Small Business Labs

Commercial Real Estate Industry Facing The Perfect Storm

Commercial real estate is getting a lot of media attention, with most articles forecasting stormy weather ahead for the industry.

For example, the title of Goldman Sachs's recent podcast on this topic is Navigating the 'perfect storm' in commercial real estate.

The Wall Street Journal's Commercial Real-Estate Woes Run Deeper Than in Past Downturns is also gloomy. Key quote: 

"Landlords are contending simultaneously with a cyclical market downturn and with secular changes in the way people work, live and shop. The sudden surge in interest rates caused property values to fall, while the rise of remote work and e-commerce are reducing demand for office and retail space."

Fortune's Office vacancy will increase by 55% by the end of the decade as hybrid and remote work push real estate to an 'inflection point' again paints a grim picture. Key quote:

"As much as 330 million square feet of U.S. office space could become vacant and unused by 2030 due to remote and hybrid work, according to a report released Wednesday by global real estate firm Cushman & Wakefield. When added to another 740 million square feet of space that will become vacant from "natural" causes, the total is around 1 billion square feet of unused office space building up over the next seven years."

And the retail industry continues to get hit by the shift to online shopping - and has to also deal with challenges related to remote work.  

Yahoo Finance's Retail store closures 'to sharply accelerate going forward': UBS research covers a study that estimates that "50,000 retail stores will close out of the current base of 940,000 stores in the United States by 2027, excluding gas and food service stations."  

If things turn out to be as dire as these articles are saying, it will have significant negative impacts on the overall economy.

We're more optimistic than these articles.  

But small businesses and independent workers with exposure to the commercial real estate industry should think through how they will deal with a major downturn in the commercial real estate market. 

Update The New York Times published A Bleak Outlook for Manhattan’s Office Space May Signal a Bigger Problem this morning.  It's hard to keep up with all the gloom and doom commercial real estate stories these days.  

The Surge in New Business Applications Shows No Sign of Slowing

The March 2023 Business Formation Statistics were released yesterday by the U.S. Census. And it was another strong month.

As the Census chart below shows (click to enlarge), there were 451,752 new business applications in March.

This continues the surge in new business applications that started during the pandemic in 2020. 

Prior to the pandemic. applications averaged around 300,000 per month. Since Q3 2020, they've averaged around 450,000 per month.  

About 300,000 of March's applications come from what the wordsmiths at Census call "applications other than high propensity."

These are applications from people not planning to hire employees - in other words, freelancers and other kinds of solopreneurs.

This continues the long-term shift in applications to nonemployers businesses. In 2005, about 60% of all applications were from businesses planning to have employees. Since the surge, about 2/3rds of all applications are from firms planning to be solopreneur businesses.

It's important to note that new business applications are applications for a federal tax I.D. And only about 20% of those who apply for a federal tax I.D. end up starting a business.

So if you read somewhere there were 450,000 new businesses started in March, it's wrong.

But a surge in applications also means a surge in new small and solopreneur businesses - with March's applications leading to about another 90,000 new businesses over the next year or so.

We're two and a half years into this surge in new business applications. We think it's now safe to say it's real.

Deloitte on the Canadian Gig Economy

Deloitte's The Gig Economy is Here to Stay provides an overview of the Canadian gig economy.  

The chart below (click to enlarge) contains the key data: about one in three Canadian workers use the gig economy to generate income.

This is similar to the workforce share of gig economy workers in other developed economies.  

Deloitte provides four broad trends driving participation in the gig economy. These are:

1. Older workers are delaying their retirement.
2. Younger workers (Gen Z and Millennials) are seeking more flexible work arrangements.
3. Worker perceptions around long-term employment are changing.
4. More people are looking to supplement their income with alternative work.

We certainly agree that these trends are helping to drive the growth of independent work and the gig economy.

See Deloitte's report for more information on the Canadian gig economy.

