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Real Estate & Construction:
The Kodak factor

Rochester Business Journal
January 23, 1998
Call it the Kodak factor.

Downsizing by Eastman Kodak Co. ripples out in the Rochester community hitting other industries in a spreading ring of ancillary effect.

Unemployed Kodak workers, for example, have trouble making home payments or put their houses on the market when they get work in other cities and the local residential real estate market tumbles.

The Kodak factor has in fact been on the minds of residential brokers for more than a decade. Layoffs by the photo giant over the past 15 years have totaled more than 10,000. Many have come in sizable bites, idling thousands of workers over a one-, two-or three-month period. And at each downsizing move, brokers have wondered what ill would come of it.

The good news is that so far the effect has been nil.

The bad news is that economists think this time could be different.

The mitigating factor is that they do not expect the fallout to be too bad.

The latest round of Kodak job cuts is in progress now. The company promises to cut more than 6,000 Rochester jobs this year in an effort to reduce worldwide employment by more than 10,000.

So how did the news hit real estate people?

They have seen it before, and have given up worrying about it.

A congenitally optimistic lot anyway, residential real estate professionals are actually expecting a banner year.

"It looks like a good year to me,'' says Nothnagle Realtors agent Robert Miglioratti. "Interest rates are down, and prices are holding steady. In the first days (after Kodak announced job cuts) it seemed like there would be a dismal reaction, but it's not materializing in the marketplace.''

Miglioratti in particular cites healthy activity in the high-end new-construction market as a positive sign. He represents several builders who put up custom homes in the $200,000-to-$300,000 range, and says they are not hurting for business.

Sales of low-end properties in the city--where low rates and prices and a tight rental market are making them very attractive to investors--also are brisk, Miglioratti says.

Some midprice, single-family homes are sitting on the market, he concedes. But sharp-looking houses in desirable areas in the $100,000-to-$150,000 range are moving in a matter of weeks.

Likewise buoyant is Michael Haymes, president of Re/Max Realty Group Inc.

Haymes also cites low rates as a positive sign, noting that omens in the bond market seem to portend a holding pattern or even further slides in mortgage interest rates.

And both see the year so far as proving their optimism.

Haymes says he has seen a flurry of sales in January, usually among the slowest months in residential sales.

And like Miglioratti, he anticipates no discernible Kodak effect.

John Piper, executive director of the Greater Rochester Association of Realtors Inc., is on the same upbeat track.

Kodak effect? What Kodak effect, he says.

The present Kodak downsizing is the photo giant's third major staff-cutting effort in a decade. Piper recently matched real estate trends to the layoff years. The previous two downsizings not only did not affect home sales, he says.

In fact, in the year following each, sales went up. And over the period, home sales in the six-county Rochester region averaged a fairly steady 10,000 a year with no big swings above or below the mark. When sales did slow, as they did in 1989 and 1990, they were in synch with national trends and not reacting to Kodak tremors.

Piper looks for 1998 to top 1997, a year in which home sales declined 2.8 percent from the previous 12 months.

The present residential market remains a buyer's dream, he says, but still is far from a seller's nightmare.

Like Haymes and Miglioratti, Piper expects rates to stay low, and prices to stay more or less steady. But the really good news is what he calls the affordability index, which by GRAR's calculations stands at 164 percent in the Rochester region.

The index compares an area's median income to its median home price. This region's 164 percent rating means that a family of median income can afford to spend 64 percent more than it needs to buy the median-priced home.

Rochester's affordability rating contrasts very favorably to ratings of 100 percent or lower in tighter markets, California, for example, Piper says.

Is there anything wrong with this picture?

There could be, says Kent Gardner, the Center for Governmental Research Inc.'s chief economist.

Gardner does not dispute the non-effect of past Kodak downsizings. He has done his own comparisons for the region's economy as a whole and reached similar conclusions.

But Gardner says new factors could come into play this time.

Previously, he says, Kodak has been more generous to its downsized, handing out larger severance packages and beefy early-retirement incentives.

Those generous packages put a significant amount of money into the local economy and thus went a long way to cushion the layoffs' blows, Gardner believes. This time there is less spread around to counter the effect.

Part of Haymes' hope of continued smooth sailing lies in what he sees as the local economy's ability to absorb workers Kodak is letting go now. In particular he sees small and midsize high-tech firms such as CVC Inc., Performance Technologies Inc. and Moscom Corp. as potentially keeping a significant number of highly skilled workers in the area.

Gardner's scenario is 180 degrees away from Haymes'. The economist says such workers are desperately needed and thus in high demand in other areas. A significant number are likely to quit Rochester for good-paying jobs in, say, the Silicon Valley or Boston.

If that happens, he says, their homes here will go on the market, while their future earnings will boost some other region's economy.

Concurring is economist Fritz Grasberger of Grasberger Economics.

"We're not as cushioned as we used to be,'' he says.

A longtime tracker of local real estate trends, Grasberger sees the residential market as stable to declining.

Home prices are holding steady, he concedes. But over the past 10 to 15 years Rochester prices used to consistently beat the Consumer Price Index. Now they do not.

The steadiness of the high-end new- home market that Miglioratti cites is not such an important factor, says Grasberger.

While a minority of financially comfortable families might be willing to invest in such properties, high-end homes in recent years have not held value on the resale market, Grasberger says. Many in the $300,000-to-$400,000 range have sold for less than they cost to build or have been taken off the market by owners reluctant to take a loss.

Furthermore, new-home starts overall are declining in the region, and will probably decline further, he says.

And though Grasberger attributes some of the cooling trend to the Kodak factor, he also sees the market as moving to a more rational mode after the "hyper-appreciation'' of the 1970s and 1980s.

Still, his final take is far from gloomy, although a less rosy picture than real estate agents want to see.

Concludes Grasberger: "We're not talking about disaster.''

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