Archive for the ‘Building services’ Category

Once High-Flying Developers Now Looking for Federal Aid

Tuesday, December 23rd, 2008

Opponents of the auto industry bailout, who warned that it would prompt other business sectors to ask for similar consideration, are probably feeling vindicated. Only days after the Bush Administration did an end run around Senate Republicans and agreed to provide a Detroit rescue package using bank bailout funds, the Wall Street Journal is reporting that commercial real estate developers are seeking their own federal assistance package. They are warning that, without such aid, thousands of office complexes, shopping centers, hotels and the like could join the country’s foreclosure tsunami.

There’s one major difference between the auto industry and commercial real estate that justifies a bailout for one and not the other: the number and quality of jobs at stake. The Big Three provide hundreds of thousands of well-paying jobs (too well-paying according to certain Southern Senators) that have helped workers achieve a middle-class standard of living. Real estate developers, by contrast, are primarily responsible for substandard retail and janitorial positions. While the Service Employees International Union has helped improve wages and benefits for some building services workers, most of those jobs don’t take people far out of poverty. While it would be a shame for janitors and clerks to lose their jobs, preserving those positions does not have the same urgency as saving the estimated 1.2 million direct and indirect jobs linked to the Big Three.

Rather than bailing out their employers, it would make more sense to use federal funds to help retail and janitorial workers find better jobs elsewhere in the economy. In the speculative boom of recent years, the real estate business built far too many office buildings and shopping centers, and many of those properties will probably not survive the current shakeout. While there is a strong case that the country needs a domestic auto industry, it is much harder to argue that every commercial property needs to be kept in operation.

And if Congress does decide it is necessary to prevent a commercial real estate meltdown, it should keep in mind that these same developers now looking for aid have repeatedly pressured local governments for property tax abatements and other subsidies. A report I wrote last year (with two colleagues) on the big mall owner General Growth Properties, which is now struggling to survive, found that the company had received more than $200 million in such subsidies and another $9 million in savings as a result of aggressive filing of property tax assessment appeals. Previous (unpublished) research I did on the country’s largest mall operator, Simon Properties, found $380 million in subsidies and savings from assessment appeals. In both cases, the data come from an examination of only a portion of the malls owned by the company. Also remember that Wal-Mart used a gimmick called captive real estate investment trusts to avoid paying an estimated $2.3 billion in state taxes.

Perhaps Congress should require developers to use part of any bailout to repay the subsidies they received from local governments that are now facing dire fiscal conditions.

But even that would not provide a compelling case for a commercial real estate bailout. In a country that still hasn’t devised a comprehensive plan for stopping home foreclosures, we shouldn’t be worrying about saving the owners of superfluous office towers and big box stores.