Economic development stymied by interest rates, market conditions

That was the less-than-optimistic message from Corey Costelloe, assistant city manager and economic development director for the city of Tehachapi, in a report to members of the Greater Tehachapi Economic Development Council on May 3.

"Interest rates make money more expensive, and the Fed is looking at another rate increase,” Costelloe said. The failure of Silicon Valley Bank and First Republic Bank may not have had a direct impact on Tehachapi, but the consolidation of banks that once served venture capitalists has diminished investment expectations and lots of empty office buildings make banks hesitant to lend for more commercial development.

He called it right as just hours later, the Federal Reserve announced its 10th interest rate increase in a little over a year. As reported by CNBC, the increase took the Fed funds rate to a target range of 5% to 5.25%, the highest since August 2007.

Costelloe shared comments he’s heard from commercial developers who had planned to build Tehachapi projects.

“We had to back out due to high construction costs and not enough interest to offset those costs,” a former potential developer of a commercial center told the city.

And from another — a current property owner with an entitled commercial development: “We have had some people interested in the property. However, with increasing interest rates, that is becoming more challenging.”

Among commercial projects previously approved by the city but not built is the proposed Red Apple Pavilion. It was approved by the City Council in January 2019 after being in development for more than 20 years.

The project on 13.94 acres of land at the corner of Tucker Road and Red Apple Avenue — across Tucker from Walmart — was expected to include a Panda Express and Carl’s Jr., along with retail space — and would have been built in phases.

But Panda Express ended up purchasing property from Walmart to build across the street from the proposed Red Apple Pavilion in 2020. Last year the city reported that the project had “formally expired.”

There has been no visible activity on some smaller commercial projects approved last year, but a new Chipotle Mexican Grill opened last December.

Tehachapi is home to a number of national brand fast food companies, including two McDonald’s, a Taco Bell, Del Taco, Burger King, Sonic, Jack in the Box and Wendy’s.

But even national chains have been hit hard by economic pressures, Costelloe said.

He shared a statement by McDonald’s CEO Chris Kempczinski: “While Mcdonald’s posted positive quarterly earnings, the chain is receiving pushback for higher prices with customers buying fewer items than before. Items per transaction have fallen.”

“Food costs have got so high, even the cheap guys aren’t cheap anymore,” Costelloe said.

He shared another statement from a representative of Raising Cane’s Chicken Fingers — from a couple of years ago: “We invest so much money into our building sites that a market like Tehachapi would take longer to recoup … costs that we are comfortable with in larger markets.”

The city’s plan

“A secondary market like ours depends on favorable economic conditions,” Costelloe noted.

“Our approach is still going to be data-driven. We’re still going to do what we can to show that our market is viable.”

According to data published on the city’s website, the city’s trade area has a consumer population of 76,646.

The city plans to attend the next convention of the ICSC (International Council of Shopping Centers), Costelloe said. Past involvement with shows sponsored by that organization have yielded important connections that eventually resulted in firms opening in Tehachapi.

But, he noted, the show planned for July in Las Vegas has a significant reduction in exhibitors from past years. Currently, only 106 retailer/tenant companies are registered — with more than 435 real estate developers, owners or brokers registered.

This year, retailers and tenants are spending less to promote their limited expansions and the show looks to be less about attracting to build new space and more about filling available spaces, he said.

Claudia Elliott is a freelance journalist and former editor of the Tehachapi News. She lives in Tehachapi and can be reached by email: claudia@claudiaelliott.net.