Pittsburgh economy avoids credit crunch

With a nationwide credit crunch taking its toll on businesses, homeowners and banks, acquiring… With a nationwide credit crunch taking its toll on businesses, homeowners and banks, acquiring loans and funding has become difficult in many areas across the country.

But in Pittsburgh, where an already slow economy and low cost of living have helped insulate the impact of a nationwide recession, young professionals are finding that the process of starting their own businesses is relatively unhindered by the credit crunch.

“We tend to be very conservative in our approach to the economy and how we do business,” said Ann Dugan, assistant dean of Pitt’s Katz Graduate School of Business and executive director of the University’s Institute for Entrepreneurial Excellence. “We don’t swing high, and the benefit of that is when there are hard times like now, we don’t swing real low.”

In recent months, the nation’s loan market has been smacked by a backlash of unpaid sub-prime mortgages that’s turned lenders into tightwads and pushed the economy toward a recession.

“Basically what is happening is that banks went out and gave a whole bunch of loans to people who really shouldn’t have gotten loans in the first place,” said Bill Hershman, executive vice president of Community Loan Fund, a regional small-business assistance organization.

Banks, Hershman said, would lend to these people, even though their credit might not be that great, because they put their homes up as collateral. At the time, home prices were increasing 10 percent each year and lenders figured, “We’ll just take their house back and sell it and we’ll get our money back,” he said.

But in the past year, as home prices fell and borrowers failed to pay back their mortgages, the houses they put up as collateral became worth less than the balance owed to the bank. In response, many major lenders began tightening their loan policies.

“And that’s where you get what they call a credit crunch,” Hershman said.

But while the crunch has affected businesses in larger areas such as New York and Las Vegas, Pittsburgh banks are still competing for loans at a high level – mostly because of the slow growth of the city’s economy.

“We aren’t an area or a region that is growing very much at all.” Hershman said. “We’re very stagnant to begin with. We don’t have a lot of inflow of people. We have out-migration if anything.”

Dugan said that even though Pittsburgh has been plagued by out-migration in the past, the city’s under-the-radar economy might indeed keep more recent graduates in the area.

“There were these heated job markets like in Atlanta and Washington, D.C., and those have cooled off significantly,” Dugan said. “People are looking in their backyard much more.”

And as Pittsburgh’s economy might provide a safe environment for students to start their own businesses, the smaller size of the city helps young professionals find investors and other support.

“We are still a very small town in a way, so we are built upon relationships,” Dugan said. “There is still an infrastructure of support here that you don’t see in other places.”

But because of the city’s small size, a large number of students graduating at once could put a squeeze on the local job market.

With a long list of colleges in the area that includes Pitt, Carnegie Mellon and Robert Morris universities, the density of students entering the job market adds an obstacle for young professionals in Pittsburgh, according to Chris P. Briem, founding editor of the Pittsburgh Economic Quarterly and a researcher in Pitt’s University Center for Social and Urban Research.

On top of the area’s high graduation rates, the fact that Pittsburgh’s economy is doing well could mean that more people in other parts of the country are looking for jobs here, Briem said.

Bev Bolden, director of student services in Pitt’s Katz Graduate School of Business, said there are currently 220 full-time, 515 part-time and 177 executive students enrolled in the school. The College of Business Administration dean’s office said 1,878 students – the most in the past thee years – enrolled this year.

With the high rate of young professionals passing in and out of Pittsburgh and large companies in more prominent cities hiring less entry-level employees in the past five years, entrepreneurship has become a big part of Pitt’s business program, according to Dugan.

Dugan said Katz is searching for its first-ever chair of entrepreneurship and hopes to fill the position by summer.

But starting a business has never been easy, and although the credit crunch hasn’t necessarily been keeping people from starting businesses, it has made the process a bit more complicated, according to Ray Vargo, interim director of Pitt’s Small Business Development Center.

“Where we see a majority of start-up ventures getting their financing is through government-related programs,” Vargo said. “So a bank would do a percentage of the project, but there has to be another participant in the deal.”

With most start-ups, Vargo said, investors other than a bank have to be involved in some way. This forces business owners to deal with more people than before, drawing the process out.

“A business owner has to be more patient because instead of working with just one organization you’re working with two, maybe three,” he said. “When you’re developing your forecast for additional capital, you have to make sure you have an adequate time horizon of when you need the money.”

Rick Cancelliere, who graduated from Katz and founded Pitt’s Entrepreneur Society with Dugan, started his own business in Pittsburgh in 2001 during another recession.

“A sound investor doesn’t freak out about a recession,” Cancelliere said. “They get excited.”

“It’s an opportunity to buy undervalued stocks or real estate,” he said. “A lot of things become undervalued. What’s important for someone starting their own business is they look at what’s undervalued and what will be overvalued later.”

The key, Cancelliere said, is to “recession-proof” yourself by focusing on markets that aren’t affected by recessions. So far, he hasn’t dealt with any impact from the credit crunch as his interactive marketing company, JDAnthony, deals mainly with medical service companies.

“It’s thinking outside the box and being a little innovative when there’s really good opportunity to be,” Cancelliere said.

President of Pitt’s Entrepreneur Society Jared Stabiner agreed that shaping a business plan to cater to industries not affected by economic slow downs helps not only your business’ revenue but also ensures a more stable future.

But as other cities struggle with the effects of a credit crunch, Hershman believes there is little Pittsburgh can do but focus on the local economy.

“All we can do is try to take care of our little corner of the world. The market’s going to do what the market does,” he said.