Industrial Real Estate Outlook

One reader asked us for an outlook on industrial development activity. We found a recent one that describes the real estate market, and here is what it has to say:

* Less is More. Completions will continue to fall in 2003, but a turnaround in the economy will begin to attract developers by 2004, leading to a modest rise. Total completions for 2003 and 2004, at 125 million square feet, will still be 20 percent below the amount of space completed in 2000.

* Vacancy Peaks. Strength in the manufacturing, distribution and trade sectors of the economy will revive demand, driving vacancy down from its peak of 10.5 percent in 2002 to 8.6 percent in 2004.

* Rents Rebound. After a flat year in 2003, rents will rise 4 percent in 2004. Concessions, which have been common in markets with vacancy rates above 12 percent, will begin to abate in the later half of 2003 and disappear entirely by late 2004.

* Fundamentals, Prices Diverge. Median sales prices for industrial properties continue to rise despite the recent deterioration in vacancies, rents and absorption. Low
interest rates and a lack of attractive alternative investments are keeping investor demand high.

* Sales Volume Down. The dollar volume of industrial sales in 2002 was down 25 percent from 2000’s peak. The number of transactions fell by 20 percent over the same period. Although weakening fundamentals played a role, the primary cause was lack of inventory.

* Cap Rates Fall. Buyers continued to put downward pressure on cap rates as low interest rates and 1031-exchange demand fueled higher prices.

* Positive Returns. While well below their peak levels of approximately 16 percent in 1997 and 1998, industrial investors managed to earn positive returns through the
recession and subsequent collapse in demand. Total return was 6.7 percent in 2002, down from 9.4 percent in 2001.

Source: Marcus and Millichap, Industrial Market Research 2003

Website link.

Jobs Follow Workers

Increasingly, businesses are developing jobs where the workers are, especially where the highly trained workers live. That is the message in a recent BizSites article, which says: "If you build it, they may not come. Until the 1990s, workers adhered to the tenet of “follow the jobs,” willingly moving wherever employment opportunities existed. But that mantra has now been reversed. According to experts, business today must “follow the workers” to the places they live, which is the suburbs—and beyond."

Take the example of MasterCard. In 1998, MasterCard International chose WingHaven over 42 other locales to build a 580,000-square-foot global operations center housing 2,500 IT professionals with an average salary of $70,000. The final competition was between St. Charles and Las Colinas, Texas. MasterCard had a major presence in both locations, but the majority of their employees lived in St. Charles, so they moved closer to their people and farther away from their CEO’s home.

For many companies, their location choice is a suburban one--not the inner city--because that is where the largest supply of their workers reside. Two examples in the Cleveland area illustrate this point. The first is Progressive Insurance, which is based in my tiny village, Mayfield, which has only 3,200 residents but over 6,000 Progressive workers because the village is located near the crossroads of two major interstates that provide easy access to the location for workers throughout the region.

A similar example comes from MBNA, a leading financial services company, which is located in Beachwood, a suburban office center, with great interstate access and within reach of a high percentage of the region's knowledge workforce. While past efforts were made to lure both Progressive and MBNA to downtown Cleveland, the fact remains that these suburban locations offer them a greater competitive advantage than they would receive by being downtown.

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Global Economic Update

Where is the global economy headed? Economy.com just released its latest global economic outlook. Here are some key tidbits.

The first quarter brought a deterioration in growth across most OECD economies that is likely accelerating during the current quarter. The slow pace of growth in the global economy during the first quarter owes to the pre-war plunge in sentiment and risk aversion on the part of businesses.

At the time, it was hoped that a surge in business and consumer sentiment following a quick end to the war in Iraq would propel a global rebound. Will it happen? The evidence for such a rebound is spotty at best. Conditions are bad and getting worse in the euro zone and Japan, weak in Latin America, and data out of Asia, aside from non-Asian exports, are likely to be very ugly for the April-to-June period. Aggregate growth will not fall to the paltry 1.1% of 2001, though Economy.com still anticipates a reduction in the rate of world growth of between 20 and 50 basis points for this year relative to last year.

And then there is SARS, which continues to slow tourism and business travel in general. The faster we get on top of this one, the better.

