By Pete Julius
Over the past few years we’ve seen a significant drop in the number of new and expanded facility activities. Of course, when you compare that to the mid 90’s, when the economy was growing by leaps and bounds, anything below that level of activity seems dismal. We all know that these are challenging times for everyone, but what does the future hold for economic development, and what can we expect?
I recently called upon 31 of our current and past clients to get their perspectives on the current and future nature of prospecting activity. In conjunction with these calls, this article contains information obtained through our work and interactions with economic developers and fellow consultants. This article will discuss current and future trends in prospecting activity, including the status of corporate real estate investments, understanding why companies are making real estate investments or why they aren’t, and, given the current and perceived future state, what economic developers can do in the meantime to stay competitive.
Overall, real estate investment activity is still struggling and it appears this will continue for quite some time. Too many domestic and international issues are stalling corporate decisions. Sure, there are some areas that are seeing various degrees of activity, but for the most part corporate America seems to be procrastinating. In addition, a roller coaster effect is at work. Economic developers indicate that activity will pick up one quarter and then the very next quarter it will plummet once again. To make matters even more unpredictable, some communities will see activity one quarter, while other communities will see activity in the next. These signs seem to suggest mass confusion and a large level of uncertainty within corporate America. So what is causing this mess?
A vast number of factors are playing major roles. The most obvious one is the economy. The jobless rate continues to rise, the stock market is struggling to regain prominence, and the dollar has lost a lot of its luster and appeal. Of course more than just the economy provides reasons to hesitate. World events are also playing a huge role. The war in Iraq, post-war Iraq, ongoing threats of terrorism, and SARS have all impacted decision-making in corporate America. In addition, we continue to lose a large number of manufacturing operations to China and Mexico. This issue affects not only those companies directly involved, but also companies and whole industries that depend on those businesses that move their operations overseas. Another factor is the airline industry. The state and potential fate of the airline industry has had a ripple effect on many industries. The airline industry greatly affects how companies operate. The slowdown and lack of business travel has slowed the decision-making process. Despite all of these obstacles, however, some companies are moving forward with their real estate investments.
So what are the driving forces behind this brave new investment activity? First, low interest rates have enticed many companies to make real estate investments. The lowered risk on investments associated with decreased interest rates have motivated many companies to expand or relocate. Second, a lot of the activity has come from companies that have particular needs other than growth. For instance, some companies have established a new facility just to be closer to a major customer or supplier. Third, companies that put their expansion and relocation plans on hold several years ago to sit out what was initially thought to be a short recession just couldn’t wait any longer. These companies had a particular need but were hesitant to a make a decision because of so much uncertainty. After waiting for so long, they realized that they needed to act before it was too late. And of course, even in tough times, there is always going to be someone who will prosper. Even in the Great Depression, while many suffered, some people benefited. OK, so if there is real estate investment activity, then where is it happening?
For the most part, the limited amount of activity seems to be scattered over a wide range of industries and locations. However, a few industries stand out. Distribution and back office operations appear to be the most active industries. In addition, food processing and plastics are also active. Most of the activity is coming from small- to mid-size companies. Why? One very important reason is that small- to mid-sized companies feature entrepreneurial risk takers. In this time of vast uncertainty, companies need to take risks to grow. Since small and mid-sized companies are filled with risk takers, it is only natural that the activity would come from these companies. In addition there are many more small- to mid-sized companies than there are mammoth companies in corporate America.
Given these tough times, what has worked around the economic development community, and what can you do in your own community to stay competitive?
Focus is one of the most important elements for staying competitive. Are you currently focusing your marketing efforts on the appropriate targets? Are you attempting to attract businesses that make sense for your area and not just attempting to attract certain industries because they are active, regardless of whether they make sense for your area? To do this effectively, you must understand the challenges and needs of your existing businesses. What is causing some area companies to struggle? What is needed to help them prosper? What is it that successful companies are doing that may help those who are struggling? By understanding the challenges and needs of your existing companies, you can focus your efforts on recruiting the businesses that make sense for your community.
To remain competitive, it is absolutely critical to remain aggressive and unique in your marketing efforts. You need to get in front of the right people with the right message, even if the time is not right for them. Timing is always a difficult issue to gauge. Just because a company is not currently wrapped up in a project does not mean that they will not have one in the future. Additionally, getting in front of them before they have a project helps to create a competitive advantage for your organization and community. When the project does come about, then you will have already provided them with ample information on your area and will have cemented the image of your community as ideal for a new location. Of course tax abatements and other financial incentives are nice, but they are not the only criteria in the site-selection decision process. It is more important to be proactive and compelling in selling your area. Sure, it is tougher sell for small- and medium-sized communities, especially during periods with lower levels of corporate real estate activity. It just means that you need to be a little more compelling and creative with your message.
Please, feel free to respond with any additional comments.