U.S. Exposure to Euro Crisis

As the economic situation in Europe worsens, its important to understand U.S. exposure. While any slowdown in an economy as large as the EU will be felt globally, the U.S. has closer ties than most. Europe and the U.S. are greatly interconnected, through financial holdings, direct investment, and trade. 

1) U.S. financial institutions hold large amounts of EU bank debt, from banks in France, Italy, and Germany. Exact exposure is difficult to know with certainty and firms are sharply reducing exposure, but U.S. firms face losses as the crisis spreads. 

2) Europe accounts for 75% of U.S. foreign direct investment. These investment levels are likely to decline as the EU credit markets contract. 

 

3) Europe accounts for 22% of U.S. exports. During a protracted recession exports to European countries will decline. 

VISIT USA Act Won’t Help Real Estate

The VISIT USA Act, proposed by Sen. Chuck Schumer and Sen. Mike Allen, includes seven separate components, some of which are important, long overdue reforms. Two critical pillars of U.S. economic development are foreign investment and tourism. This bill will make it easier for people to invest and spend money in the U.S., both good things. Unfortunately some included components, such as providing visas for foreign citizen real estate investors, are ill-conceived and won’t produce significant benefit. Positive parts of the bill include;

Premium Visa Process – Premium visa processing will allow travelers the option of paying a much higher visa processing fee in order to receive a visa interview within three business days. This applies to both tourist and business travel visas. Currently, the State Department fails to meet its goal of processing visas within 30 days of an application submission in critical travel markets, with wait times reaching upwards of three months in countries like Brazil and China.  This delay is bad for business and needs to be fixed.

Videoconference Pilot Program – Establishes a videoconferencing pilot program to conduct visa interviews, lowering the hassle and additional costs of obtaining a U.S. visa. Currently, an in-person interview is required of each applicant seeking a U.S. visa but millions of potential travelers do not live in a city where a U.S. Embassy or Consulate is present.  A pilot program is a no-brainer.  

Encouraging Canadian Tourism to the U.S. – A new “Canadian retiree visa” (non-immigrant visa) is created that lasts 240 days and is renewable every three years for Canadians who are: 1) over age 50; 2) can show that they own a residence in the U.S. or have purchased rental or hotel accommodations in the U.S. for the duration of their stay; and 3) are not otherwise inadmissible.

The visa for foreign real estate investors, which has received the most press, would provide a visa to anyone purchasing at least $500,000 in residential real estate assets. This may be the least important part of the bill and will have little impact on domestic real estate. The visa offered is low value, with significant strings attached;

• The visa issues is not a work-visa, nor an immigrant-visa
• The visa recipient is required to live in the home for 6 months of every year
• As such, the immigrant is taxed  by the U.S. on foreign income
• The visa expires when the home is sold

The visa holder is not able to work, but will be taxed on foreign income, which seems to limit the target audience. Truly wealthy people would invest capital through the EB-5 program, which offers a proper green card, not just a tourist visa.

The program provides no criteria regarding jurisdiction or type of real estate to be purchased. The price of condos in Miami may go up, but it’s hard to see how this program will benefit the broader real estate market which needs to work off inventory in areas less appealing to foreigners. Since the visa holder can’t work in the U.S. the country is importing unemployed investors. Even then, why require them to live here six months a year? The Visit USA Act has merits and Congress should pass the bill, but no one should anticipate any benefit to the real estate market.  

Does China play fair in international trade?

This post is a modified version on an answer I provided on Quora. You can see the original here - http://qr.ae/75Ikc

Mitt Romney and others like Columbia University economist Glenn Hubbard argue China does not play fair when it comes to international trade. Do their arguments have any merit?

As a grumpy old man once said, "fair has got nothing to do with it." China maintains an aggressive stance with regard to economic development and international trade. They use the same tools available to any other country, including the United States. The Chinese are simply industrious economic developers and adept at exploiting weaknesses in our political and economic systems. China is still a poor country in many ways and sometimes they want that next dollar of GDP more than developed nations.

But to answer the query - yes China is aggressive and many would agree unfair. Most academics and policy makers agree China engages in currency manipulation to support domestic exporters. Artificially undervaluing your currency provides a meaningful advantage in global trade and is a tried and tested approach used by many countries over the years, Japan being a prime example.

China denies domestic market access to foreign companies, through legislation, bureaucracy, and red tape. Lenovo, a Chinese computer firm, is free to compete on equal footing with Apple in the U.S. market. To sell cars in China, General Motors is required to enter into a joint venture with a Chinese owned firm. GM is required to split profits, license technology, and share manufacturing best practices.

