Market Analysis

Taylor Maine, UBPL 714

MARKET ANALYSIS FOR LAWRENCE, KANSAS A realistic growth proposal based on data gleaned from the Census, Bureau of Labor Statistics, Department of Revenue, and American Community Survey

Background

Background The city of Lawrence, Kansas has recently been seeking effective economic development strategies. The Chamber of Commerce and other political forces insist that the manufacturing and retail sectors are ready to grow, and that other political forces are restraining growth. This, however, does not line up with the data.

Population and Employment Population and employment growth figures are a good basic indicator of long-term economic growth. If population is steadily rising, it shows that the region is experiencing steady, long-term growth. Unemployment rates tend to show booms and recessions fairly well. Four to six percent unemployment is generally considered the normal rate.

Population and Job Growth Source: Census Data 100,000

Table 1 Year

Unemployment Rate National Lawrence Average

Total Unemployed Lawrence

80,000

2000

5.07

4

2423

60,000

2006

7.34

4.6

3956

2007

6.21

4.6

3229

2008

9.21

5.8

5134

2009

7.47

9.3

3923

40,000 20,000 0 2001 Jobs

2006 Population

Labor Force

Source: BLS Data

These charts demonstrate the fact that there is an abundance of workers who would be ready to be employed at whatever development project Lawrence decides to use. The unemployment rate also seems to say that Lawrence is just now exiting the recession, so this could be a good time to start a few development projects, if the 2010 unemployment rate is lower than 2009’s number. A project will need market demand for it to work, and there is very little latent demand during a recession.

There is often an assumption that many Lawrence workers commute to Kansas City or Topeka for employment, and that this skews numbers and takes money out of Lawrence. This really is not the case. About 15-20% of the workforce does leave the county for employment, but this is about 5% under the national average. If studies were done to see what employers or employment sectors are not represented within the county, Lawrence might be able to take action to capture the productivity of a few hundred workers who were commuting.

1

Growth

Workers who Work out of County (As a Percentage of Total Workforce) Source: American Community Survey

30.00%

20.00%

United States

10.00%

Lawrence

0.00% 1990

1995

2000

2005

2010

Growth Economic growth is the increase of per capita gross domestic product. This is increased by an increase in the number of jobs. In addition to job growth, Economic Growth can be furthered by an increase in Human Capital (another way of saying education). Once inflation is removed from the numbers, the figures can be isolated to see the cause of the lack of growth .

Property and Sales Taxes (In 2009 Dollars) Source: Lawrence Property and Sales Tax Reciepts 16000000

14000000 12000000 10000000 8000000 6000000 4000000 2000000 0 1990

1992

1994

1996

Average Average Annual Annual Income Sales Tax Growth Growth 2006-2009 1.09% 0.38% Source: Kansas Department of Revenue Inflation Adjusted to 2009 Dollars Table 2

1998

2000

2002

2004 2006 Property Taxes

2008 2010 Sales Taxes

The sales tax growth indicates that Lawrence’s retail spending is currently not growing at a very fast rate.

Retail-based project proposals should be viewed with the understanding that there is probably not money there to support it. This chart also shows the enormous growth in property taxes. This could be a result of the developerdriven economic development strategies that have been employed in Lawrence for the last twenty years. There are plenty of buildings in which companies can locate, once spending increases. If a development project is to be undertaken within the next five to ten years, it would have to be quite special, and not rely on consumption spending for its income. For

2

Growth

example, if the engineering firm Black & Veatch, which has mostly federal contracts, wanted to locate some of its offices within Lawrence, the city should be willing to support, as this sort of company is virtually recession-proof.

Table 2 shows sales tax growing much more slowly than income. Now this could mean that there is too little supply within the Lawrence area, and that consumers are forced to leave the city to spend their money, but when it is compared to the property taxes above, it can be seen that this is not the case. Property taxes are often an indicator of supply, as more vendors building more buildings will be represented. As will be demonstrated later, the retail market in Lawrence is almost saturated. This shows that consumers in Lawrence are not spending more with respect to income increase. Because of this, a development project involving retail trade would be foolish.