At this point, Economy.com is looking at a 1.9% growth rate for the world economy, a 2.3 percent growth rate for North American economy (U.S., Canada and Mexico), and a 2.2% growth rate for the U.S. economy for 2003. Let's see if it happens.

Article link. (If you subscribe to Economy.com)

Austin May Get New Urban Village

Like many cities, Austin is exploring new ways to enhance livability, which is vital to economic development.

The real question is whether the project should receive a $25 million public subsidy. In these lean economic times, local officials are counting their money more carefully and competing uses for the money exist.

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Rural Jobs Feel Pain of Globalization

According to the Federal Reserve Bank of Kansas City, rural areas are experiencing major business and job losses, and these losses are linked to the globalization of industry.

Rural factories across the nation cut 4.6 percent of their payrolls last year and about 140 plants closed, according to the Bureau of Labor Statistics. Nearly 500,000 jobs were lost in February and March alone.

"Rural areas have typically offered an energetic work force, an inexpensive work force, inexpensive land and in many cases inexpensive taxes. That formula is increasingly called into question in a globalizing economy where there are locations that have even more inexpensive land and labor," said Mark Drabenstott, an economist with the Fed.

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Innovation Works: Worthy of Note

Innovation Works (IW) is a Pittsburgh-based publicly funded venture capital organization that invests in technology startups in Southwestern Pennsylvania. This is an organization that is worthy of note by those developing venture and risk capital funds to spur economic development.

IW's mission is to increase the new enterprise success rate by providing the highest potential technology companies with access to risk capital, business expertise, and third party resources. Through a continuum of hands-on support, guidance, and investment, IW helps companies to maximize their chances to attract additional capital and achieve commercial success.

Who are some of the companies that IW has invested in? Here are a few examples:

* Bonecraft: Whose technology is revolutionizing the way physicians perform complex surgeries.

* Crystalplex Corporation (formerly Bioplex Corporation): Which offers drug and medical researchers unprecedented opportunity to multiplex the search for biological markers.

* Lifechek: which is a start-up medical device company, that has developed a wearable, accurate and cost-effective device for the measurement of human caloric expenditures.

* Mobot: which is creating the next generation of interactive technology within the field of mobile robotics.

* Sentek: a non-invasive diagnostic tool enables diabetics to continuously monitor their blood glucose levels.

* TissueInformatics: provides an integrated set of tools to capture, search, and analyze the rich data present in tissue.

These are just a few of the many investments made by Innovation Works.

To learn more, visit the organization's website.

Megasite Strategies

Thinking about luring a big ED project to your community? Step one is having a ready-to-use site. That was the logic behind a cooperative agreement signed by the states of Alabama and Mississippi a month ago to create a shared megasite for the next major auto project. Now, Georgia is headed down the same path--that is to get a highly competitive megasite to attract the next big deal coming along.

This is what I would call a "systems solution" in economic development. It involves having an integrated strategy to compete that includes a site, pre-approvals for identified site uses, an incentive package defined, and a list of companies that might be looking for the type of "location product" you're offering. It's a smart strategy, provided that you do not go crazy with incentives and approach the deal in a performance-based manner. Remember that it cost Alabama $250 million to land the Hyundai plant. Texas got lucky with the Toyota truck plant, which actually left incentive dollars on the negotiating table.

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New World Economic Competitiveness Report Released

The Institute for Management Development (IMD), based in Switzerland, has just released its 2003 world economic rankings report. It says that the United States is once again the best of the large economies and that Finland was number one in the smaller economies group.

Here are some of the major points made in the report:

* It is not a recession that is starving national and local economies -- it’s "economic anemia"; it is more pernicious and just as bad. This same view was reflected in an editorial by the publisher of the Washington Post just last week. He called the problem "economic stagnation," which is what has afflicted Japan's economy over the past decade.

* The U.S. economy is fairly resilient, thanks to interest rate cuts and consumer spending. However, the current account deficit (4.8% of GDP), the expected budget deficit ($300 billion) and proposed tax cuts may push foreign debt up and the dollar down further.

* Europe battles with deficits and the ability to reform governments. Over-regulation and complexity hamper its growth. Joining members of the EU perform better.

* Latin America continues to struggle to overcome the side effects of the implosion of Argentina and Venezuela. Brazil’s new administration has been well received so far.

