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Episode 6 – The Impact of Business Sentiment and Workforce Competition on Location Decisions

Site Selectors Guild
Episode 6 - The Impact of Business Sentiment and Workforce Competition on Location Decisions
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Rick Weddle: Welcome to Site Selection Matters where we take a close look at the art and science of site selection decision making. I’m your host, Rick Weddle, president of the Site Selectors Guild. In each episode, we introduce you to leaders in the world of corporate site selection and economic development. We speak with members of the Site Selectors Guild, our economic development partners, and corporate decision-makers to provide you with deep insight into the best and next practices in our profession.

In this episode, we have as our guest, Seth Martindale, managing director with CBRE Incorporated, the world’s largest commercial real estate services and investment firm with more than 75,000 employees. They offer a broad range of integrated real estate and corporate site selection services. Seth is a leader in the location analysis and economic incentive negotiation practice within CBRE’s strategic consulting organization.

Today, Seth will talk to us about trends he’s seeing in technology-related businesses and how business sentiment and competition for workforce is impacting corporate location decisions. Join me as we welcome Seth Martindale to Site Selection Matters.

Seth, today, we hear a lot of speculation about why tech companies move and shift operations to new locations. We hear anecdotes about companies leaving one area and moving to other areas. Let’s start with trying to unpack that premise. Do you really see examples of that happening?

Seth Martindale: I do. I mean that kind of thing happens all the time. Some of it you see in the news and some of it you don’t. But, you know, I would say for every huge Amazon-type project, there are several or many more that are much smaller in scale.

You know, I think predominantly you see companies moving from the expensive markets like your standard New York, San Francisco to somewhat less costly markets for a variety of reasons, whether it’s a diversity of labor or just cheaper labor or, you know, business risk mitigation or whatnot. But we really do see quite a bit of that happening, and I think a lot of that is just companies trying to stay ahead of the game and trying to get any advantage they can.

Rick: Well, you know, obviously the cost question is one that we can come back to a little bit because obviously if a company can save money, they want to try to do that. But there are other reasons, and I think you’ve mentioned in conversation “business sentiment” or someone might call that business climate or perhaps anti-business sentiment as a factor. Is that something that comes into play? And if so, could you provide a little detail about the nature of that particular factor?

Seth: Yeah, I mean I think it’s definitely something that comes into play. I mean, frankly, that’s just a business risk, right? You never really know what’s going to happen, and I don’t mean to pick on California here because I live in California myself, but, you know, a lot of those laws that you’re seeing getting passed at the state level or even at the city level are potentially dangerous to a company, right?

If you’ve got additional taxes coming into executive-level people, or you’ve got additional taxes that are going to come on like an IPO tax, or even something as simple as you need to rezone part of your building in the city of San Francisco and that process takes you five years, all those things can be problematic to your business. And the last thing you want to do is have some government entity or something that you’re not aware of impact your ability to do your standard day to day business.

So, you know, I think if you’re not keeping track of these things or at least taking a look at all this stuff when it’s happening, you’re not doing the right thing for your business, so I think that’s why you see a lot of these companies taking really close aim or really close look at what’s going on.

Rick: Let’s go back to the question of cost and also how it relates to moving or possibly moving an operation. You know, if a company is in a fixed location, it only has a limited number of ways it could reduce its operating cost. It’s already bought its land. It’s built its building. It’s leased its lease or whatever.

So, they tend to focus on a narrow list of things like: could I get a rebate on taxes or whatever? But when they open up the idea of moving to a different location, let’s say their lease is expiring, or they’ve outgrown their existing space, and they need new space, it opens up a range of different opportunities for a company to reduce cost. Is that correct?

Seth: It does. I mean, there are a lot of factors in there that can go into your cost, right? I mean, first and foremost, you think people usually talk about the labor cost. So, you know, just for an example, a financial analyst in New York might make $150,000 a year. That same person in Nashville might make $120,000. So, you know, you’ve got a cost differential there.

You know, this cost differential is in your real estate. You know, if you’re an industrial manufacturer, this cost differential is in utilities. You know, really the list goes on and on and on.

The interesting thing that I think we’re seeing now that’s changed a little bit is that I think cost used to be the number one factor by a very long margin. Everybody cared about reducing that.

Now, I think there are costs associated with this but access to labor, the true access to people who work for a company is becoming a broader and bigger issue and you know that record low unemployment across the country.

But on top of that, people just don’t want to compete. You know, if you’re sitting in Silicon Valley, you’re competing with some of the biggest tech companies out there or a software engineering town or whatever it might be. And I think companies are willing to say, “Okay, let’s go to a secondary or a tertiary market, and see if we can operate there, and hire a good level of people, and do it for much cheaper, but at the same time, not have to worry that, after we hire someone, that that person’s going to take six months of training and then jump somewhere else for a 10% or 20% raise.”

So, I think not having to deal with that turnover and that competition, which in itself has costs as well, is really one of the bigger factors that we see a lot of the at least office space companies moving for.

