Commercial Developments Do Not Create Jobs

Buildings—offices, hotels, restaurants, stores—do not create jobs.

In a first order sense the tenants create the jobs—the businesses and organizations that occupy space hire the people who fill the jobs that occur in the building.

But in a deeper sense it is the demand for the goods and services provided by the organizations that occupy space that actually leads to the creation of the obs.
So buildings don’t create jobs—it is the goods and services provided by occupants in response to local and worldwide demand that creates the jobs.

That is why space markets can be volatile. Firms, hotels, restaurants and non- profit organizations see sometimes see demand drop as in a recession or surge. So sometimes there is a space shortage, rents rise and more space comes onto the market. Sometimes the reverse is true especially for spec office space.

But these markets are pretty self-correcting. If spec office space is built far ahead of demand or in anticipation of job growth that does not occur, vacancy and rents will fall and building will slow.

It is certainly possible that the Bay Area office market will cool as job growth slows but there are trends in place that will soften overbuilding this time around.

Much of the job growth is within organizations that control their own building plans.

Think of Facebook, Google, LinkedIn and Apple and Stanford University. They add facilities that they are pretty sure will be filled soon by their own plans. These organizations have plans to grow in the Bay Area and while anyone can misjudge what is yet to come, their building plans are far different from spec building.

A local perspective,however, can be quite different.

While it is true that more buildings in a region do not drive job growth, it can also be true that more building construction within a local area can affect the location of jobs, rents and vacancies within the broader region.

In the Bay Area there is more land zoned for revenue producing commercial activities than can realistically be filled by even the largest projected job growth. This has two implications:

–it is further validation that simply zoning land for commercial purposes does not create jobs at the regional level

–but the more important local implication is that this regional long-term oversupply of commercial zoned land sets up sometimes intense local completion as a result of the implications of Prop 13 for local revenue generation.

Take, for example, the proposed re do of Vallco Shopping Center. While there might be small differences in whether the changing market for space like Vallco is served in that location or nearby, the proposed development responds to sub regional market demands. There are many local issues related to any new development but the idea that the development creates the jobs (or the need for housing) is mistaken. It only affects the location within, in this case, the sub region.

The sane us true for the recent land swap between Google and LinkedIn. The driving force here is the growth plans of the two companies, The land swap helps both companies but the demand comes from their operations, not whether the physical buildings are buildings are in Mt View or Sunnyvale.