But
let’s not get too far ahead of ourselves. Now, more than ever, the
issue of where we work — of place and location — remains a fundamental
question.
Pandemics
and other crises can disrupt or change the status quo, but history
shows they can also accelerate trends already underway. The question of
where to locate corporate facilities has been increasing in strategic
importance for a long time. Corporations were facing a rising backlash
to their perceived effects on housing prices and gentrification in
superstar cities and tech hubs, and from attempts to hoard
taxpayer-financed incentives — a backlash that is only likely grow in
the wake of the growing movement for racial and economic justice that has swept American cities since the brutal police killing of George Floyd in Minneapolis in May.
Further Reading
In
today’s increasingly fraught economic, political, and social
environment, decisions about where to locate are becoming more, not
less, important. Figuring out who will work from home and who will
require actual office space, which offices to prune and which to keep,
how they will be configured and shared, and precisely where they should
be sited — in talent-laden superstar cities, in more cost-effective
second- or third-tier metros, in downtown urban centers, suburbs or
rural regions — requires more strategic thought, analysis, and planning
than ever.
Location
today is a central component of corporate strategy. It is not just a
cost that can be cut, but a key factor in attracting and retaining
talent. What I call “locational strategy” is essential to the ability of
corporations to gain competitive advantage. My insights on locational
strategy are drawn from both my academic research in economic geography
and business location, my personal involvement with numerous
high-profile location decisions, and work with high-tech companies and
cities over the past several decades.
The New Imperatives of Corporate Location
For
the past several years, I have been undertaking research on changing
locations and determinants of corporate headquarters. This research,
conducted with my colleague Patrick Adler, charts the locations of the
headquarters’ units of Fortune 500 companies from the heyday of the old
industrial economy in the 1950s to the rise of the knowledge economy
today. It identifies a huge shift in the locations of those headquarters
and zeros in on the factors that underlie such changing locational
imperatives.
Back in 1955, when Fortune magazine
compiled its first 500 list, America was still a largely industrial
economy, dominated by industrial corporations like General Motors, Mobil
Oil, General Electric, and U.S. Steel. Today’s more knowledge- and
technology-driven economy is dominated by technology-intensive companies
like Amazon, Apple, and Alphabet. Indeed, just 60 of the companies on
that original list remain today.
In
the old industrial economy, location decisions were oriented to
minimizing the costs of three key factors: gaining access to raw
materials and transporting them to factories, transporting finished
goods to their markets, and labor. Though early industries were based in
and around cities like Detroit and Pittsburgh, over time this model
came to be biased against these higher-cost locations. As industrial
corporations grew into highly diversified, industry-straddling
enterprises, they were able to shift their factories — or what came to
be tellingly called “branch plants” — from more expensive cities to
lower-cost greenfield locations, first in suburbs, then in the Sunbelt,
and eventually overseas. To capture those factories, mayors and other
local leaders and boosters of aspiring cities used tax credits and other
financial incentives. The new profession of economic development
emerged to position communities to better compete for and attract
corporate investments and of corporate site selection to manage the
process and extract maximum incentives for businesses. Over time,
incentives packages grew and grew into modern day multimillion-dollar
mega-deals.
But
the location decisions of high-tech, knowledge-based firms turn on a
different set of factors. The driving factor is access to highly
educated and skilled people. This new location model is shaped by the
simple fact that such talent is heavily clustered and concentrated in
certain places. This is particularly true of young talent which is
central to knowledge-based industries like finance, media, entertainment
and high-technology and which is drawn to places which offer a
combination of abundant job opportunities, deep professional networks,
and lots of other young people to make friends with (and date). As such,
it is skewed toward superstar cities like New York and Los Angeles, and
leading tech hubs like San Francisco, Seattle, Boston, Washington D.C.,
and Austin, which serve as talent magnets. Under this model, the
ability to attract and retain talent has become the central factor in
corporate location.
Our
statistical models, which track hundreds of Fortune 500 headquarters’
locations over six decades, confirm the role of talent as the key factor
in the geography of corporate headquarters today. Seventy percent of
Fortune 500 headquarters are located in metros that rank in the top
quartile (25 percent) for talent, measured as the share of the
population which holds a bachelor’s degree or more. Another key factor
is the size of metro areas. This reflects the fact that larger metros
have larger talent pools and more the amenities that attract top talent.
Ninety percent of Fortune 500 headquarters are located in metro regions
with populations of 1.3 million people or more. The third factor is the
presence of international airports. Almost 90 percent of corporate
headquarters are located in metros with international airports. Such
airports offer global connectivity between talent hubs across the world.