Rick: You know, it seems like this whole issue of workforce competition is a bit of a dichotomy. You know, we hear companies moving, like you mentioned, the Bay Area, California, Seattle because for a lot of reasons, to reduce cost or maybe it’s hard to find needed workers. But at the same time, we hear stories of young people and talented people or skilled people moving into those markets because that’s where they have so many jobs.

Net-net, it seems these areas remain hot markets and continue to grow rapidly even as companies are moving out to find different labor environments. It seems kind of hard. How can both of these things be true and happening at the same time?

Seth: Sure. I mean, it’s kind of hard to explain because we really do see both sides of that coin. I mean, I think the first thing I tell you is you’ve got to remember all this is happening under a backdrop of, you know, 10 years of solid economic growth. So, you know, everywhere that’s doing pretty well and the places that are big like Silicon Valley and New York tend to do very, very well.

I think that you’re not going to see these major shifts in where people are just vacating a big, huge market like San Francisco or New York or LA happen overnight. You know, I think what you see a lot of, or at least we see a lot of, that people don’t really pay attention to and I think especially a lot of the state economic development agencies don’t pay attention to is…A company like an Apple, or a Facebook, or a Google will put 500 people in Austin and say, “Wow, that worked pretty well,” and 500 turns to 1,000 and 1,000 turns to 2,000 and 2,000 turns to 4,000. You know, and all of those could have potentially been jobs that were based in Silicon Valley or wherever else. But, you know, they had success somewhere else and they start to grow that group there.

So, I think, you know, that goes under the radar because that’s not really like that high…You don’t see a lot of press around that where you see a huge relocation from one market to the next. It just happens slowly over time. So, I think, you know, that’s what people are missing because that’s happening quite a bit, and that’s what’s driving the growth in places like Austin, and Nashville, and Dallas.

But, you know, that being said, Silicon Valley is always going to be Silicon Valley. You’re going to have a base of people that are always there, and, you know, so that’s the change I think you’re looking 30, 40, 50 years on. I just don’t think that’s going to happen overnight.

Rick: You mentioned all this happens against the backdrop of this long-standing, you know, almost decade now of recovery and growth. I don’t want to put you on the spot as a forecaster or a soothsayer, but how long can this go on? How long can we continue to sustain this kind of growth do you think?

Seth: Yeah, I mean that’s a good question. I really do. I wouldn’t be doing this. I’d be investing and rich, but I think at some point, for the last three or four years, everybody has said a recession is right around the corner and it really hasn’t happened. And a lot of the fundamentals still look pretty good at least for U.S. or North American growth. So, you know, I don’t know if we’re going to have this big, huge correction overnight.

I think the interesting thing is that, if you were around and working on the working world in 2008, 2009, you saw what a really nasty recession looks like. And I think at least a lot of people that are maybe in their late 20s, almost 40 sort of have that stuck in their mind is that’s what a recession is. You know, and all recessions aren’t necessarily bad things. You know, a little one might not be the worst thing in the world for everybody and, you know, hopefully it won’t be as bad as the one we had the last time around. So, I think, you know, you’ve got to keep that in mind as well.

You know, I think it’s happening. You know, I think what I see a lot of and this kind of thing—maybe I’m just getting old—that drives me a little crazy is, you know, the perks that people are getting and the new young workers, what they expect in their jobs is getting pretty crazy in my opinion. You know, you see, like, Michelin-rated star chefs serving free meals every day in the Bay Area at certain companies and, you know, free snacks, and free laundry, and free concierge service, and, you know, people almost demanding that to work. And, you know, last time we saw that in the last dot-com bubble, it ended pretty nasty.

So, those tend to be the warning signs that I see a lot and I just worry that… Some kind of correction is around the corner. But even if we do have one, I don’t know that it… Well, I hope that it’s not going to be nearly as bad as the one we had before.

Rick: That’s for sure and, you know, what you’re really describing really are the kinds of things that happen at the very, very top of a growth curve where things are a little too frothy and too much.

Let’s turn a little bit and look at the issue of regional and community competitiveness if we can. What would some of these secondary or tertiary markets… What do they really need to do to improve their overall attractiveness as a possible or future location for some of these shifting operations that are in this data flux as they’re looking around?

Seth: Right, I mean I think the perfect formula, you know, at a high level is, you know, low cost of living, high quality of life with a big bunch of educated people, right? You know, and there are certain cities that we’re seeing that sort of formula froth at the top.

So, you know, for a long while, that had been Austin, that had been Nashville. You know, most cities have had a lot of growth, and they’re starting to get more expensive in turn, right? And now what we’re seeing is a new crop of cities pop up, right? We’re seeing Kansas City, Pittsburgh, Columbus, even Jacksonville, and some other cities like that that are not normally thought of as huge growth powerhouses that are seeing a lot of action now.

You know, cities like Charlotte, and Raleigh, and Atlanta are always going to be in the mix, and I think they’ve done a good job of continuing that growth. But going back to your original question, I do think it’s that formula that low cost of living with a high quality of life and a lot of educated people.