* Asian economies were just beginning to pick-up again, but the SARS epidemic is jeopardizing their recovery.

* Oil prices are back to reasonable prices ($24) after the Iraqi war.

* The collapse of stock markets has forced the financial sector, once a buffer in periods of slowdown, to restructure just as drastically as industry.

* Pension funds have lost $2,800 billion worth of assets. A time bomb is ticking.

* Corporate debt has increased five-fold in the US in 20 years. If interest rates go up again, many companies could go bankrupt.

* The IT sector continues to consolidate and is no longer the locomotive of growth in the world economy. What will be the next big hype? Wireless? I would add life sciences and biotech to the list of silver bullets.)

* Confidence in business leaders is at an all-time low. Trust in numbers and people has been destroyed. Legislation on accounting, auditing, and corporate governance will step in.

* Competitiveness key words for 2003: back to fundamentals, simple, solid, no-nonsense, adaptive, transparent, and honest.

The report analyzes the world's national economies according to various criteria, including public financial strength, infrastructure, economic performance, business efficiency, and government efficiency.

Download the report here.

Federal Reserve Bank of KC on the Move

The Federal Reserve Bank of Kansas City has out-grown its downtown building and is looking for new space. KC economic developers are trying to keep the Bank downtown, but it may relocate to the city's Midtown area outside of downtown.

Even Federal agencies are facing growing pressures to contain costs. It would be a shame to see the Bank leave KC's downtown area, which like many big city downtowns, has struggled over the years. Many cities, including Cleveland, have used their federal facilities as important anchors for revitalizing downtowns. Hopefully that can be the case in KC.

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Hyundai Alabama Plant Incentive Package

Hyundai, the Korean auto manufacturer, is building a new $1 billion auto assembly plant in Alabama. The 2-million-sq.-ft. facility will produce 300,000 cars and trucks a year, once completed. The plant will employ 2,000+ people.

What was the incentive package delivered to Hyundai to attract the deal to Alabama? Here are the details:

Public Incentives
* Site improvements: $55 million.
* Transportation improvements: $29 million.
* Training incentives: $61.8 million.
* Misc. incentives: $12.1 million
* Tax incentives: $76.7 million
* Public subtotal: $234.6 million

Private Incentives
* Electrical improvements: $6 million.
* Natural gas improvements: $4 million.
* Telecom improvements: $200,000
* Rail improvements: $8 million
* Private subtotal: $18.2 million

* Total Incentive Package: $252.8 million

* Incentive Dollars Per Job: $126,400.

Source: Site Selection Magazine

Chinese Steel Update

In case you have not noticed, steel production is very big business for China. In 1990, China produced 9.1% of the world’s steel and was the fifth-largest producer, behind the Commonwealth of Independent States (the former Soviet Union), the European Union, Japan, and the United States. Since 1990, Chinese production has increased nearly 63%. In 2002, China produced over 20% of the world’s steel, and was firmly in the number one position ahead of the EU, North America, Japan, and the CIS.

Despite the rapid growth in Chinese steel production, it still could not keep up with its own booming demand. In response, China has also become the most dominant importer in the world. Between 1992 and 2001, Chinese imports more than tripled, reaching 25.6 million metric tons.

So, what is the problem? China produced and imported more than it could consume, despite a booming economy. A 14% increase in production was forecasted for 2002, but instead, production expanded almost 25%. The excess production and imports have caused inventories to swell. Suddenly, the demand for imports has dried up. In reaction, global spot prices for several benchmark products are beginning to slip. Exporters will face continuing challenges from the weaker Chinese demand, exacerbated by the weakness of the U.S. dollar, to which the Chinese currency is pegged. Add SARS on top of that and the problem gets even worse.

This situation points up an important point that all of us in the economic development business should bear in mind, which is that it is very difficult to predict where the market will head in this uncertain world economic and political environment. This same problem complicates the ability of businesses in most countries to plan future business facilities. This suggests that businesses may continue to struggle as they work to position themselves for the future.

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Think Knowledge Administrator

Napa Valley believes that knowledge administration will be a growth industry/occupation for the future. They are so convinced of this that they created a Knowledge Administrator Training (KAT) program. I agree with them.

Take a look at what the Napa Valley ED Corporation is doing in this area. I think you will also find their cluster development program to be of interest.

