Salt Lake's future in an uncertain world

SALT LAKE CITY — As I discussed in previous columns, uncertainty has been pervasive in the broader business environment since 2008. This uncertainty is affecting business strategies and will influence growth in cities across the country. Fortunately, Salt Lake City is well positioned to benefit from many of the trends fueled by uncertainty. However, challenges remain and how much the city benefits from its strengths is yet to be determined.

Earlier this year, an interesting survey from McKinsey & Company was released. The survey stated that domestic political conflict, insufficient government-policy support, and low consumer demand were, in varying order, the top concerns for executives both globally and in North America. Although consumer demand may seem to be unrelated, research from the Federal Reserve Bank of San Francisco indicates higher levels of uncertainty negatively impact the economy. From that perspective, all three of these concerns have some relation to each other.

Concerned About Politics

So, this begs the question: why are executives so concerned about politics? Many of the unresolved problems (which create uncertainty), will require policymakers to act. Whether looking at the U.S., Europe, or China, major structural issues must be addressed.

Among issues that must be resolved: America's unsustainable fiscal policy, Europe's incomplete union and China's transition to a more consumer-oriented economy are huge issues facing the global economy. Ultimately, the quality of policy produced in response to these challenges will affect economic performance around the world. This helps explain much of the heightened executive interest in politics.

With political outcomes hard to predict and policy prescriptions imprecise at best lately - a tremendous amount of uncertainty is produced. Companies have no choice but to adapt to such an environment. To better understand how companies are meeting this challenge, it is worth looking at corporate earnings.

Expenses

First quarter 2013 data from Thompson Reuters shows the number of companies beating overall earnings expectations was above the historical norm. At the same time, the number of companies missing revenue expectations was also above the historical norm. So, how is it that companies are historically profitable while at the same time missing revenue estimates more than usual? It's all about expenses.

With growth uncertain, companies are turning their focus to expenses in-order to maintain profitability and meet expectations. As a commercial real estate analyst, this is an important point, because real estate tends to be a large expense for organizations. As a result, commercial real estate is being affected, with many trends carrying broader implications.

Take for example a trend commonly referred to as, "right-shoring". Essentially, this trend is all about companies moving certain operations to locations where they can get the most "bang for their buck". Locally, the news is full of companies moving to Salt Lake or expanding in the area, because costs are lower and they gain access to an attractive workforce. Looking at commercial real estate data from CBRE (full disclosure: where I'm employed) there is evidence that markets able to accommodate right-shoring strategies are growing at a faster rate than others.

Levels of Uncertainty

Due to the nature of structural issues, solutions are difficult and will require focused and sustained efforts. As such, it is unlikely that elevated levels of uncertainty in the macro environment will fully dissipate in the near-future. Even still, it is important to note that this is not to say improvement and growth will not occur. However, periods of heightened uncertainty, which is a drag on growth and produces market volatility should be expected.

As a result, businesses are more likely than not to continue cost-containment measures, including right-shoring initiatives. Consequently, Salt Lake City and other metros with similar characteristics are well positioned to capture and experience growth during the coming years as businesses continue to focus on expenses.

Potential Unlocked

However, the amount of potential unlocked in the community will be determined by future decisions. Issues on the local and state level such as infrastructure and education will be critical determining factors related to growth in coming years. Fortunately, many leaders (from the public and private sectors) in Utah understand this.

While uncertainty buffets companies around the globe, Utah offers unique stability and a sense of promise for the future. With the right amount of community engagement and continued leadership from all sectors, it is exciting to imagine future possibilities.

Changing World

As the world changes, some communities thrive and others seemingly get left behind. While preparing for a recent speaking engagement, I found a picture comparing Shanghai, China in 1990 to Shanghai, China in 2010. The change in the city's landscape was dramatic. I couldn't help but to think about the contrast of this picture with recent headlines out of Detroit. This is not mentioned to promote the idea of Salt Lake City becoming just like Shanghai, but that image expressed the idea of huge amounts of progress achieved in a short amount of time.

Salt Lake like Shanghai in 1990 maintains a tremendous amount of potential and is well suited to thrive into the future, even amid global uncertainty. Perhaps it's time to stretch the imagination of what is possible across the state and especially along the Wasatch Front. While reaffirming and great to have - forget past awards and accolades. When it comes to this community, the future is most exciting and worthy of our best thinking, focus and consideration.

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