Just an anecdote, what we see a lot is, if a company let’s just say moves from New York to Atlanta, they expect maybe 30% of the people will accept relocation packages or whatever 20% to 40% but almost all the time that number gets underestimated by our clients. More people are willing to take that relocation package out of an expensive market to a cheaper market just because your $100,000 or $200,000 a year, whatever it is that you’re making goes a lot further in a place like Kansas City or Nashville or someplace like that.

And I mean you could still have a high quality of life. You know, there’s still good restaurants, NFL sports teams, NBA sports teams, all that stuff that you want to do, and I just think that’s a good move for some of those people that are younger, ready to start a family and, you know, want a little bit of change of pace.

Rick: Yeah, that’s an interesting thing. We underestimate how many people would actually avail themselves of that opportunity if given the chance to maybe slow down their pace a little bit, have a little smaller market, a little higher quality, or maybe the same quality of life but a little lower cost profile, maybe put a little more money in the bank.

Seth: Right. I mean, I live in Southern California, and that might be one of the most depressing parts about my job is when you’re seeing, you know, what kind of residential real estate you can buy or how far your money goes in some other areas of the country that are also really nice areas to live in. So, you know, you’ve got to remember what you’re paying for, I guess.

Rick: So, taking the flipside of that, you know, what a community could do to be more attractive to attract new business, what about some of these markets like you say in California, the Bay Area, Seattle, some of these hot markets that have been really super strong growth areas for a long time? What can they do foreseeably within their control to be a better location for workers and retain these companies in the future?

Seth: Yeah, I mean that’s a good question. You know what? I don’t really know I have an answer for that one. I mean I think what you’re seeing is some of… Like areas like LA and San Francisco, their local economic development groups, they’re not nearly as highly staffed than some of the areas that you might see like in the southeast. Like, if you compare the amount of people that work for Georgia Economic Development versus the State of California Economic Development, the ratio is off.

But I do think that the people that are working for those economic development groups are doing their best with what they have. I mean, they realize that they don’t have incentives to offer, that they don’t have, you know, [inaudible 00:13:48] making waivers they can give and those sorts of things that you might normally see in other areas of the country. But they do have a really solid base of talent. They’ve got, you know, the best talent access you’re going to have. You know, they’ve got access to ports. They’ve got all kinds of things that other areas of the country won’t have. So, I think they’re doing the best of what they can, but I mean it’s a tough situation to be in.

You know, I think the interesting though that you’re seeing is some of the areas that are sort of I think you’d consider on the periphery of the expensive areas like, for instance, Sacramento, you know, they’re pushing their agenda pretty hard and saying, “Look, this is a lower-cost alternative. We realize it’s still California but, look, you can come here, and you can have a solid quality of life. Your money goes a lot further. And we have good access to talent and all the stuff that you want.” And I’m seeing areas like Sacramento, you know, even like Portland sort of pushing that message harder because I think they’re getting sort of lost in the whole West Coast thing. And I think it’s working. It’s just working slowly.

Rick: That’s interesting. So, it’s really kind of an intermediate step, maybe not going so far as to a Nashville or an Austin or a Charlotte but to stay in-state or stay a closer proximity and still have many of the same kinds of savings. When it comes to the staffing and when it comes to how these organizations and entities do try to compete, does it kind of come down to maybe leadership and how hungry they are or how confident they are that they need to or don’t need to intervene in the market? Because some of these markets are really hungry for new investment.

Seth: Right. I mean I definitely believe that and it kind of hurts me to say it but the harder you push your agenda, the more marketing dollars you throw at something. You know, it really will make a difference.

I mean you saw the State of Texas maybe 10 years ago or so when Gov. Perry pushed really hard into California and, you know, put up billboards, and had meetings with California-based CEOs, and really pushed the message that Texas is a good place to do business. And I think they threw a lot of money and a lot of people at it, but I think it did a really, really…You know, I think they ended up getting what they wanted. They had a ton of growth and they did end up poaching a lot of business away from California.

You know, I don’t know that poaching business away is what needs to happen, but I think that if you are willing to have aggressive marketing and you’re willing to push your people out to whether it’s site selectors or business leaders or both, I really do think that makes a difference. And if you can get the political backing in your own state to go push that message and that’s what you want to do, I think you can be successful as long as you have at least a reasonably good product to sell.

Rick: Some might call it poaching. Others might call it positioning or putting your best foot forward I guess, you know, to make your case and make the opportunities that you have be top of mind among the target audiences.

You know, Seth, you’ve given us a lot to think about in today’s conversation. I had a really interesting… What a great conversation, but, you know, that’s about all the time we have today, so let me say thanks, Seth, for talking with us today in this episode of “Site Selection Matters”.

Seth: Thanks. I appreciate you having me.

Rick: Thanks for listening to this episode of “Site Selection Matters” and a special thanks to Seth Martindale for helping us get inside and better understand the impact that business sentiment and workforce competition has on the location of new corporate facilities and of course new job creation. What an informative discussion that has really left us with a lot to think about.

Again, I am Rick Weddle, president of the Site Selectors Guild. We hope you’ll subscribe to the “Site Selection Matters” podcast on Apple podcast, Stitcher, Spotify, or wherever you listen to your podcast. We look forward to bringing you some great discussions in the year ahead. Until next time, good day.