'Near-Shoring' Boosts Office Outside Financial Hubs

NEW YORK CITY—Clarion Partners sees opportunity in office markets beyond the gateway cities, including its home base of New York, but not because of higher cap rates in those second- and third-tier cities. Instead, it's because these markets are seeing strong job growth, and particularly in the financial sector.

Even if job growth remains “tepid” at the national level, this masks “significant variation in recovery rates at the metro level,” according to Clarion's new report on the outlook for office. “In fact, while most traditional financial centers have experienced weak growth (New York, San Francisco, Boston, Philadelphia, and Chicago) or outright declines (Hartford, Stamford), many lower-cost non-traditional financial centers have added financial industry jobs at a rapid pace.”

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 employment since the 2009-2011 trough, in contrast to the track record of markets such as New York City, Chicago and San Francisco: low single-digit gains

Clarion uses the term “near-shoring” to describe the migration toward lower-cost metro areas. It's especially common among universal banks and other global financial institutions, “which have long maintained separate front-office and back-office operations across various regions,” due both to previous mergers and acquisitions and “deliberate personnel strategy.”

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

However, the trend seems to have gained momentum in recent years. “Cost-cutting measures and the political liability of high compensation have come into greater focus, while information and communication technologies have now advanced to the point where satellite offices can interact with other offices and headquarters almost seamlessly,” the report states.

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

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

For example, although Goldman Sachs' headquarters remain squarely in Manhattan's Financial District, approximately 25% of Goldman employees are located near Salt Lake City, Dallas, Singapore and Bangalore, India, compared to 10% in 2007. Goldman has reportedly expanded its Salt Lake City staff to more than 1,800 (with plans to add hundreds more), up from 600 six years ago, representing business units such as research, credit analysis, trade settlement and compliance. Employees in the Beehive State cost their employer about 30% less than those in New York City, according to CNBC.

Other firms are following suit. “Charles Schwab plans to move half of its 2,700-person San Francisco-based workforce to other areas of the country over a three- to five-year horizon, with Phoenix, Dallas, and Denver named as possible destinations,” according to Clarion's report. Deutsche Bank will ramp up its presence in Jacksonville, FL, while UBS will do likewise in Nashville, to the tune of some 1,000 jobs.

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

Nor are banks and other financial institutions expected to exit the gateway cities entirely. Instead, “financial firms are utilizing what can be described as a 'hub and spoke' strategy, maintaining high-value front-office and client-facing personnel in primary locations and operating networks of ancillary offices in smaller markets around the country,” according to Clarion. Then there's the proliferation of boutique financial firms, which will help offset reductions in headcount and square footage in the traditional financial centers.