Buildings Do Not Create Jobs--Let's Cut the Rhetoric

It’s time we put an end to the political rhetoric that “buildings create jobs.” Companies create jobs and a building is but one of the three classical components of production, along with labor and capital. But it has become the norm in every announcement of a new commercial building for the government official and/or private developer to announce that the building of “One XYZ Place will create 100 construction jobs and 600 permanent jobs.” The claims are pernicious because it is often the rationale for government approval or public financing for the building and for public infrastructure expenditures (see Assembly Square link).


Buildings do not create jobs. Companies create jobs and then, as needed, assemble the factors of production necessary to produce a product or service. One of these factors of production is land, which, for our purposes, can be considered commercial space. The other factor is capital, such as the machinery necessary to manufacture a product or the telecom system necessary in a new office. The third and most important is labor.

To say that one factor of production—land (or commercial space) -- creates another factor of production—labor-- is not only theoretically wrong, it is absurd on the common sense level. A building is a box. If, and the” if” goes to the very core of commercial real estate, the building attracts a user, it will still be a box. It will not create the jobs; it will only house the jobs. And if the company leaves, it will not sprout new jobs. It will still be a box.

Buildings do not create construction jobs either. If the building is constructed by and for a specific user, the user, by creating the building, creates the construction jobs. If the building is constructed on a speculative basis, derived from an investor’s perception of the need for commercial space, then the construction jobs are created by the investor, not by the building. Again, the building is a box, just one factor of production.

One might argue that this is an issue of semantics. I beg to differ, because the “buildings create jobs” battle cry is used as a justification for virtually every new commercial construction project. If a private investor constructs an office building purely on the basis of its judgment of supply and demand and exactly within the zoning and building codes, I have no problem with semantics. Of course, this happens in the Land of Make Believe. Every office building constructed in Boston, even those meeting zoning and building codes, must still receive Boston Redevelopment Authority approval at the design level. And then the sensational claims come gushing out about buildings creating jobs. And then come the requests for public financing or incentives. And then the taxpayers start coughing up money based on an untruth. This is not an issue of semantics when semantics become a weapon of deceit.

The citizens of Massachusetts have now learned the issue the hard way, spelled E-V-E-R-G-R-E-E-N. Taxpayers paid for the building to the tune of $58 million in direct subsidies, incentives, and tax breaks. Evergreen created the jobs. And then Evergreen eliminated the jobs. The building is empty. It is not “creating jobs.” It is just a big empty box, which is all that it ever could be. It may once again become an active factor of production if a user chooses to produce a product or service in the box. But until then, the building will not be creating jobs.

Unfortunately, the Governor had already drunk the “buildings create jobs” Kool Aid, and his erstwhile development director, Greg Bialecki, is still handing out cups of the stuff all over the state. And we all keep drinking it. By the way, Mr. Bialecki considers Evergreen as a minor mistake. Makes you wonder what a major mistake would be.

If you want an idea how deeply entrenched this wishful thinking extends, simply visit the Boston Redevelopment Authority website, look up any development project, and read how many jobs the project will create. It’s a complete farce. I know a lot of landlords who wish that their existing half empty office buildings started to suddenly create jobs one day.

Saying a building creates jobs is like saying that making a hammer will create jobs. It leaves out the fact that hammers do not stand up, grab some nails, and start pounding away. A person (let’s call that person Mr. Labor) picks up the hammer first. And someone (let’s call that someone Mr. Producer) informs Mr. Labor what he wants him to do with the hammer. And, if we all hold our breath, maybe Mr. Producer will find his way to Fort Devens and rescue us all from the Evergreen debacle.

I’m a real estate broker. If buildings created jobs, my profession would not exist.

The Geography of Disaster: The LNG tanks of Everett, Massachusetts

While the Commonwealth continues to debate the wisdom of onshore LNG plants in Somerset and Fall River and while the populace cries foul at Cape Wind over price concerns, the Department of Energy recently and quietly painted a frightening picture of the onshore LNG industry. Liquefied natural gas, exposed to air or water, forms a pool of superheated, inextinguishable fire. Its burn rate depends on the amount of the spill, wind, waves, and currents. By its own assessment, the DoE, working in conjunction with the Sandia National Laboratory, estimated that a breach of only 3 of the 10 compartmentalized tanks on a typical LNG tanker would kill anyone within a ½ mile radius in less than 20 seconds. In 8 minutes, a breach would cause 2nd degree burns within a 2.5 mile radius.


