Faltering tech flails cities that poured money into industry Stalled projects see little prospect of quick return
2001-07-11
quamnet.com
When city officials in Austin, Texas, committed $ 50.5 million to create a downtown high-tech center last year, it seemed a wise investment.The fast-paced Internet economy was purring, and local politicians envisioned gleaming new facilities in a "Digital Downtown" that would employ 7,500 workers and spur development of housing, retail stores, restaurants and clubs.
But the economy soured, and Digital Downtown now resembles a ghost town. The cornerstones of the city's project, including Intel, Vignette and Computer Sciences Corp., have delayed or pulled the plug on construction. High-tech hubs in the USA and abroad are having their share of low times. Communities that rode the New Economy in the late 1990s have faltered, their cyber plans turned to cyber dust. Nationwide, high-tech communities are feeling the pain of shutdowns, layoffs, commercial real estate vacancies, evaporating venture funding and slower growth of new companies and jobs. Since January 2000, 555 dot-coms have closed, and there have been 127,000 Internet-related layoffs. Monday, online grocer Webvan laid off 2,000 workers in California, Washington, Illinois and Oregon. (Story, below.)
The most exasperating losses, however, are for local governments and economic development agencies that poured taxpayers' money into tech ventures that have yet to pay off. Public money has funded everything from construction tax breaks for offices and factories, to job training, to venture capital funds for financing start-ups.
But New York City's nearly 2-year-old, $ 25 million tech investment fund hasn't yet invested in any firms because it can't find any worthy candidates. "The money is just sitting there," says Jonathan Bowles, research director at the Center for an Urban Future, a policy think tank in New York.
Despite the downturn, most cities and states are still willing to court high-tech firms, because they and their high-income workers generate generous tax revenue and pump cash into local economies. The average annual output of tech workers is $ 200,000 -- double that of other white-collar workers -- according to the Milken Institute, an economic think tank. Large tech players such as Intel in Texas and Cisco Systems in California are among the biggest taxpayers in those states.
Still, some regions have yet to see their tech investments pay off:
* In Austin, chip giant Intel last March put the brakes on a 10-story office building that the city helped finance with $ 9 million in fee waivers and transportation improvements. Intel has not indicated when construction will resume. It has also delayed projects in Denmark, Malaysia, California, Oregon and Arizona. Computer Sciences, which will belatedly complete the second of three office buildings in November, may take several years to build the third. CSC was granted $ 10.4 million in deferred costs and incentives by the city last year.
In May, e-commerce software firm Vignette scuttled plans to build a $ 350 million office complex in Digital Downtown, which is now littered with towering cranes over unfinished construction sites. Company officials say expansion didn't make sense, even with a $ 25 million incentive package of reimbursed property taxes and waived development fees the city approved in December. That's because Vignette lost $ 229.8 million in the first 3 months of 2001 and has axed 540 employees, nearly a fourth of its workforce, this year. Its stock, which peaked at $ 200.94 a share in April 2000, has slumped to $ 8.55.
The bare-bones buildings in Austin underscore "a negative image that is symbolic of a slumping economy," says architect Jack Tisdale, a member of the Downtown Austin Alliance. All told, Austin is missing out on an estimated 1,700 jobs that would potentially feed the city's economy with millions of dollars in disposable income and taxes. Unbowed, the city is prepared to offer Advanced Micro Devices $ 95 million, mostly in reimbursed property taxes, to build a 1,500-worker microchip plant.
The situation is raising the ghost of Austin's real estate bust of the mid-1980s, when Texans groused about changing the state's official bird from the mockingbird to the crane. An '80s term has resurfaced: Texans call the empty structures "see-through buildings," says Bob Richardson, a Dallas bankruptcy attorney.
"The Intel building is a multistoried tombstone to the high-tech boom," says Mike Levy, publisher of Texas Monthly magazine.
* New York Mayor Rudolph Giuliani had high hopes when he authorized the Emerging Industries Fund in September 1999. The plan was to invest $ 250,000 to $ 1.5 million in promising high-tech start-ups overlooked by venture capitalists and to retain small businesses. But the fund, which hired venture firm Draper Fisher Jurvetson Gotham to weigh proposals, has not invested in any of the 136 small-business owners who applied. Critics say the $ 25 million fund could have been used on education or to beautify parks.
"It's no wonder people think government moves too slow," says Peter Vallone, speaker of the New York City Council, which rescinded $ 10 million from the fund in June. "I can understand not wanting to waste taxpayer money, but sometimes taking a little risk can go a long way toward benefiting everyone."
Michael Carey, who oversees the fund for the New York City Economic Development Corp., blames the tech-stock meltdown for the fund's slow start. "What if we had invested in companies that bombed?" he asks. The fund is in the "final stages" of approving its first investment, Carey says.
* The $ 12 million Oregon Resource and Technology Development Account, started in 1985 to invest in high-tech companies, began investing last year in university research projects because it didn't see enough high-tech opportunities.
