The Working Unemployed

How long can people go to work every day and not get paid for it?

There's one thing about the struggling local economy—smart people have a lot of time for long lunches and interviews and they can offer a lot of candor about their business in exchange for anonymity. I talked to a developer, a mortgage banker, and a small businessman.

Keep in mind my sources are very depressed. Perhaps it won't be this bad.

I've been trying to come up with a term to describe them, and the best I can do is the "working unemployed." The official unemployment rate in Knox County is less than 6 percent. But each workday these people get up, put on the suits, and go to the office—and do nothing. Developers, real estate agents, mortgage bankers, car salesmen, commission salesmen of all types—they work hard all day and for the last two months they have little to show for it. Business is just not getting done.

Government jobs keep Knox County from depression but the rest of the local economy is driven by development, real estate, retail, furniture, and car sales. These businesses are largely moribund and will get worse.

The "true" workers being idle in Knox County could be as high as 10 percent.

A mortgage banker tells me he has been trying to close two loans for three months. Every time the paperwork is revised and resubmitted there is yet another reason not to make the loan. The good news for his business is that mortgage rates have come down in the last two weeks. The bad news is that no one can qualify for a loan.

A developer says there is a local bank that hasn't made a real estate loan since last February, even though they are sitting on a pile of cash. The market is just too uncertain.

Local retailers are not just having Christmas sales—they are liquidating inventory to generate some cash flow. Business guys tell me you can expect a lot of local retail businesses to close their doors in January. They aren't ordering spring inventory. And even if they wanted to, then can't get a line of credit to make the purchase.

If shopping centers and malls have high vacancy rates due to small businesses failing, then the shopping-center business may be the next economic domino to fall. Big-box tenants get price breaks to anchor a center or a mall. It is the smaller stores that provide the margin of profit for the property owner.

A lot of planned subdivisions and condo projects will shortly be converted into apartment projects, assuming there is any credit available to build. They say anything $250,000 or less, whether it be a house or condo, can be rented and generate cash flow. Do not expect any spec housing over $250,000. There are no buyers with good enough credit and the units cannot be rented for enough money to cover the cost.

What does this mean for local government?

Should local officeholders and the Metropolitan Planning Commission and the zoning boards take a hard look at their policies? Should they work with the developers to just get some housing built, or continue with strict infrastructure, density, and zoning requirements? Multi-family housing may be the only construction projects possible.

If we have some foreclosed shopping centers come spring, with resulting auctions, who will buy them? Where can they get the credit? What bank will bet on retail store occupancy? So the properties may go for a lot less than they were worth last year. Won't other shopping center owners demand "comparable" property evaluations, and the amount of property tax they pay, be reduced?

A business going into bankruptcy to reorganize requires a "lender in possession." That's a lender who will pay vendors and employees while the company gets its act together. Today, there are no "lenders in possession." Bankruptcy reorganization is not an option. Bankruptcy means liquidation.

What is clear is that revenues to local and state government will be down significantly in the coming year. At least that's the word from depressed lunch tables in Knoxville these days.

The only people making big money locally in the coming year will be people living in an alternate universe—like University of Tennessee football coaches, past and present.