Using Census Bureau and City of Boston estimates of workday populations under the 3 tank DoE scenario, over 80,000 people would die within 20 seconds with an additional 540,000 people suffering severe burns, many fatal, within 8 minutes. Within 12 minutes, fire would engulf all of Charlestown, East Boston, South Boston, the South End, the North End, North Station, Beacon Hill, the Back Bay, the West End and the towns of Chelsea, Everett, all of East Cambridge and over one half of Somerville.


Those are the aftermaths of breaches in tankers. The actual tanks at Everett, at equal if not greater risk of a similar breach, contain over 125,000,000 cubic meters of LNG, ten times the amount carried in a single ship.


There are 9 operating LNG plants in the United States. As the table below shows, Everett is the only plant located in a populated area and the only plant served by passage through a narrow, active harbor.


The Geography of Risk: The Relative Location of Existing Liquefied Natural Gas Plants in U.S.A.




Location of LNG Plants     Surrounding Area   Nearest Major City      Distance (miles)


Sabine, LA                         Island in lake              Shreveport                   72


Kenai, AK                       Port on Cook Inlet        Anchorage                    65


Freeport, TX                     Isolated bay                   Houston                      61


Cove Point, MD              Isolated riverfront      Washington DC               46


Cameron, LA                   Isolated bayou              Lake Charles                24
  
Lake Charles, LA            Island in lake               Lake Charles                 18


Peñuelas, PR                    Offshore ocean                Ponce                         7


Elba Island, GA       Unpopulated Island in river     Savannah                    6


Everett, MA            Heart of major city port            Boston                       1/4

The Unpredictability Factor--The Myth of Telecommuting and the Growth of Central Cities

I never quite understood the appeal of working in my pajamas, although, evidently, the ability to do so makes one the member of an exalted class—the telecommuter. It’s all very George Jetson--like and it’s made folks like Steve Jobs very wealthy men. It’s also the topic of countless and generally boring visions of telecommuter nirvana where we are all in our pajamas looking out at the smog free home of the brave. The problem is it doesn’t work. Yes, jobs that have specific instruction and little deviation from the norm can be done in your home. They can also be done in India or Brazil. But you just can’t do much when the unexpected happens. The value of the American worker will be increasingly based on his or her ability to react to and deal with the unexpected and unpredictable world of global business. That’s tough to do in your jammies.


Let’s start with the latest rather startling evidence. The latest statistics from the Census Bureau indicate that office jobs have been growing at a faster pace in central cities than in their surrounding suburbs. Yes, the cities who our many experts told us 15 years ago would be virtually empty while we all sat and watched the grass grow in squat brick buildings in suburbia are outpacing the dull worlds surrounding them.

Considering that a suburban office worker is one step up the ladder from a telecommuter, things don’t bode well for the pajama party. Nor does it matter how many apps you’re running on your IPhone, because you can’t run an app for something that doesn’t yet exist, such as an unexpected visitor. It’s not difficult to see why suburban office use is on the relative decline. And it’s very easy to see why telecommuting rates have barely changed in 20 years. And it won’t change regardless of how much more of a toy we make our phones. It’s still a phone. Period.

I offer up the “unpredictability factor” as a new determinant in the location of the workforce. In short, the more unpredictable events that may occur in a given business day, the greater the necessity that the worker be located in or in close to a central city. And unpredictability has three components.

The first component is one of unexpected demand for services. Examples of the first would be commercial loan officers. Although one could argue that a loan officer can stay in his pajamas until the day and hour of his meeting, that would imply that every meeting must be a scheduled one. Not being in your office when a successful businessman wants to discuss a loan is not providing your core service. Other examples include real estate brokers, who must be ready for unexpected showings; attorneys who are unexpectedly called to court; and most public workers, who must be available for unexpected public business such as a marriage license. All of these workers possess the same qualities—the ability to deal with and react to new, unexpected business events.



The second component of unpredictability is the unexpected need for supplies or connections to provide the service. Examples from the unexpected supply side can be direct—an architect’s unexpected need for large scale renderings and a premium restaurant table for an out-of-town client unexpectedly in town for the night. They are more frequently indirect –the commercial loan officer’s need to meet with a rating service’s local representative about the creditworthiness of the unexpected seeker of the loan mentioned above.

The third component of unpredictability is the endless series and cycles of the unexpected meeting whether that be during a walk through the city, at a popular lunch spot, or while attending a seminar or lecture. This component is the one most cited by advocates of doing business in the city, and it is entirely one of making one’s presence known simply by being in the midst of your potential clients and vendors. As Woody Allen said, “80% of life is just showing up.”

