Construction employment declined in 28 states from September 2011 to September 2012, according to an analysis by the Associated General Contractors of America of Labor Department data. Delaware lost 1,500 jobs. And if we agree that construction jobs are the canary in the coal mine and are predictive of our economic health, are we recovering? Let’s examine the commercial office market to see how we might define recovery.
According to Nick Marsini, Regional President of PNC Delaware, the economic condition in Delaware could be worse…much worse. That’s hard to believe considering that back in 2008 and 2009, Delaware was considered one of the states in the worst shape because of massive job outflows and a state government budget that lacked sufficient revenues. But according to Marsini, Delaware dodged a major bullet. Subsequent to the housing failure, economists were holding their breath as nearly three billion worth of commercial loan maturities came due throughout the country. Marsini relates that most of the national market and especially Delaware didn’t experience the “other shoe dropping” because he says, “Banks learned their lessons in the previous recession and had already implemented tighter lending standards.” Marsini continues to say, “This was unlike the housing industry that was not only churning out non-repayable loans, but they were reselling them on the open market.” And according to Pete Davisson, founding partner of Jackson Cross Partners, “Banks prevented a complete collapse during the crisis by being patient with building owners while their vacancy rates were spiking.” And while this all sounds wonderful, where is the economic recovery?
From 2004-2008, the state of Delaware enjoyed non-farm employment levels that approximated 435,000 jobs. And then suddenly, after being defrauded by the players in the mortgage market, the consumer suddenly saw their equity disappear, their buying power evaporate, and their ability to borrow money come to a halt. According to Davisson, “The result was that they began to purchase fewer goods. In turn, the purchase of fewer goods resulted in fewer manufacturing facilities and ultimately corporations began to trim their sails.” Ultimately, this contraction resulted in an exodus of nearly 34,000 jobs in Delaware. And they left over 10,000,000 s.f. of office, manufacturing and retail space in their wake. Much of this real estate is owned by the companies themselves and some of the space has been filled now that employment has risen to 420,000. But 3,000,000 s.f., owned by third party “landlords” still remains vacant. This marketable space is easily understood as an important benchmark. Once filled by 6,000 workers, this empty space is not just a symbol of our lagging economy, it is a real drag on expansion. Until that 6,001st employee is hired and vacancies return to healthy levels, banks won’t lend and developers won’t invest in our cities. Maybe, instead of celebrating our millionth visitor to local attractions, we should greet Mr. or Ms. 6001 with flowers, candy, and a ground-breaking shovel!
Preparing Delaware to fill this space is more complex than during the era when speculative office buildings were once developed. Banking never experienced the concepts of branchless relationships with customers, retail and distribution never experienced the purchase of daily needs over the internet, and the idea of having enough infrastructure to locate support teams anywhere they can access their laptops completely changes the demand for traditional space. The non-traditional responses have taken shape in many ways. Several years ago we saw the DuPont Company sell their Barley Mill facility on the open market; we saw Amazon double down on Delaware with distribution facilities, knowing they’d be closer to the northeast market and less of a target of internet taxes; we have seen the University of Delaware banking on the desire of users to be closer to the university’s intellectual capital when they purchased the former Chrysler Motors plant; and we have seen the Town of Whitehall, Delaware position itself to allow employers to be closer to their employees with their series of mixed use villages.
I am looking forward to seeing how corporations rethink their physical space needs for the next 20 years, with the experience of the 2008 recession behind them. And I look forward to delivering flowers and a shovel to that very special 6001st. That will be one important definition of recovery.