The American press has dissected how the offshoring trend is affecting US employment. A new study by Jones Lang LaSalle (JLL) shines a spotlight on how the trend is affecting US real estate absorption.
Bruce Rutherford, Managing Director and leader of the global offshoring and outsourcing practice, says real estate devoted to outsourcing activities in the US is shrinking one percent a year. “That’s no growth at all,” he says.
Last year outsourcing companies generated $56 million in real estate commissions for leasing US call center space, according to the JLL study. The real estate firm arrived at this figure by counting the number of call center seats, multiplying that number by the space needed per seat, then calculating how much of that space has to be leased every five years.
The changing nature of call centers is a major contributor to this trend. Rutherford says in the past, call center operators purchased or rented old K Mart, Wal-Mart, and tire stores and converted them into call center space. But now call center work is either going offshore or being done by virtual workers, leaving these stores empty. “Now there’s less and less use for that space,” the JLL executive says.
However, this trend is not affecting big cities because they have already converted that space to other uses. “This trend is affecting second- and third-tier cities in the South and West,” he points out.
Based on rented space, Rutherford says about 70 percent of offshoring work emanates from the US. Another 20 percent moves from companies in Asia-Pacific locations to other countries in the region (i.e. Japan to China or Korea.) Europe currently makes up the remaining 10 percent.
Offshoring Growth in Europe
Rutherford predicts in the next five years Europe will dramatically increase its use of offshoring, especially to Eastern European countries which are much closer than India or the Philippines. “Strategically they have to compete; that means they have to find a better cost structure,” he explains. At the moment the British are “well ahead” of Continental Europe in advancing offshoring as a strategic solution.
The outsourcing world thought the advent of the European Union “would have made this easier than it has been.” However, European companies are realizing they have to break down their trade barriers. “This has happened more slowly than we expected,” Rutherford reports, “but the momentum is building fast now; in 2003 and 2004 in Europe the number and size of outsourcing contracts which lead to offshoring increased dramatically, even exceeding that of the United States in 2004.”
The weakening of the dollar against the euro has increased the pressure to offshore. “Now that the euro is strong, Europeans can’t send cheaper goods to the US,” he points out. History has several precedents: for example, the strong yen contributed to the Japanese building auto plants in the US in the 1970s.
Growing Real Estate Markets
The US’s loss is other regions’ gain. According to the JLL study, total demand is increasing:
- 17 percent in the Caribbean and Latin America
- 15 percent in Asia-Pacific
- 8 percent in Canada
- 7 percent in Europe, the Middle East, and Africa (EMEA)
Rutherford says the Caribbean and Latin America region is growing the fastest because Spanish is the most commonly spoken language in the world. American companies are putting a greater emphasis on marketing to their Spanish-speaking customers. He says they are looking for offshore locations that can provide this service as well as traditional English-based services.
Currently, China, India, and the Philippines represent 28 percent of the offshore real estate activity, the largest concentration, according to the study.
The Importance of Second Tier Cities
The offshoring trend has spread with such velocity that many of the offshore cities–like Delhi, Bangalore, or Manila–can’t meet the burgeoning real estate needs. So companies sending work overseas are looking at second-tier cities where there is also a large population of well-educated employees.
Rutherford says these second-tier cities don’t have an ample amount of suitable real estate either. He says companies eager to offshore have been searching for developers to erect their buildings.
This trend is not limited to the Asia-Pacific region. Rutherford says it’s also happening in Canada. “Companies are chasing each other to rent suitable real estate,” he says. He worked with a US company that had a difficult time finding appropriate real estate in St John’s, Newfoundland, he reports.
Even though the world economy has become more global, it’s still a logistical challenge to get goods from point A to point B. The offshoring trend is causing manufacturers to set up shop in major offshoring locations to produce goods that stay in that local market. “Volkswagen manufactures and sells more cars in China than it does in Germany,” he points out.
Another good example is the manufacturing of cogeneration plants and microprocessors to manage their interface with municipal power supplies. He says electric power in India is erratic. However, offshore companies have to have a constant source of electricity to power their computer screens. So each building has its own cogeneration power plant. The building has to purchase a microprocessor that interfaces between the municipal power supply and the building’s own generator.
Until the offshore trend took off, only US and UK companies produced these microprocessors. Today Western manufacturers produce the complete cogeneration package in India for local Indian consumption.
“That’s the world economy at work,” Rutherford says.