The past several months of turmoil in the U.S. and global economies have been fraught with uncertainty, anxiety, and concern. Plunging stock prices and a worldwide liquidity crisis have caused a knee-jerk reaction in the general business community. No one is quite sure what to expect in the coming months or what effect - if any - the federal bailout will have on long-term business plans.
Unlike past U.S. economic downturns, however, this time around the world stage is feeling the pressures of recession right along with us. Countries throughout Europe and parts of Asia are experiencing slow economic growth, resulting in a notable drop in U.S. exports, which decreased by 1.0 percent in September following a 1.7 percent decline in August.
Complicating the financial picture are several interlocking factors that paint a bleak picture. At the time of this writing, the stock market, while struggling to find bottom, continues to experience wild fluctuations on a daily basis; our Gross Domestic Product shrank during the third quarter, signaling the worst contraction in seven years; and consumer confidence was at an all-time low in the series' 41-year history.
Fluctuations in energy costs have added to the uncertainty. Down from its $140-per-barrel peak in July to below $60 per barrel in November, oil is expected to settle at the low $70s. Its cost greatly impacts operations, logistics, and consumer demand, and so the volatility of prices makes long-range forecasting difficult.
Individually, each of these events can challenge manufacturers' and distributors' ability to sustain business activities. Combined, they place companies under extreme pressure that some people believe is more severe than at any time since the Great Depression.
The liquidity crisis has placed much tighter limits on corporate expansions. A dramatic drop in consumer spending has led to a downward plunge in commodity prices. In addition, this drop is keeping products on the shelf longer, backing up inventories and causing declining profit margins that are stifling companies like never before. The uncertainty of how long it will take for recovery, and at what cost, weighs heavily on companies' relocation and expansion plans and limits growth throughout the supply chain.
Despite the challenges, however, there are real estate and location strategies available to many companies as ways to weather the storm and perhaps gain a competitive advantage over similarly beleaguered competitors. Let's look at some of them:
Sale-Leasebacks: In tight credit markets, capital looks for stable investments. In the world of real estate, overall investment sales have declined dramatically, but sale-leasebacks are more popular than ever. That's good news for cash-strapped companies with good credit ratings.
By selling owner-occupied property to an outside investor, then leasing that same space back at market rates, companies can raise much-needed capital for the purchase of new materials and/or equipment, expansion, or growth. These transactions may also provide sellers with an immediate, positive earnings impact and can offer the added benefit of removing the non-earning asset from the balance sheet and transferring the long-term disposition risk to a new owner-investor. In addition, sale-leasebacks generally offer security for the investor to structure favorable debt terms as part of its acquisition.
Onshoring and Near-Shoring: For many companies, a competitive investment solution will mean investing closer to their customer base, whether that is in the United States or a targeted overseas market.
Globalization is transforming yet again - this time into a more regionalization perspective. The main causes are the rising parity in overall global labor prices and productivity, rising energy costs, traffic congestion, and the growing concerns of the environmental impact of long-haul shipping.
For U.S. companies with operations in Asia and Europe that primarily serve U.S. markets, there will be growing pressures for nearshoring to closer, yet competitive locations such as Mexico and Brazil. We are already witnessing some repatriation (onshoring) of back office and call centers seeking to improve the quality of customer service. Most onshoring will not be in the form of returning manufacturing, but rather domestic companies choosing to make their new investments in the United States rather than overseas in order to have better, more responsive access to their U.S. customer base. However, do look for more U.S. companies to invest in Asia during this economic downturn, as this is where most growth will be taking place.
Consolidation: The economic downturn will force some companies to seek lower costs and improve efficiencies to remain competitive, and consolidation of their real estate portfolio is the logical place to start.
Incentives: Whenever and wherever jobs are added or retained, smart companies should look at state and local economic incentives, which can save them significant upfront costs in the short-term. While one firm's strategy may be served by taking advantage of research grants or job training assistance, another may place a higher value on expediting the permit process or gaining assistance with infrastructure, land, building acquisitions, or roads and water/sewer upgrades.
Sustainability Issues: Siting a new facility, especially an industrial facility, requires a long-term business commitment. Energy is a significant operating expense. Rising utility costs as well as regulatory concerns over greenhouse gas emissions have prompted companies to look for access to renewable energy sources such as wind, solar, and wave.
Unfortunately, with limited access to capital, big-ticket energy plans have been put on hold. To keep the green movement on track, the recently passed Energy Improvement and Extension Act of 2008 (part of the Federal bailout) amends the Internal Revenue Code to provide incentives for energy production and conservation, extend expiring energy-related tax provisions, and provide for revenue enhancements. The Wall Street bailout package included an eight-year extension of a 30 percent tax credit for businesses that purchase rooftop solar systems. It also granted an eight-year extension of the investment tax credit for solar businesses. This may be the shot in the arm that renewable energy R&D firms need to develop effective and affordable energy alternatives sooner rather than later. However, funding of such projects has become a major hurdle.
Nontraditional Capital Sources: The worldwide economic downturn has tightened the availability of funds for companies around the globe. Multinational corporations have the advantage, as they may have success borrowing from a declining number of overseas banks in locations in which they operate. Another option is to find financing from sovereign funds such as those from Taiwan, Saudi Arabia, and China. As part of the U.S. government's response to ease the credit availability situation for U.S. companies and help pump liquidity back into the financial system, the IRS recently established measures to greatly increase the opportunity for U.S. firms operating abroad to repatriate funds from their foreign subsidiaries without significant tax implications.