By Anatole Pevnev

Ever since the national economy took a dive three years ago, guessing when sustainable employment growth will return has become a favorite pastime for some investors. Everyone is looking for some early clue that the economy has officially turned a corner and job growth will take off.

Pundits have been forecasting the economic rebound for each of the past three years, and many people are confident that 2004 will be "the year." Eventually someone will be right. But as we look at where we are in our economic life cycle, maybe we need to rethink where growth will come from.

The dynamics of the national economy are ever-changing. The United States, as with many other post-industrial nations, has gone from being an agrarian economy to a manufacturing economy, and most recently, to a service economy. What is the next phase in our economic growth, and what will it mean for job growth in this country?

We have become a knowledge-based economy, but the improving worldwide communication infrastructure is making it easier and cheaper to locate knowledge-based employees anywhere in the world. More and more database management and programming tasks are outsourced to foreign countries.

This will no doubt have an impact on demand for office space. Offices have become the factories of the service economy. Where American workers once toiled in front of textile looms or metal stamping presses, they now labor in front of computers or telephones. As it became cheaper, and more efficient, to manufacture goods overseas, those jobs did indeed move overseas, despite staunch political intervention.

This loss of manufacturing jobs over the past 30 or 40 years has led to dramatic declines in demand for manufacturing facilities. It has also forced Americans to prepare themselves for service sector jobs. But now many of these same jobs are going overseas. Granted, not all service jobs will find their way overseas, but many tasks can be handled as well overseas as they are here. When you call customer service to fix a glitch with your computer, does it matter to you that the person at the other end of the line is in Austin, Texas or Bangalore, India as long as they can solve your problem quickly and efficiently?

The Gloomy Forecasts

So, how pervasive can we expect this trend to be, and what will be the impact? The Bureau of Labor Statistics (BLS) reported that in 2001 total employment in the U.S. stood at 127.98 million. The major occupational group with the largest employment in 2001 was office and administrative support, with 17.8 percent of total employment. This represented 22.80 million jobs, according to the BLS’ "Occupation Employment and Wages, 2001." Business and financial operations employment (another major user of office space) represented 3.7 percent of total employment, or 4.68 million jobs. Computer and mathematical employment was 2.2 percent of total employment, representing 2.83 million jobs.

In aggregate these three segments represent more than 30.3 million jobs. A widely read report published late in 2002 by Forrester Research concludes that over the next 15 years, 3.3 million services industry jobs and $136 billion in wages will move offshore to countries like India, Russia, China and the Philippines. This would represent more than 10 percent of these existing office-based jobs. An article published on CNN/Money last summer cautioned that, "Many of the 2.5 million jobs lost in the past few years are never coming back."

Along the same lines, A.T. Kearney, a management consulting firm, published a report early in 2003 indicating that U.S. banks, brokerage firms, insurance companies, mutual funds and other financial services firms are planning to relocate more than 500,000 jobs, or 8 percent of their workforce, offshore over the next five years. That report also found that 64 percent of the financial services firms surveyed have already begun to implement offshore business process initiatives, and 57 percent have already engaged or intend to engage outside assistance with these initiatives. The report went on to say that relocations will involve a wider range of high-end internal functions than have typically been slated for overseas transfers, including financial analysis, research, regulatory reporting, accounting, human resources and graphic design. Until recently, offshore job transfers have primarily focused on back-office functions.

Awareness Raised, Problem Spreads

Press coverage of this shift in hiring practices has clearly increased in the past year. Labor unions are beginning to focus on this as an issue and are beginning to make inroads into the traditionally non-unionized white-collar labor force. Political interest in this issue is beginning to pick up steam as some states have outsourced call-center type jobs to vendors who are using overseas employees to handle calls. Some of these jobs have returned to the U.S. after political pressure was placed on local politicians.

But the trend to use lower cost employees overseas is not likely to go away. This phenomenon is by no means restricted to the U.S. In October, HSBC Bank PLC announced that they were eliminating 4,000 data processing and call-center jobs in the U.K. and moving those operations to China, India and Malaysia. HSBC currently has 55,000 employees in the U.K. and 8,000 back-office personnel in Asia.

In all likelihood, the outsourcing trend will not only continue but will expand, and more and more service jobs will find their way out of the U.S. It is likely that this will have an impact on office space demand in the U.S. Clearly, if we are losing service jobs, jobs that typically use office space, the news is not good for office landlords.

If history is any indicator, those jobs will be replaced. Office markets that rely heavily on tech jobs or call-center operations will suffer from near-term demand issues.

The real issue facing everyone is not whether or not we will see these jobs move to lower cost locations, because we will. The real issue facing us is how do we replace these jobs. Innovation has been an important engine for growth in this country and will likely remain so in the future. Over time this will likely benefit markets that have a high concentration of intellectual capital to draw upon. But this shift in workplace economics is likely to hurt office markets nationally in the near term.