Global Economy Brings New Challenges to Twin
Cities Markets
By Boyd Stofer
President/Chief Executive Officer, United Properties
Slowly but surely, demand for Twin Cities commercial office and industrial space is showing signs of recovery. Even so, it’s not yet clear sailing for landlords. Vacancy rates are hovering in the high teens for industrial properties and low twenties for office properties, leading many to ask: when will the much-needed job-generating machinery kick into gear again?
Regional job growth has begun to turn positive over the second half of 2003, creating new jobs at a faster pace than the national average. However, job growth has not manifested itself in lower vacancies, probably because companies are already carrying excess space. Longer-term, the Twin Cities is still projected to add as many as 380,000 new jobs to the current total of 1.75 million by 2010. At best, it now appears that 2004 will be the first year of a longer, multi-year recovery for space markets.
Manufacturing Bore The Brunt Of State’s Recent Job Losses
Minnesota suffered a 2.4% decline in jobs between February 2001 and June 2003. Manufacturing was particularly hard hit, representing more than 49,000 of the 64,000 lost jobs in the state. A lot of those jobs may be gone for good, either because of contraction and consolidation within companies and industries or because the jobs have been outsourced to overseas labor markets. The Minnesota Department of Employment and Economic Development (DEED) says that by 2010, half of those lost jobs will return, but they may be in different capacities.
In today’s global economy, all companies are under pressure to increase productivity and reduce costs. While productivity has soared in recent years, the improved efficiency has had a negative effect on overall space utilization. Real estate has yet to feel the benefits of the improving economic picture.
The manufacturing sector first experienced the dramatic shift in job creation activity toward overseas markets. The lure of labor markets, such as China where the average manufacturing wage is just 5% of the average U.S. wage, is strong. U.S.companies taking jobs to China cost the U.S. about 234,000 jobs last year, according to Industry Week magazine.
Growing Concerns About Overseas Job ‘Exports’
It’s not just manufacturing jobs leaving either. Service sector jobs, such as software programming, accounting and paralegal work, are also being exported to India and other countries. Commercial real estate professionals are monitoring this outflow of jobs to other countries, as the shift could crimp demand for as much as 500 million square feet of office space in the U.S. by 2015, according to Forrester Research.
Certainly, we have reason to be concerned about this trend but it’s also important to look at the big picture. No one predicts a massive movement of Twin Cities’ jobs to overseas labor markets in the foreseeable future; the good news is that as firms add support jobs overseas, it is highly likely that they are also adding jobs in their base market due to increased business. In fact, regional job growth is expected to recover much of its pre-2000 momentum over the next few years. If the area follows a path similar to job creation in the late1990’s, we’ll see around 1.2% annual growth in jobs.
Jobs likely coming from the tried and true
Demand for industrial space improved throughout the second half of 2003. Many of our sales and leasing professionals report that it’s the more established companies showing the strongest signs of growth. Many of these firms didn’t experience the phenomenal growth of the late 90’s. Now they are incrementally adding employees or one more work shift. Many of these companies are in the manufacturing, distribution and testing industries. Their caution has served them well: while some of their competitors went out of business or consolidated, the lost business is now returning and these survivors are poised to handle the new orders and clients.
Given their cautious tendencies, many of these “survivor” firms may not expand right away. Shadow space – or the underutilized office space and unused industrial floor space – also remains an issue that will need to be absorbed before expansion of facilities can occur.
Headlines Don’t Tell The Whole Story
The trend of off shore outsourcing of jobs, both in the service and manufacturing sectors, is one that bears close watching by Twin Cities commercial real estate professionals. That said, there’s no reason to believe that we are in danger of seeing the future real estate market collapse due to these job losses. Headlines are generated whenever a company announces it is moving some of its production or office jobs overseas. But these companies remain the exception to the rule, which is why their announcements make news. Companies that quietly add to their workforce here in the Twin Cities as a natural part of doing business don’t receive the same attention from the public. Odds are that there is a lot more of the latter occurring than meets the eye today.
In any event, overseas outsourcing of jobs is inevitable due to the enormous available cost savings, and these jobs will gradually raise the standard of living and stability of less developed countries. This process also improves the profitability of U.S. companies, generating stronger cash flow for reinvestment. Despite the obvious short-term pain, in the long term, this trend is probably good for America and the global economy.
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