Our
research also charts the shift in the cities and metros where corporate
headquarters are located. Not surprisingly, the biggest loser since
1955 has been the industrial Midwest, while the biggest gainer by far is
the San Francisco Bay Area, the veritable center of America’s high-tech
knowledge economy. New York, of course, remained the center for
corporate headquarters over the entire period, home to 16% of corporate
headquarters from the mid-’50s to today. Back in 1955, Chicago was the
nation’s second-leading headquarters city, and Cleveland, Detroit,
Pittsburgh, Minneapolis, and Milwaukee all ranked high up the list.
Today,
the Bay Area, which spans the San Francisco and San Jose metro areas,
ranks second with 52 headquarters, quadruple its number back in the
1950s and adding up to more than 10% of today’s total. This tremendous
growth vaulted the Bay Area ahead of Los Angeles and Chicago, America’s
second and third largest metro areas. LA’s corporate headquarters
declined by nearly 20% over this period. And Chicago, a huge center of
corporate HQs in the industrial age, saw an even larger decline of
almost 30%. Other Rustbelt cities like Cleveland, Pittsburgh, Detroit,
and Milwaukee saw even steeper declines.
San
Francisco was not the only metro to add headquarters. The tech hubs of
Seattle and Denver also quadrupled their numbers. And, greater
Washington, D.C. added 13 new headquarters for a growth rate of more
than 300%. A number of Sunbelt cities also saw significant growth.
Dallas and Houston, with roughly 60% headquarters growth each, are now
the nation’s third and fourth biggest headquarters centers respectively.
Atlanta and Nashville both experienced 50% headquarters growth. And
Miami, which has solidified its position as the economic and financial
center of Latin America, saw 200% growth in its headquarters. All in
all, the top 10 metros account for more than half of all corporate
headquarters, the top five for nearly 40%, and just two metro regions,
New York and the San Francisco Bay Area, account for more than 25%.
Urban Corporate Headquarters Aren’t Going Away
The new geographic pattern of corporate headquarters reflects the rise of a spiky, winner-take-all geography
that is dominated by giant superstar cities and metro areas. While
Covid-19 may result in some additional dispersal, it unlikely to
dramatically overturn this now well-established corporate locational
pattern.
Hubs and Spokes
What
is more likely is that Covid-19 crisis will alter the distribution of
business functions and locations within leading corporate clusters.
With the rise of remote work, many families and older and more
vulnerable people may opt to move to less-crowded suburbs, exurbs, and
even smaller cities. A likely outcome is a more distributed hub-and
spoke system of corporate location, with major headquarters facilities
in urban centers, surrounded by satellite complexes to service remote
workers. The changes will ultimately register less in the
macro-geography of the country than the micro-geography of its metro and
mega-regions. The depth and extent of this shift will ultimately turn
on how long the current crisis lasts. If a vaccine becomes available in
early 2021 and things revert back to something approaching the old
normal, the changes will be relatively small. But if a vaccine proves
elusive and the virus remains an active threat, the changes will be
longer-lasting and in some cases permanent.
In
either case, the shift to remote work is no temporary blip. Before the
crisis hit, about 10 or 12% of the American workforce worked remotely
part of the time, with just 2% working from home on a full-time basis.
That figure shot up to
between 50 and as much as 75% of the workforce as the virus took hold
last spring. Roughly 20% of the workforce is likely to continue working
remotely on a full-time basis after the crisis, with another third doing
so part-time, according to a recent survey.
The ability to work remotely gives people much more flexibility in
their choices of where to live. The need for social distancing has made
families more inclined to place a premium on space — both outdoors and
indoors, so as to accommodate a home office and a space for online
learning for their kids. So some people will be pulled out of cities.
But
there are also factors that will push other groups back to cities.
Younger workers at the earlier stages of their careers will continue to
be drawn to cities because they offer higher pay, extensive professional
networks, and deeper and thicker pools of potential friends and mates.
Young, educated people between the ages of 25 and 34 have accounted for
roughly half
of the population growth in close-in urban neighborhoods (within three
miles of the city center) since 2010, and their share is likely to grow.
Because they are crammed into small apartments with multiple roommates,
they want and need to develop more personal and professional ties, and
they feel less threatened by the virus, office space — whether in a
corporate center or a company-underwritten co-working space — will
remain a key amenity or perk to recruit them.
