Q1 / Winter 2013 by Area Development

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THE Business Case FOR INCENTIVES

2013 Real Estate “BIG DATA” OUTLOOK

Migrating Inland

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Q1/ WINTER 2013

Changes in Priorities

th ANNUAL

CORPORATE SURVEY

th ANNUAL

CONSULTANTS SURVEY

Sometimes becoming a better company isn’t a matter of “how” as much as “where.”

With accessibility to nearly half of the population of the U.S. and Canada in under one day, the Columbus Region matches the strength of our location with the capabilities of our experienced workforce. Not to mention that Ernst & Young and KPMG ranked Ohio #3 in tax competitiveness in the nation. #1 UP-AND-COMING TECH CITY

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HOME TO 54 COLLEGES AND UNIVERSITIES

NETWORK PARTNER

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CONTENTS 69 REGIONAL SUPPLY CHAINS:

FEATURES

12 DECIDING THE FATE

OF AGING BUILDINGS

By assessing a facility’s condition, functionality, and usage, organizations can optimally plan for the future and make intelligent investment choices.

REAL ESTATE OUTLOOK

• Bricks to Clicks? Growth in “e-tailing,” as well as Class I railroad investment, is having a noticeable impact on the demand and development of industrial space.

MANUFACTURING IS ON THE RISE IN AMERICA

Regional sourcing is helping manufacturers save time and money; with that in mind, savvy suppliers are moving closer to the end users of their products.

80 MAKING A BUSINESS

65 2013

COVER STORY

A WIN FOR OEMS AND THEIR LOCATIONS

• New Demands, Challenges in Office Market More investment is needed by the private sector in order for full office recovery to take hold.

Exhibiting know-how and innovation, U.S. manufacturers are adding to their payrolls and economic growth across the nation.

CASE FOR INCENTIVES

Incentives are only part of an area’s economic development strategy, and they are a necessity for companies and areas struggling to compete in challenging economic times.

83 FEDERAL AND STATE

LEGISLATIVE MOVES TO BOOST COMPETITIVENESS

Understanding the competitive economic climate across the United States, Congress and state legislatures continue to propose new legislation to compete in today’s economic environment.

86 PREPARING FOR THE

NEW LEASE ACCOUNTING STANDARDS

While the new accounting standards will provide more financial transparency, they may lead to a false picture of a firm’s financial health.

Exclusive O N L I N E Content FEATURES NOW ONLINE... In Focus: The Electric Utility and Data Center Interface – Things to Consider

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Front Line: Railroads — An Important Manufacturing Link Location Notebook: Data Centers Betting on Nevada Size Matters in the Location Decision The site selection needs of medium and small-size firms differ from those of larger firms so a singular approach to the facility location process will not fit all. Working “Smarter” With Incentives As economic developers seek to preserve capital and protect their investments, companies should be aware of performance requirements and repayment provisions accompanying incentives. Protecting Your Business with Cross-Training Training employees — including managers — to take on functions other than their own will help a company achieve operational readiness, while promoting teamwork among individuals and across departments. Area Development® Site & Facility Planning (USPS 345-510) is published five times per year (Q1/Winter, Q2/Spring, Q3/Summer, and Q4/Fall — and Annual Directory in December) at Richmond, VA, by Halcyon Business Publications, Inc., 400 Post Ave., Westbury, NY 11590. Periodicals postage paid at Westbury, NY, and additional offices. Single copies, $10. Yearly subscription U.S. & Canada, $65; foreign, $95.

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“Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” Milton Friedman, American economist, statistician, and recipient of the Nobel Prize in Economic Sciences (1912–2006) Volume 48 | Number 1

Q1/ WINTER 2013

EDITOR’S NOTE — Annual Surveys Show Consistency of the “New Normal”

FRONT LINE 7

DEPARTMENTS

“Big Data” Migrating Inland

FIRST PERSON

6 IN FOCUS Intelligent Communities Provide a Positive Environment for Business Growth

8 IN THE KNOW • SC, TX, and NC Lead U.S. in Inward Foreign Investment • PwC - 4th Quarter Optimism Among U.S. Manufacturers • Milken Study Highlights Metros Recovering Most Quickly from the Economic Recession and Growing Their Economies • Growing Challenge of Supply Chain Risk Must Be Addressed

SPECIAL REPORT: APPA 71

How Public Power Utilities Are Meeting Customer Demands

WEB DIRECTORY 88

9 BUSINESS LOCATION TRACKER

Interview with: Alexander Frei Director, Business Incentives Practice, Cushman & Wakefield of Illinois, Inc.

Web addresses to this issue’s advertisers

Business expansion & relocation announcements

SPECIAL

The27 7tthh Annual Corporate Survey

(follows page 24)

27th ANNUAL CORPORATE SURVEY & 9 th ANNUAL CONSULTANTS SURVEY

The 9tthh Annual Consultant Survey

Although the survey results show no dramatic upswings in new facility or expansion plans, there are changes in site selection priorities — perhaps as a result of the lackluster economic recovery.

Life Sciences Site Selection Focused on Smaller Cities, Access to Innovation and Incentives North American life sciences companies are shuffling and right-sizing their footprints to maximize ROI in R&D and other corporate functions. Health Insurance Reform: Boon or Bane for Business? Will “Obamacare” encourage or inhibit the expansion of companies into new areas? Moving Companies — Separate Fact from Fiction! Here are some steps to minimize down time — and cut costs — when choosing a moving partner for your business.

Join Our Newsletter areadevelopment.com/newsletter

Online Database Resources www.facilitylocations.com www.fastfacility.com

POSTMASTER: Send address changes to Area Development, Circulation Department, 400 Post Ave., Westbury, NY 11590. Subscribers requesting address changes must provide both old and new addresses. © Copyright 2013 by Area Development® magazine. ISSN: 1048-6534. Printed in the U.S.A. Area Development® is a registered trademark of Halcyon Business Publications, Inc.

AREA DEVELOPMENT | Q1/Winter 2013

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EDITOR’S NOTE

Q1/WINTER 2013

Annual Surveys Show Consistency of the “New Normal” This issue contains the results of our signature Corporate and Consultants Surveys outlining our readers’ — as well as consultants’ clients’ — facility plans and priorities. Although the results show no dramatic upswings in activity, they do show some marked changes in site selection priorities. Nonetheless, as the economy — and manufacturing, in particular — continues to bounce back, we expect modest economic growth as decisionmakers continue to be as cautious as they are consistent in this regard. In fact, as we went to press on this issue, the Institute for Supply Management (ISM) reported that its Purchasing Managers Index (PMI) increased to 54.2 in February, a very positive sign considering that the Index has only reached that level about one third of the time over the last 20 years. This latest news indicates that consumer and business demand is growing, resulting in increased factory orders and production. We also report on the states that are strongest in manufacturing — in terms of employment and output — in this issue. Exhibiting know-how and innovation, U.S. manufacturers in these states are adding to their payrolls and leading the nation out of recession. Needless to say, uncertainty about U.S. government policies — including healthcare and taxes — may continue to slow growth. These issues were cited by our survey respondents when asked what was preventing them from spending more of their earnings on investment in U.S. facilities. And now we are dealing with the budget sequester. Henry Aaron, senior fellow of Economic Studies at the Brookings Institution, recently told The New Republic, “Trying to curb long-term budget imbalances now carries the high probability of delaying economic recovery and the possibility of turning recovery into decline.” That may be a worse case scenario, but even slower growth caused by the current budget sequestration in Washington would be an unfortunate turn of events. If you one of the 38,000 regular readers of Area Development magazine — or one of the 22,000 new subscribers who have joined us this month — please avail yourself of our print and online resources as your firm plans for the year ahead. You will receive four quarterly issues of Area Development magazine, plus our annual Facility Locations Guide (FacilityLocations.com contains 5,000+ contacts who can help to satisfy your site selection needs). As our audience increasingly turns to the Internet for more information, we are enhancing AreaDevelopment.com with additional exclusive content, interviews, news items, and studies/research papers. You will also find listings of available sites and buildings at FastFacility.com — our online free-access property database. As always, if you have any questions about our print or online resources, you may contact me at gerri@areadeveloment.com.

www.areadevelopment.com EDITORIAL

E-mail: editor@areadevelopment.com Editor Geraldine Gambale Staff and Contributing James Berger John Borchardt Lisa Buddecke Dan Calabrese Dave Claborn Mark Crawford Clare L. Goldsberry Greg Guillot Cynthia Kincaid

Editors Susan Kleeman Beth Mattson-Teig Richard Maturi Phillip Perry Jim Romeo Mali R. Schantz-Feld Monique Silverio Steve Stackhouse

DESIGN/PRODUCTION Art & Design Patricia Zedalis Production Manager Jessica Whitebook Production Assistant Talea Gormican EXECUTIVE Publisher Dennis J. Shea

dshea@areadevelopment.com Sydney Russell, Publisher 1965-1986 ADVERTISING SALES William Bakewicz (ext. 202)

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valerie@areadevelopment.com ONLINE SERVICES Digital Media Manager Justin Shea (ext. 220)

jshea@areadevelopment.com Business Development Matthew Shea (ext. 200)

mshea@fastfacility.com Web Designer Carmela Emerson

BUSINESS SERVICES Reader Service Barbara Olsen (ext. 225)

olsen@areadevelopment.com Circulation Gertrude Staudt

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annie@areadevelopment.com EXECUTIVE OFFICES Halcyon Business Publications, Inc.