It’s hard to accommodate the unexpected in your pajamas. And once you strip away the chic and false notion that an IPhone is somehow more than a phone, you can see that a telecommuter is the most replaceable of workers. By design, their work cannot deal with the live unexpected world of business on either the demand or the supply side. You don’t run in to many potential business partners in your kitchen. It’s nice to be able to email me a picture of your cousin’s new baby from your living room couch, but that’s not business.

A worker’s value in America is increasingly tied to his or her ability to deal with and respond vigorously to the unexpected. The closer a worker is to the central location of any geographic area makes that worker more capable of dealing with demand for and supply for unexpected business. It also dramatically increases the chance of the serendipitous meeting. The role of the telecommuter is to operate within dictated boundaries. But, of course, you get to wear your fluffy slippers at the same time.

For Every Love Letter Written, There's Another One Burned--A Little Balance Please

Banker & Tradesman’s lead article today was “Boston Tenants Vacate 1 M Square Feet in 2010.” A good grabber. And it’s even true. Gritty reading as Jim Cronin covered all of the properties that saw tenants pack up and go. He even got some respectable industry quotes. The problem is that his article was only half-a-story, as they say. What he forgot to cover or just plain overlooked is that more than 1 M Square Feet was occupied by fresh tenancies in 2010. Let’s get into the detail.

Banker & Tradesman (“B&T”) failed to balance off the vacancies to space that came to the market in 2010 with companies that did indeed, contrary to some of the article’s quoted sources, backfill the vacancies. Every good real estate researcher knows that backfilling takes place across markets, not within individual buildings. If B&T does not analyze the data this way, then B&T would be showing massive negative absorption in Boston of over 1 million in 2010. Every brokerage house and I have already noted positive absorption for the year. I will use B&T’s list first and then cover the properties they ignored.

1. International Place—Yes, when Ropes moved, nobody backfilled the space. But B&T failed to mention that Ropes’ move to 800 Boylston completely backfilled the vacancy left by the Gillette Company after its purchase by Procter & Gamble to the tune of 400,000 square feet.

2. One Federal—B&T is right on with this property. Between One Federal and 125 High, Tishman is sitting on the largest amount of space of any landlord in the city.

3. One Congress—I would not consider a converted garage to even be in inventory and thus not truly vacant. Under Tom O’Brien, the property is being marketed as future office space, and Tom is seeing a lot of interest.

4. 225 Franklin—This is B&T’s biggest mistake. Bank of America leased 226,000, followed shortly by Ameriprise Financial for 130,000 square feet. Along with 100 High, covered below, 225 Franklin was the success story of 2010. B&T’s numbers are completely wrong.

5. 99 High Street—How can B&T mention a vacancy increase without talking about the building’s largest tenant, KPMG, taking over 100,000 square feet to anchor Two Financial Center?

6. 53 State—Same question. The entirety of the vacancy at 53 State consists of Choate’s backfilling massive relocations out of Two International Place. The same will be true at 75 State when Wellington vacates 300,000 square feet there and at a handful of properties to anchor 500 Atlantic in a 400,000 square foot lease.

B&T missed the remarkable leasing efforts at 100 High Street—net 140,000 square feet slowly chipping away at what Bingham left behind; at 200 Clarendon led by the Bain Capital lease; and by way of Liberty Mutual’s expansion into 500 Boylston and its announcement of a new tower which will represent net growth. And many more pure growth stories.

B&T needs to make a choice—accurate net absorption figures or scary stories. You can’t have it both ways, no matter how much of a “grabber” it is.

What's Right about Boston's City Hall

It's my guess that about 95% of Bostonians would not mind if Boston City Hall were demolished tomorrow. About a year ago, the Mayor was so desparate to get out, he almost built a building in the ocean.

But the entire problem and the tremendous potential of the building is the landscape upon which it sits. Consider the State House (New State House, as a proper Bostonian would say.) If the building were built on the vast acreage that City Hall sits on, it would immediately lose its glory. City Hall is a majestic building. It is a city on a hill unto itself, but inverted. The problem is that nobody ever thought to bring the grandeur of City Hall itself to what could be the grand approaches to City Hall.

And I am not talking about the brick. I’m talking about bringing light and activity in concentric circles out from the base of City Hall. Doing so should have been simultaneous with the design of the building. Any building with an inverted base will naturally have a dark and shadowy base. Kallman et al forgot about this. As you approach City Hall, instead of looking up to see how the levels build upon each other, you look down into the pit of the entry. The lack of attention to light, a clear entry, and clear entry “flight paths,” if you will, defeat the architecture of the building. You feel like a mouse trying to find the hole into a massive hunk of cheese.

