2016 Economic Outlook by Bismarck Mandan Chamber EDC

H E A LT H C A R E

A G R I C U LT U R E

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03.09.16

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2016 ECONOMIC OUTLOOK | INTRODUCTION

TABLE OF CONTENTS 4 u Health Care Dr. Craig Lambrecht, Sanford Health

As you read the articles in this publication, you’ll find a common theme. Various industries recognize the difficult economic times ahead and approach it with a sense of confidence in the economic environment created in recent years. Incoming retail stores, ongoing investment in energy infrastructure and a low unemployment rate are all encouraging factors that continue to make the economy of Bismarck-Mandan — and North Dakota — one for the nation to aspire to.

6 u Agriculture Steve Brooks, North Dakota Stockmen’s Association

8 u State Revenue

Thank you to the many contributors to both the Economic Outlook Forum and Publication. To gain an accurate sense of the various industries, the Chamber asked business leaders to provide us with their insights. We hope you find the information valuable as you look to the future of your business and our community.

Ryan Rauschenberger, North Dakota Tax Commissioner

10 u Energy Ron Ness, North Dakota Petroleum Council

Cordially,

INTRODUCTION | 2016 ECONOMIC OUTLOOK

As 2016 brings new challenges to Bismarck-Mandan and the state as a whole, the resiliency of this community is put on display. While lower oil prices and a slowed economy are clearly areas of concern, the continued growth in Bismarck-Mandan and throughout the state is a reason to remain optimistic.

11 u Real Estate Scott Ritter, Aspen Group, LLP

Ryan Parsons, Vice President of Membership

12 u Survey Results

Bismarck-Mandan Chamber of Commerce

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HEALTH CARE | 2016 ECONOMIC OUTLOOK

By Dr. Craig Lambrecht,

“

CEO, Sanford Health

The emphasis for health care providers now is to prevent and cure disease by keeping people healthy rather than treating singular, episodic diagnoses.

”

I grew up in Wishek, N.D., and, during that timeframe and for much of the last half of the 20th century, not much changed in North Dakota. Sure, businesses opened, while others closed, but, in general, the makeup and spirit of the state was static. The consistency of life provided comfort. Similarly, for many years, health care providers lived in the same state of stability. In the early part of the 21st century, North Dakota began changing. While much of the world suffered through a downward turn in the economy, North Dakota grew even more vibrant. Energy, technology and numerous other industries thrust the once-sleepy state into the spotlight. This shift brought tremendous opportunity, growth and challenges. While North Dakotans continue to live through unprecedented times, we in health care face similar upheaval – one that brings its own share of opportunity and challenges. Two major shifts in the health care landscape weigh heavily on everyone in the industry. For one, care has moved from hospitals to outpatient settings. Surgeries that 10 years ago may have required a three-day stay now are performed in the morning with the patient going home that afternoon. Those patients who do require hospitalization often require a higher level of care. Concurrently, our payment models from government sources – Medicare and Medicaid – and private insurance companies are moving to a value-based model rather than a fee-for-service model. In a value-based model, health care providers must demonstrate they can provide quality outcomes for patients while controlling costs. If the health care providers can’t, they won’t be viable. The good news is these two changes should stem the rate at which the cost of health care is rising. The emphasis for health care providers now is to prevent and cure disease by keeping people healthy rather than treating singular, episodic diagnoses. This effort combines preventive measures, wellness, behavioral health and chronic disease management. It includes connecting all points of patients’ care, identifying barriers to providing care and collaborating with patients and community partners to overcome those barriers. While challenging, it’s a tremendously exciting time. We’re helping forge a new paradigm that will benefit our patients. No matter the delivery or payment model, Sanford Health is committed to the highest quality care as close to home as possible. To do so, we continue to recruit new providers to increase access to primary and specialty care in our communities. We look for opportunities to increase outreach care in surrounding towns, so patients can stay in their hometowns rather than travel for health care. We engage partners to address community-wide needs, such as our partnerships with the Missouri Valley YMCA to build Family Wellness in Mandan and additional childcare in north Bismarck and teaming with the Bismarck Public Schools and Shiloh Christian to provide world class sports medicine coverage at local sporting events. We also support the development of work force by teaming with higher education, including North Dakota State to train a growing number of nurses in Bismarck and working closely with the University of North Dakota School of Medicine and Health Sciences to train medical professionals. Just like North Dakota has had to be nimble and move quickly to address needs brought on by change, so, too, will Sanford Health. We are confident we’ll be up to the challenge, much like our great state. We are proud to be a part of Bismarck-Mandan and North Dakota, and we feel honored and privileged our community members entrust us to provide health care.

