ATLANTA – The annual deluge of year-end and year-ahead economic reports is upon us, and some of them are even relevant.
        In fact, some of the news is germane to the world of corporate real estate. Eighty percent of companies, for instance, want to cut costs in 2003, yet 37 percent received no management information on their real estate portfolio and 55 percent had no defined real estate strategy in place in 2002, says a recent survey of global CFOs by Ernst & Young. "That's a curious position to take toward an item that is typically the second-largest cost (after labor) on almost any company's balance sheet," says the firm's annual report on the state of the real estate industry. Manufacturing companies, says one experienced observer, tend to know less than service companies about their real estate because it tends to be controlled internally within each business unit.
        The Ernst & Young survey also reveals that in the year ahead, roughly 70 percent of projects are "likely to either suffer huge cost overruns or fail to meet construction deadlines because of inadequate project management oversight."
        A more macro viewpoint was offered February 13, when the traveling road show of Economy.com gave a series of presentations in Atlanta before a full house of corporate executives, manufacturers, bankers, retailers and other worried professionals.
        Dr. Mark Zandi, chief economist and co-founder of Economy.com, spoke to everyone's most prominent fear - the tension-building Iraq situation - by relating that he had spent 15 dumbstruck minutes the previous day talking with his wife about emergency scenarios in case of an attack. With conversations like that taking place across the entire country, he said, it was no wonder that many saw Iraq as "a metaphor for all the things we're concerned about. Even a small probability attached to a dark scenario has a great impact on the way we behave. If we're all buying duct tape and worrying about where our safe room is, we're not doing much of anything else."
        One place Zandi did call for some quick action was in the realm of fiscal policy, taking direct issue with the implacable commentary of Fed Chairman Alan Greenspan. "I think we need stimulus, and we're going to get some form of it," Zandi said. "Politically, the risk of not doing something is too much to bear."

Manufacturing: 'Firmer Tone Developing'

With both commercial and industrial vacancy rates so high, Zandi said he would not be surprised to see commercial real estate construction still looking for a rebound three years from now. However, the depreciating dollar, while not so hot for retailers, should bring some relief to manufacturers, particularly in the textiles, apparel and chemical industries. For manufacturing as a whole, he sees a fitter, trimmer future.
        "There will be a firmer tone developing in manufacturing," he said. "The hemorrhaging in jobs will come to an end pretty soon."
        The Manufacturers Alliance Business Outlook Index rose to 67 percent in December 2002, its highest quarterly mark in five years. An index of 50 percent or better indicates an increase in manufacturing activity in the coming quarter. The survey results from 57 senior financial executives belonging to the 450-member Arlington, Va.-based association showed that shipments and profit margins both rose significantly during the final quarter of 2002.
        Zandi said that all the cutting of jobs and costs is reaping some benefit for non-financial corporations, whose margins have at least stabilized. But as with international diplomatic efforts, the time is nigh for some action.
        "As households face slowing compensation gains and businesses gain profitability, we must see businesses increase their hiring and investment soon," said Zandi. "If we don't see business start to expand, we're going to have a problem, with enormous implications regionally."

Defense is Economy's Best Offense

One implication that is with us for good, said Zandi, is that an increasing share of resources will be allocated towards defense and homeland security. His colleague Steve Cochrane, director of regional economics, concurred that defense industry spending was a mainstay of some areas that might otherwise be in real trouble.
        "Months of strong spending started in October," he said, "with a lot of contracts going out now to manufacturers, shipbuilders and electronics companies. And that is filtering through into the labor market data, especially in the South and West, where the defense industries are most concentrated."
        But the most outstanding trend right now in the regional U.S. economy is that no one region is standing out.
        "It's a very unusual situation," he said. "The fact that we're in a weak recovery period, and have very narrow differences in regional performance, really is a new phenomenon."
        Of course, the massive grouping together is more out of widespread misery than any cosmic economic unity. But it indicates something else as well.
        "It also illustrates some fundamental changes in the way regional economies interact with one another," Cochrane said. "Regional economies more directly link with each other. There is more export exposure across the country now as well. Improved technology, just-in-time systems that link inventory management systems, all allow transmission of economic shocks to work more quickly across the space of the economy."