This
trend is not lost on major tech companies, a number of which have
doubled down on urban locations. Facebook shocked many this August when
it signed on to lease a
whopping 730,000 square feet of office space in the landmark post
office building across from New York’s Penn Station. Amazon continues to
plan to locate thousands of workers in New York’s iconic Lord and Taylor building which it purchased before the pandemic.
These
push-and-pull trends are not so much major disruptions as they are
accelerations of changes that were already underway. Net them out while
adding in the need to reconfigure for social and physical distancing and
it is hard to say just how much the need for office space in central
locations will decline. Companies will need to allocate more square
footage to their non-remote workers, at least in the short run, and it’s
likely that at least half and more likely three-quarters of today’s
remote workers will ultimately return to offices full time.
A recent CBRE report
predicts that urban hub facilities will be needed to house top
corporate functions, as a mechanism to recruit and retain young talent,
and to function as “brand statements,” much as a Fifth Avenue flagship
store does for a retail chain. The spokes will house full-time office
workers or part-time remote workers who live in the suburbs or second
and third-tier cities. The study thoroughly debunks the idea that major
companies will abandon or substantially reduce their footprints in
superstar cities like New York or San Francisco. As the report puts it,
such dense markets “house deep, diverse and sought-after skills which
continually attract employers.” A strategy that accommodates both
younger and older workers, whether they are density friendly or density
averse, “would pair well with increased work-from-home formats, and
offer optimal flexibility and safety to workers that still want
in-office workplace options. By creating thoughtful and engaging
satellite offices proximate to concentrations of workers, these offices
serve as magnets, attracting employees and promoting culture,
collaboration and innovation.”
While
such a shift may negatively affect the economies and fiscal capacities
of some expensive cities, it will have the side benefit of bolstering
suburban and regional economies, reducing commutes and the emissions
that flow from them, and creating the possibility for establishing
integrated 15 minute neighborhoods
in which people can work, live, and raise their families in cities and
suburbs alike — a goal that urbanists have only dreamed about until now.
Location as Corporate Strategy
Deciding
where to locate a major corporate facility — especially a headquarters
or a significant branch office in a knowledge or innovation hub — is
among the most consequential and expensive decisions a company can make.
Such decisions involve far more than calculations about the costs of
real estate and the levels of local wages. They have powerful and
lasting effects on a company’s ability to attract, recruit, and retain
talent and gain access to vital business networks and markets. When
location decisions are taken lightly or done badly, they can be
extremely costly and very hard to undo. The potential negative impact to
the reputation or “brand” of a company like Amazon that can come from
demanding and accepting excessive incentives can far outweigh its dollar
value. Those risks, which have always been substantial, have increased
significantly as the nation’s political mood has become more fractious.
Amazon’s
much ballyhooed search for a second headquarters, or HQ2, provides a
textbook case of the “do’s and don’ts” of the new corporate location.
Announced in September 2017, Amazon’s original Request for Proposal (RFP)
neatly encapsulated the key factors that drive business location today:
a large metro with more than a million people, with large pool of
skilled tech and management talent, served by interstate highways and
transit, and in close proximity to a major international airport. Amazon
took the process very seriously, undertaking what is perhaps the most
detailed, comprehensive and data-driven site selection process anyone
had ever seen, driven by a top-level team of real estate, economic
development, and site selection professionals.
Yet,
to urban economic development experts like me, it seemed like something
of a circus, if not an outright ruse. Corporations almost always know
more or less where they want to locate key facilities in advance. More
to the point, only a handful of cities fit it Amazon’s own stated
criteria. From the git-go, I predicted they would choose Washington,
D.C., where Jeff Bezos had recently purchased a $20 million-plus
mansion. Not only is D.C. a major metro on the East Coast power
corridor, CEOs’ living choices have long been recognized as key factors
in where corporations site their headquarters. (I was a member of the
board of the organization that submitted Toronto’s proposal — a position
I later resigned when it became clear to me that the process had
devolved into a fishing expedition for financial incentives).
Nonetheless, the “Amazon Idol”
competition followed its script to the end: 236 cities sent in
proposals, providing detailed data on their economies, talent bases, and
available building sites. Amazon whittled it down to 20 finalists,
taking an even deeper dive into these cities, sending teams to undertake
multiple site visits at each location. The resulting dataset is a
treasure trove that Amazon can draw on as sites for operations,
research, warehousing, and distribution facilities in the future.
