Buildings Don’t Create Permanent Jobs

Gaines Street is the “it” place for Tallahassee’s economic redevelopment initiatives, skirting the northern edge of the southern border of the Frenchtown/Southside Community Redevelopment Area. With large new projects going up along the corridor–the College Town mixed use project alone is expected to add 72 new residential units, 44,000 square feet of retail, and $18.2 million in “new” real estate value to the district–it’s easy to get caught up in the excitment of new construction and new buildings and believe that the activity itself is economic development. It’s not. The construction activity is a byproduct of economic growth, not it’s cause.

I was reminded of this point when I read an article on another mixed use develoment project in the same corridor. The Deck and the Block are projects expected to generate $114 million in new value along the Gaines Street corridor. Here’s how the Tallahassee Democrat described (March 22, 2013, p. 6A) the recent groundbreaking for the Block, the second phase in the development:

Dan Schimberg, president and CEO of Uptown Rental Properties in Cincinnati, Ohio, [and the developer] told the gathering that the projects will generate more than 850 construction jobs and have a permanent economic impact of $17 million. They will produce 157 permanent jobs.

After studying economic development for more than 25 years, and teaching classes in urban development for 20, I’m at a loss to see how a building creates 157 permanent jobs. Buildings don’t create jobs. The construction of the building will employ many laborers, craftsmen, and professoionals. But these jobs will disappear once the construction is finished. Similarly, how can the construction of a building create a permanent economic impact of $17 million? It can’t. And it won’t. We simply need to see the collapse in real estate values in the wake of the Great Recession to see the fallacy of that argument. Value is created by the market, which depends as much on demand as it does suppply.

Economic development, and the increase in value for the land and buildings in this area to $17 million, will come from the income earned by workers hired to fill positions in industries and businesses other than those used to construct these buildings. Moreover, that income will have to be channeled into this area of Gaines Street for these values to materialize. If these projects simply attract people, households, and businesses from other parts of the city–say students and young professionals from Midtown or Downtown–net job creation and income growth may be zero. (This is not purely hypothetical. Some studies of the impact of sports stadiums have found negative economic effects for precisely this reason.)

So, where did Mr. Schimberg get this information about permanent job growth and impact? Most likely, his firm, or the Community Redevelopment Agency (CRA), hired a consultant to examine the potential impacts of a development their size using input-output studies. I’ve critiqued these studies elsewhere, but the basic methodology behind this tool assumes that all new spending is net new spending, not money redistributed from other parts of the regional economy. These studies also routinely ignore the potential productivity impacts of taking funds out of one sector of the economy and putting them in another perhaps less productive sector. This becomes problematic when local governments, like Tallahassee and Leon County, subsidize new development because the very nature of the subsidy implies the market has determined the investment in this area is less productive than other parts of the region. So, in essence, these studies assume that dollars are parachuted into the local economy and automatically generate new income, even when the dollars have really just been redistributed from somewhere else and probably redirected from more productive uses.

Does that mean these projects are destined to fail? Not necessarily. But their success depends crucially on the income generated from new employment created in the non-real estate sectors of the economy. In short, as long as Florida State and Florida A&M, are growing, these projects will do fine.

Construction is not the source of sustainable, long-term economic development. Improved productivity and innovation are the drivers of Tallahassee’s economic future.
The real-estate industry is the beneficiary of that growth, not the driver.