LAI KeyNotes: August 2006

Land Economics Weekend in Ottawa, Canada's Beautiful Capital City

Friday October, 13 through Sunday, October 15, 2006
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Tulips, Parliament Building

Ottawa, Canada’s capital city will welcome us to our fall Land Economics Weekend. Hosted by Ottawa chapter president, Doug Kelly and his colleagues, we are invited to share the crisp fall weather of the Canadian Northeast. LAI members are fortunate to be visiting at a spectacular time of the year as the “Fall Rhapsody” unfolds.

Nestled at the junction of three picturesque rivers, Ottawa is considered one of the world’s most beautiful capitals. The city also borders the province of Québec, creating a dynamic cultural milieu in which both French and English cultures are deeply rooted. The result is a truly cosmopolitan experience—a North American city with a distinctly European charm and flair.

The city's rich ethnic diversity also includes thriving German, Lebanese, Italian, Polish, Dutch, Portuguese, and Asian communities, among others. Throughout the year, these communities celebrate their heritage in an array of multicultural festivals and events.

Canadian Museum of Civilization Grand Hall

The seat of Canada’s federal government, Ottawa is a major center for the visual and performing arts. Yet the city retains the accessibility, atmosphere and charm of a smaller center—rich in wide-open green spaces, parks and wilderness areas. The city is proud of its environmental heritage with ample parks and open spaces. It is this quality that we will experience in contrast to some of our more recent visits to more thoroughly urbanized settings.

Fall Hike in Gatineau Park

Our base of operations will be the Fairmont Chateau Laurier Hotel located in the heart of Canada’s capital next door to the Parliament buildings. The landmark Fairmont Château Laurier is a magnificent limestone edifice with turrets and masonry reminiscent of a French château adjacent to the Rideau Canal. The National Capital Commission website has city and area maps.

Our events will commence on Friday noon with a luncheon and orientation to Ottawa by Guy Laflamme, Vice President of the National Capital Commission. Following our orientation and lunch, we’ll tour Gatineau Park and the Jacques Cartier Park Redevelopment project guided by Jean Rene Doyon of the Commission. Jacques Cartier Park is a large urban park located in the center of Ottawa and a major cultural resource for all its residents. Also managed by the National Capital Commission, Gatineau Park is a superb nature reserve just 15 minutes from Parliament Hill. It serves as a reminder that environmental protection is a cherished Canadian value, and its objective is to ensure the permanent preservation of a vast natural territory for the enjoyment of all Canadians.

Returning to the hotel after the afternoon’s tours, we’ll enjoy cocktails and dinner at the Foundation Restaurant with remarks from Ottawa’s Mayor Bob Chiarelli.

Ottawa City Hall

On Saturday, we take a more traditional approach starting with a presentation on Ottawa’s Plan for the Future after which we will board buses for a tour of the Rockliffe Air Base Redevelopment project with remarks by the Canada Lands Company project manager, Rick Hughes. The base will ultimately be developed with housing and commerce after decommissioning as a base for the Canadian Air Force.

The Parliament Building

We’ll be hosted at lunch by the Canada Lands Company and then re-board our buses for a tour of the nation’s capital buildings and central core of the city. The tour will continue with tours of new developments along Confederation Boulevard. As on Friday, we will finish the day with cocktails and dinner, this time at the Chateau Laurier. For those seeking additional evening entertainment, Ottawa/Hull also sports a landmark casino.

Ottawa - Skaters on the Rideau

Our visit to Ottawa is the bookend to this year’s North American capital tours. Ottawa in the fall is a beautiful place and we will get a chance there to see how park space and the natural environment can be integrated into a major world capital. It promises to be a fascinating visit and we hope to see many of you there.

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Letter from the President

Dr. James A. Fawcett

Twice each year your Board of Governors meets to manage the program and finances of Lambda Alpha International. For the last ten years we have expanded our semi-annual meetings to include members and guests in the city tours that accompany these meetings of the Executive Committee and Chapter Presidents. Thus the genesis of the LAI “Weekend Experiences” or “Land Economics Weekends.”