Despite
all that careful planning and data analysis, Amazon’s ultimately called
a do-over on its final selection. It pulled out of its Long Island City
site in the wake of a firestorm of outrage from local politicians and
community activists over incentives and the prospect of further
gentrification and displacement. A few months later, Amazon proved my
own and other critics’ point when it quietly leased a large amount of
space in Manhattan’s Hudson Yards without receiving a nickel of
subsidies in return.
Amazon is far from the only high-tech company to engender such community backlash. Protests erupted
over the buses that shuttle techies between their urban apartments in
San Francisco and Oakland and their workplaces in Silicon Valley. In
March of this year, San Francisco considered a measure
that would limit the construction of new office space if the city
failed to deliver affordable housing. In April, Alphabet’s smart-city
subsidiary Sidewalk Labs, a company I have worked closely with, pulled out of Toronto,
in part because of the pandemic, but also because of the controversy
over privacy and what was perceived as its privileged access to public
land on Toronto’s lakefront. This occurred even though Sidewalk Labs did
not seek or accept any taxpayer sponsored incentives, committed to
affordable housing and environmental development, and engaged in
extensive community engagement. In July, Seattle passed a payroll or “head tax,”
to increase revenues from the city’s biggest businesses and highest
earners which are widely perceived as not paying their fair share — an
ongoing issue that was partly responsible for Amazon’s search for a
second headquarters to begin with.
How Companies Should Rethink Their Approach
It
is time for corporations to rethink and revise their approach to
corporate location. They must approach site selection and community
engagement in a far less transactional way. They must think of places
not as abstract points on a map made of bundles of measurable
characteristics that meet certain corporate criteria, but as actual
communities where people live, raise their families, and form deep
emotional attachments. And they must put their money where their
proverbial mouth is, investing in those communities and in the full
complement of capacities they need to build and sustain more fruitful
relations with the places in which they choose to locate. The backlash
will only grow given the deepening anti-corporate, anti-Big Tech
sentiment on both the left and the populist right; community concerns
over gentrification, inequality, and unaffordable housing; and the
burgeoning Black Lives Matter movement for racial and economic justice.
In
today’s environment, locational strategy is an ever more important of
competitive advantage. Based on my research and conversations with
leading corporations, consultants, mayors, city leaders, and urban
development experts, as well as a decade-plus of teaching about these
issues in a leading business school, here are the five key dimensions
that underpin a more effective approach to locational strategy.
Say No to Taxpayer-Financed Incentives
Tax-payer-funded incentives amount
to a whopping $50 billion or so every year. And individual mega-deals
have risen to multiple billions. That’s a lot of taxpayer money that
could be spent on education, infrastructure, affordable housing, and
other public goods.
Corporate incentives are wasteful and useless. Detailed research shows that they have little to no effect
on siting decisions. Companies (or their site-selection consultants)
create a fictitious competition to extract maximum incentives and locate
where they would have anyway. America is an extreme outlier on this
matter. The European Union, for example, strictly limits the tax
incentives that jurisdictions can offer. But efforts to develop similar
federal, state, and local policies in the U.S. have gone nowhere. In the
absence of public regulation, corporations should recognize that it is
in their own interest to regulate themselves.
Embrace the Rise of the Rest
Companies
need to think more expansively about where they locate. It makes sense
for them to develop spokes, not just in the suburbs of superstar cities,
but in second- and third-tier cities as well. For all their massive
concentrations of talent, superstar cities are increasingly expensive
and come with the host of problems borne of inequality — exorbitant
rents, rampant gentrification, extreme inequality, traffic congestion,
homelessness, and more — that I have dubbed the “new urban crisis.”
When it comes to location, too many companies have a herd mentality,
following each other into the same locations. It’s time for bold leaders
to break ranks and establish new beachheads, spreading their
investments wider and helping to build new innovation ecosystems,
accelerating what Steve Case dubbed “the rise of the rest.”
We
seem to be reaching an inflection point in the geography of talent
where smaller, less expensive cities have a new allure, something that
is reflected in the inclusion of cities like Philadelphia, Pittsburgh,
Columbus, Indianapolis, Newark, Miami, and Nashville on the list of
Amazon’s HQ2 finalists. Those cities and many others are much more
welcoming than coastal superstar cities, both because they need jobs and
because they are more affordable. As a business leader in one of those
cities put it to me, “Tell those tech companies to come to the ‘grateful
cities,’ where they will be more welcome.”
Be a Serious and Invested Community Partner
Companies
should resist the temptation to play communities against one another,
or to treat them as mere points on a map. Locational strategy is not
just about choosing places, it is about managing them and investing in
them in ways that are a win-win for communities and their residents.