* Asian cities have also been caught in the tech slowdown. Cyberport, a $ 2 billion plan by the Hong Kong government to develop a high-tech office hub and elevate Hong Kong's position as a tech hot spot, has labored since its 1999 debut. It has been criticized as everything from a glorified land deal to a government subsidy for high-tech companies. "Let's not kid ourselves," says Joseph Sweeney, research director at Gartner Dataquest in Hong Kong. "The goal of the place is not to enrich Hong Kong's IT community. It was to stimulate the property market."
Annie Tam, deputy secretary of Hong Kong's Information Technology and Broadcasting Bureau, counters that the project has been "progressing well" and says the first phase should be complete in 2002. Microsoft is Cyberport's anchor tenant, she says.
Also in limbo: Malaysia's $ 20 billion Multimedia Super Corridor, a 270-square-mile project hatched in 1996 to clone Silicon Valley on a neglected swath of wetlands. The corridor, due for completion in 2020, will include a digitally wired corporate city, dedicated to high-tech companies, and a new airport. So far, the government has spent $ 3.7 billion, or 17% of Malaysia's total annual budget, on the project.
Much of the physical infrastructure has been built, and local companies have set up shop, but of the 465 companies given corridor status -- which includes a 5-year exemption from corporate taxes and other benefits -- only about 25 list their address there.
Microsoft, which in 1996 announced it would transfer its regional headquarters from Singapore to the Multimedia Super Corridor, has backed out. Further, the project hasn't drawn substantial investments from tech companies or benefited the economy, says a report by McKinsey & Co.
Multimedia Development Corp., the government agency behind the corridor, maintains it is on schedule, although the agency might be "overstretched" implementing the high-profile project. It says the critical study was incomplete.
It is in California's Silicon Valley, the heart of high-tech, that the slowdown has hit hardest. Commercial real estate vacancies have soared, while rental prices have plunged. Unemployment is up. And venture funding in the second quarter fell for the first time in 15 years, according to a report by online industry trade publication VentureWire.
"The Valley is in a malaise," says George Zachary, a general partner at Mohr Davidow Ventures. "There's less venture capital, fewer start-ups and not as much competitive urgency."
Tech firms still wanted
Many city planners insist their future economic riches remain closely tied to innovation. Several cities are intensifying high-tech investments and recruitment. "Ultimately, cities, counties and states see tech as an opportunity to create jobs and improve their infrastructures," says Perry Wong, research economist at the Milken Institute.
Cincinnati's multimillion-dollar Regional Technology Initiative, for example, launched this year with $ 500,000 in state funds. It will fund local start-ups and recruit out-of-state firms specializing in software, communications and biotech.
"Despite the downturn, we see a growing market opportunity next year," says Johnathan Holifield, vice president of the Greater Cincinnati Chamber of Commerce. "Tech is a wise investment."
In Seattle, where used furniture stores such as Ducky's are deluged with calls from frantic dot-coms trying to unload desks and chairs, and the economic outlook is somber, biotech firms are sprouting. A 40-story skyscraper for health care firm IDX Systems is due for completion in 2003. Immunex, meanwhile, is proceeding on a $ 750 million waterfront campus, and the city, county and port of Seattle are financing construction of a highway overpass to accommodate it.
"We're preaching a diverse, resilient economy," says Ben Wolters, high-tech sector manager for Seattle's office of economic development. "The key is job retention and expansion. It's cheaper than recruiting."
Orlando, home of Disney World, is attempting to become as well known for computer mice as Mickey Mouse. Local government is financing 40% of a $ 17.5 million marketing campaign to establish the city as a technology center. So far this year, 16 tech firms -- including circuit maker RF Micro Devices and data-storage firm Adaptec -- have vowed to moved or expand operations in Orlando, creating more than 2,000 jobs and $ 200 million in capital investments.
In July, the Tennessee Technology Development Corp. announced $ 45 million in early-stage venture funding -- its most aggressive effort.
In the heart of Texas
Intel's abandoned building is a constant reminder of high tech's low times in the southern section of downtown Austin. "The city has lost some of its swagger," says Mike Rosenfelt, a local venture capitalist.
But Austin Mayor Kirk Watson, who coined the phrase "Digital Downtown," considers it a foundation for the future. "Sure, there have been hiccups along the way, but look at what we're doing," Watson says. "We're replacing burned-out warehouses with New Economy firms. We've gone from no major employers downtown to several. Once that happens, you ask four questions: Where do they sleep, eat, shop and play?
Few believe the chilly economy will stymie construction downtown. "The only developments on hold are tech projects," says Tim Hendricks, senior vice president of commercial real estate investment trust Cousins Stone, which is in pre-development work on a 33-story office tower. "Everything else -- lofts and restaurants -- is proceeding."
"Remember what was there before: nothing," Watson says. "This is a long-term investment, and it will pay off big time in 2002, 2003."
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