Give Credit Where Credit Is Due

Like lawyers, car salesmen and politicians, real estate
developers are favored scapegoats for societys ills. But as the saying goes,
absence makes the heart grow fonder. With the economy in its current state of
malaise, now may be as good a time as any to give real estate development the
credit it deserves. When construction cranes dot the sky, unemployment is down,
retail sales are up, and state and local government budgets are running
surpluses from building-related tax revenues.

The construction industry is one of the leading contributors
to the nations economyits Gross Domestic Product (GDP). In 2007, for example,
before the current crisis was front-page news, construction spending in the
United States totaled $1.16 trillion, or approximately 8.5 percent of GDP. In
most years, residential development represents the majority of American
construction spending. Significantly, however, in 2007, at a time when
residential construction was slipping, commercial activity increased, adding
approximately 839 million square feet nationwide of building space at a direct
cost of $174.7 billion (which includes both hard costs, primarily labor and
materials associated with on- and off-site physical improvements, and soft
costs, such as architectural, engineering and other consultant services,
permits, inspections and the like). By any measure, commercial development is a
significant indicator of our economic well-being.

Moreover, the direct costs associated with initial
construction are only part of the story. According to Stephen Fuller, director
of the Center for Regional Analysis at George Mason University and author of The
Contribution of Office, Industrial and Retail Development and Construction to
the U.S. Economy, while the economic
contribution of new construction is generally understood, its true importance
to the economy is not. Understanding the full value of commercial real estate
requires consideration of not only the direct spending for construction, but
also the additional jobs associated with the ongoing maintenance and operation
of completed buildings as well as the continued spending on payroll and
salaries by and to all those involved in the industry. Using this multiplier
effect, as the economists like to call it, provides a better picture of the
economic benefits of commercial development.

In his study, Fuller gathered all of the direct outlays
associated with the development processsoft costs, site development costs,
construction and tenant improvement costs. He then applied an aggregate
multiplier of 2.14 (a composite figure to reflect the mix of services and
activities involved) to calculate the full economic impact of commercial
development on the Washington economy.

In 2007, direct spending on commercial development in this
state totaled approximately $4.4 billion. Applying the multiplier, this initial
investment in new buildings resulted in economic output of approximately $9.4
billion, personal income of $3.4 billion and almost 87,000 jobs. There are also
the jobs and income generated by postconstruction building maintenance and
operations, which represent a continuing source of economic activity over the
life of the building. Again, in 2007, existing buildings in Washington
contributed $74.7 million in direct spending and $154.7 million in total output
to the economy, supporting an additional 1,828 jobs in 2007.

One could argue that our state economy was overexposed to
the rapid rise in speculative construction spending, but no one was complaining
about unemployment or budget shortfalls at the time. If nothing else, those
flags whipping in the wind off the ends of construction cranes are a sure sign
that our state economy is back on track. So, next time you hear someone blame a
developer for one thing or another, stop and remind the person of the
contribution commercial development makes to our economic well-being.

This is a sponsored legal report from Lane Powell PC. Glenn J. Amster is a shareholder at Lane
Powell and a LEED Accredited Professional. He focuses his practice
on real estate development, including feasibility analysis, development
strategy, property acquisition, environmental review, permitting, and administrative
proceedings. He is a member of the board of the Washington State Chapter of
NAIOP: The Commercial Real Estate Development Association. He can be reached at
[email protected] or 206.223.6241.