China provides strong incentives to Chinese companies including cash grants, low interest loans, infrastructure development, protected domestic market access, and expedited government permitting. The U.S. and other countries provide similar incentives but usually on a smaller scale than China. Chinese firms are accused of using these incentives to engage in illegal dumping, or selling goods for less than the cost of production in order to drive the competition out of business.

Intelligent people disagree on the scale of these activities and resulting benefit. For my own part, the growing trade imbalance between the United States and China provides meaningful evidence of a distorted market. China accounts for ~45% of the U.S. trade deficit. The competitive advantage to manufacturing in China is one of the many headwinds facing U.S. manufacturing today. It's an issue of concern for state and local economic developers trying to support existing firms and win new site selection projects. 

Are you prepared for a corporate site selection project?

Last week I participated in a war game produced by the American Enterprise Institute. The game revolved a crisis on the Korean peninsula, with teams representing China, South Korea, North Korea, and the United States. Each person was given a character to play and two briefing books, one public and one private. The public book, which everyone had a copy of, provided situational background, location and size of military assets in the region, and broad information on each country. The second book included detailed information on your character, including your political ambitions, personal and country alliances, and assets at your disposal.

Twenty “civilians” participated, with five AEI experts managing. I was on the North Korean team, playing Chang Sung-Taek, regent and political advisor to Kim Jong-il and his son Kim Jong-Un. Three hours later the world was safe, but only after much drama, including in no particular order;

• China stopped buying U.S. treasury debt
• Nuclear missiles prepared for launch on civilian targets
• Large scale military invasion
• A foreign leader died, another was assassinated
• Much politicking

It was great fun, and quite educational. The game was setup with great distrust amongst the North Korean team, similar to real life apparently. Dan Blumenthal, representing a key Chinese official, later related that no one could negotiate with the North Korea team as we were busy conspiring to save ourselves from other North Koreans.

War games exist to help develop and improve planned responses to potential crisis. Communities seeking corporate investment should war game a site selection project, grade their response, and make improvements. This is especially true for newly aggressive communities, or those without recent site selection experience. Understanding the site selection process will;

• Educate participants on the process, requirements, and community response
• Make it appear you’ve done this before
• Identify areas for improvement  

Not a minor undertaking, but worth the time and effort. 

Cool economic development mapping tool

The Michigan Economic Development Corporation projects page has a great interactive mapping tool. The map allows you to filter MEDC projects by geographic location, industry, and type of incentive provided.  The filtering tools provide an appropriate balance of detail without causing the user too much hassle. The map provides a site selection consultant with a quick overview of activities in the state, and the ability to drill down to applicable projects. If I am researching alternative energy projects, the mapping tool provides project location, detail on job creation and private investment, and public support provided. I get an idea of the projects MEDC is funding, areas of geographic activity, and some insight into the level of public sector support. It’s a good example of a user friendly tool, which reduces the time required for a reader to get a quick overview. Compare this to a word document listing projects, at 10-20 pages long.

The map works because it shortens the amount of time between me and the info. It’s also an answer to a larger question, how best to provide relevant information to site selection consultants and corporate real estate professionals? Marketing to us is tough when we spend so much time using the information, and each person is working on different projects with different needs. A couple of tips come to mind;

• Get to the point. Whether you are using text, data, or a visual tool, the quicker it leads me to the point, the better. For both of us, my ability to remember data decreases as the volume of data increases.
• Interesting data, relevant to us. Small cities, all bunched around the hub of a large metro, don’t need to spend as much time on workforce and demographic issues.  If I’m driving past lots of empty land to get to your city, then make me feel comfortable about the local workforce.
• Data we can’t get on our own. We have access to most demographic, industry, and workforce data, so a quick summary will do. Information on the local development process is more difficult to come by, such as timeline to occupancy, and rarely available with any specificity.
• Anything that mitigates a perceived weakness. Does your 53% of your rural town’s population have a college degree? Reasonable electric costs in an otherwise high cost state?

The MEDC map succinctly provided information I couldn’t get elsewhere, and was easy to use. 

U.S. FDI and site selection

China is the world's second largest economy, the United States second largest trading partner, and our 17th largest source of foreign direct investment. Investment originating from Sweden was three times that coming from China, despite the Swedish economy being 10% the size of China. India, Brazil, and Russia provide similar, although less striking examples. The lack of large Chinese corporate site selection projects is another example of the unbalanced nature of the economic relationship between China and the United States. And another interesting aspect to a developing nation becoming such a large economic force. 

China and Brazil are certainly targets for local economic developers, but they are a long way from rivaling Europe or Japan in overall deal flow.

Site selection resources

We use a large amount of data in our site selection work, and we've posted a few data sets we use. 