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AGRICULTURE | 2016 ECONOMIC OUTLOOK

By Steve Brooks,

“

President, North Dakota Stockmen’s Association

The beef industry has been an economic pillar of North Dakota since even before statehood. With cattle and calves accounting for $1.334 billion in cash receipts* alone, it continues to be significant to the state’s economy.

”

My friend has a bumper sticker on his old Chevy pickup that says, “Eat beef: The West wasn’t won on a salad!” As a third-generation rancher, that bumper sticker always makes me smile, as it speaks of the nutritional significance of our product and the generations of dedicated cattlemen and women who have worked to put beef on the tables of families around the world. The beef industry has been an economic pillar of North Dakota since even before statehood. With cattle and calves accounting for $1.334 billion in cash receipts* alone, it continues to be significant to the state’s economy. After several years of low commodity prices, the livestock sector has been the bright spot in the agricultural economy the last couple years. Today, prices remain strong for North Dakota’s cow-calf operations, but many producers have felt a bit of motion sickness the last several months, with roller-coaster-like market volatility plaguing the last quarter last year and the first quarter this year. A perfect storm in 2014 –including record-low beef supplies, created in part by extended drought and herd liquidation in major U.S. cattle-producing areas, as well as record-low pork and poultry supplies, which drove up the cost of the competing proteins – led to record-high cattle prices in 2014 and early 2015. Prices were additionally bolstered by herd rebuilding that held back more heifers for breeding. Fast-forward to Late 2015 and Early 2016 and other factors have kicked in that downward-shifted prices. Among the challenges: Economic struggles in China and other critical markets have curbed protein demand, and a strong U.S. dollar has rendered our beef less competitive in the global marketplace. Analysts project U.S. beef exports to drop another 8 percent this year. The pending Trans-Pacific Partnership (TPP), a multi-lateral trade agreement that will reduce or remove tariffs on U.S. beef, would help reinvigorate our export market. Japan, a major beef customer, will be the biggest prize if Congress passes TPP, as it would ratchet down the 38.5 percent tariff on U.S. beef to 9 percent and put us on par with Australia, which has its own agreement with Japan that cost the United States more than $100 million in sales since it was signed last year. Volatile limit price moves in the cattle market have been even more alarming than price drops recently. The result has been decreased confidence for producers using the futures market as a risk protection tool. The industry has been working closely with the CME to address areas of concern, like implementing a delay between trading actions, greater enforcement against market spoofing, and monitoring and reporting of market misuse. The CME has made a few adjustments, but the effect of automated trading remains unresolved. Industry’s efforts will continue to work to level the playing field between speculators, commercial traders and producers. Despite challenges that have shifted the market from an unprecedented high just over a year ago, North Dakota’s beef industry remains strong. The focus will be to manage against rising costs, increase production efficiencies and find innovative ways to regain momentum in the global market through the pursuit of new customers and new opportunities in both emerging and established markets. These are strategies that have served our industry in the past during times of challenge and made beef what settled the West.

* Most recent numbers from 2014 from the Economic Research Service. This number is more than double what it was five years earlier in 2009.

STATE REVENUE | 2016 ECONOMIC OUTLOOK

By Ryan Rauschenberger,

“

North Dakota Tax Commissioner

And the oil is still here and being pulled from the ground at a rate of over one million barrels per day – North Dakota’s oil boom is far from over.

”

