A land that recession forgot


Mayor Dave Munson drove past acres of chopped-up prairie and pointed matter-of-factly at signs of economic health that are hard to come by in most of the country.

“This is going to be a very strong retail center,” he said, waving at one graded lot where a Target store is to be built. He gestured at the other side of the road. “There’s another development.”

A few years ago, many cities were pocked with freshly overturned dirt soon to be retail or residential developments. The most severe recession in 70 years has changed that in most places, but not in this community of 150,000 and others like it in the midsection of the country.


One chunk of the nation has avoided much of the current economic misery: the region from North Dakota to Texas, most of it sparsely populated. This area includes five of the six states that analysts at have classified as not yet in recession. And other states in the Rocky Mountain West -- from New Mexico to Idaho -- are facing relatively mild downturns.

States like South Dakota rarely figure in the national economic discussion, which focuses on population and business centers on the coasts or in the Rust Belt and Southwest.

But the nation may end up looking a little more like Sioux Falls. Home prices inched up 2% last year, but didn’t increase more than 5% a year during the preceding housing boom. There is a mall and a couple of shopping centers, but a lower density of stores than in most metropolitan areas.

The city has an unemployment rate of 4.8% -- up nearly 2% in the last three months, but still less than half that of Los Angeles -- with jobs in service fields such as healthcare and call centers rather than manufacturing. Home-building is healthier than elsewhere; permits for new single-family homes are half of what they were here at their 2003 peak, but nationwide have fallen by two-thirds from their peak.

Residents know they have a modest lifestyle, but feel that brings security. “It’s a slower pace, so you don’t have much money to play with,” said Rod Hersrud, 49, pest-control worker.

South Dakota and other states that have avoided recession -- North Dakota, Oklahoma, Texas and Wyoming -- have been protected partly because of lingering effects of the commodities boom, be it in natural gas or corn. Energy and crop prices have plunged, but they are still high enough to provide some shelter.

But, perhaps more significantly, analysts say, most of the high plains and Rocky Mountain West was left out of the real estate boom. The median home price in Sioux Falls in the fourth quarter of 2008 was $177,200, up only 38% since 2000. Home prices in much of California doubled or tripled in that time.

“These are areas where you did not have a significant buildup in population and income,” said Chris Connell, who tracks Western states for Economy .com. “You did not have the pressure of inflating real estate prices.”

For decades, Sioux Falls was a modest agricultural outpost, a place for farmers to pick up new equipment or have a fancy dinner. Its main employer was a hog-butchering plant. But in the early ‘80s, Citibank and other financial companies began to open branch offices here to escape New York usury laws that hampered their efforts to expand into the credit card market.

“People were very proud,” Munson recalled. “It lifted the whole being of Sioux Falls to say we can get a corporation like Citi to come here.”

Now Wells Fargo, HSBC and other banks have joined Citibank in plunking down call centers and back-office functions in office parks north of downtown. Despite the pummeling the financial sector has taken, the banks have only made limited cuts in Sioux Falls because it is so much cheaper to operate here. Citibank, for example, has slashed 53,000 jobs around the world but only 122 here.

Nowadays the top employer is neither the banks nor agriculture, but healthcare, a sector that has been fairly resistant to the downturn. The city is home to two large and growing health systems -- Sanford Health and Avera McKennan -- that employ 13,500 people.

Helped by a $400-million donation from a local credit card magnate, Sanford has increased its staff by 1,200 since 2007. It just finished a new children’s hospital shaped like a castle and plans to break ground on a 185-acre medical research park.

Ruth Krystopolski, Sanford’s vice president of growth and development, said she had noticed that it has become easier to persuade medical specialists to relocate.

“The higher-end people are looking at Sanford and Sioux Falls as opportunities they may not have looked at when the organizations they were with were flush with capital,” she said.

Business leaders say that old-fashioned heartland values have kept the city financially safe. “We don’t do bubbles,” said David Link, a Sanford executive vice president. “People have a very conservative attitude about paying as we go.”

Mike Keller, dean of the business school at the University of South Dakota in Vermillion, said the blessing of slow growth in home prices is that it never tempted residents with home-equity loans and adjustable-rate mortgages.

“People didn’t overextend themselves,” Keller said, “because they did not have the means to overextend themselves.”

Sioux Falls stretches for 73 square miles, nearly a third of which is undeveloped. On the less-populated western edge, earthmovers are clearing way for the city’s second Target and several new neighborhoods.

Raquel Blount, vice president of commercial real estate for the retail project developers, the Lloyd Cos., said it was a coup for Sioux Falls to persuade Target to open a second store in town. Wal-Mart recently opened its second store, and solid sales have helped persuade other chains that it’s OK to have more than one branch in this under-retailed city.

“Retailers always look for those ‘A’ locations, in large metropolitan areas, first,” Blount said. When they get to Sioux Falls they tend to grow cautiously, she said.

Also, commercial projects only start here when there are viable tenants, Blount and others said. In more populous cities, shopping centers are built on spec rather than demand.

“People here appreciate stability more than an extra 5% return,” Blount said.

Developers can also promise tenants that they can begin building within 60 to 90 days because the city fast-tracks projects. That’s an example of an aggressively pro-business slant in the city and state that some also credit in part for the resilience amid the recession. South Dakota has no personal or corporate income tax, and the city sales tax in Sioux Falls is 5.92%.

Still, analysts and business leaders acknowledge that harder times are on the way for Sioux Falls and other places that have been sheltered from the downturn.

Lloyd Cos. had to scale down a proposed seven-story tower near downtown when it couldn’t find an anchor tenant. Some companies have made job cuts in recent months. And residents’ retirement plans are in bad shape, like those of residents of Los Angeles or Miami.

“It better change soon,” Kathy Sawier, a 49-year-old housecleaner, said of the economy, “or we’ll all be in the poorhouse.”

But local retailers report only modest cutbacks in spending, and some say sales have grown. J & L Harley-Davidson posted record sales last year, and January was its best month in three years.

“I told my staff, we’re not going to buy into this economic downturn,” said co-owner Jim Entenman.

On a recent afternoon, Greg Harder was in the shop looking not for a pricey new bike, but just a Harley cap to wear. It’s not that he’s cutting back -- he needed the cap because he was leaving on a vacation to Jamaica the next day.

“As long as everybody can make a fair living and put food on the table, it’s good,” Harder, 43, said. “The economy is pretty good if you just don’t read the newspaper or watch the news.”