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President Dennis J. Shea Finance Mary Paulsen

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2013 EDITORIAL ADVISORY BOARD Larry Gigerich Managing Director, Ginovus Robert Hess Executive Managing Director, Newmark Grubb Knight Frank Andy Mace Principal Consultant, Cushman & Wakefield Global Consulting, Supply Chain Solutions Ed McCallum, Principal, McCallum Sweeney Consulting

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John Morris, Leader of Industrial Services for the Americas, Cushman & Wakefield, Inc. Kathy Mussio Managing Partner, Atlas Insight Scott Redabaugh Managing Director, Jones Lang LaSalle Andrew Shapiro Managing Director, Biggins Lacy Shapiro & Co.

Noah Shlaes Senior Managing Director, Newmark Grubb Knight Frank Thomas Stringer, Esq. Director, Business Advisory Services, Ryan & Company Dean J. Uminski Executive, Site Selection Consulting, Crowe Horwath LLP

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Intelligent Communities Provide a Positive Environment for Business Growth By John G. Jung, ICF Chairman and Co-Founder

John G. Jung is Chairman and CoFounder of the ICF. He is an award-winning registered urban planner and designer and economic developer. The ICF seeks to share the best practices of the world’s Intelligent Communities in adapting to the demands of “the broadband economy” by conducting research, hosting events, publishing newsletters, and producing its high-profile international awards program. For more information, go to www. intelligentcommunity.org

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Smart business executives looking for new company locations need look no further than the towns and cities that have earned a designation by the Intelligent Community Forum (ICF). Earning “Intelligent Community” status from ICF indicates these municipalities not only possess the right technologies and related infrastructure, but also have gone one step further to have the holistic advantages necessary to create Intelligent Communities. These are places with exceptional talent and skilled workers that have differentiated themselves with a culture that uses smart technologies in creative and innovative ways — a key competitive advantage. They are also very successful in attracting investment and are excellent promoters, able to gain global recognition through earned media. Furthermore, these Intelligent Communities share these benefits with all of their citizens, hence evolving a depth of community culture and capacity around the use of smart technologies that further add to their exceptional credentials. These communities also advocate intelligent government policies; share leadership qualities among the public, private, and institutional sectors where collaboration among them is a recognized trait; and seek sustainable solutions, further differentiating themselves from their competition. They not only possess the intelligent infrastructure — it becomes part of the culture of the communities through everyday use. Some Examples

For instance, Chattanooga, Tennessee, designated by ICF in 2011 as an Intelligent Community, was the first U.S. city to install affordable gigabit-per-second connectivity to its schools, homes, and businesses. But not stopping there, the community sought to attract and retain its brightest talent; supported its new startups; created a quality of life, promoting creativity and innovation; and marketed these to the world. This, in turn, has attracted billions of dollars of new investment from many companies including Volkswagen, Amazon, and Blue Cross. Waterloo, Ontario, and Riverside, California, receive visitors daily to learn how they prospered using their Intelligent Community reputation and status. Waterloo, ICF’s Intelligent Community of the Year in 2007, has a reputation of exceptional universities, local technology talent, and a legacy of collaboration. These exceptional Intelligent Community traits have attracted Google, EA, AGFA, Cisco, and others as well as supported thriving home-grown technology firms including Research in Motion (RIM), Christie Digital, OpenText, Teledyne-DALSA, and Com Dev. Riverside, once a struggling bedroom community in the shadow of Los Angeles and ICF’s current Intelligent Community of the Year (2012), attracts investors due to its talent base and renewed infrastructure, including China’s Winston Chung, Xerox, Motorola, and Microsoft. Dublin, Ohio’s Dublink high-speed broadband network and Intelligent Community culture supports Verizon Wireless, Ashland Research, Nationwide, Alcatel-Lucent, IBM, and Cardinal Health. Well over 100 cities around the globe have benefited from the holistic approach that the Intelligent Community movement advocates, including Austin, Texas; Gangnam, Korea; Whittlesea, Australia; and Eindhoven, Holland. Many cities, envious of an Intelligent Community’s “secret sauce,” simply make high-speed broadband and specialized monitoring equipment available to make them more efficient and cost-effective. However, although a terrific start, it’s only the first step in becoming an Intelligent Community.

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FRONT LINE

“Big Data” Migrating Inland

s you walk down the airport concourse, the text message arriving on your smart phone informs you that the comfortable, yet worn, shoes you’re wearing have only 10 percent of their useful life left — and, by the way, the airport shoe store coming up on your right happens to have a pair in your size. Welcome to the world of data everywhere. Chips in your shoes, a smart device in your pocket, GPS satellites, banks of computing power, and all the petabytes they generate are “big data.” How to manage it to generate a business advantage and useful action is today’s advanced analytics. “I talked to a lot of people 10 years ago and they were screaming that they didn’t have enough information,” says IBM spokesman Scott Cook. “Now, you talk to those same people and they scream that they have too much! What they need now is the right information.” Among the 50 or more analytics solution providers in the United States, IBM is one that’s making a large investment in the business of mining data in various forms from myriad sources. Cutting the ribbon in November on the new IBM Client Center for Advanced Analytics on the northwest side of Columbus, Ohio, Senior Vice President of IBM’s Software Solutions Group Mike Rhodin noted the center is expected to produce 500 jobs within three years. “I think if we’re wildly successful, it’ll keep growing. This is really the wave of what we here at IBM call the next era of computing.” Gartner, Inc., the IT consulting and research group, concurs. “By 2015, 4.4 million IT jobs globally will be created to support big data, generating 1.9 million IT jobs in the United States,” said Peter Sondergaard, Gartner senior vice president and global head of research at Gartner’s recent IT conference in Orlando. Each IT job generates three more outside of IT, he says; therefore, the information economy could be responsible for six million U.S. jobs within two years.

Faculty and students partner at the IBM Client Center for Advanced Analytics in Columbus, Ohio.

By Dave Claborn

That’s if employers and firms like IBM and Gartner can find the right people. Sondergaard thinks only a third of those IT jobs may be filled because of a shortage of qualified workers. Higher education must up its game, he says. The IBM analytics center is in Columbus, in part, to take advantage of Ohio State University’s willingness to partner with IBM in developing cross-disciplinary curriculum to deliver a steady supply of computer engineers, statisticians, mathematicians, and designers to the new center. Christine Poon, dean of Ohio State’s Fisher College of Business, says the school will design “experiential learning” environments where students will work on real problems with IBM and their clients to find real solutions. In addition to the education assets, it was a ready pool of potential clients that enticed IBM, says Rhodin. “A group of local businesspeople got together with the Columbus 2020 organization and said, ‘We’ve got an idea; would you like to sit down and talk to us?’” IBM’s location in Columbus heralds a trend noted by Chapman University Presidential Fellow Joel Kotkin — that tech growth is moving away from the coasts and happening in lower-density metro areas. As he notes in a recent Forbes article, “Ultimately, one of the main dynamics of the information age — that even sophisticated tasks can be done from anywhere — works against the dominion of single hegemonic industry centers.” Kotkin is co-author of a February 2012 Sagamore Institute study on the Midwest’s re-birth that attributes a shift in migration from the coasts to factors “such as taxes and regulations. But perhaps most important may be the region’s greater affordability” — particularly housing prices which, for 30-something tech workers establishing families, are more attractive in the middle of the country than on the East or West coasts. AREA DEVELOPMENT | Q1/Winter 2013