Grass is not the answer. It would be as unused as the brick plaza or the Dimway, oops Greenway, and would belittle the architecture itself. The answer to the context is varied, gentle elevations leading up into City Hall rather down into the pits. Imagine a series of ramparts approaching a castle except that along the ramparts we could build appropriately designed commercial, retail, and entertainment space—perfect space for an opera house which we embarrassingly do not have. But the approach must be up and toward the top of City Hall, not down and into the pit.

Back to the Old State House. How would you feel if there were McDonald’s bags on the lawn or plastic planes of glass in a few of the Governor’s office windows? The City has never taken care of City Hall. It is a disgrace. This is OUR building, and its care should be a matter of civic pride. The only response we manage to come up with is “tear it down, tear it down.” That’s fear speaking, not logic. About 10 years ago, the same crowd wanted to “re-clad” the Prudential Tower.

And all the architects who praise its design do that and nothing more. We are all wonderful critics and cynics, but few of us feel obligated to do anything. If the 1 million architects (that’s my estimate) who bobble around Boston and Cambridge want to bring life back to what, without dispute, is one of the country’s greatest examples of Brutalism, then they and we better look at the context of the property and the disgusting manner in which have let this property rot.

If we condemn City Hall to the wrecking ball, we condemn ourselves for a lack of will and imagination.

The Angry Man and the Guillotine

I like John Palmieri, the Director of the Boston Redevelopment Authority. He approaches development thoughtfully. His work at Seaport Square, Fan Pier, South Station, Liberty Mutual, and countless other development sites have been noteworthy and worth commending.


Unfortunately he works for the Angry Man. And after the latest self-induced debacle at the Filene’s site, the Angry Man, as is his custom, will be looking for any head to roll other than his own. Alas poor Yorick.

For two years, the Angry Man has been threatening Vornado and its partners at the Filene’s site with any combination of removal of permits to eminent domain. I wrote about the nonsense of such an approach on September 25, when the editors of the Globe started drinking the Angry Man‘s Kool Aid and demanding the same.

Fast forward one month and the Angry Man, using Mr. Palmieri the way President Bush used Colin Powell, had admitted that his approach was not thought out financially or procedurally.

I don’t want to beat a horse that’s not only dead but nearly buried, so let’s focus on how the Angry Man works. The Angry Man can never be wrong even when he is wrong. I didn’t hear any apologies for the money spent analyzing and developing renderings for a new City Hall in the unreachable docks of the easternmost piece of Boston Harbor. And you won’t hear any apologies for his nonsensical behavior with Vornado. His plea for help from Mayor Bloomberg was an embarrassment to Boston. His latest desire for unachievable vengeance on Messrs. Roth and Hynes is a further embarrassment.

This brings me back to Mr. Palmieri. The guillotine has been delivered to floor 9 at City Hall. And the Angry Man will pass the blame on again. Good luck John. Maybe intelligence and practicality will prevail at City Hall. But between Chiofaro and Vornado, the Angry Man needs to strike out at someone.

Report on Massachusetts Home Sales is Not Accurate

Yesterday, most media sources reported that single family home sales had declined year over year in September. The Boston Globe chose to run this at the top of the business page with the ominous and incorrect title, “Mass. home sales dropped 12.9 percent last month.” The report was on existing single family homes and condominiums, not “homes.” I guess that’s the old-fashioned attention grabber.


The story was not technically incorrect. It was selectively correct. The Globe gave short shrift to pricing, which, if included as I do below, paint a very different picture.

As an example, suppose the lead article of the Globe Sports Section that same day discussed the previous night’s game against the Heat and covered all of the Celtics’ scoring but never mentioned the Heat. The title would read “Celtics Score 88 Points.” I don’t know about anyone else, but I think I might want to also know how many points the Heat scored so I could at least know who won the game. But that’s exactly the way the Globe played the news.

The correct approach would have incorporated both numbers of sales and pricing. Every industry measures its performance by GROSS REVENUE and GROSS PROFIT. Let’s look at the numbers in that light.

Gross home sales revenue in September 2010: 3,285 homes x $287,000 = $940,000 gross sales.

Gross home sales revenue in September 2009: 3,771 homes x $284,000 = $1,070,000 gross sales.

Gross single family home sales, expressed in revenue dollars, decreased by 8.3%, not by 12.9%. The same analysis of existing condominium sales results in a gross revenue decrease of 16.2%, not 21.5%.

Declines of 8% and 13% are certainly not comforting news, but they are a far cry from 13% and 22%. It’s not as bad as you think. When sales are declining while prices are increasing, that is simply the market at work constantly seeking market pricing.