Discussing Industry Clusters and Risks at the ULI Spring Meeting

May 24, 2017

Recent MSRE graduates Jiachen Li and Alastair Townsend were invited to lecture to the ULI’s Industrial and Office Product Council at the recent Spring Meeting in Seattle. Their talk centered around the concentration of different industries in cities about the US, and what risks this may present to real estate investors.

Cities like Seattle are enjoying rapid growth since the Great Recession thanks to an influx of tech workers. Citing the research of UC Berkeley’s Enrico Moretti, they explained why tech has a higher stimulative effect on urban economies: for each new tech job, five additional jobs are created in the local economy. And of these five jobs, two are professional services jobs, like lawyers and doctors.

But what creates an tech industry agglomeration in the first place? Li and Townsend discussed the importance of having a skilled workforce; resources that tech companies require to grow, like venture capital; exchange of knowledge that stimulates new spinoffs and startups; and the presence of a leading research institution. All of these factors create a virtuous cycle that attracts more companies, more workers, and more capital to the ever-growing market.

The presenters used data provided by Pacific Coast Capital Partners to highlight some other important industry concentrations in key markets. For example, both Memphis and Nashville in Tennessee are leaders in healthcare, while Northern New Jersey is a hub for biotech. Some cities are more diversified, with more than one industrial concentration, such as Orlando, which is the most concentrated market in defense, while being fourth in biotech. Charlotte, Minneapolis, and Jacksonville are among the five most-concentrated financial centers in the nation. And it come as no surprise that Houston and Oklahoma City area both have the highest concentrations of energy-sector jobs, but this also exposes them to volatility in the oil markets.

Li and Townsend concluded that an investment diversification by industry concentration is more important than simply diversifying by geography. To achieve diversification the investor may adopt strategies of investing in diverse markets, or spreading their assets over multiple markets with diverse concentrations.