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IN THE KNOW SC, TX, AND NC LEAD U.S. IN INWARD FOREIGN INVESTMENT

PWC 4TH QUARTER BAROMETER SHOWS OPTIMISM AMONG U.S. MANUFACTURERS

IBM’s 2012 “Global Location Trends” report attempts to provide a current view of the world’s “location landscape,” as companies determine where to locate their operations in order to maintain their competitiveness. According to report authors Jacob Dencik and Roel Spee, companies are taking a more strategic approach to optimizing their international operations by reducing risk, while continuing to seek new market opportunities. And these markets — or locations — must ensure that they improve their value propositions for investors by identifying their strengths and addressing their weaknesses. The top ranking countries for jobs created by inward foreign investment are China, India, the United States, Mexico, and the United Kingdom, in that order. However, China and India saw this job creation drop by 15 percent and 21 percent, respectively, from 2010 to 2011. China suffered from a decline in the electronics sector and India from a decline in the business services sector. On the other hand, Mexico (+25 percent) and the UK (+16 percent) both saw an increase in the number of jobs created by inward investment. Overall inward foreign investment in the United States was stable from 2010 to 2011. According to the report’s authors, U.S. business environments show less differentiation among states/communities than in other parts of the world. Consequently, investing companies often have many candidate locations to choose from, and economic development strategies and marketing tools (e.g., financial incentives) can strongly impact location decisions. The top 10 performing states in attracting jobs through foreign investment in 2011 were South Carolina, Texas, and North Carolina, followed by Indiana, Ohio, Georgia, Alabama, California, Mississippi, and Illinois, in that order.

Forty-eight percent of the industrial manufacturers responding to this latest PwC survey expressed optimism about the 12month outlook for the U.S. economy during the fourth quarter of 2012, up 11 points from the third quarter, while only 7 percent were pessimistic. Additionally, 83 percent of respondents forecast revenue growth at their own companies for the next 12 months, and only 3 percent expect negative results. Additionally, indications regarding new hiring increased to 58 percent, up 21 points from the same quarter in 2011. “Overall sentiment among U.S. industrial manufacturers regarding the prospects for the domestic economy rose in the fourth quarter along with company growth projections, which trended higher as well,” said Bobby Bono, U.S. industrial manufacturing leader for PwC. “The improved sentiment regarding the domestic outlook contrasts with the continued high level of uncertainty concerning the international stage. This dichotomy appears to be playing out in the healthy indications for net new hiring and operational investment, which contrast with the pullback in plans for international expansion.” With regard to barriers to growth during the next 12 months, industrial manufacturers continued to point to lack of demand (52 percent) as the greatest concern, as well as legislative/regulatory pressures (47 percent), and oil/energy prices (42 percent). Survey respondents also identified taxation policies as a barrier to growth at 33 percent, up 10 points from the third quarter of 2012. Interestingly, the respondents to Area Development’s latest Corporate Survey agreed with those responding to PwC. Area Development’s respondents are also concerned about legislative/regulatory pressures and overall “economic instability.”

MILKEN STUDY HIGHLIGHTS METROS RECOVERING MOST QUICKLY FROM THE ECONOMIC RECESSION AND GROWING THEIR ECONOMIES Milken Institute’s “Best Performing Cities 2012: Where America’s Jobs Are Created and Sustained” is a data-driven, comprehensive measure of economic strength across 200 large and 179 smaller U.S. metropolitan areas that illuminates the job, wage, and technology trends that shape prospects for a city’s or community’s success. The report attempts to explain why some places in America are prospering and some are struggling. It provides insight into what separates Best-Performing Cities 2012: TOP 10 LARGE METROS the cities that are well positioned for the future from those that are still 1. San Jose-Sunnyvale-Santa Clara, CA (51)* mired in the setbacks inflicted by the financial crisis and the Great 2. Austin-Round Rock-San Marcos, TX (4) Recession. 3. Raleigh-Cary, NC (14) According to the report, in 2012, high technology was behind the 4. Houston-Sugar Land-Baytown, TX (16) success of many locations. Communities that embraced technological 5. Washington-Arlington-Alexandria, DC-VA-MD-WV (17) know-how grew their economies. Designing and producing communica6. Salt Lake City, UT (6) tions and computing devices, and serving companies and consumers 7. Provo-Orem, UT (9) online, were good businesses to be in. Having the proper infrastructure 8. Cambridge-Newton-Framingham, MA (12) to meet business’ energy needs also lent stability to a location’s econo9. Charleston-North Charleston-Summerville, SC (11) my and provided for growth. Overall, the regions that weathered the 10. Fort Worth-Arlington, TX (24) economic downturn best and are recovering fastest adopted a range of * 2011 rank SOURCE: Milken Institute ideas and strategies for seizing opportunity and keeping risk at bay.

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Track business relocations and expansions on Area Development Online.

Studies/Research/Papers on Area Development Online.

We track announcements of all significant investment and job-creation projects throughout the United States and Canada at www.AreaDevelopment.com/NewsItems.

We cull insightful corporate real estatefocused studies, research, and papers from credible industry sources at www.AreaDevelopment.com/Studies.

BUSINESS LOCATION TRACKER Oracle Corp. Relocating Manufacturing From Mexico to Hillsboro, Oregon

Oracle Corp. plans to move production of its server systems and data servers from Mexico to Hillsboro, Oregon, where it will create 130 manufacturing jobs over the next two years.

Midwest Veterinary Services To Build Research Center Near Manhattan, Kansas

A Nebraska-based company, Midwest Veterinary Services, will invest approximately $10 million to expand its operations and build a 200,000-square-foot Veterinary and Biomedical Research Center in Pottawatomie County’s Valley Business Park near Manhattan, Kansas.

Ford Relocating Production of Popular Engine from Spain to Cleveland

To meet rising consumer demand for its 2.0-liter EcoBoost engine, Ford Motor Company will invest nearly $200 million to relocate North American assembly of its popular engine model from Spain to Ohio and add 450 new jobs at its Cleveland Engine Plant.

Stealth Software To Establish Its U.S. Headquarters in Phoenix

Netherlands and Luxemburg-based software development firm STEALTH Software will invest $2 million to establish its U.S. headquarters in Phoenix, Arizona, creating approximately 200 jobs.

Canon USA Moves into New Americas Headquarters in Melville, New York

A leader in digital imaging solutions, Canon U.S.A., Inc., opened its new 52-acre, 700,000-square-foot, LEED Certified Gold Americas headquarters in Melville, Long Island, where it will consolidate nearly 1,400 Canon employees into one central location.

Tenaris Invests $1.3 Billion in Texas Steel Pipe Plant

A global manufacturer of products used for drilling in the energy industry, Tenaris, will extend its U.S. investments by building a $1.3 billion steel pipe manufacturing facility in Matagorda County, Texas, creating an estimated 600 jobs.

Global Food Group To Locate Facility in Clinton, Arkansas

Global Food Group will invest $4.7 million to locate a new manufacturing and packaging facility in Clinton, Arkansas, where it plans to create 224 new jobs.

Coastal Cloud To Locate Headquarters in Flagler County, Florida

Computer service company Coastal Cloud, LLC will invest $3.1 million to locate its corporate headquarters in Flagler County, Florida, creating 100 new jobs over the next three years.

Go to www.AreaDevelopment.com/NewsItems to track business expansion & relocation announcements

GROWING CHALLENGE OF SUPPLY CHAIN RISK MUST BE ADDRESSED According to a new survey of 600 executives from Deloitte — “The Ripple Effect: How Manufacturing and Retail Executives View the Growing Challenge of Supply Chain Risk” — global executives are increasingly concerned about the growing risks to their supply chains and costly negative impacts such as margin erosion and inability to keep up with demand. “Supply chains are increasingly complex, and their interlinked, global nature makes them vulnerable to a range of risks,” says Kelly Marchese, principal, Deloitte Consulting LLP, who specializes in manufacturing operations and supply chain strategy. “To be effective, companies should take a holistic and integrated approach…True resilience means building in the ability to recover efficiently and decrease the impact of those events.” The four important attributes that are critical to supply chain resilience are: 1. Visibility: The ability to monitor supply chain events and patterns as they happen, which enables companies to proactively — and even preemptively — address problems. 2. Flexibility: Being able to adapt to problems efficiently, without significantly increasing operational costs, and make timely adjustments that limit the impact of disruptions. 3. Collaboration: Having trust-based relationships that allow companies to work closely with supply chain partners to identify risk and avoid disruptions. 4. Control: Having policies, monitoring capabilities, and control mechanisms that help confirm that procedures and processes are actually followed. AREA DEVELOPMENT | Q1/Winter 2013

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ALEXANDER FREI DIRECTOR BUSINESS INCENTIVES PRACTICE CUSHMAN & WAKEFIELD OF ILLINOIS, INC.

