In addressing the Congressional stalemate over the terrorism-insurance law, President Bush has repeatedly invoked the large number of blue-collar jobs that hinge on the bill's passage. "The lack of terrorism insurance has delayed or cancelled more then $15 billion in real estate transactions," he said in a radio talk last Sunday. "And more than 300,000 carpenters, joiners, bricklayers, plumbers, and electricians and laborers and other building professionals who could have good paying jobs have been out of work."
This line, in various forms, has become a staple of Bush's non-Iraq-related public utterances. It's effective, because it makes it appear as if there's a plan on the table that will magically create 300,000 jobs—something the entire U.S. economy has failed to do in the past two years. And it allows Bush to express solidarity with working-class swing voters.
If a president repeats the number frequently enough, it might enter the lingua franca.But that doesn't make it accurate. Yes, the lack of terrorism insurance is a serious problem—a crisis, even—that Congress should address immediately. But it's difficult to conclude that a piece of legislation is all that's standing between 300,000 out-of-work Americans and high-paying jobs. In fact, the folks whose jobs the terror-insurance quagmire threatens are more likely to be wearing wingtips than hard hats.
When building owners bought standard property and casualty insurance before Sept. 11, the policies covered damage suffered as a result of acts of terrorism. In the past year, when policies came up for renewal, insurers excised the language covering terrorist acts. Except for a few companies such as AIG and Lloyd's, most insurers have since simply refused to even offer terror insurance. Those that do offer coverage may redline major metropolitan areas, or exclude biological or chemical attacks. And the price is exorbitant. According to a survey by the Real Estate Roundtable, a Washington, D.C.-based group of property heavy-hitters, something that was essentially free in 2001 now eats up about 42 percent of overall insurance premiums.
Both the House and Senate have passed legislation that encourages insurance companies to provide coverage, in part by having the government step in if losses exceed a particular amount. Reconciliation is being held up by disagreements over thresholds for government support, whether the government aid should come in the form of loan guarantees (the House) or direct assistance (the Senate), and to what degree victims should be able to sue building owners for punitive damages related to attacks.
In the meantime, many companies remain priced out of the market. The Risk and Insurance Management Society found that two-thirds of companies in a survey had no terrorism insurance whatsoever. Even if there are no significant terrorist attacks, this lack of insurance complicates things in the real-estate financing business.
Just as homeowners must obtain home insurance before they receive a mortgage, commercial or industrial property owners must prove they have adequate insurance in order to finance—or refinance—their holdings. Lenders won't extend credit on buildings unless they can be sure they'll be repaid in the event of a terrorist assault. So, if you want to buy a building, or refinance an existing mortgage on a shopping mall, you may be out of luck.
Like home mortgages, commercial mortgages are also increasingly securitized—bundled up into pools and sold to investors. This spreads risk, replenishes the coffers of lenders, and keeps financing costs lower. But the $270 billion commercial mortgage-backed securities market has been sandbagged by the insurance issue. Commercial properties that lack insurance, or that have to pay through the nose for it, have been downgraded by ratings agencies, meaning they must pay higher interest rates. So far this year through July, the Mortgage Bankers Association of America saysterror insurance issues had altered the pricing on $4.5 billion in such securities and spiked deals worth another $3.7 billion.
A $1 billion refinancing of a mortgage or the replacement of a construction loan by a conventional mortgage certainly represents an important economic activity. But the only people to whom it means higher wages are lawyers, accountants, and investment bankers. And there's good reason to think that financing deals—not merely construction projects—make up a significant chunk of the $15 billion in stymied real-estate transactions that Bush cited.
Bush's figure probably comes from the Real Estate Roundtable, which has identified some $15.5 billion in transactions that have been terminated or put on hold due to terror insurance concerns. Without naming names or cities—for a developer to cop to not being able to get financing is like a male porn star having to confess impotence—it tallied 24 office projects, 10 retail projects, eight apartment buildings, six hotel and industrial projects, and three mixed-use developments in 17 states that have been affected.
But even if we assume the entire amount is in new construction (and it surely is not), $15.5 billion doesn't add up to anything close to 300,000 jobs. According to the Bureau of Labor Statistics, the 6.552 million people working in construction in September had average weekly earnings of $738.66. Wages for 300,000 of them for a year would add up to $11.5 billion dollars. But wages are just a fraction of the overall cost of development. Speaking to New York's ABC affiliate, New York developer Douglas Durst estimated that a delayed project in midtown would cost $1 billion and provide 6,000 jobs. In testimony to Congress, an executive at the Real Estate Board of New York cited a stalled $130-million residential project that would create 500 jobs. Crude math suggests that $15 billion in New York construction would create only 60,000-90,000 jobs. Discount for the exorbitant cost of land in New York—a project that employs 6,000 people in Denver may cost only $700 million—and it still doesn't approach 300,000 jobs.
Finally, there are a whole bunch of other reasons aside from terrorism insurance why construction projects, especially office projects, might not get off the ground. In the most important markets, there's significantly less demand for office space than there was a few years ago. Vacancy rates for Class A office space have spiked nationwide—from 10.6 percent last year to 14.4 percent this year. In New York, the rate was 11.8 percent in September. In Silicon Valley, as Fortune'sAdam Lashinsky pointed out this week, nearly 20 percent of all office space lies fallow. Large companies are simply leaving projects uncompleted—viz., Intel's half-finished office building in Austin—and are hesitant to sign on as anchor tenants for glamorous new projects.
On the industrial side, activity is way down too. The Wall Street Journal reported that industrial development has dropped 40 percent year over year. Here the issue is excess capacity. There are too many, instead of too few, factories and warehouses. As of September, about 41 percent of American manufacturers were using less than three-quarters of their capacity. Companies eager to boost their profits and make operations look better are cutting capital spending with a vengeance—which may account for the depressed industrial development activity.
Sure, Congress should act quickly on terrorism insurance. But not because it'll create 300,000 blue-collar jobs. Terrorism insurance is vital to the smooth functioning of financial markets and the maintenance of property values.
If the president wants to sell terrorism insurance more honestly, he could try appealing to voters' pocketbooks. A great deal of real estate is now owned by publicly held real-estate investment trusts—and hence by investors—or by institutions like pension funds. Like stock ownership, the ownership of trophy office buildings and malls has become democratized. Lack of terror insurance is cutting the value of those properties, and thus the value of 401(k)s and retirement plans. Those losses, unlike the 300,000 construction jobs, are real.