A recent study by Ernst & Young LLP, “U.S. Investment Monitor (USIM),” found that corporate investment in new business facilities such as office buildings, industrial campuses and call centers rose to a record $1.2 trillion in the United States last year. That's the highest level of facilities investment by American and foreign companies since the turn of the century.

Perhaps even more intriguing, this record investment pace comes at an interesting time because the actual ownership of business facilities by corporations is decreasing, as more national real estate development and management companies partner with investors to own and manage this normally privately held real estate. In fact, the opening of these well-funded real property improvements to the seemingly insatiable demand of the institutional investment markets is only one of the positive ripple effects that are   stimulating the marketplace.

This trend is also good news for those involved in economic development around the country. It's also a boon for the management side of the real estate sector because increasingly Corporate America is looking to the RE industry as a long term outsourcer to manage these facilities for them.

 What's more, a great deal of these corporate dollars are going into replacing, refurbishing and reusing existing facilities — a fact that should make communities, environmentalists, no-growthers, and of course corporate PR people, excited. Of the total $1.2 trillion invested, $270 billion was spent on new facilities, while $950 billion was allocated for replacing and/or modernizing existing facilities.

These findings were among many revealed in the first USIM, a report designed to track real property investment and jobs growth by Corporate America and foreign companies in business-dedicated operational real estate around the country. The USIM joins Ernst & Young's “European Investment Monitor,” which tracks similar data for all of Europe.

The numbers in the USIM's state-by-state look at these specific types of corporate investments are also significant in light of the recent effect of severe weather to several regions of the country. Six of the top 15 capital investment projects announced by corporations in 2004 were in areas of the Gulf Coast, which were later hit by Hurricane Katrina. The good news for the Gulf region is that these projects were in the early stages of development and look set to proceed, eventually creating nearly 1,500 jobs.

 The USIM study also found that it was the state of Texas that grew its business facilities fastest in 2004 — with $13 billion in capital invested, more than twice as much as invested by second-place Michigan and also ahead of Ohio, California and New York. In fact, of the top 15 mega-projects by capital investment around the country, almost half are taking shape in Texas.

The biggest of these projects is Texas Instruments' $1 billion facility in the Dallas suburb of Richardson. Richardson is also home of the nation's largest new job creator — a $200 billion call center being built by Countrywide Financial Group that will eventually employ 7,500 people. The Dallas Metroplex was far and away the biggest beneficiary of job creation via new business facilities in 2004 with projects announced totaling more than 11,500 new jobs.

The overall investment rate for Texas may be overstated due to the mix of industries in the state. Oil and gas companies typically announce new facility investments early in the planning and approval process, and some proportion of these projects will either be significantly delayed or may never reach completion. However, even without the oil and gas investments, Texas would still lead the pack with approximately $7 billion in new investment.

Michigan and Ohio benefit from the continued domestic investment in automotive and auto parts manufacturing throughout the Midwest. USIM data identified 1,182 projects in this segment alone, carrying with it a total investment of more than $24 billion and affecting more than 145,000 jobs. DaimlerChrysler's $400 million investment in Trenton, Mich., is the largest example in the study, creating an estimated 1,600 jobs.

As far as the United States as a whole, findings show that there have been significant investments in new back office and call center facilities. Given all of the recent gloom and doom about off shoring of U.S. jobs and investment capital, it appears that the United States still competes for and wins a significant number of these projects and is making the necessary investments to compete globally.

Let's also not forget that those improved and expanded facilities will now continue to house and retain jobs, old and new. That is the Holy Grail for economic development people who ferociously compete for those jobs. The investments and employment growth caused by projects such as these also affect secondary investment in suppliers, vendors, other support functions, and even such industries as residential construction. There is unlikely to be disagreement among economic development factions that these are important and much sought-after benefits of the capital now being committed to expanding, relocating and updating U.S. business facilities.

John Heywood, the southwest regional leader of Ernst &Young's Real Estate Advisory Services Group, based in Los Angeles, points out that an unprecedented increase in mega mixed-use projects have commenced in the West, particularly in Los Angeles and Las Vegas. Corporations and large resort developers, he says, are taking advantage of the demand and the support by these cities in creating urban villages. The complexity of these projects, which include a mix of residential, hotel, retail, office and casinos, requires sophisticated contractual and financial management procedures to enable developers and corporate executives to monitor costs and their correct allocation for depreciation and investment purposes.

 Another key finding of the USIM indicates that U.S. companies have little loyalty to their home states. U.S. companies are setting up new operations in new office buildings, headquarters, research and development centers and light and heavy manufacturing facilities in locations outside of their home states. Forty-nine percent of investments in U.S. facilities originated from firms moving or establishing new operations outside their home states, while in-state investments averaged only 34 percent. While some of this is certainly an artifact of large national corporations with multiple locations (e.g., New York- and North Carolina-based banks) and corporate governance laws (such as the case of companies that incorporate in Delaware but have operations elsewhere), it does illustrate that companies continue to expand to locations beyond their original markets.

Despite talk about corporate defections from higher cost areas, the capital is also being invested across the board. The USIM study found that even with their high costs, states like New York and California continue to rank highly for business facilities growth and construction, especially for industries such as biotech, publishing and high tech.  Industries such as these need the supply of experienced talent that is drawn to or produced in these major markets. These states still provide large talented population bases, and have premier colleges and universities to support R&D and training. Access to talented individuals is the lifeblood of companies in these industries, and companies are willing to pay the increased costs to maintain or improve that access.

While U.S. firms are responsible for the majority of the investments in the USIM, foreign companies operating in the United States are responsible for about 17 percent of the capital tallied in the study. For the projects tallied, this corresponds to about one in every 10 projects funded overseas, and a little over 10 percent of the jobs created responding to a foreign headquarters. Among the states, Ohio had the highest percentage of foreign investment (32 percent) in its business facilities with Japan, Germany, and United Kingdom companies doing the lion's share of investing nationally.

 The survey's findings are interesting for a business public that has come to believe that we may not be holding our own here at home. In particular, it shows that in an ever competitive global marketplace, there are significant business reasons to be in the United States, ranging from proximity to end markets, to access to key labor, to the ability to operate in comparatively low-cost, business-friendly locations.

The purpose of the “U.S. Investment Monitor” is to give clients a look at numbers and trends — which states are most popular, who is receiving these kinds of investments and what effects are they having on labor and local economic development. It's important to also go beyond the numbers to think about the trends:  What makes an area more competitive for a certain kind of investment? What locations produce or attract what kinds of labor?  What factors can influence costs or other factors affecting business success? 

The answers to these questions help companies to make informed decisions.

Corporate real estate properties selected to be part of the Ernst & Young study have a minimum of $10 million invested or 20 jobs retained or created. Project types run the gamut of real property improvements, excluding retail and entertainment establishments, restaurants, hotels, airports and power plants. To download a copy of the report, visit www.ey.com/global/download.nsf/US/US_Investment_Monitor_

September_2005/$file/InvestmentMonitor09-05.pdf.

Mark Costello heads Ernst & Young's Business Risk Services-Real Estate (BRS) practice in the eastern region. Chris Steele is a business location specialist with Ernst & Young's BRS practice in Boston.

The views expressed by the authors do not necessarily reflect the view of Ernst & Young LLP.