You recently gave a presentation at Area Development’s Consultants Forum in Jacksonville about the “oil and gas revolution” in the United States. Can you explain that term? Frei: I used the term “revolution” in the context of a recurring cycle of events in time. In that instance I was comparing the early oil drilling activities of the mid-nineteenth century and the Texas oil boom, also known as the “Gusher Age,” of the early 20th century to the discoveries of massive shale oil and gas reserves across many regions of the country.

How is hydraulic fracking contributing to this increased domestic energy supply? Frei: The technological advancements that have taken place over the last 20 years, which ultimately resulted in the establishment of fracking as an economically feasible method of accessing fossil fuels, is arguably the biggest single reason why today we are talking about the United States becoming energy independent. Specifically, fracking for shale gas could result in the United State becoming a net exporter of natural gas in the next decade. What are the benefits of fracking and why do environmental advocates oppose it? Frei: Fracking provides access to formerly inaccessible hydrocarbons, which allows us to extract previously difficult to access resources to produce the energy needed to become less dependent — ultimately independent — on foreign energy sources. However, environmental advocates oppose fracking because of its invasive nature, with the potential of ground water contamination, risks to air quality during the extraction process, and possible surface contamination from spills.

When and how did the “oil and gas boom” begin? Frei: A key milestone to the current oil and gas boom was an innovative process called slick-water fracturing (“fracking”) pioneered by Mitchell Energy. Fracking resulted in the first economically feasible shale fracture that took place at the Barnett Shale in north Texas in 1998. Since then, natural gas from shale has become the fastest contributor to total primary energy in the United States. The IEA says the United States will be the world’s top producer of oil by 2020. How is that possible? Frei: Many people are not aware that the United States is the third-largest producer of oil in the world (producing 10.1 million barrels per day or “bpd” in 2011), closely following Saudi Arabia (11.2 million bpd) and Russia (10.2 million bpd). For the U.S. to become the world’s top producer of oil, it would need to produce an additional 1.1 million bpd. The necessary oil resources are expected to come primarily from unconventional shale oil (“tight oil”) reserves discovered in North Dakota, Montana, and Texas as well as from the ongoing development of conventional offshore resources in the Gulf of Mexico.

What will the oil and gas boom mean for the U.S. economy? Frei: I believe that growth in the oil and gas industry could become the catalyst to jump-start the U.S. economy and lead to new opportunities or re-births across all categories of industry. For example, it could lead to new foreign direct investment (FDI). The United States has generally been considered to be the most stable country in the world for FDI and becoming less dependent on foreign oil should certainly reinforce this consensus.

The U.S. is also the world’s top energy consumer. When will increased domestic oil and gas production catch up with our needs? Frei: The U.S. gobbles up an astounding 95 quadrillion Btu of total annual primary energy, while it produces 73 quadrillion Btu. A 2012 EIA report estimates that the nation will be nearly self-sufficient in energy by 2035, which means that the U.S. will be able to generate an additional 22 quadrillion Btu of total annual primary energy based on current supply and demand statistics.

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What specific new business opportunities are being created by the oil and gas boom? Frei: A direct opportunity has been the influx of oil- and gas-related business into communities that had never been a part of that industry in the past. Some entry-level wages in the oil- and gas-related industry can reach up to $65,000 per year even for workers that do not have an advanced degree. Other select opportunities are impacting the transportation industry, heavy manufacturing (steel and chemicals, in particular), and engineering, among others.

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THE ASSIGNMENT What geographic areas of the United States stand to benefit the most? Frei: Communities near the Bakken reserve in North Dakota and Montana as well as the Eagle Ford reserves in Texas are benefiting, as are many other communities scattered across much of the central and eastern United States. What challenges are still ahead for the U.S. energy industry? Frei: Although it is difficult to predict specific challenges, I would start by grouping them into four categories: geopolitical, economic, regulatory, and environmental. On the political front, how would becoming less energy-dependent — ultimately energy-independent — affect U.S. foreign policy? Would the U.S. continue to provide resources to police the world’s energy supply chain? When considering economics, shale oil and gas reserve discoveries around the global should theoretically translate into cheaper energy prices worldwide — including in China so would China not gain even more from this than the United States? Additionally, because of the thousands of shale wells that have been put into place in the last few years, the debate of whether to change existing regulation of the industry at the federal and state levels is being considered. And, finally, from an environmental standpoint, the impact of shale oil and gas fracking may not be fully understood today, although the consensus is that the benefits seem to outweigh the negatives. Having said that, explain the term “green culture.” Frei: To me, green culture means being aware of the shortand long-term impacts that one’s everyday personal and professional life has on the environment and then — all things considered — making reasonable efforts to minimize said impacts.

The editor of Area Development magazine recently discussed the latest developments in the oil and gas industry and their economic impact with Alexander Frei, Director of the Business Incentives Practice at Cushman & Wakefield of Ill., who holds a BS degree in Mechanical Engineering, an MBA, and is a LEED AP accredited professional. He previously worked at Eisenmann Corp., where he specialized in industrial engineering.

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FACILITY PLANNING

Deciding the Fate of Aging Buildings By assessing a facility’s condition, functionality, and usage, organizations can optimally plan for the future and make intelligent investment choices. By Ray Dufresne, Vice President, VFA, Inc.

n challenging economic times, the need for the effective management of facilities and infrastructure is crucial. Tight budgets make it more critical than ever for both public institutions and private industry to maintain and improve existing facilities and, in doing so, to ensure that they efficiently support people and services in concert with organizational goals. But what if aging buildings make up a significant part of the portfolio? How do organizations decide whether to continue investing in those facilities? It takes a strategic approach based on accurate and current data. If a building is less critical, if it’s no longer serving the purpose or program for which it was built, or if its condition is so poor that the cost of improvements is too high, it is time to plan for disposition. On the other hand, a key asset could be targeted for investments to improve the condition and proactively renew systems.

A Strategic, Holistic Approach How should building owners and facility managers decide a building’s fate? It’s vital to understand — through accurate data and analysis — the condition, function, and usage of the buildings. It’s important to take a strategic approach, looking at the facility portfolio holistically. Any analysis, in order for it to be valid, must be based on accurate, objective data, including an understanding of current facility condition and remediation costs, functionality, and demographics. Without access to detailed information regarding these issues, facilities managers and capital planners find it virtually impossible to decide whether buildings warrant further investment or are ready for disposition. Condition: One important first step is gathering accurate facility condition and cost information. An organization needs to determine the best objective method for data collection. A Facility Condition Assessment (FCA) is the process of collecting detailed data on facility condition and deficiencies, generally with walk-through inspections by qualified professionals (mechanical, electrical, and architectural engineers) to collect this baseline data. These teams survey the buildings, systems, and infrastructure assets in detail using consistent best practice methodologies, visualizing and taking photos rather than disassembling equipment. Another option for data collection is facility self-assessment that employs a consistent, repeatable process for internal staff.

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By leveraging existing facility resources to quickly assess assets of all types and portfolios of all sizes, organizations can greatly enhance the management of geographically dispersed facilities. The self-assessment process should be rapid and cost-effective, resulting in data that can identify “hot spots” within the portfolio that require a more detailed professional condition assessment, and should help develop quick budgetary estimates. A good facility self-assessment also ensures that data captured in previous assessments is updated so that strategic decisions are based on current information. Self-assessment empowers organizations to close the loop on portfolio knowledge gaps and gain immediate insight into their most pressing facility needs. By employing industry cost standards to estimate spending requirements for each suggested improvement, organizations can associate specific dollar amounts with each potential project. Also, lifecycle renewal costs can be a significant percentage of major operational and maintenance expenses, and a detailed understanding of renewal timelines and costs is important to effectively prioritize systems requirements and understand the further investment required to keep aging buildings in good condition. Accurate facility condition data enables analysis of the investments needed for facility improvements. A commonly used metric, developed by industry associations, is known as the Facility Condition Index (FCI). The FCI is the ratio of deferred maintenance dollars to replacement dollars, and provides a straightforward comparison of an organization’s key estate assets. To calculate the FCI for a building, divide the total estimated cost of deferred maintenance projects for the building by its estimated replacement value. The lower the FCI, the lower the need for remedial or renewal funding relative to the facility’s value. For example, an FCI of 0.1 signifies a 10 percent deficiency, which is generally considered low, and an FCI of 0.7 means that a building needs extensive repairs or replacement. The FCI provides the ability to