For nearly a decade, North Dakota has been the envy of the nation as our economy grew at an unprecedented rate. Our employment, personal income and population grew faster than any other state in the country; our unemployment rate was consistently the lowest. Then the price of oil plummeted to the lowest price in more than 10 years. The number of drilling rigs began to decline. Oil companies and oil field service businesses laid off employees. North Dakota continued to make headlines, but for a different reason…the reported end of the oil boom and the faltering economy. There is no denying that our economy has slowed, but it is important to remember that things are still pretty good in North Dakota. According to the Bureau of Labor Statistics, we still have the lowest unemployment rate in the nation (2.7 percent in December 2015, compared to a national average of 5 percent). Although unemployment claims have risen and overall employment has fallen, Job Service North Dakota reports that in January 2016, there were still over 13,500 unfilled jobs posted. And the oil is still here and being pulled from the ground at a rate of over one million barrels per day – North Dakota’s oil boom is far from over. The revised general fund revenue forecast for the 2015-17 biennium, released on February 1, 2016, projects a revenue shortfall of over $1 billion compared to an original forecast of $5.6 billion. That amounts to a 20 percent decline in overall general fund revenue – by anyone’s measure, a huge revision to the state forecast. On the other hand, the resulting forecast of $4.6 billion is still over 40 percent larger than actual revenues during the 2009-11 biennium, just six years ago. Nearly half of general fund revenues are generated from the state’s sales and use tax, which is 5 percent on most taxable items. Not surprisingly, the largest revision in the forecast relates to sales and use tax. The original estimate of $2.9 billion was reduced by more than 25 percent to $2.1 billion. Sales and use taxes are generated not only from consumer purchases, but also from business activity. A large component of sales and use tax is related to oil activity and the taxable inputs that go into each producing well, such as drill pipe and frack sand. The new forecast recognizes not only the slowdown in drilling activity, but also the fact that companies are building an inventory of wells drilled but uncompleted (known as DUCs). Most of the taxable inputs that go into completing these wells have yet to take place. Many companies are building an inventory of DUCs, waiting as long as they can for a rebound in prices before moving forward with completion. The completion of these wells, whenever that takes place, will result in a surge in state sales and use tax collections as well as oil production.

2016 ECONOMIC OUTLOOK | STATE REVENUE STATE REVENUE | 2016 ECONOMIC OUTLOOK

The forecast takes a very conservative approach to predicting the volatile oil and gas tax revenue. The price for North Dakota crude oil is expected to bottom out around $25 per barrel by mid-year, then gradually increase to around $37 per barrel by the end of the biennium (this biennium is from July 1, 2015 through June 30, 2017). A conservative estimate when you consider that as recently as November 2015, the average North Dakota price per barrel upon which oil taxes were paid was over $39 per barrel. Production, which in November 2015 was still 1.18 million barrels of oil per day, is projected to gradually decline by the end of the biennium to around 900,000 barrels per day. The resulting forecast shows a decline from the $3.4 billion legislative forecast used to craft the state budget to $2.5 billion, a decrease of over 28 percent. Compare that to the $6.0 billion the state actually collected during the 2013-15 biennium and you can hardly blame the media for talking about the â&#x20AC;&#x153;bustâ&#x20AC;? facing the North Dakota oil industry. But once again, it is important to be aware of the historical perspective. As recently as the 2009-11 biennium, the state collected less than $1.6 billion in oil taxes. Even if the conservative projections hold true and production declines to 900,000 barrels of oil per day, production will still exceed the level from July 2013. This is not to discount the severity of the revenue shortfalls, either for the general fund or oil and gas taxes. The budget reduction of 4.05 percent ordered by the governor is very significant and will force state agencies to look at all areas of their operations to find savings and efficiencies. The cuts would have been much more severe were it not for the foresight of the legislature to establish the state budget stabilization fund, projected to be tapped for nearly $500 million to close the budget gap. However, if we lose sight of the historical perspective, we may reach the wrong conclusion. Although this slowdown is significant, our state revenue forecast reflects an economy that is still the envy of the nation and is poised for continued robust growth in the future.

ENERGY | 2016 ECONOMIC OUTLOOK

By Ron Ness,

“

President, North Dakota Petroleum Council

The oil and gas industry will invest about $1.8 million within the next year in natural gas infrastructure to help capture and process more natural gas for use in our homes and businesses both here and throughout the Midwest.