Gross metropolitan product includes;  

• 2010 GMP for all U.S. metropolitan statistical areas
• Rank by MSA
• Compound Annual Growth Rate from 2001 to 2010
• 2010 Population 
• 2010 GMP per capita
• 2010 GMP per captia rank 

Gross state product includes;

• 2010 GSP for each state
• Rank by State
• Compound Annual Growth Rate from 2001 to 2010
• 2010 GSP per capita
• 2010 GSP per captia rank 

 We'll post updates as we add additional resources. 

Primary Employer Attraction

Full disclosure - I stole today's post from Mike Masciola. I spoke with some wonderful people from Thornton, CO last week and Mike thoughtfully put our collective ramblings into an outline. Since I am just arriving home from the work day (I really need to start posting in the AM), this might be the only way for me to make my midnight deadline. Plus the outline is pretty good. 

Primary Employer Attraction - What it takes to be competitive

Reasons primary employers move or expand into new markets

• Strategic positioning, efficiency needs due to increased competition nationally and internationally, new market opportunities, be closer to customer, consolidation/downsizing, etc.

Process used to evaluate new markets (Site Selection Process)

• Driven by the strategic needs of the company
• Location will be where company can be most successful 
• Tremendous competition - Lots of choices – process of elimination
• Short list of Metro then go to Cities

Major considerations for new location decisions

• Use ~ 400 data points
• Traditional - Proximately, labor, operating costs, logistics /transportation, etc.
• In today’s environment
• Productivity improvements – reduces workforce needs
• Space optimization – smaller foot prints
• Existing buildings
• Shovel ready sites
• Alternative financing  

What can a city can do to improve chances in the site selection process?

• Be very good at what the City can control (Good, Bad & Ugly)
• Government approvals (development, incentives, etc)
• Speed, Predictable, Flexible, Reduce risk and uncertainty
• Confidentiality
• Risks the projects (i.e. HR issues)
• Break means more work for company and consultant
• Makes community look unprofessional
• Effective ED staff - Importance of having a credible reliable single point of contact
• Regional networks/partnerships in place & coordinated
• Strong after care/retention program in place
• Long term strategic plan to protect investment
• An understanding/appreciation of business drivers not under city control
• Market fit, private sector negotiations, gaps in workforce, lack of building/site options, etc.

Actions city can take to increase opportunities of being included the site location process

• Marketing with regional organizations
• Strong relationships with site selectors
• Strong relationships with commercial brokers
• Data rich website
• Enlist existing industry in identifying prospect opportunities 
• Effective public policy examples from other communities

US Trade Deficit YTD - 48% Oil, 39% China

We discussed the relationship between U.S. manufacturing and the trade deficit in a post last week. I decided to pull up 2011 year to date statistics and look for any changes or trends. Mostly the same story other than small shifts between the country's main trading partners. Oil accounted for 48% of the trade deficit and China the next 39%. One country and one commodity account for 87% of the U.S trade deficit. The next largest deficit is with Japan at 7%, which is an economy the same size as China. 

The data comes from the International Trade Administration. 

Steve Jobs' real estate vision for Apple

Looking back through a number of Steve Job’s presentations, I’m struck by his talk to Cupertino City Council fourth short months ago. This was his last public appearance, and he was pitching a real estate development project to local elected officials. He was clearly quite ill, and according to the New York Times was told in February his time was growing shorter. The dying CEO of one of the most valuable companies in the world showed up to present site plans. And he did a great job. I’m not aware of another CEO who has made a similar presentation. Video link is below, and worth watching.

The proposed campus is an interesting and unique design, and I like it. Watching the video reminded me of two articles critical of the building and site design. John King, urban design critic for the San Fran Cisco Chronicle, was generally fair but did throw this dart,

"No space planner would fashion offices that require you to walk nearly half mile indoors to reach co-worker on the far side of the doughnut (will employees be issued Segways?)"

I wonder if any modern structure could accommodate 13,000 employees in 2.8 million square feet of office space without requiring employees to walk similar distances. Mr. King may view the extra space between tables or above our heads at an Apple retail store as wasted space. A Borg like cube would be more efficient I guess.

Christopher Hawthorne, the Los Angeles Times architecture critic, was even more critical. 

"Though Apple has touted the new campus as green, its sprawling form and dependence on the car make a different argument." 

Mr. Hawthorne goes on to link the proposed campus to "pastoral capitalism" and argues the corporate estate allows the company "to turn its back on cities and stake a claim on the suburban pastoral idyll — isolated, proprietary, verdant, and disengaged from civic space."

I love dense urban environments, but I understand the benefits of both urban and suburban locations for corporate headquarters and people’s homes. The new Apple campus seems as accessible to mass transit as the Infinite Loop campus, and I'm not convinced a company could create a car-independent campus in Cupertino, CA or any similar suburban location. Apple is reducing the previous concrete footprint, increasing green space, and creating a more sustainable facility all around.