compare similar buildings to each other and to establish target condition ratings. Comparing buildings analytically will rapidly highlight the buildings that are in the greatest need for updates, repairs, or replacements. Function: Next, functional adequacy must be addressed. Facility performance should be evaluated to determine if the building in question is still suited for the purpose originally intended, or if it needs to be changed for new uses. Measuring the functional adequacy of a building or campus requires a functional assessment to capture the current status, compare it to a pre-defined standard, and then identify the gaps. The gap analysis shows what changes need to be made to a facility to bring it into compliance. A functional score can be defined that gives the facility under review a rating as to how well it meets the overall standards. Ideally, a solution that includes a quantitative ranking system for functional criteria that enables the assignment of scores will help companies objectively prioritize current requirements and focus their capital initiatives where they will be most effective. Modeling tools for functional assessment, coupled with facilities capital planning software, can provide a framework for organizations to evaluate alternatives for capital spending and their impact over time. Usage: With metrics such as the FCI and a functional adequacy score, companies can objectively prioritize facility projects and capital spending. The most successful prioritization is based on organizational objectives as well as an understanding of the relative importance of assets, the functionality of the buildings, and demographics that may impact use. For example, most organizations have certain buildings in the portfolio that are strategically critical with a high level of permanence. They serve a specific and highly necessary function, and the population that uses these buildings is growing. These buildings are essentially irreplaceable and a low FCI is important. The strategy for such critical buildings may be

to invest to improve — renewing systems proactively, providing redundancy, ensuring regulatory compliance, and addressing deferred maintenance. On the other hand, many buildings in the portfolio may be operationally redundant, subject to frequent mission change, and easy to replace. They may no longer be serving the purpose for which they were built, and may or may not be able to be re-purposed. Demographic analysis for the population that uses these buildings may show a decline in future use or a change in who is using them. Depending on what the analysis shows, the strategy for these less vital assets may be to reduce operation and maintenance (O&M) costs, maintaining only critical systems for business continuity, making no long-term investments, and positioning for shortterm disposition or alternate use.

In Sum The key benefits of a systematic, data-driven approach to functional adequacy, which includes a holistic view taking into account facility condition, are defensible results; upgrade costs that can be quantified to facilitate all-inclusive planning; and avoidance of unnecessary spending on functionally deficient buildings. Given today’s ongoing economic challenges, now is the time for companies to assess both the functional adequacy and condition of their facilities. By combining bestof-breed methodologies for these assessments with sophisticated modeling and decision support tools, organizations can optimally plan for the future, take the subjectivity and guesswork out of the process, and use a rational, repeatable process to determine how to allocate funding where it will have the most impact and best support strategic goals. Analysis based on accurate data results in objective prioritization, a clear path to decisionmaking, and, ultimately, intelligent investment choices resulting in cost savings over time. Ray Dufresne is vice president at VFA, Inc., a provider of end-to-end solutions for facilities capital planning and management. He can be reached at rdufresne@vfa.com. AREA DEVELOPMENT | Q1/Winter 2013

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COVER STORY

Exhibiting know-how and innovation, U.S. manufacturers are adding to their payrolls and economic growth across the nation. By Mark Crawford

AREA DEVELOPMENT

anufacturing is the backbone of America. It’s in our blood. Americans know how to build —

it’s how we forged a nation, won two world wars, put men on the moon, and shaped the “new economy.” American workers are among the most productive in the world. With new advances in technology, lean manufacturing techniques, and best practices, American manufacturing is becoming cost-competitive

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with offshore locations, resulting in more companies bringing their operations back to the United States (or nearshoring to Mexico). According to the Institute of Supply Management (ISM),

a world-class work force.” The high quality of Alabama workers reflects the state’s investment in work force training. Alabama Industrial Development Training (AIDT) services are free for employers

American manufacturing continues to improve. The ISM

or trainees. The Alabama Technology Network (ATN) of the

recently reported that manufacturing activity expanded in

Alabama Community College System also works closely with

January 2013 for the second consecutive month and that the

companies to provide the skill sets they need.

overall national economy grew for the 44th consecutive

Alabama’s automotive manufacturing industry, with three

month. The Purchasing Managers Index (PMI) registered 53.1

major automotive assembly plants, three auto engine plants,

percent, an increase of 2.9 percent from December’s value of

and nearly 400 auto suppliers, is a big contributor to the

50.2 percent. All five PMI component indices registered

state’s overall economy. Alabama’s top automakers

above 50 percent in January — including employment, one

(Mercedes-Benz, Honda, and Hyundai) together produced

of the most critical indicators.

more than 880,000 vehicles in 2012, a 17 percent increase

The PMI employment index jumped from 51.9 percent to

from 2011 and a new state record. As a result, Mercedes is

54.0 percent in January 2013. This is especially significant

expanding its assembly lines and hiring about 1,000 more

because manufacturing companies learned how to be incred-

employees to manufacture the C-Class sedan. Honda is

ibly efficient during the Great Recession, doing more with far

expanding to produce the Acura MDX, and Hyundai has

less — this means manufacturers are reaching their limits and

added a third shift that it expects to run all year.

must hire more to keep up with new orders. So, which are the top manufacturing states that are lead-

“It is very encouraging to see our automakers reinvest in their operations by updating their equipment and expanding

ing us out of recession? We compiled this list from the

the capacity of their production lines,” comments Secretary

Bureau of Labor Statistics’ (BLS) November 2012 rankings for

of the Alabama Department of Commerce Greg Canfield.

the top 10 states in total manufacturing jobs and the top 10 for manufacturing’s share of non-farm employment, as well as the National Association of Manufacturers’ top 10 states for manufacturing’s share of GSP (2011). This simple approach identified 19 states that are leading the U.S. in manufacturing prosperity: Alabama, Arkansas, California, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana,

■ ➨ ARKANSAS Arkansas continues to diversify its manufacturing base by adding advanced manufacturing jobs. Top sectors are food and beverage, paper, transportation, machinery, wood products, chemicals, plastics and rubber, and apparel. Arkansas’ highly skilled work force and favorable business cli-

Michigan, Mississippi, New York, North Carolina, Ohio,

mate, combined with its research and education opportunities,

Oregon, Pennsylvania, South Carolina, Texas, and Wisconsin.

make the state an attractive location for manufacturing.

Shared traits include a diversified manufacturing base, posi-

Arkansas’ workers continue to impress employers with their

tive business climate, flexible incentive packages, outstanding

work ethic, skills, productivity, and low turnover rates. Arkansas’

work force development programs, and highly proactive

labor force is projected to grow by 4 percent by 2015.

local and state governments that support manufacturing.

The Arkansas Economic Development Commission (AEDC),

Below are manufacturing snapshots of each state that show

working with other state agencies, offers a Career Readiness

how they are strengthening their industries and contributing

Certificate for potential employees, which documents their

to our national economic recovery.

skills for prospective employers. This productive manufacturing environment continues to

■ ➨ ALABAMA Key manufacturing sectors in Alabama are

attract big projects, such as Big River Steel’s announcement it will build a $1 billion steel mill in Mississippi County that will

aerospace/defense, automotive, agricultural products/food

employ about 500 workers. Big River will produce steel for the

distribution, metals, forestry products, chemicals, biosciences,

automotive, oil and gas, and electrical energy industries. The

and information technology. Much of the state’s manufactur-

company cited the high-quality work force, geographic loca-

ing output is exported — in fact, 2012 was a record-breaking

tion, well-developed transportation infrastructure, availability

year with $19.5 billion in exported goods, an increase of

of reliable electrical power, and helpfulness of state and local

almost 10 percent over 2011.

government as the major reasons it selected Arkansas.

“This shows that Alabama’s economy continues to

“A project of this scope will be a catalyst for job creation,

improve and we are making gains in exporting to countries

investment, and economic development beyond this one

all over the world,” says Governor Robert Bentley. “The

facility,” says Governor Mike Beebe. “Building Big River Steel

products made in Alabama are second to none, and we have

will mean up to 2,000 construction jobs and it will help us AREA DEVELOPMENT | Q1/Winter 2013

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recruit more supplier businesses and steel consumers to

Commerce and Economic Opportunity. Top manufacturers in the state include Caterpillar,

Northeast Arkansas.”

