The State Of Economic Development (7 mins)

The Strategy Of Real Estate Economic Development

The fourth in a series of articles on how changes in port infrastructure and development can impact industrial real estate. The previous article addressed inland ports’ impact on industrial real estate.  To read the previous article in this series, Inland Possibilities, please click here.

U.S. agriculture is a good example of an industry that can benefit from both a modernized transportation system and a change in how economic development is conducted.  U.S. agriculture is especially robust along the Mississippi River, and its competitiveness is reliant on the capability of the region’s transportation infrastructure to transport goods quickly to destinations domestically and across the globe.  Development possibilities for the real estate industry along river regions such as along the Mississippi River are immense, and improving this transportation infrastructure can have significant impacts on the region’s competitiveness because of the limited shelf life of agricultural commodities  ¹.  True economic development should be focusing on exposing domestic regions to foreign markets, measuring and facilitating logistics needs, and introducing new technologies.  Instead of focusing solely on following demand, the real estate industry should start incorporating this strategy in order to create conditions for demand.

Economic development is frequently talked about by bureaucrats and politicians as the panacea for their communities.  Unfortunately, the term economic development is often misunderstood and abused. References of the ripples and multipliers that economic development produces are common.  The talking points are always the same:  stimulate private investment, expand the tax base, as well as increase employment opportunities, wages, and community wealth.  Methods for stimulating economic development are usually similar among political jurisdictions, and involve variations of subsidies and tax incentives.  All of these things have a degree of truth and merit, but undoubtedly serve the interests of government leadership and prospective business more than the impoverished or those needing increased wages.

Because the real estate industry traditionally follows demand for space, it should also work to originate demand through promoting and supporting a regional integrative economic development initiative that matches the local needs of production with global resources and logistics networks in regions where intermodal and maritime infrastructure can be utilized.  To do this, traditional understanding of what economic development is needs to change.  True economic development leads to the creation of new business in a location that provides for worker’s incomes and pays for homes.  It also pays for the transportation of goods and services, to and from a location.  This affects the need for other buildings and propels investment in collateral businesses.  True economic development along the Mississippi River could influence Washington, D.C. attitudes toward investing more into its maritime and intermodal infrastructure.

Consider the impact an improvement in maritime and intermodal infrastructure could have on real estate along U.S. river systems if authorities made concerted efforts to modernize and maintain these systems.  Many of the ports in these systems are underfunded and provide great opportunities for economic development, agriculture, manufacturing, wet and dry bulk transportation, retail, and last mile delivery because of their geography in the heart of the country and their proximity to cities and transportation networks (McGowan, 2005).  If prioritized, they could greatly increase the competitive capabilities of companies that rely on importing, exporting, and using local products in value-added processing activities. (National Research Council, 1994)  If the real estate industry strategized on creating demand as opposed to always chasing demand, the industry could create its own conditions for ripples and multipliers that it could benefit from.

One study claims that “Local governments are the catalyst and responsible for creating opportunities to enhance economic development…” (Alemayehu & Mancuso, 2015).  If this statement is true, then it should equally be true that local government must understand economic development.  Unfortunately, the piecemeal but visually alluring approach to economic development satisfies the rhetorical and symbolic needs of local and state leadership.  Herein lies a problem that is pervasive across the entire U.S. and across all party affiliations.  The need for government authorities to make headlines is often the dynamic for policies expensive to the public that are passed off as economic development.

Take the State of Louisiana’s Department of Economic Development (LED) as an example.  Most recently, Amazon rejected $6.56 billion in incentives offered by Louisiana’s attempt to attract the tech giant’s coveted, 50,000 job, HQ2 facility ².  Louisiana did not make Amazon’s recent shortlist of possible cities.  This strategy to offer huge incentives to business is not new to Louisiana, and is certainly not exclusive to the state.  Like the offer to Amazon, Louisiana and its Parishes (Counties) have spent billions of dollars in subsidies and tax incentives over the past decade to attract and retain industry, though their return on investment is not as quantifiable as it is questionable.  The LED website, however, claims many accomplishments.  Among these accomplishments is the top 5^th state ranking in which to do business, and the 1^st place southern state with the “most project wins” per capita ³.

A survey conducted in 2015 reveals that over ninety-eight percent of Louisiana Parishes have regional economic development offices that have been open for more than half a decade.  These offices are funded through state and local resources, have independent strategic plans, and are usually staffed with four to ten people in each office.  Fifty-three percent of these offices have budgets less than $100,000 while forty-seven percent have budgets up to $500,000.  The survey found that, despite tremendous state spending on economic development,  statewide household incomes remain well below the national average while the statewide poverty rate is among the nation’s highest (Alemayehu & Mancuso, 2015). In the case of Louisiana, should not economic development be measured by rising wages and decreasing poverty?

Traditional economic development initiatives in Louisiana serve as illustrative examples indicative of a nationwide trend.  Though too many examples exist to cover in this post, true economic development should be having large impacts on regional economies, and the results should be quite obvious in the real estate industry.  We should ask ourselves some simple questions:  Why are traditional economic development practices not easily quantifiable, and, as an industry, how can we incorporate true economic development into a strategy that strengthens agriculture, manufacturing, wet and dry bulk transportation, retail, and last mile delivery in the heart of the country?  The success of true economic development, accompanied by higher wages and lower poverty, should be ultimately be the creation of demand for buildings with investment propelling into collateral businesses.

The real estate industry has a social component, and that is to bring value to society.  One way to bring value to society is to change how we approach development and how we influence public policy.  The nature of political dynamics also tends to respond to the immediate needs of a supportive business community.  Promoting and supporting a regional integrative economic development initiative that matches the local needs of production with global resources and logistics networks will drive demand.  The real estate community must propel such an integrative economic development strategy in order to make a case to political leadership that public investment in U.S. transportation infrastructure is not only warranted, but necessary to the national interest.