They can learn from anchor institutions,
like universities and medical centers, which typically work
hand-in-glove with local leaders to create housing and amenities and
jobs.
A
growing number of companies are already using this approach of
partnering and investing in their communities, some which I have
observed and been involved with:
- Prudential
Insurance has stuck with its hometown of Newark, New Jersey through
thick and thin. Instead of following other businesses to Manhattan or
residents to the suburbs, the company stayed in Newark after the
devastating riots of the late 1960s, upping its investments in the city.
- Right
around the time that Amazon launched its HQ2 search, Walmart announced
its decision to build a new campus in its original hometown of
Bentonville, Arkansas. Walmart could have easily moved to Dallas,
Atlanta, New York, or another superstar location. But instead, it
doubled down on its hometown. With support from Walmart, local leaders,
and some of the Walton family heirs, Bentonville invested in a host of
leading edge projects and amenities aimed at turning the region into an
attractive location for world-class talent — among them the art museum
Crystal Bridges and its sister institution The Momentary, a new
contemporary art space; an art hotel; a culinary school; a new private
school with scholarships for less advantaged students; numerous
restaurants and coffee shops; a network of new bike trails; and various
projects, centers and schools at the University of Arkansas.
- In
Tulsa, the George Kaiser Family Foundation have worked to make the city
a center of remote work, invested in its award-winning arts district,
the Guthrie Museum, and more.
- Quicken Loans’ Dan Gilbert has made massive investments in downtown Detroit.
Create a Chief Location Officer
Location
decisions can no longer be offloaded to real estate units or outsourced
to site selection consultants. Large, rapidly growing firms must
proactively manage portfolios of locations that serve different
purposes. To ensure they are making their decisions both sensitively and
strategically, corporations should appoint a Chief Location Officer at
the C-suite level, providing them with a staff that is well-versed in
the new economic geography, its data analytic underpinnings, and in the
actual management of communities — not just MBAs with real estate or
operations backgrounds, but professionals who have worked in cities and
local economic development. Such staff capacity should be, supplemented
with advisory groups of former mayors, economic developers, and others
who can help companies better understand and manage communities and
partner with them on addressing pressing issues.
The
building of such capacity should extend to the boardroom. Large
companies would do well to recruit former mayors, city leaders, and
community developers as directors and to create special committees to
oversee location and community management functions.
Locational Strategy as a Centerpiece of Business Education
Business
schools have to step up too, establishing courses and curricula which
teach MBA candidates the disciplines of location and community
management. Locational strategy needs to be taught as a core element of
corporate strategy. Here business schools can draw from existing faculty
experts in strategic management and real estate, who have developed new
insights into geographic clusters and ecosystems.
My
course at the University of Toronto’s Rotman School of Management now
asks students to consider three key sets of issues. I begin by making
location personal, inviting students to consider their own location
decisions strategically and in a data-driven way. I then have them work
through each of the factors involved in locating and selecting a new
site for a startup or major corporation. After that, I engage them in
simulated negotiations with a city government or economic development
organization, helping them understand the dimensions of conflict and
contestation on all sides. In this way, I help them better understanding
of multiple sides of location decisions and community development.
It
may well be time for an MBA concentration in location and urban
development, melding knowledge firm management, corporate strategy, and
real estate concentrations. More extensive executive education is also
needed, particularly value-added practitioner-oriented programs for
senior managers and members of corporate boards of directors.
Given
the unprecedented stress, change, and uncertainty of our current
moment, location and community engagement must become a central focus of
business education and business practice alike.
America’s
economic geography has shifted dramatically over the past several
decades, shifts that are both accelerating and changing as a result of
the Covid-19 pandemic. It’s too early to tell how the landscape will
settle. But these changes are and will continue to shape a new corporate
landscape. Forward-looking corporations take location more seriously
than ever, making site selection and community engagement a centerpiece
of their overall corporate strategy. Location, after all, is everything.
Was this article helpful? Connect with me.
Follow The SUN (AYINRIN), Follow the light. Be bless. I am His Magnificence, The Crown, Kabiesi Ebo Afin!Ebo Afin Kabiesi! His Magnificence Oloja Elejio Oba Olofin Pele Joshua Obasa De Medici Osangangan broad-daylight natural blood line 100% Royalty The God, LLB Hons, BL, Warlord, Bonafide King of Ile Ife kingdom and Bonafide King of Ijero Kingdom, Number 1 Sun worshiper in the Whole World.I'm His Magnificence the Crown. Follow the light.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.