Top 10 Deere & Company, Motorola, Navistar, States for Chrysler/Fiat, Ford, and Mitsubishi. Newer Manufacturing Jobs advanced manufacturing sectors such as Overall (Nov. 2012)

■ ➨ CALIFORNIA California is a national leader in job cre-

aerospace and pharmaceuticals are also

ation, with over 257,000 private-sector jobs created in 2012. Its private-sec-

tor growth rate of 2.2 percent is

2 3 4 5 6 7 8

outpacing the national average, and its unemployment rate of 9.8 percent is the lowest it has been in almost four years — due in part to the resurgence of manufacturing in the state. More than 1.2 million people are employed in manufacturing jobs, the most in the nation, according to the Bureau of Labor Statistics.

9 10

WISCONSIN

1,231,300 847,000 660,100 598,700 571,500 526,000 488,900 450,200

YORK

448,200

NORTH CAROLINA

439,700

CALIFORNIA TEXAS OHIO ILLINOIS PENNSYLVANIA MICHIGAN INDIANA

NEW

Source: BLS

becoming established. Recent project announcements include Continental Tire ($224 million expansion in Mt. Vernon), Mitsubishi Motors ($45 million expansion in Normal to support the production of the 2013 Mitsubishi Outlander SUV), Excel Foundry and Machine ($7.4 million expansion, 100 jobs in Pekin), and Woodward Inc., an aerospace and energy firm that plans to invest more than $200 million to build a

The National Association of Manufacturers (NAM) notes that manufacturers in California

manufacturing plant and offices in Loves Park near Rockford.

account for 11.2 percent of the total GSP (2011), employing

(Woodward selected Illinois over South Carolina and

almost 9 percent of the work force. Total overall output from

Wisconsin.)

manufacturing was $229.9 billion in 2011, significantly higher

“The Rockford region’s highly skilled work force makes

than in any other state. Nearly $138 billion of that output was

Illinois an ideal place for companies like Woodward that are

exported — an important figure because more than 22 percent

looking to grow,” indicates Illinois Governor Pat Quinn.

of California’s manufacturing employment depends on exports.

“Woodward’s expansion is a great example of how we are

Energy has always been a key industry for the California economy — not only traditional resources like oil and gas, but

creating jobs, fueling key sectors of the economy, and stimulating growth throughout the state.”

also alternative energies such as biofuel, wind, and solar. In December 2012 Soitec, an international manufacturer of semiconductor materials and photovoltaic systems, opened its $150

■ ➨ INDIANA Indiana combines traditional production with progressive

million, state-of-the-art North American solar manufacturing

technology to create an attractive environment for manufac-

facility in San Diego. Beginning in 2009, the California govern-

turers. The state’s central location and excellent transporta-

ment worked with Soitec to establish its San Diego facility.

tion network — combined with a skilled and dedicated work

“This project demonstrates the long-term commitment of

force — make it an ideal location for manufacturing. Top

our state and local partners to ensure Soitec opened their

manufacturing sectors include automotive, parts and trans-

first U.S. manufacturing facility in California,” says Director

portation equipment, metals, machinery, plastics and rubber,

of the California Governor’s Office of Business and Economic

chemicals, and computers and electronics.

Development Kish Rajan. “Not only will Soitec employ 450

Nearly 17 percent of the Indiana non-farm work force is

Californians, it is contributing to the state’s goal of increas-

employed in manufacturing (the most of any state according

ing our renewable energy portfolio.”

to BLS statistics for November 2012). Manufacturing employment grew 4.2 percent from October 2011 to October 2012,

■ ➨ ILLINOIS

more than double the national average of 1.6 percent. Since

Illinois is a major producer of chemicals, machinery, com-

2010, Indiana has added the third-most manufacturing jobs

puters and electronics, rubber and plastic products, and fab-

of any state in the country — an impressive 9 percent

ricated metals. Manufacturing totaled more than $86.5 bil-

growth rate.

lion in output in 2011 and employed nearly 600,000 work-

One of Indiana’s most dynamic manufacturing sectors is automotive. More than 11 percent of all automobiles pro-

ers as of November 2012. “We have experienced significant growth in manufactur-

duced in the United States are made in Indiana, which is

ing in recent years, which has created tremendous opportuni-

home to more than 630 automotive companies. Three

ties for growing our economy and creating more jobs,” says

Japanese automotive companies have facilities in the state,

Adam Pollet, acting director for the Illinois Department of

which also has the highest level of Japanese investment per

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■ ➨

capita in the country. Automotive announcements keep

KANSAS

coming in — for example, Honda ($40 million expan-

Total Kansas GSP in 2011 was $130.9 billion.

Mfg. Share of GSP

sion), Toyota Motor Manufacturing ($131 million), and Greenville Technology ($21.37 million plant, 325 new jobs in Anderson).

Manufacturing accounted for more than $18.4 billion of that, or about 14 percent. As of November 2012, 167,000 workers were

(2011)

“Indiana’s low-tax policies and high-

employed in manufacturing in the

ly skilled work force have made it

one of the premier manufactur-

2 INDIANA 3 LOUISIANA 4 NORTH CAROLINA 4T WISCONSIN 6 IOWA 7 OHIO 8 KENTUCKY

28.7% 26.7% 25.4% 19.6% 19.6% 18.6% 16.7% 16.5%

SOUTH CAROLINA

16.0%

MICHIGAN

15.8%

ing states in the country,” states Indiana Secretary of Commerce Victor Smith. “The predictable regulatory environment, and our willingness to work collaboratively with the private sector, continues to reinforce Indiana’s strength and stability for business.”

■ ➨ IOWA

OREGON

Source: NAM

state — more than 12 percent of the state’s non-farm work force. Advanced manufacturing is a major factor in the Kansas economy — especially aviation and aerospace. For example, Wichita manufacturers produce more than 40 percent of the world’s general aviation aircraft. Major aircraft companies with Kansas operations include Hawker Beechcraft, Cessna, Spirit Aerosystems, and Bombardier

Iowa’s $27.6 billion advanced manufacturing industry is the state’s largest single business sector

Learjet. Nearly 60 percent of the state’s manufacturing work

— with more than 6,000 manufacturers operating 6,400 fac-

force is employed in this vital sector. General Motors, which

tories, employing 200,000 workers, and generating more than

manufactures Chevrolet and Buick in the Kansas City area, is

18 percent of Iowa’s total gross state product (GSP) in 2011,

another key employer. Bioscience is a rapidly growing field in Kansas, including

according to NAM. During the past decade Iowa’s manufacturing GSP has grown at an impressive inflation-adjusted rate

an “animal health corridor” that runs through central

of 9.2 percent.

Kansas. Here major companies and research centers conduct

Leading industries include industrial metal processing,

cutting-edge research and innovation on new products for

automation precision machinery, environment control systems,

animal health and nutrition. This corridor accounts for almost

digital and electronic devices, and power generation equip-

one third of total world sales in the $19 billion global animal

ment. Other top sectors are aerospace and defense, industrial

health market. Currently more than 16,000 employees work in the bio-

chemicals, construction components, commercial and industrial motor vehicles, food ingredients, printing and packaging,

sciences. The Kansas Bioscience Authority is investing $580

pharmaceuticals, and medical devices and products.

million to further support R&D and commercialization oppor-

“Iowa’s economy is very strong, thanks in large part to the

tunities in this field and accelerate cluster growth. “Manufacturing is a critical component of the Kansas

success of the advanced manufacturing industry in our state,” says Debi Durham, director of the Iowa Department of

economy,” indicates Kansas Commerce Secretary Pat George.

Economic Development. “It’s obvious that we have the right

“The state is fortunate to have everything from advanced

tools in place to attract and grow manufacturing companies.

aviation to meat packing represented in the sector. We’re

From our logistics advantages to our highly productive work

going to keep working to make the Kansas business environ-

force, Iowa has a proven track record in helping manufactur-

ment as great as it can be for manufacturers.”

ers succeed.”

■ ➨

That includes Egypt-based Orascom Construction

KENTUCKY

Industries, which recently announced its decision to build a

Manufacturing is Kentucky’s third-largest employment

new $1.4 billion facility in Lee County, which will reduce the

sector — nearly one out of every eight non-agricultural jobs

nation’s dependence on imported fertilizers (the U.S. imports

in Kentucky is in manufacturing. In 2012, 232 manufacturing

over half of the ammonia, urea, and urea ammonium nitrate

facilities announced new locations or expansions in the

[UAN] it consumes every year). It will be the first world-scale

state, which will contribute over $2.25 billion in capital

natural-gas-based fertilizer plant built in the United States in

investment and create about 6,700 new jobs. One quarter of

nearly 25 years. The plant will utilize proven state-of-the-art

these new projects are related to the automotive industry,

production process technologies and is expected to produce

creating nearly one third of all new manufacturing jobs in

over a million tons of ammonia, urea, and UAN annually.

the state. According to the U.S. Bureau of Labor Statistics,

State incentives for the project totaled about $100 million.