South and West Strongest

But he sees small differences nevertheless, because that's what economists do. For instance, because of positive population migration, the South and West are almost stable, while the Northeast and Midwest economies are still contracting, with the Northeast being the weakest. However, in the Midwest's defense, he did note that while the manufacturing economy there continues to shed jobs, it still accounts for 18-percent of GDP there - "vibrant in a certain way," said Cochrane, "but less and less an employment generator."

Economy.com Senior Economist Gus Faucher called for slowing auto and home sales in the near term, in part because of "spent-up demand."

        Cochrane said that flat to declining auto sales will hurt the auto-producing areas of the country - this despite the recent spate of new North American plant announcements by industry leaders. And he repeated his vision of defense spending as a prime mover.
        "No question it will filter through to the regional economies," he said. "Aerospace, ships, electronics, missiles, munitions. That will happen. The Pentagon plans spending increases of 7 percent per year through 2007, with a 10-percent rise in 2007. Congress is willing to commit more. Huntsville (Ala.), San Antonio (Texas), Norfolk (Va.), Fort Worth (Texas) - that's one factor where the South and West will continue to be the leading regions in the country." Cochrane reiterated the South's claim for leadership when noting coming improvements in commodity markets.
        The economists also see reason for hope in the information technology marketplace, as the replacement cycle for all the IT investment preceding Y2K (remember when Y2K was scary?) is now approaching. Zandi called for this kind of business investment to pick up before hiring will, but he foresees substantive job growth by the spring and summer of 2004. Cochrane sees that trend benefiting cities like Portland, Ore.; Austin, Texas; and Raleigh, N.C. And he foresees an opportunity here for a tie-in to the defense juggernaut: so-called "netcentric" warfare, which is heavily dependent on high-tech communications.

To see the Economy.com snapshot of which U.S. cities will make a comeback, when they will do so and why, click the image above. This is a PowerPoint file, requiring that Microsoft PowerPoint® be installed on your system.

        "There is new potential for Boston and Silicon Valley to return to some of their roots," he said, noting those areas' one-time heavy dependence on defense spending.
        Where Cochrane sees the most resilience in small cities, especially those with colleges in them. In fact, cities like Riverside, Calif.; Oklahoma City; and Baton Rouge, La.; were to have already reached new employment peaks by the end of 2002. Next in line will be metros like San Antonio (even pre-Toyota blockbuster), Norfolk, San Diego and Raleigh. Based on when employment reaches a new peak again, Cochrane then rolled out his city-by-city comeback schedule for the next two years. (See the Economy.com charts accompanying this article.) Only 35 metros are at a peak right now. Big metros won't kick in until 2004, said Cochrane, and San Jose will bring up the rear in 2010.

All Together Now

Other recent economic forecasts, also released under the mounting international gloom, nevertheless join the sanguine view of Economy.com that a rebound that may be already in the offing.
        "We don't see great growth for the next five years, but the fact is that current business trends in this country argue for a return to times of economic growth," Smith Barney Managing Director John Manley told an Atlanta gathering of some 500 corporate real estate executives in January. Despite recent poor U.S. job reports, Manley said that the key statistic to consider is the percentage of upwardly revised corporate earnings reports. For December, upward revisions of company earnings were 8 percent above normal - and 60 percent above normal for technology firms - a harbinger of an economic recovery.
        James F. Smith, Ph.D., chief economist of the Society of Industrial and Office Realtors (SIOR), agrees with Manley that the health-care sector is the healthiest in the U.S., now accounting for about one-seventh of the entire economy. Whether or not it follows President Bush's plan, Smith does predict a significant reduction in the tax burden during the first quarter. He also points out that the same opportunity to refinance that exists for homeowners also exists for the owners of some US$4.6 trillion in commercial and industrial real estate. And he says that the attractiveness of the U.S. for foreign investment shows no sign of waning.
        Every outlook has the same ominous caveat, however. Iraq will be a "cathartic event," said Zandi, and assuming the conflict is resolved by the end of the second quarter, he predicted that the recovery now under way would remain intact. But he called the effect of a prolonged conflict "devastating," saying, "We're not going anywhere until that cloud is lifted."