Outsourcing of Jobs Could Affect U.S. Real Estate

About 14 million U.S. jobs are at risk for offshoring, in the sense that they meet the conditions that make them candidates for sending them overseas, according to Dwight M. Jaffee, a finance professor at the University of California at Berkeley.

About 25% of these jobs, or about 3.5 million jobs, are likely to be actually offshored, he believes. Speaking at a panel session on the impact of outsourcing at the Urban Land Institute's fall meeting here, Mr. Jaffee mentioned Dallas as a city that has a high concentration of jobs that are vulnerable to offshoring. Washington, Atlanta, Boston, San Jose and Stamford, Conn., are also on this list, he said.

Based on one estimate of 250 square feet of office space per U.S. office sector worker, this translates into an implied loss of about 875 million square feet of office space in the U.S, or about 6.7% of the total office space of 13 billion square feet in the country, according to Mr. Jaffee.

While this is a significant loss, it is "not off the charts in terms of magnitude," he remarked. Further, this is a gross loss and people who lose their jobs are likely to find employment again, creating only a short-term impact on the bottom line and making for a "benign story," the way he looks at it.

Bruce Rutherford, managing director, tenant representation, Jones Lang LaSalle, Houston, said that in terms of the global picture for job offshoring, 70% of the offshoring is done by American companies, 20% by Asian companies to other Asian countries, and 10% by the rest of the world (primarily Europe and also South America). He cited a survey on the practice, which found that 25% of companies began offshoring non-manufacturing jobs more than 10 years ago. Another 41% began doing this between three and 10 years ago.

And 57% of the companies surveyed reported that they are offshoring new jobs primarily, rather than replacing U.S. jobs. Another 87% said that they use service providers or partners to assist in offshoring activities. The benefits companies see in offshoring include lower labor costs, lower labor turnover, improved labor quality, the enablement of 24/7 operations, diversification of operations and enablement of "multilingual capability."

Even though labor cost is more often cited as an incentive to outsource, Mr. Rutherford said, labor quality also plays a role, considering that the jobs outsourced are sought after in overseas locales, resulting in employee turnover resulting more from market competition than from employees who become disillusioned and unproductive when they find themselves stuck in jobs with no distinct career paths.

Once a company makes the decision to offshore jobs, there is a "tremendous pressure to get the job done," and these expectations are mostly being met, according to Mr. Rutherford. Therefore, he expects that more offshoring is likely to take place.

In one instance of offshoring he cited in the mortgage industry, title policies for homeowners are being processed in India. And about 90% of worldwide computer code is now written in India, according to him. Other tasks being offshored to India, one country that is a major beneficiary of this trend, include the reading of X-rays and low-end research. In fact, McKinsey & Co., the management consulting firm, now does 100% of its global research in Bangalore, sent over fiber optic cable, according to him.

While jobs that cannot be done without face-to-face interaction are not good for offshoring, routine tasks are "more amenable to offshoring." Another panelist at the session, Leann Lachmann, president, Lachmann Associates, New York, sees a more malignant effect from offshoring, at least in the short term, believing that the U.S is not currently creating any replacement jobs for the ones lost to offshoring.

About 500,000 jobs have gone abroad, she reported, and what "would have been growth" in the U.S. "is displaced by offshoring."

Therefore, she expects that the next three to five years will be "dire" for office landlords. Office acquisitions are not being underwritten with this in mind, according to her. The good news is that development of office space has also been reduced, she said.

Ms. Lachman said that she is concerned about the nature of the new jobs that are being created, which are not paying as well as the office jobs being offshored did, and about "the wonderful, educated labor forces emerging in India and China," and the "long-term competitiveness of the U.S."

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