Kentucky gained 1,400 manufacturing jobs from December

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2011 to December 2012 — among the most in the nation. Just a few of Kentucky’s major manufacturing location

■ ➨

LOUISIANA Manufacturing accounts for about 25 percent of

announcements in 2012 include iwis Engine Systems (German

Louisiana’s GSP, according to NAM. The state has a history of

Tier-I automotive plant in Murray), Anchor Packaging (food

both traditional and advanced manufacturing, especially

industry packaging plant in Mount Vernon), Baton LLC (natu-

related to natural resources and energy. Affordable energy is

ral stone manufacturer in Louisville), and Birtley (Chinese

a big reason companies choose Louisiana. Louisiana’s highly

coal equipment and processing operation in Lexington).

developed pipeline infrastructure, combined with an abun-

Important factors in their site selection decisions were low

dant supply of historically low-priced natural gas, makes the

industrial electricity costs, competitive tax structure, innova-

state an attractive location for industrial projects.

tive incentive programs, and high quality of life.

For example, Maritime International, based in Broussard,

“Manufacturing is a crucial sector of our economy, rep-

is creating 90 new jobs by bringing back production of mar-

resenting about 16.5 percent of Kentucky’s GSP,” says Erik

itime mooring systems from China. “We can best maintain

Dunnigan, commissioner for Kentucky’s Department for

the benchmark for quality we have set in our industry by

Business Development. “The diversity of our manufacturing

enhancing our control over our manufacturing process,” says

base is also vital to our growth. More than 2,400 manufac-

President David LeBlanc of Maritime International, whose

turing facilities across Kentucky produce everything from

customers include the U.S. Navy and many international

automobiles and aerospace parts to food, beverage, and

ports. “With the support of Louisiana Economic

paper products and everything in between,” Dunnigan

Development, we can bring that technology to our backyard,

continues. “The Commonwealth’s reputation for meeting

create quality jobs, and supply a superior product made here

and exceeding industry needs, and providing companies

in Louisiana.”

with a skilled and available work force to meet the

In December 2012, representatives of Sasol Ltd. (South

demands of a global economy, continues to fuel our manu-

Africa) and Louisiana Governor Bobby Jindal announced the

facturing success.”

largest manufacturing investment in state history — up to $21

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• U.S. Foreign Trade Zone • Abundant Water Supply • Right-To-Work State

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General Motors is opening a new innovation center in

billion for an integrated fuel and chemical complex, which

Warren, creating up to 1,500 new jobs; and Ford will

may prove to be the largest foreign direct investment in U.S. history. The project will consist of a natural gas-to-liquids (GTL) plant producing premium transportation fuels, with an ethane cracker producing ethylene, which is in high

create 2,350 hourly jobs and invest $773 million in Mfg. Share of six Southeast Michigan plants during the next Non-Farm two years. Employment (Nov. 2012)

■ ➨

MISSISSIPPI

demand in the chemical industry. The

project represents the first GTL

business environment and a critically

2 WISCONSIN 3 IOWA 4 ARKANSAS 5 MICHIGAN 6 ALABAMA 6T OHIO 8 MISSISSIPPI

16.9% 16.5% 14.6% 13.4% 13.2% 12.7%* 12.7% 12.5%

important energy state opens doors for

KANSAS

12.4%

force, according to the BLS (November

SOUTH CAROLINA

12.0%

2012).

plant in the United States, 1,253 direct jobs, and almost 6,000 new indirect jobs. At least four other energy projects are in the works. “Louisiana’s reputation as a low-cost

INDIANA

us,” says Louisiana Economic

Development Secretary Stephen Moret.

Source: BLS

“But what seals many manufacturing

*Note: Alabama data for 2012 not available; based on 2011 data

deals is our work force development

Mississippi continues to show a positive economic trend, with a 2 percent gain projected for 2013. Manufacturing companies, especially automakers, are key drivers for this economic momentum and employ 12.5 percent of the state’s total non-farm work

There have been some recent notable manufacturing business location and expansion announcements in Mississippi.

program — LED FastStart — and our

Among these, Comfort Revolution, a

targeted incentives that reward job creation, facility modern-

developer of high-end sleep products, will locate manufactur-

ization, and capital expansions.”

ing operations in Belmont in Northeast Mississippi, creating 200 new jobs over a three-year period; Nissan North America is

■ ➨

MICHIGAN

expanding its Canton plant to accommodate production of the

“Michigan is a leader in making things and making things

Nissan Sentra compact vehicle, creating 1,000 new jobs; Von

work,” says Governor Rick Snyder. “Very few locations in the

Drehle will locate a paper product manufacturing operation in

world can match our world-leading bases in manufacturing,

Natchez, creating 100 jobs; and Signet Maritime, a marine

R&D, engineering, and high-skilled talent. These advantages

transportation and logistics company, will expand its shipbuild-

— combined with the bold reforms we have made to our

ing and repair operations in Pascagoula, creating 50 new jobs. Sustainable energy — especially biomass — is an emerg-

business climate — are generating new opportunities for

ing industry for Mississippi with high growth potential. The

manufacturers of all sizes and in all industries.” For example, business taxes are lower than at any time in

state is rich in biomass resources, largely derived from the

decades. The state’s flat 6 percent tax for “C” corporations is

wood products and paper industries. Biomass is processed to

among the lowest in the nation and has slashed business costs

create a feedstock that can be burned efficiently to gener-

by 83 percent. According to the Tax Foundation, a nonparti-

ate steam and electricity. Leading private-sector firms con-

san tax research group, Michigan’s overall corporate tax rank-

tinue to invest in biomass research and development in the

ing is now 12th best in the country. The Michigan Economic

state. Most recently, British-based Drax Biomass

Development Corporation also spends $150 million annually

International announced it would construct an $80 million

in incentives and assistance, along with another $100 million

wood pellet production facility in Gloster to provide fuel for

for loan support to small and mid-size businesses.

its power plant in England. “With our abundance of biomass resources, Mississippi

Durable goods manufacturing output in Michigan increased 41 percent in the past two years, reaching a value

offers important advantages to businesses that rely on bio-

of $55.9 billion in 2012. Although a variety of manufacturing

mass for their operations,” says Brent Christensen, executive

industries has contributed to this resurgence, automotive is

director of the Mississippi Development Authority. “Drax

still king. Michigan is home to more than 370 vehicle-related

Biomass’ decision to locate its plant in Gloster is exciting

R&D and technical centers, including research, product devel-

news for all of Southwest Mississippi.”

opment, or production facilities for eight of the 10 largest OEMs, as well as a vast network of automotive suppliers. Automotive manufacturing is booming: Chrysler plans to

■ ➨

NEW YORK Manufacturing remains a key element of the economy in

hire 1,250 workers and invest $240 million at three Michigan

every part of New York — food/beverages, petroleum and

plants so it can ramp up production of its engines and pickups;

coal products, textiles, machinery, and primary metal manu-

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Page 21

facturing are especially showing strong gains. New York’s

Governor Cuomo. “New York has become the world’s hub for

strengths — its proximity to markets, skilled work force, and

advanced semiconductor research, and now the Technology

higher education and R&D institutions — continue to make

Development Center will further ensure that the innovations

the state an attractive place to do business and capitalize on

developed in New York, in collaboration with our research

new advanced manufacturing opportunities.

institutions, are manufactured in New York.”

“Governor Cuomo is committed to growing New York’s manufacturing industry and creating jobs,” indicates Empire State Development (ESD) President and CEO Kenneth Adams.

■ ➨

NORTH CAROLINA North Carolina has a long history of manufacturing excel-

“From investing in traditional manufacturing sectors to

lence — from its traditional, natural-resources-based indus-

advanced manufacturing industries, ESD is focused on mak-

tries to the innovative, high-tech R&D and commercialization

ing New York State the place to be for manufacturing.”

that give its research centers, such as Research Triangle Park,

This includes creating a collaborative environment for

a world-class reputation.

high-tech sectors such as semiconductor R&D and manufac-

Manufacturing is the largest driver of North Carolina’s

turing. The effort is paying off — for example, GLOBAL-

economic growth (35 percent) coming out of the recession.