”

2015 was a year of many challenges for the oil and gas industry as oil prices remained the trending topic in the industry and news reports told stories of “bust” in the Bakken. Of course, the drop in oil prices and the resulting slowdown in activity has forced some to lay off workers and make other difficult decisions. For those who live and work in North Dakota, however, the state of the industry is anything but a bust. While we cannot predict oil prices or how long the price will stay at levels that are insufficient to attract and stimulate exploration, we do know that the industry is continuing to drive down the costs of Bakken exploration, making the play more attractive and resilient in the long-run. The recovery time will take longer than most think and the new normal may look different, but rest assured that the Bakken is a world-class resource and it will be produced. In the meantime, producing over 1 million barrels a day still requires many inputs, investments and people. In fact, like many shale plays across the nation, the Bakken has continued to be a place of growth. Communities that were once struggling to keep up with the rapid growth that defined the first several years of Bakken development have now had an opportunity to invest in infrastructure and other projects. They know that the industry is not only here to stay, but that more development can and likely will pick up again once the market correction has passed. This build-out is thanks to the hard work of many community and industry leaders who pushed hard for the more than $1.1 billion appropriation for impacted counties and cities during the North Dakota legislative session. Build-out also continues for the industry. The oil and gas industry will invest about $1.8 million within the next year in natural gas infrastructure to help capture and process more natural gas for use in our homes and businesses both here and throughout the Midwest. The North Dakota Public Service Commission also recently announced the approval of the $3.78 billion Dakota Access Pipeline, which will take as much as 600,000 barrels of premium Bakken crude per day to market. Enbridge’s Sandpiper pipeline is also moving forward, ready to deliver Bakken crude to a hub that can then take it to the east coast. Clearly, there is still a need and a demand for our rich natural resources both here and abroad. For more than 40 years, the U.S. was banned from participating in a free global market due to a ban on crude oil exports, but late in 2015, that ban was lifted. Finally, the U.S., including North Dakota, may now sell its resources to our allies in Europe and Asia, which will help usher in a new era of stability for both our energy prices and foreign relations. 2015 has been a tumultuous year, and the tough times are not yet behind us. Yet, given the billions still being invested in our economy, we are reassured of a bright future for our state, and the knowledge that oil and gas will continue to be strong contributors to our state and nation’s economy and our national energy security.

2016 ECONOMIC OUTLOOK | REAL ESTATE

Bismarck-Mandan is experiencing growing pains in the commercial real estate market. Everyone has read the headlines. The obvious is the downturn in oil prices. The State budget has been readjusted based on recent projections, agricultural prices are off and the overall stock market is not in the shape we have grown accustomed to as of late. All of these variables can affect the commercial real estate market. The outlook is not all negative. Bismarck-Mandan has seen new retailers come to the area. Haycreek Shops officially opened in 2015 in North Bismarck and much more is planned for this development in 2016 with the addition of Ross Clothing Store. Kirkwood Mall developed two outlots on their current site. Einstein Brothers Bagels and Caribou Coffee share a space and opened at the corner of 3rd and Indiana in January. In the spring of this year, Verizon Wireless will move its Corporate Store to the newly constructed space in the south half of the building. Panera Bread has moved into a brand new, single tenant building at the corner of Expressway and 7th which opened in late 2015. In addition, Kirkwood Mall announced that in 2016, the national Retailer H&M will open a 22,000 SF store. A few new restaurants have landed in Bismarck. Longhorn Steakhouse selected a site in the south parking lot of the Gateway Mall. Breaking ground in 2016 will be the national franchise Buffalo Wings and Rings will open the State’s 2nd location (first being in Minot) in north Bismarck, located east of McKenzie River Pizza. Other new attractions include the Sunrise Town Centre where multiple banks, Caribou Coffee and Einstein Brothers Bagels, two office buildings and a gas station have joined Dan’s Super Market in East Bismarck by Legacy High School. The City of Mandan saw a new strip mall being built on what is known as the Strip or Memorial Highway. Classic Rock Coffee and Dickey’s BBQ Pit are new Tenants to the mall. The ground work is being laid for Downtown Bismarck’s newest development, Five South, which will have something for everyone to live, work and play in the growing downtown. Ace Hardware is opening its second, 40,000 SF location at 43rd Avenue and Highway 83 with the extra retail space to lease and a pad site.

“

By Scott Ritter, Partner, Aspen Group LLP

While the commercial real estate market in Bismarck-Mandan has seen the pace slow a bit, there are plenty of things to be excited about in 2016 and there is no reason to think that the consistent, sustainable growth won’t continue beyond.

REAL ESTATE | 2016 ECONOMIC OUTLOOK

As you drove around Bismarck and Mandan these last few years, it’s impossible not to take notice of all the growth in commercial real estate. From retail in North Bismarck, to Memorial Highway and Sunset Drive in Mandan. New office buildings in Downtown Bismarck to industrial warehouses across the area. As 2015 tapered off into 2016, it was evident that a change in the real estate market was happening. Demand has slowed, vacancy has gone up and for the first time in a few years, tenants and business owners had more property options to consider.