With the exception of a small rise in 2006, Lawrence’s retail sales have been steady or declining since 2000. The data for 2007 and after is not available, so the extent of its effect on retail sales is unknown, but it can be seen secondhand through some other indicators. In general though, retail sales are hurt fairly badly by any sort of recession, so it is probable that they returned to pre-2006 levels after 2007.

Lawrence

2003 2004 2005 2006 2007 2008 2009

Pull Factor

1.05 1 0.95 0.9 0.85 0.8 0.75

Pull Factor

2004 2005 2006 2007 2008 2009 2010

1.15 1.1 1.05 1 0.95 0.9

Douglas County

Source: Kansas Department of Revenue

Lawrence’s pull factor is currently just below 1, so the city is losing a small amount of money to the surrounding areas. The amount that they have been losing has increased since 2006, but flattened out from 2008 to 2009. Ideally, the pull factor would be over 1, so that the city has more dollars flowing in than are flowing out. Plans for “Big Box” retailers have been proposed to minimize this loss, but the city should seek businesses that are not represented in the region, so that outside consumers and dollars come in. Also, the City Commission seems to think that Lawrence is a tourist town, allowing retail to be a basic industry. This is not the case.

As the following data will show, a massive amount of retail square feet have been built within the past decade, but the pull factor has actually fallen over the same time period.

3

4

Employment Sectors Total Employment, By Sector

Average Weekly Wages (2009 Dollars)

Source: Kansas Department of Labor

Source: Kansas Department of Labor

40000

$750

30000

$700 $650

20000

$600

10000

$550

0 1999

2001

Office

2003

2005

2007

Production

2009

2000

2002 2004 Manufacturing

2006

2008 2010 Office Sector

Office employment and wages are growing fairly quickly, and have surpassed those of the production sector. The production sector’s wages and employment have been decreasing since before the recession, while the office sector’s employment and wages have continued to grow in spite of the recession. Lawrence should be wary of development projects that claim to be able to combat this trend, as it is market driven, and does not seem like it will reverse itself in the foreseeable future.

Table 3 Category

Sector Total, All Industries Manufacturing Transportation and Warehousing Construction Manufacturing Wholesale Trade Office

Information Finance and Insurance Real Estate and Rental and Leasing Professional and Technical Services Management of Companies and Enterprises Educational Services

Growth from 2001-2009 Growth from 2006-2009 Wages Employment Wages Employment 27% 0% 10% -3% 31% 42% 1% -21% 23% -32% 6% -31% 31% 0% 8% -7% 14% 9% -6% 21% 7% -10% 37% 52% 70% 15%

-66% 41% 6% 24% -33% 49%

5% -8% 13% 28% 0% 30%

-10% -7% 18% -16% -10% -4%

Employment Sectors

5

6%

8%

11%

Retail Trade 8% -10% Source: Kansas Department of Labor, Labor Market Information Services

7%

-1%

Health Care and Social Assistance Retail

32%

As can be seen in Table 3, the employment in the Manufacturing and Construction sectors is decreasing, while the Service Sector Industries, such as Professional and Technical Services, Finance and Insurance, and Real Estate, are doing very well from 2001 to 2009, and have a smaller decrease from 2006 to 2009. Construction and Transportation were hit the worst by the recession, while Real Estate and Healthcare weathered it best, as their growths in employment from 2006 to 2009 were 18% and 11%, respectively. As stated before, consumers are not increasing spending with respect to income increase, and this can be seen in the above table by a decrease in employment in the Retail Trade. If any public funds are to be used in an economic development strategy, they should try to capitalize on the growth trends, and avoid the industries that are shrinking.

Square Feet of Commercial Real Estate Development Source: Douglas County Tax Assessor

6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 1985 Retail Space

1990 1995 Manufacturing

2000 Office and Banking

2005

2010 Warehousing

This graph shows that retail space is growing faster than any other type of commercial real estate. If it was fueled by high demand, it might be acceptable, but the demand just was not there. This graph also provides some evidence for Lawrence’s developer-driven pro-growth economic developmet committee. Office, manufacturing, and warehousing are not generally targets for the committee, so it can be assumed that they are merely responding to real demand. Retail should have a similar slope to office or manufacturing, but since the Lawrence economic development committee is so pro-growth, the retail sector can easily be seen to be overbuilt. The growth of warehousing can somewhat be ignored, as its space-intensive nature skews its growth when compared to more traditional uses of space, such as office, manufacturing, or retail.