The Number of U.S. Independent Workers Continued to Surge in 2022

MBO Partners released the 2022 edition of their ongoing State of Independence study series. Emergent Research (that's us) works with MBO Partners on this study.

The key finding is that the number of independent workers (freelancers, gig workers, independent contractors, etc.) reached 64.6 million, up 26% over 2021's 51.1 million.

As the study chart below shows (click to enlarge), the number of U.S. independent workers is up 57% since before the pandemic. This is despite a pandemic-induced decline in 2021.

What is also quite noticeable in this chart is that the total number of independent workers grew relatively slowly between 2015 and 2019.

This raises the question, has the pandemic - and the related shift to remote work - resulted in a growth inflection point for independent work?

We believe the answer to that question is yes. And there are both supply and demand reasons why.

On the supply side, workers are seeking to take greater control of their destiny, exercise a sense of agency, and build strong connections between their work and personal purpose.

On all these fronts, working as an independent - either part or full-time - can be a path to empowerment and self-realization. And more Americans are choosing this path.

On the demand side, firms of all sizes are increasing their use of independent talent to access specialized skills and improve business flexibility and agility.

But while we think we've reached an inflection point, independent worker growth will likely not continue at the torrid pace of the past two years.

We're forecasting that the growth rate will slow to 5%-7% next year. This is still quite fast by labor market standards.

We'll be covering other key findings in the coming weeks.

See the study microsite for more information. And click here to download the 2022 MBO Partners State of Independence report.

Why Being Anti-Fragile is Important for an Entrepreneurial Mindset

MIT Management's 3 traits of an entrepreneurial mindset covers the key traits that define an entrepreneurial mindset, no matter the environment.

Key quote on an entrepreneurial mindset:

An entrepreneurial mindset helps leaders create value by "recognizing and acting on opportunities, making decisions with limited information, and remaining adaptable and resilient in conditions that are uncertain and complex," said Rowena Barrett, pro-vice-chancellor for entrepreneurship at the Queensland University of Technology.

The three traits are:

1. Solutions-oriented
2. Adaptable
3. Anti-fragile

We liked their description of anti-fragile, which is spelled out in the chart below (click to enlarge).

We've studied and worked with start-up founders, small business owners, and other types of entrepreneurs for over 20 years.  

And what we've learned is that the one trait that almost all of them have is being anti-fragile.  

Another Strong Month for New Business Applications

The October Business Formation Statistics were released by the U.S. Census last week.

And as the Census chart below shows (click to enlarge), there were 432,934 new business tax I.D. applications in October.  

Business applications took off in Q3 of 2020, and in 2022 they've run at a rate about 43% higher than pre-pandemic.

Retail trade, which includes ecommerce firms, and professional services, continue to be the top two applications categories.

Also continuing is the shift to solopreneur business applications instead of employer business applications. 

We're going repeat ourselves and point out that new business applications ARE NOT the same as new business startups.

Research by the U.S. Census and similar research by our firm indicates that about 18% - 22% of applications result in new businesses. So if you read that 432,000 small businesses were started in October, it's not correct.  

But by historical standards, 20% of 423,000 is still a lot of new businesses.  

McKinsey finds 36% of Employed Americans are Independent Workers

McKinsey's Freelance, side hustles, and gigs: Many more Americans have become independent workers, covers the results from their American Opportunity study.

And this study found that independent work is booming. Key quote:

"... a remarkable 36 percent of employed respondents—equivalent to 58 million Americans when extrapolated from the representative sample—identify as independent workers. This figure represents a notable increase since we estimated the US independent workforce in 2016 at 27 percent of the employed population."

The study asks survey respondents to self-identify as independent workers. Those answering yes to either, or both, of these questions are considered to be independent:

• "Is your current job as a contract, freelance, or temporary worker?" 
• "Would you consider yourself a gig worker or part of the gig economy?"

The article covers a range of data from the study, but the data on how workers view economic opportunity jumped out at us (click to enlarge the chart below). Key quote:

"Given the broad range of reasons why people work independently, it's surprising how united this group is in one distinct characteristic: they are among the most optimistic workers in the country."