Historically these events were a means of providing leavening to the business meetings that were required to manage our Society. But, through the efforts of our former presidents and some very dedicated chapter members, the events now almost threaten to overtake our business meetings. For example, we have most recently visited Washington, DC, with a private tour of the US Capitol Visitor Center hosted by the Architect of the Capitol, visited the pre-Civil War National Building Museum, the National Capital Planning Commission, the Anacostia Waterfront Initiative as well as touring the new home of the National Association of Realtors, a LEED building. The noted economist Anthony Downs addressed one of our dinners as well. You should know that many of our attendees were not members of the Board of Governors but wanted to get an “under the skin” tour of the US capital and we were delighted to have them.

We will now pay tribute to the Canadian Capital by hosting the fall Land Economics Weekend in beautiful Ottawa, Ontario, Canada. The dates are 13-15 October and I want to invite all of you who have never joined us at one of our weekend in-depth city tours to join us. We’ll be at the historic Fairmont Chateau Laurier Hotel and I know you will enjoy the events and warm camaraderie of your fellow members.

As members of Lambda Alpha, we are all in the business of real estate, whether we deal with office or industrial properties, housing, retail or public infrastructure projects. The business of real estate is continuously affected by national and global economic cycles. Rising or declining interest rates, job growth, undulating construction costs and demanding returns on equity are among the market and economic factors that weigh heavily on the success of real estate projects or investments.

Demand for office space is particularly sensitive to office job growth and the suitability of specific projects to the rapidly evolving needs of innovative organizations and the modern-day work place. To use a highly technical phrase, demand for space is determined by the number of “butts in seats.” Organizational restructurings such as outsourcing, whether to offshore locales or other, more cost effective neighboring communities, have moved many “butts” out of some of our major markets. In addition, alternative workplace strategies allow organizations to do with fewer “seats” than their payrolls would imply. As a result, owners of buildings need to think more strategically about attracting and maintaining occupancy levels that ensure the continued return on investment and viability of an office project

Nevertheless, job growth remains the single biggest driver of demand for office space in any given market. When organizations hire more people, they typically lease more space to house them. Hence, net positive absorption of office space is not just a key indicator of a healthy real estate market, but indirectly also of a healthy job market.

Imagine our surprise then when, in a recent analysis of the San Francisco office market, we discovered a rather exuberant level of net absorption of +4.4 million square feet (representing about 5% of total market inventory) between early 2004 and the end of 2005, but little by way of explanation as to what economic factor or growing industry was driving that much absorption of space. If we were to assume an average of 400 square feet per person (which is generous by most corporate standards), it would imply that employers in the city would have added about 11,000 new hires to their payrolls. Yet official employment statistics only showed 2,800 office workers added to employment levels during that time period. Why did firms lease space to house the equivalent of another 8,000 workers?

There are several possible explanations, and anecdotal evidence suggests that all were at play. First, at the start of 2004, the market was at or near its cyclical bottom. Many firms were simply taking advantage of low rental rates, “banking space” in anticipation of future growth. Second, continued restructuring may have increased the space per person profile of some firms. For some, the mix of private offices versus open space may have tilted toward the former, as more lower and middle-level functions exited toward suburban offices. For many others, the increasing demand for team workspaces may have negated the space savings from open plan officing.

The third, and in our view most important factor, is the increasing reliance on contingent workers. These “ghost workers” are not employed by the firm whose site they work in – rather they may be traditional agency temp workers, independent contractors, or employees of another firm that has contracted to fulfill certain technical or administrative functions on-site. Think for example of a corporation outsourcing its IT department; while it no longer counts 150, 300 or 500 workers as employees, they may nevertheless still be housed on-site rather than in space leased by their “real” employer. These workers are not easily accounted for in official employment statistics. Traditional definitions of the location of a “firm” or an “establishment” are becoming somewhat fuzzy concepts. Even harder to account for are independent contractors who work full-time on-site. In the Bay Area, there has been a remarkable growth both in the number of “non-employer firms” as they are technically known, as well as in their average revenue indicating that for many independent contractors it is a full-time occupation. Employers large and small are relying on independent contractors to manage fluctuating workloads and changing talent needs throughout the year. Importantly, independent contractors do not show up in traditional employment statistics at all.

This ghost worker phenomenon is posing quite a puzzle in the statistical evaluation of the health of the Bay Area real estate market. Recent levels of net positive absorption cannot be explained by formal job growth alone. The use of independent contractors in particular appears to be a significant contributing factor, and it is here to stay. Just when we thought we had it figured out, we need to recalibrate how we think about the market, and rethink our market forecast models.

Johanna Buurman
Director, Strategic Services
Trammell Crow Company
San Francisco
jbuurman@trammellcrow.com