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Offshoring may cripple U.S. office markets

March 11, 2004

New study from ULI, Columbia Business School analyzes impact of jobs moving abroad


Inman News

The steady movement of knowledge-based jobs overseas has dire implications for America's office markets, virtually ensuring high vacancy rates and minimal rent increases for several years and affecting several types of office space, according to "The New Exports: Office Jobs," an analysis published jointly by the Urban Land Institute and the Columbia Business School's Paul Milstein Center for Real Estate.

"Offshoring of knowledge-based jobs poses the greatest threat to America's office markets since the massive overbuilding of the 1980s," said report author M. Leanne Lachman, president of Lachman Associates LLC, ULI Foundation governor and executive-in-residence at the Columbia Business School.

The report cites research predicting a cumulative loss of 3.3 million knowledge-based jobs in the United States by 2015, and notes that escalating cost cutting by firms could shorten that time span to 2010. "The current and potential loss of hundreds of thousands of office-oriented jobs to foreign countries virtually guarantees high office vacancy over the short-to medium-term," Lachman says.

According to the report, the 400,000-plus jobs that have already been shifted overseas have left empty 70 to 80 million square feet of office space—the equivalent of approximately one year's supply of new office construction. The current projected losses could result in a reduction in tenant demand of 500 million square feet over the next 12 years. "The prospect for office building owners and developers is sobering," Lachman said. "In an ideal world, new construction would be halted until vacancy dropped to 10 percent, at which point rents tend to rise. However, because development never stops completely, office vacancy will probably go up between now and whenever replacement office jobs are generated."

Lachman analyzes the steady shift in jobs from the United States overseas, starting with the movement's beginnings 30 years ago in the manufacturing sector. At the time, a widely held assumption was that America was evolving into a knowledge-based economy and would cover the loss in manufacturing jobs by exporting intellect. However, "the global economy caught up with the United States, and people in diverse locations acquired the education needed to perform many of the same tasks," she says.

Offshoring of information technology and software development—among the first services to be outsourced—began 10 years ago as American companies struggled to meet soaring demand for the new technology and found a capable, educated source of workers overseas willing to work for far less money. The movement accelerated rapidly with Y2K compliance work, then expanded to include relocation of call centers to a variety of countries, particularly India—which has about 100,000 call center jobs—as well as Canada, Ireland, Central Europe and the Philippines. The report notes that much call-center offshoring is now based on a "follow-the-sun" model, through which companies position call centers to three locations worldwide, allowing them to provide 24-hour service, all during the day shift, thus eliminating the need to pay overtime wages. "Depending on when your refrigerator conks out, you might speak to someone in Canada, Poland or India," Lachman said.

Lachman cites research ranking the competitiveness of offshore destinations for information technology services: both India and Ireland rank high in the areas of government support, education and English proficiency; yet India ranks low in cultural compatibility, and Ireland ranks low in labor availability. Along with these other factors, political stability is a key consideration in offshoring considerations, the report explains. "One of the most promising by-products of a global economy encompassing countries on multiple continents is that enlightened self-interest will keep governments in check," Lachman said.

Other types of business operations have quickly followed call centers overseas, ranging from bill payment processing to magazine layout to legal research; even radiology services are now being outsourced. All types of office space is being vacated as a result of offshoring, due to the steady "rise up the value chain" in the types of positions moving out of the United States. What began in cubicles of industrial parks has migrated to class A high-rises, reflecting a growing tendency by Wall Street firms to outsource credit analysis services and law firms to outsource legal research services, the report found. Among the implications for office building owners and developers: Prolonged high vacancy rates, due to a jobless recovery for office workers; dim prospects for rent increases or cuts in tenant concessions; little justification for new office development; and a significant blow to the local economies of call center and data processing hubs. Least affected by offshoring: the economies of Washington, D.C., and many state capitals, because of the political incorrectness of moving government jobs overseas.

Keeping prices down through outsourcing "allows companies to report profits…A high proportion of the corporate profits reported in 2003 were the result of expense reduction, not revenue growth," Lachman points out, noting that offshoring likely cuts overall costs as much as 30 percent. "The combination of cost reduction and highly productive workers is compelling." Moreover, such savings through outsourcing leaves other companies little choice but to follow suit in order to stay competitive, she notes.

Despite claims of some in the business community that offshoring can benefit America's economy by freeing up capital and allowing opportunities for "strategic thinking," Lachman points to the potentially detrimental impact for displaced workers: "Replacement employment often requires new skills and frequently pays less."

Moreover, Lachman contends that while baby boomers are retiring, America's labor pool is being replenished by the echo boom generation (as large as the baby boom generation). "Those relatively well-educated young people are the ones for whom meaningful entry-level jobs must be created – a priority that should be America's highest…Creation of replacement jobs is important on three counts: to employ the country's educated youth, to maintain American households' standard of living, and to provide tenants for existing office buildings," she said.

The Urban Land Institute is a nonprofit education and research institute with more than 20,000 members representing all aspects of land use and development disciplines.

Copyright: Inman News Features



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