NVEDC website.

Capture Your Local Business and Economic History

It occurred to me in reviewing state historical archives recently that most states and communities are not capturing their business and economic history. These agencies keep tons of historical files on other subjects, but relatively little business and economic history information. Economic developers are busy creating new 'economic futures' for the areas they represent, but maybe they should devote a little more time to preserving information and knowledge about their area's economic and business accomplishments. How easy we forget unless we are reminded.

Who should tackle this challenge and why? Let's deal with the why question first. It's important because businesses, students and other people in the community should look at their business and economic history as a source of ideas and inspiration for the future. In some cases, they need to review their history to avoid making past mistakes, and in other cases, they need to review their history to unearth good ideas that can be used again. I find that this information is often important to the visioning part of the economic development strategic planning process.

Who should undertake this challenge? This strikes me as an area where local colleges and universities could work with local and state historical societies and libraries to do the job. Where would the money come from? Why not ask your local community and corporate foundations to help? Once state budgets are back on their feet, maybe state legislatures could provide some funds for this task.

This is important because it reflects the 'economic legacy' of an area. We should not live in the past, but we certainly need to learn from it.

Helping Tool and Die Companies Compete

Tool and die makers are important suppliers to a wide range of manufacturing industries, including the automotive and aerospace industries, which are major consumers of tools, dies, jigs, fixtures and a host of related products. At one time, these companies represented a unique strength of the American manufacturing system. Today, competition in this sector is global, with many other countries able to best our prices and match our quality. U.S. tool and dies companies are struggling.

How can EDO's help these companies to strengthen their competitiveness? Take a note from Michigan's collaborative business model for the state's tool and die companies. The Michigan model encourages and assists local tool and die companies to work cooperatively on both domestic and international projects. The objective is to increase Michigan's tool and die makers' ability to provide 'system solutions' to market needs and also to grab global market niches through working together, even with foreign tool and die makers, where that is necessary.

How can you learn more about the Michigan collaborative business model for tool and die makers? Download the report describing it here.

Maytag Puts the Screws to Its Communities

Everybody loves the Maytag repairman commercial. Nobody likes the way Maytag is playing Iowa and Illinois communities in an economic development bidding war. As the company shutters its U.S. plants, it readies to open new facilities in Mexico, where $2.00 per hour wages await the company.

One of the issues at stake in this situation is the fact that Maytag has been benefiting from lucrative ED incentives from Iowa and Illinois communities, and now the company plans to skip town and leave the communities holding the bag.

No one questions that businesses must do what is in their best interests. At the same time, communities must do the same, and hopefully in this case they will succeed in getting what they are owed by Maytag. This situation, like many others nationwide, speaks to the need for performance-based incentives that ensure that communities and states are not left with the bill when the company decides it wants out of the deal.

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Young Scientists to Visit Cleveland

Here is an example of a cool idea that just so happens to be in my hometown.

1,300 high school students from around the world, including 34 Ohio stduents, will be in Cleveland for the Intel International Science & Engineering Fair. It's the largest high school science fair in the world, and students will compete for about $4 million in prizes and scholarships.

Northeast Ohio colleges will try to lure the students, whose weeklong activities include interacting with Nobel prize winners and astronauts. It will be interesting to see if any are successful in attracting this young talent.

The event is growing in popularity. Organizers say this year's fair, which is the 54th, has 100 more students than last year's, which was in Louisville, Ky. Donald Harless, president of Science Service, which runs the fair, said that in the last five years, participants have increased by 20 percent.

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More Questions Raised About How Public ED Money Spent

You know the economy really sucks when all people have to talk about is why their City Convention Center hosted Chamber of Commerce meetings and why the Convention Center helped pay for "Coffee Hour" breakfast meetings held to discuss business and economic development issues in the community. This is the situation in Bowling Green, Kentucky.

Chambers of commerce and City halls across the country jointly pay for activities of this sort. Is this the best use of both organization's meetings? That question needs to be answered in the context of the goals of the events undertaken and whether these goals were achieved.

This is another example of where EDO's need to be cery careful how they use public money and resources. Criticism is growing now as government budgets tighten and people are looking for excuses to take money away from one activity for another.

My advice: watch it!

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