A strong post-pandemic economy—despite media accounts to the contrary—combined with a sizzling hot industrial real estate market, and dramatic shifts in office work patterns have combined to turn the traditional practice of economic development upside down, Christopher Thornberg, founding partner of Beacon Economics, told attendees of NAIOP’s I.CON West: The Industrial Real Estate Conference taking place in Long Beach, California last month.
“We have to think differently about this,” he said. “Migration patterns have changed. The old economic development mantra was ‘jobs, jobs, jobs.’ We don’t need jobs anymore, we need workers. Economic development will be built around the labor market.”
One of the biggest economic challenges today is the inability of businesses to hire enough workers.
“There’s a reduction in labor supply but also a great demand in labor,” Thornberg said. Part of the issue is based on demographics, and the population pyramid has taken a new shape as baby boomers, many raised in large families, built their own families with far fewer children. “This leaves us with a profound problem, and we are seeing a decline in the number of people in their prime working years. It took the pandemic to speed it up,” he said.
He cited as an example Tesla CEO Elon Musk’s decision to move the company’s headquarters from California to Texas, where there are more workers.
Expanding a workforce is harder than it might seem. “Workers want more than pay—they aren’t always just working for a paycheck,” Thornberg said. Ideas include attracting workers from other countries or other states, raising participation rates among the existing population, and productivity enhancements through capital investments and skills training.
State migration patterns show the greatest declines in the coastal states of California, Maryland, Massachusetts, New Jersey, and Connecticut, but also Midwest states including Ohio and Illinois, as well as North Dakota and Kansas. The biggest gains are largely in the Southern states of Tennessee, North Carolina, South Carolina, Florida, Alabama and Arkansas, in addition to South Dakota, Arizona, Oregon and Idaho.
In the office sector, Thornberg said central business districts will survive, but there will be fewer workers in the office on a daily basis, leading companies to take smaller floorplates with more amenities. The excess space will lead to a drop in rental rates, which will lure more companies back to downtowns.
These trends are being driven by an economy that has been powered by strong demand for consumer goods – whether they purchased in stores or delivered — along with an activist monetary policy.
He summarized key economic conditions:
- The COVID-19 pandemic is a tragic natural disaster, yet history shows that natural disasters have little long-run economic impact. A quicker than normal recovery was certain.
- Fiscal policies are “overheating” the economy from consumer spending to asset markets.
- Geopolitical uncertainty is heating up, but the impact is largely to extend the U.S. asset cycle due to the reserve currency status of the U.S. economy.
- Cyclical risks now lie primarily in the public sector; the twin issues of inflation and out of control budget deficit – but this may expand in months to come.
- There is no economic “new normal” coming out of the pandemic, but it has accelerated underlying trends that were already in place, with huge implications for labor markets, land use, retail channels, housing and debt.
There’s been much debate about the shape of economic recovery, and Thornberg believes it’s a V shape due to a very short period of recession of only two months, followed by a voracious bounce back. It’s been an uneven recovery, though, with supply not able to keep up with demand. “Look at the auto sector,’” he said. “Sales collapsed in 2020-2021 because manufacturers couldn’t build enough. Data shows that up to 2.5 million additional automobiles could have been sold in the US if supply could have kept up with demand.”
His outlook for the economy? It will remain heated for the next year, with unemployment at 3.4% by year-end, inflation will continue to be hot, and it is unclear when interest rates will reflect reality. Although he couldn’t predict how serious it will be, we should expect a “sugar crash” to come, from a combination of a tight federal budget and inflation.