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SD commercial bankruptcies amongst highest in nation

Commercial bankruptcy rates may be falling nationwide, but the same can't be said of San Diego.

With 400 small businesses declaring bankruptcy in the first quarter of the year, San Diego now ranks fourth among all major markets in commercial bankruptcies, according to a recent report by Atlanta-based Equifax Inc. (NYSE: EFX).

San Diego's also in a minority of markets with an increasing pace of small business bankruptcies.

Compared to the first quarter of 2008, such instances have increased 92.3 percent in San Diego, a fairly typical number compared to other troubled markets since the dawn of the Great Recession.

But the year's first quarter total is up 2.3 percent over the 391 suffered in the first quarter of last year, a period during which nine of the 15 hardest-hit metropolitan statistical areas (MSAs) instead saw declining bankruptcy rates, with the overall trend in those 15 areas being a 5.71 percent decrease.

The Equifax data also showed that the bankruptcy rate was slowed from 3Q 2010 through 1Q 2011.

San Diego, on the other hand, continued to see an increase in its rate of bankruptcies during that time, though the pace of that increase appears to be slowing. Bankruptcies increased by 3.46 percent from 3Q 2010 to 4Q 2010 and increased 2.83 percent from 4Q 2010 to 1Q 2011.

It isn't clear why small businesses in San Diego are underperforming those in other markets.

Markets are affected relative to one another based on the sectors that are represented in each. Given San Diego's reliance on hospitality, it's possible that a lack of consumer confidence is hurting it disproportionately to markets less dependent on consumer spending.

"If I was going to go on vacation and spend four days in San Diego, now I might spend three instead," said Nikhil Varaiya, professor of finance at the San Diego State University College of Business Administration. "That's a 25 percent reduction rate. All of these businesses are hurt by that."

The balance sheet recession has meant two significant types of deleveraging in the economy. One by consumers, who've looked to repair their debt burdens by spending less and saving more. The other is by banks, which have restricted access to credit while gradually marking the troubled assets that have plagued their balance sheets.

Both have meant a demand-starved market. And both could be said to have been hit harder in markets, like San Diego, that were heavily involved in the housing bust.

San Diego has routinely ranked among the markets with the most underwater homeowners, with more than 30 percent of all mortgage holders in the county owing more than the value of their homes. That could be part of San Diego's struggles with commercial bankruptcies, according to Varaiya.

But he added that small businesses going under could also be indicative of the current phase of the economic cycle. As the economy is no longer suffering from declining output, there are more startup businesses being founded. Part of an increase in startups is an increase in startups going under.

"In a typical cycle there will be a net increase in businesses," he said "In cycles like ours, businesses starting might not be as high as going under. That's been true of prior businesses cycles."

Reza Barazesh, senior vice president of Equifax Commercial Information Solutions, said bankruptcy trends are helpful in gauging the credit health of small businesses.

"Our latest analysis shows that while business failures may be on the decline, conflicting trends are still making us question if the worst is behind us," he said in a release accompanying the company's data. "Only time will tell if these patterns are just a market aberration resulting from current economic turbulence or a sign of change to come."

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