Proposal

Table 4 Growth from 2001 to 2006 Square feet of retail space Retail Employment Retail Wages (2009 Dollars) Retail Establishments Retail Spending (2009 Dollars)

13% -9% -9.7% -3% 3%

Source: BLS, Douglas County Tax Assessor, Kansas Department of Labor

If there was a high demand for retail space, a high amount of growth would be expected in the number of retail establishments and jobs. But both of those numbers experienced a loss.

The choice of the 2001-2006 time period provides the most generous conditions, as it cuts out the current recession. Manufacturing space is an example of a more demand-driven growth. Its employment growth is similar to that of Retail. Retail’s employment decline is -10% (20012009), and Manufacturing’s employment growth is 0%. Even though Retail’s employment growth is 10% less that of Manufacturing, its growth in space is massive compared to Retail’s.

The excess retail space seen in the “Commercial Development” graph will cause aboveaverage vacancies for the foreseeable future. From 1995 to 2006, the square footage of retail grew by 44%, while retail spending only grew by 11%. If retail development completely ceased, and retail spending growth continued at the same rate it has since 1995, it would take about 30 years to fill the vacancies and have actual demand for development. This estimation is very generous, as it leaves out the current recession, which set the retail market back a few years. A more realistic estimation, which factors in the recession, as well as the growing online retail market, would be closer to 50 years. Demolishing the structures is not an option, as they have inherent worth, and still generate property taxes.

Proposal By all indicators, the office sector seems to be the most steadily growing area of employment. It also happens to contain the highest paying jobs. The city should cease its current trend of encouraging retail, construction, and manufacturing growth, and should instead focus on filling Lawrence’s vacant space with offices. A fairly low-cost development option is the “retail to office conversion”. Since the facilities are both considered commercial, in some cases the conversion could be as simple as zoning. In other cases, walls need to be removed, but the actual guts of the building are usually compatible. Once the office market nears saturation, the city should encourage local developers to undertake these conversions.

The city should not attempt this before saturation, so as not to jeopardize the existing office market.

6

Proposal

As far as high-cost projects go, the city should seek branches of large, stable firms to locate within its borders. Real Estate and Healthcare have both been extremely stable through the recession, and should be given priority over more volatile industries, such as Information. If, however, the city is approached by an employer that is not represented in the region, they should be given some priority, because they will increase Lawrence’s Pull Factor, and will contribute to long-run growth. If the city is approached with a proposal by a company that wants to move within Lawrence, the city should not fund it, as it brings no new firms, workers, jobs, or dollars into the community.

Above all, though, the Lawrence City Commission needs to change its approach.

Currently, the committee seems to believe that it is better to spend public dollars on whatever projects are available to choose from, no matter their potential success or cost, rather than to do nothing when no good projects are available. A better approach is to follow the original goal of economic development: targeting. Only a fortunate few projects, after being submitted to rigorous pro forma and but-for analyses, should be deemed worthy of the committee’s attention and tax-payer’s dollars.

The committee needs to understand that Lawrence does not need to be building or growing at all times to have a healthy economy. Lawrence is fortunate to be the home of The University of Kansas, a resource that will not leave the foreseeable future. This is the main economic advantage of Lawrence, and the City Commission would do well to capitalize on the enormous amount of human capital that is present within Lawrence’s borders. Much of this human capital is currently being squandered at many of the retail jobs that the City Commission fought to gain. The City Commission also needs to realize the potential consequences of overbuilding: vacancies, blight, real estate bubbles, and decreasing property values. Even if the Commission’s members are not concerned with the public good, and are only interested in bettering themselves and their constituents, they have to realize that these consequences will directly affect them.

7