NEW YORK CITY—Clarion Partners sees opportunityin office markets beyond the gateway cities, including its homebase of New York, but not because of higher cap rates in thosesecond- and third-tier cities. Instead, it's because these marketsare seeing strong job growth, and particularly in the financialsector.

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Even if job growth remains “tepid” at the national level, thismasks “significant variation in recovery rates at the metro level,”according to Clarion's new report on the outlook for office. “Infact, while most traditional financial centers have experiencedweak growth (New York, San Francisco, Boston, Philadelphia, andChicago) or outright declines (Hartford, Stamford), many lower-costnon-traditional financial centers have added financial industryjobs at a rapid pace.”

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Among those fast-growing markets are Phoenix, Austin, Nashville,Miami, Dallas/Ft. Worth, Salt Lake City, Jacksonville and Tampa.All have seen double-digit growth in financial services employmentsince the 2009-2011 trough, in contrast to the track record ofmarkets such as New York City, Chicago and San Francisco: lowsingle-digit gains

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Clarion uses the term “near-shoring” to describe the migrationtoward lower-cost metro areas. It's especially common amonguniversal banks and other global financial institutions, “whichhave long maintained separate front-office and back-officeoperations across various regions,” due both to previous mergersand acquisitions and “deliberate personnel strategy.”

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The reasons for relocating jobs to an emerging financial hubsuch as Dallas from New York or California seem obvious, saysClarion. They include “lower compensation costs, cheaper housingfor executives, lower personal and business taxes, better weather,and less competition for workers, among other things.”

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However, the trend seems to have gained momentum in recentyears. “Cost-cutting measures and the political liability of highcompensation have come into greater focus, while information andcommunication technologies have now advanced to the point wheresatellite offices can interact with other offices and headquartersalmost seamlessly,” the report states.

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The types of jobs being added in these emerging financial hubsvary widely, says Clarion, They range from low-skill back officestaff to high-level executives.

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“In some cases, entire corporate headquarters have relocated,”according to the report, co-written by the firm's director ofresearch, Timothy Wang. “Ongoing regulatory reformrequires larger in-house compliance and legal units—functions thatcan be housed in separate locations from headquarters andfront-office personnel.”

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For example, although Goldman Sachs'headquarters remain squarely in Manhattan's Financial District,approximately 25% of Goldman employees are located near Salt LakeCity, Dallas, Singapore and Bangalore, India, compared to 10% in2007. Goldman has reportedly expanded its Salt Lake City staff tomore than 1,800 (with plans to add hundreds more), up from 600 sixyears ago, representing business units such as research, creditanalysis, trade settlement and compliance. Employees in the BeehiveState cost their employer about 30% less than those in New YorkCity, according to CNBC.

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Other firms are following suit. “Charles Schwabplans to move half of its 2,700-person San Francisco-basedworkforce to other areas of the country over a three- to five-yearhorizon, with Phoenix, Dallas, and Denver named as possibledestinations,” according to Clarion's report. DeutscheBank will ramp up its presence in Jacksonville, FL, whileUBS will do likewise in Nashville, to the tune ofsome 1,000 jobs.

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However, Clarion says, “We do not believe this trend necessarilyimplies a steep, long-term decline of major financial centers suchas New York, Boston, and San Francisco. The migration of jobs outof traditional financial centers is a gradual process that can beexpected to occur across future cycles as opportunities arise.”

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Nor are banks and other financial institutions expected to exitthe gateway cities entirely. Instead, “financial firms areutilizing what can be described as a 'hub and spoke' strategy,maintaining high-value front-office and client-facing personnel inprimary locations and operating networks of ancillary offices insmaller markets around the country,” according to Clarion. Thenthere's the proliferation of boutique financial firms, which willhelp offset reductions in headcount and square footage in thetraditional financial centers.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.