says Mickey Boyer, the company’s president. As sequestration bore down on the military, the firm closed locations in Baltimore and St. Croix, reduced operations in Louisiana and cut its overhead in Virginia by 50 percent.
Navy contract work, however, had picked up considerably by early April, primarily with 2012 budget money being spent. “We do not plan on the 2013 cutbacks being felt until the third quarter,” Boyer says. “We are not sure why 2012 money has recently started flowing.”
UHP has started investing and hiring and hopes to rebuild to past production levels. Expansion, however, will be confined to Virginia, with other locations not being scheduled to open until 2014.
UHP has diversified into the commercial and industrial sectors, but Boyer cautions that will not immediately make up for losses in the marine division.
Coordinated efforts urged
Promoting new industries is a step in the right direction, says ODU’s Wagner. He would also like to see the region’s economic development efforts become more integrated with city and county economic development departments pooling resources more often. “Our region has to be viewed as competing relative to other regions,” he adds. “If a business is located in Chesapeake, its benefits are not just isolated to Chesapeake. The region is very integrated. People live in one city and work in another.”
Fraim can attest to that within Norfolk. “About half of the jobs in the city are filled by residents from outside the city,” he notes.
That’s one reason he and other leaders want to expand Norfolk’s light rail system into Virginia Beach and other points. “From the beginning, light rail was supposed to be a starter line,” the mayor says. “In order to truly be a regional system, it has to get to at least one other city.” Virginia Beach voters approved a referendum last November for City Council to adopt an ordinance approving all reasonable efforts to bring The Tide to the city. City and regional leaders believe it would benefit residents and enhance the region’s economy.
In early April, a private development group proposed extending The Tide east into Virginia Beach without federal funds on a schedule four years ahead of current projections. The group includes former Hampton Roads Transit President Philip Shucet, Truland Transportation, AECOM and Jacobs Engineering. The city is reviewing the proposal.
Ultimately, sequestration could be a silver lining for Hampton Roads by spurring leaders to broaden the region’s economic landscape. “If anything, it causes you to focus on what needs to be done,” Morris says. “You hate to get to that point where you have to feel pain before you decide to do something, but our dependency has put us in a situation where we’re forced to make decisions about things we’ve put off.”