Will Small Businesses Lead the Recovery?

Small businesses are poised to lead job growth because of their flexibility and cutting-edge nature, say economists and researchers, which is a healthy sign for the nation's office market.

Leading indicators show that positive momentum is indeed building in the office sector. Venture capital spending in U.S. companies registered $4.9 billion in the fourth quarter of 2003, the highest quarterly investment since the second quarter of 2002, according to a report by UBS Securities on the U.S. office market that was released in February.

In addition, 22% of respondents to the Federal Reserve's most recent quarterly survey of U.S. bank senior loan officers indicated increased loan demand from small businesses, according to UBS. What's more, banks are easing lending standards.

An 8.2% increase in the gross domestic product for the third quarter and timely payments of existing loans are reasons banks are easing standards for small business, says Keith Leggett, senior economist for the Washington, D.C.-based American Bankers Association (ABA).

“We believe small businesses will be a major influence of office employment growth in 2004, as they did in 1992 following the last U.S. recession,” wrote UBS Securities. “We are therefore encouraged by the easing of U.S. bank loan standards on small businesses and an increase in U.S. venture capital spending in the fourth quarter of 2003.” Both indicators are a precursor to job gains.

UBS stated that in 1992, small businesses created 641,000 jobs, while companies with more than 100 employees posted a net decrease of 142,000 positions. The U.S. Census Bureau defines small businesses as firms with less than 100 employees.

Because small businesses tend to be risk takers, they will drive the general recovery by being the first to demand more space, says Joe Costello, senior economist at Torto Wheaton Research in Boston.

In fact, office market absorption already is on the upswing. In 2003, 19 million sq. ft. was absorbed, up from negative 12 million sq. ft. in 2002. Although that's substantially less than the 87 million sq. ft. of average annual absorption between 1997 and 2000, “any time it's not negative that's good,” Costello notes. He predicts that absorption will register about 8 million sq. ft. per quarter in 2004 and as much as 34 million sq. ft. for the year.

“It's the acceleration we need,” explains Anthony Pierson, an economist who leads CIGNA Realty Investors' strategy and research group in Hartford, Conn. “The overall factor is business confidence.”

Businesses will have to hire employees to keep up with increased production levels, and small businesses will lead the jobs recovery in part because they can react quickly, economists say. Already, about 600,000 more people were employed in February compared with a year ago, according to the Bureau of Labor Statistics. Look for 200,000 to 250,000 jobs to be created each month beginning around mid-year, adds the ABA.

“It becomes a self-reinforcing process,” says Doug Duncan, chief economist with the Washington, D.C.-based Mortgage Bankers Association. “When profits pick up, then companies start to invest and then you see office spaces start filling.”

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