Job Growth: Half full or Half Empty?

While scanning news reports recently from around the country, I noticed a consistent theme: "Little or no job growth forecast in (insert the name of your city here)." To make matters worse, the US Census reports that, since June 2001, the economy has shed 2.2 million payroll jobs. In the first quarter of 2003, 115,000 jobs were lost, and preliminary data shows a loss of about 122,000 jobs in the second quarter. The Labor Department has been reporting each week for almost six months that jobless claims exceed 400,000 nationally, a sure sign of a weak labor market. Such statistics are not good signs for the real estate industry.

The forecasts vary, of course, but all seem to be roughly in line with a recent survey that quantified job growth in the US at a little less than 1% annually from 2002 through 2007. This suggests the economy may gain something like 500,000 new full-time jobs a year in the white-collar sector during that period. These are jobs where workers will predominantly populate office space.

According to studies conducted by the Building & Office Managers Association, the per-square-foot use of space per employee reached a high-water mark of about 255 sf per employee in the early 1990s. As companies have adopted more efficient space utilization strategies, that number has leveled off today to 220 sf per worker. Using this data, one could infer that job-growth forecasts indicate an increase in demand of at least 110 million sf of office space each year through 2007.

At the risk of sounding too much like Pollyanna, while 110 million feet a year might not sound like much to those of us in the industry, we can still appreciate several things. First, we can be glad there is positive job growth forecast at all. In the first few months of this year, the US economy actually lost 0.2% of its full-time jobs. Also, a recent report from a CB Richard Ellis research unit pointed out that office demand is off about 4% from its peak, representing about 100 million feet. If job growth does indeed spur110 million sf a year in new space demand, this could put the sector right back on track--after first absorbing all the empty and shadow space currently cycling through the system, of course.

Which brings us to the other potential fly in the ointment for job growth in the US: the loss of jobs to overseas markets. Much has been written in the press recently about the outsourcing of jobs to India and other countries where skills are strong, labor costs low and services cheap. There's no doubt that this trend is accelerating; it's all part of the globalization that we're witnessing in real estate as well as throughout the general economy, and companies can hardly be faulted for jumping on the bandwagon. To a great extent, the movement of jobs was initially from so-called back office or customer support functions. India, for example, has quickly become one of the premier destinations for call centers.

It has been estimated that more than 110,000 people are currently employed in call centers located in India, and forecasts by an Indian trade association suggest that this sector of the sub-continent's economy may grow tenfold by the end of the decade. A number of tech and financial services companies have located centers there in recent years. Increasingly, more traditional office functions are sure to join this exodus.

A recent survey by Boston-based Forrester Research estimates that over the next 15 years, about 3.3 million service-industry jobs will move overseas, at least 472,000 of those jobs coming in the IT sector. (It is important to note that this is on top of the millions of manufacturing jobs that have already moved out of the country--a trend that has been with us for a while and shows no signs of abating.) If Forrester's numbers are on point--and there are those out there who believe even these numbers are conservative--the impact on the US office sector could be a loss of demand equating to something like 700 million sf over the next decade and a half. That's roughly 47 million feet of office space that won't be needed each year.

Clearly, there's significant pressure on the office sector as a whole. A lessening of demand is never good, but it's especially damaging when the sector has already gone through a severe economic downturn that has resulted in a 17% vacancy rate nationally.

Yet, this pressure won't be felt by all sectors. Much of the space likely to be deserted due to the movement of jobs overseas will be in smaller secondary markets and will be felt most strongly in obsolete or homogeneous properties that may need to be retrofit for use other than office space. Even if jobs are lost in so-called gateway cities like New York, Miami or Los Angeles, the class A office market is buffered by the fact that there are always tenants looking to move into better space. As a result, lesser quality and technologically obsolete buildings may suffer while the markets re-balance.

Clearly there are often wide differences between markets. San Francisco vs. New York; suburban vs. CBD--all have different supply/demand generators. With all the variables, it's difficult to tell if the job-growth glass is half full or half empty. What is clear is that it's going to take at least the job growth numbers being forecast to help pull the national office market out of the fire.

Dale Anne Reiss is global and Americas director of Real Estate, Hospitality & Construction at Ernst & Young. She is based in New York City.