”

SURVEY RESULTS | 2016 ECONOMIC OUTLOOK

WHO IS YOUR PRIMARY TARGET MARKET? 50.30%

Bismarck-Mandan North Dakota Midwest

34.13% 9.58% 5.39%

Nationwide International

.6% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ON AVERAGE, HOW MANY FULL-TIME EQUIVALENT EMPLOYEES DO YOU HAVE? 2.4%

32.93%

9.58%

1-4 7.19%

5-19 20-49 50-99 100-499

16.77% 31.14%

500+

SURVEY RESULTS | 2016 ECONOMIC OUTLOOK

WHAT IS YOUR BUSINESS CLASSIFICATION?

BY WHAT PERCENTAGE DO YOU ANTICIPATE YOUR EXPENSES TO CHANGE FROM 2015 TO 2016?

100

2.68%

5.36%

37.5%

8.04%

1.79%

5.36% 8.04%

41.32%

35.33% 23.35%

20 28.57%

Business to Business

Business to Consumer

Both

+ 1-3%

+ 4-6%

+ 6-9%

+ 10-15%

≤ +16%

No Change

- 1-3%

- 4-6%

OVERALL, HOW WOULD YOU COMPARE YOUR ORGANIZATION’S EXPECTED RESULTS TO ACTUAL PERFORMANCE IN 2015? 26.89%

Exceeded Expectations Met Expectations

41.18%

Performed Below Expectations

31.93% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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SURVEY RESULTS | 2016 ECONOMIC OUTLOOK

WHICH BEST REPRESENTS YOUR FORECASTED CHANGES FOR 2016 21.78% 39.6%

Sales Revenue

3.42%

14.85%

25.64%

16.83%

Hours worked for employees

6.93%

2.63%

11.61%

0.0%

52.68%

Total Operating Cost as a % of Revenue

60.68%

12.28%

23.21% 12.50%

58.78%

Employee Compensation (wages + benefits)

0.00%

24.56% 2.63%

8.85%

1.76%

39.52%

Capital Expenditures

3.60%

44.25%

38.74%

9.73%

Raw Material Costs

6.19%

3.60%

18.92%

0.90%

37.84%

Profitability

53.15%

7.76%

19.82%

41.38%

19.82%

Price charged by Your Company

3.60%

46.55% 2.59%

10.35%

1.72%

30.17%

Number of Employees

10%

20%

30%

46.55% 18.97% 0.86% 0%

10%

20%

Increased 7 - ≥ 10%

30%

40%

50%

60%

Increased 1 - 6%

70%

No Change

Decreased 1 - 6%

Decreased 7 - ≥ 10%

40%

50%

60%

70%

2016 ECONOMIC OUTLOOK | SURVEY RESULTS

43.73%

YES NO 57.27%

SURVEY RESULTS | 2016 ECONOMIC OUTLOOK

IS YOUR BUSINESS EXPERIENCING DIFFICULTY IN ATTRACTING AND HIRING QUALIFIED WORKERS?

WHAT FACTORS ARE MOST LIKELY TO ADVERSELY AFFECT YOUR BUSINESS IN THE NEXT YEAR? Attracting and Retaining Qualified Employees

35.55%

Increasing Competition

20.00%

Increasing Raw Material Costs

6.67%

Increasing Regulations

5.56%

Difficulty Providing Health Insurance for Employees Increasing Transportation Costs

8.89% 1.11%

Challenges in Acquiring Financing

6.67% 15.56%

Other 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SURVEY RESULTS | 2016 ECONOMIC OUTLOOK

DO YOU EXPECT TO PERFORM BETTER OR WORSE IN 2016 COMPARED TO 2015?

DO YOU THINK THE BISMARCK-MANDAN ECONOMY WILL PERFORM BETTER OR WORSE IN 2016 COMPARED TO 2015?

55.86%

50.89%

36.61%

25.23% 18.92%

Better

Worse

No Change

12.50%

Better

Worse

No Change

DO YOU THINK THE NATIONAL ECONOMY WILL PREFORM BETTER OR WORSE IN 2016 COMPARED TO 2015? 20.72%

Better Worse

51.35%

No Change

27.93% 0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

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