Striking out on one's own requires a certain amount of optimism.  So it's not surprising to us that independent workers, on average, are more optimistic about their economic opportunities than workers overall.  

See the article for more details.

New Business Applications Continue at Historically High Levels

The number of new business applications in July was 425,698, which is another strong month.

Although down from their all-time high in 2020, applications in 2022 have averaged about 420,000 per month. This is about 40% higher than before the pandemic.

The business application data comes from IRS Employment Identification Numbers (EIN) applications. EINs are the tax id number that identifies a business for tax purposes.

Most applications (about 70%) are from firms the Census calls "applications other than high propensity" (grey in the chart; click to enlarge).

These are applications from businesses that are unlikely to have employees, such as freelancers, independent contractors, and other types of solopreneurs.

"High propensity applications" (yellow in the chart) is Census speak for firms they think are likely to hire traditional employees.

As the above chart illustrates, the share of solopreneur applications has steadily increased over the past decade.

Retail continues to be the industry with the most applications. This has been the case since the surge of applications started in 2020. Professional services is second, consistent with its position since the pandemic began.

As we pointed out earlier this year, only about 20% of applications for tax I.D.s result in a new business starting.

But the continuing high levels of business applications means a corresponding surge in new employer small businesses and solopreneurs.

The Inflation Reduction Act and the Growth of Microgrids and Virtual Power Plants

The Inflation Reduction Act, which was just signed into law, has a variety of tax credits and incentives to encourage homeowners and businesses to install green energy systems.  

One of the biggest incentives is for solar power systems. The bill extends a current tax credit for ten more years and raises the tax credit to 30% of the system's cost.  

The law's various credits and incentives will lead to broader deployment of microgrids.

These are localized power generation grids that can disconnect from the traditional grid and operate autonomously.

They can also feed power back to the traditional grid.

The growth of microgrids is allowing the development of virtual power plants.  

Virtual power plant (VPP) consists of distributed microgrids that are used in concert to provide power plant levels of electricity to the grid.

An example is Tesla's virtual power plant agreements with California's two largest utilities.  

Under this agreement, Tesla connects Tesla Powerwalls (a battery storage device fed by solar panels) to the grid and supplies power during peak power usage. Tesla's Powerwall customers are paid $2 per kilowatt hour for contributing energy to the VPP.

Generac, which also provides solar systems with battery storage to homeowners and businesses, has a similar arrangement with Arizona's largest utility.

Given the advantages of distributed solar microgrid systems - cleaner energy, lower costs, resilience to outages - we expect the deployment and use of microgrids and VPPs to grow rapidly.

And as we pointed out in our article The Clean Energy Economy = Small Business Opportunities, the distributed nature of microgrids means numerous opportunities for small businesses.  

BCG on Tapping Into Fluid Talent

The global "Big Three" strategy consulting firm BCG recently released Tapping Into Fluid Talent. It covers their view that companies need to turn to new and diverse talent sources - including various forms of nonemployee labor.

The BCG chart below (click to enlarge) shows the alternative talent sources BGC suggests companies tap.

As with a recent MIT-Deloitte study, the BCG report suggests that companies need to develop new work processes, procedures, and management systems to support the shift to fluid talent. Key quote from the BCG report:

"Support fluid talent with a new operating model. Companies that have experimented with fluid talent understand the need to adapt legal and procurement frameworks, rewire HR processes like performance management, build cross-functional project teams, and invest in change management. But to really unlock value from fluid talent, companies also need to rethink their ways of working and how they deploy and onboard talent."

This study again shows that the debate around whether or not nonemployee labor is an important and growing source of corporate talent is over. 

The focus now is on how to effectively build and manage workforces combining traditional employees and external talent.

This means greater of use of what BCG calls fluid talent.  

BTW, we already have too many buzzwords describing the various types of talent businesses employ.  So we hope "fluid talent" doesn't catch on.