Entrepreneurs may “start-up” the recovery

Amidst government efforts to stimulate the economy via strategies such as quantitative easing, sweeping mortgage modification plans and talks of further tax cuts, economists are studying the phenomena of an organic economic recovery.

One window into the current state of economic development, which focuses on job growth as the key indicator of recovery, looks to potential job creation from newly- developed businesses that carry a payroll (employer firms) and thus have a direct effect on employment numbers. Not surprisingly, reports are grim in this sector of the jobs market. New firm growth in the United States dropped 20% from 2005 to 2009, with the most precipitous decline occurring in late 2007.

However, another perspective takes into account alternative sources of job growth which are often overlooked in traditional economic studies of employment markets. Entrepreneurial activity takes on more diverse forms than conventional employer firms based on corporate structures, as the Kauffman Index of Entrepreneurial Activity reveals. The index includes new unincorporated and non-employer businesses in its statistics and demonstrates entrepreneurial activity was at its highest rate in 14 years in 2009.

This surge in non-employer, independent business creation, called start-ups, during one of the greatest recessionary periods in the history of the United States points to an entrepreneur of necessity effect that has taken shape during the Great Recession and persists through the current recovery period. It appears as though the resourceful jobless droves emerging from the Great Recession are employing themselves.

Given that over half of all Fortune 500 companies were started during recessionary periods, this uptick in non-employer start-ups may bode well for the currently stagnant economy. The key question which emerges from this trend is how many of these non-employer businesses will eventually develop into powerful economic forces capable of supporting a payroll and thus contributing to substantial job creation?

first tuesday take: With staggering numbers of prime-age workers (workers aged 25-54) unable to find traditional employment, the spirit of innovation thrives and leads to unconventional types of job growth through the entrepreneur of necessity effect. As these startups expand, they will be looking for office and warehouse space to accommodate their growing businesses — enter the California real estate agent who has an eye to every tenant requiring a new or expanded space for their start-up. [For more information on the nexus between jobs and the real estate market, see the October 2010 first tuesday article, Jobs move real estate.]

California non-residential property owners have a necessity as well — to fill the thousands of vacancies still spanning the state. When paired with a healthy contingent of the unemployed who must necessarily start and grow a business in order to thrive, this appears to be a perfect opportunity for California real estate agents and brokers — but there is one caveat. The simple reason why the growing population of entrepreneurs is not snapping up California’s massive volume of vacant commercial and industrial properties is that they typically lack the financial reserves necessary to growing a business and supporting a payroll. [For more information on non-residential vacancy rates in California, see the August 2010 first tuesday article, Office vacancies deliver rock-bottom leasing rates.]

The savvy and forward-thinking real estate professional will view this lack of start-up capital as an opportunity to pair non-residential property owners with prime-age visionaries. Agents can fill these vacancies by assisting in negotiations with the owners of vacant properties to provide space to innovative startups by accepting rent in the form of stock options, percentage lease arrangements or other profit-sharing plans. [For more information on prime-age workers and incubator buildings, see the November 2010 first tuesday article, The demographics forging California’s real estate market: a study of forthcoming trends and opportunities – Part II.]

With the saturation of vacancies in the California non-residential real estate market, property owners have nothing to lose by “partnering” with entrepreneurs of necessity. By developing these negotiation strategies, the innovative real estate leasing agent can fill vacancies, support growth in the California job market and collect a fee, if not now, later when the business matures and the cash begins to flow.

This is an example of the win-win synchronicity borne out of a truly organic economic recovery. Recession can be tough, but the recovery transforms everyone involved — an aspect of the new paradigm in real estate transactions and services offered by agents. [For more information on the new real estate paradigm, see the May 2010 first tuesday article, Looking through the window towards recovery: a real estate paradigm shift – Part I and Part II.]

Re: “Entrepreneurs of necessity” from the Federal Reserve Bank of Atlanta

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