FOUNDRIES plans to build a multibillion-dollar R&D facility at

Almost 20 percent of the GSP is attributed to manufacturing

its Fab 8 Campus in Saratoga County in New York’s Capital

by NAM (2011). Nearly 440,000 employees work in manufac-

Region. The Technology Development Center (TDC) is expect-

turing, which represents 11 percent of the state’s non-farm

ed to result in at least 500 new, high-paying direct jobs, as

work force, according to the BLS (November 2012). Over the

well as 500 additional jobs at GLOBALFOUNDRIES Fab and

last two years North Carolina has added 7,200 net manufac-

administration buildings.

turing jobs.

“This significant expansion demonstrates that the invest-

“Some companies are coming to North Carolina because

ments we have made in nanotechnology research across New

of reshoring initiatives,” says North Carolina Deputy

York State are producing the intended return,” says

Secretary of Commerce Dale Carroll. “They realize that North

“Louisiana’s custom-ﬁt solutions enabled us to begin our mega-project 6 to 12 months sooner than planned.” ANDRÉ DE RUYTER | SASOL NORTH AMERICAN PRESIDENT

LOW-TAX ADVANTAGE 2nd lowest taxes in the nation for new firms and 10th lowest for mature firms TARGETED INCENTIVES Custom-fit incentive program ranked No. 2 in the nation by Area Development UNRIVALED ACCESS Six deepwater and 33 shallow draft ports combine with six Class 1 railways to create an unrivaled logistics network #1 WORKFORCE TRAINING LED FastStart® ranked top U.S. workforce training program three years in a row

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AREA DEVELOPMENT | Q1/Winter 2013

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Page 22

Herbalife’s project in Winston-Salem involves retrofitting

Carolina’s geographic proximity to customers and supply chains, highly skilled and productive work force, and reason-

an existing facility to create a world-class manufacturing

able transportation, labor, and logistics costs make it possible

plant for dietary supplements and food products. This will be

to be cost-competitive with overseas locations like China.”

the company’s largest owned manufacturing facility. To help

Top manufacturing industries in North Carolina include

facilitate this expansion, Herbalife received a grant of up to

food, chemicals, fabricated metal products, computers and

$1 million from the One North Carolina Fund, which provides

electronics, and furniture.

financial assistance for business projects that are considered important for growing the state economy.

Representatives from North Carolina Department of Commerce regional offices across the state make 1,500 visits

■ ➨

a year to businesses to “provide service after the sale,” says Carroll. “We check in regularly to see how we can help them

OHIO According to the U.S. Bureau of Labor Statistics, Ohio

grow their operations. Our relationships with these compa-

gained 50,000 manufacturing jobs from 2009 through

nies and local trade organizations really make a difference.”

December 2012. Overall, manufacturing has accounted for

In 2012, 68 percent of the new projects that were

about a quarter of the state’s job growth over the past two

announced were in the manufacturing field. Lenovo indicated

years, while increasing its output by about 12 percent ($8 bil-

it would construct a plant in Guilford County to build comput-

lion). Over the last 12 months, the hottest manufacturing

ers, creating 115 new jobs. Other high-level projects include

sectors for jobs were transportation equipment (1,700), food

KSM Castings ($45 million, 189 jobs), Herbalife ($130 million,

manufacturing (1,900), and plastics and polymers (1,200).

493 jobs), Klausner ($110 million, 350 jobs), Deere-Hitachi ($97

Other key industries on the rebound are chemicals, structural

million, 340 jobs), and Ashley Furniture ($81 million, 550 jobs).

steel, and fabricated metals.

Columbus, Ohio, Region: An “Intelligent Community” The Columbus, Ohio, region is not

Columbus made the ICF list is

manufacturing, logistics, and infor-

only a manufacturing hub (manufac-

employment growth — “adding

mation technology companies.

turing represents nearly 20 percent

15,000 net new jobs while much of

In fact, a public-private venture

of the work force in nine of 11 counties) but is

the rest of the state has struggled with indus-

effectively to leverage the region’s

trial decline and

research and technology assets into

Community,”

home foreclo-

startup companies. And, Ohio State

as noted by The

sures,” said ICF. In

University has re-energized its technol-

fact, the Columbus

ogy transfer office and holds monthly

also an “Intelligent

Intelligent Community Forum (ICF).

region saw a “dramatic rise in job openings for advanced manufacturing, automa-

“The Top 7 communities of 2013

tion, electronics, robotics, and indus-

have made innovation — based on

trial design,” the group added.

information and communications

called TechColumbus is working

forums for entrepreneurs, while joining forces with Ohio University to create a venture capital fund. Columbus is also reaching out to neighboring municipalities to collab-

technology — the cornerstone of

Being the state capital has also

orate on building a broadband

their economies and fostered eco-

helped Columbus, as has collabo-

ecosystem serving the entire region.

nomic growth through high-quality

ration among city government,

The ICF reports it is one of the few

employment, while increasing the

academic institutions, businesses,

old industrial regions to reverse a

quality of life of their citizens,” said

and nonprofits. The ICF finds

“brain drain” and show net in-

Lou Zacharilla, ICF co-founder.

that although the government

migration for the first time in

there reduced spending during

decades.

In fact, Columbus is the only U.S. city

the recession, it nevertheless

on the ICF’s Top 7 Intelligent

invested in work force development

Communities for 2013. One reason

to meet the needs of advanced

AREA DEVELOPMENT

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Page 23

“We are seeing the resurgence of Ohio’s manufacturing industry, which is creating economic prosperity and jobs for

Oracle America, which recently decided to expand its hardware manufacturing of data center servers in Oregon. Value-added food processing is another key component of

Ohioans,” says Christiane Schmenk, director of the Ohio Development Services Agency. “From automotive to advanced

Oregon’s manufacturing sector. Oregon’s food-processing indus-

manufacturing technologies such as fuel cells, we are imple-

try employs more than 40,000 people, with more than 1,400

menting more resources to support Ohio manufacturers.”

companies generating nearly $650 million in exports annually.

These resources include expanded services from the

Products include wine, beer, cheese, and fruits. Innovation is

Manufacturing Extension Partnership program, which now

also driving Oregon’s food industry, with state-sponsored

provides a broader regional model with five regional centers

research plans to help food processors improve productivity and

and has increased outreach to smaller manufacturers with 50

cut energy consumption by 25 percent in the next 10 years.

or fewer workers. The state also introduced the Energy Efficiency Program for Manufacturers, which has invested

■ ➨

more than $24 million in Ohio’s manufacturing sector to help

PENNSYLVANIA Pennsylvania’s manufacturing companies are leading the

hundreds of companies reduce their energy consumption,

state’s economic resurgence following the Great Recession.

improving cost efficiencies and making them more competi-

With gross state product (GSP) exceeding $70 billion,

tive in the global marketplace.

Pennsylvania manufacturers account for more than 12 percent

Stillwater Technologies, a precision machining and fabrica-

of the state’s GSP (NAM). Productivity is on the rise as compa-

tion company in Dayton, has been in business for over 50

nies continue to adopt process innovations and new technolo-

years in the Buckeye State. It builds parts for the communica-

gies, including automation and additive manufacturing.

tions, aerospace, defense, machine tool, automotive, and

“Manufacturing in the U.S. is definitely changing,” indi-

energy industries. CEO Bill Lukens indicates demand for expe-

cates Pennsylvania Governor Tom Corbett. “It is important

rienced operators is very high.

for governors to continue to learn so they can determine the

“We are also seeing more interest in manufacturing by younger people,” says Lukens. “That’s good news because we

best way forward, ensuring good businesses and rewarding jobs for their states.”

can’t find enough experienced workers. In Ohio we have

Pennsylvania’s economy is highly diversified — no single

people with a can-do attitude, as well as plenty of training

industry accounts for more than 5 percent of the total num-

opportunities. When you add our well-developed infrastruc-

ber of businesses in the state. Key sectors include transporta-

ture and a transportation network [that] few states can

tion, metal machining and fabrication, glass, chemicals, and

duplicate, Ohio is a great place to make something.”

plastics. These industry sectors are also well positioned to support growth in emerging markets such as energy, medical

■ ➨

OREGON

devices, and life sciences. Pennsylvania also has a plentiful supply of natural gas, which

Manufacturing represented 28.7 percent of Oregon’s GSP in 2011 (NAM) — the largest share in the nation. And, the

is being produced from the Marcellus and Utica shale forma-

American Institute for Economic Research recently recog-

tions via hydraulic fracturing. This vast energy resource, com-

nized Oregon as the best state in the nation for manufactur-

bined with a deregulated electricity market, is driving down the

ing. With a focus on quality and adding value in advanced

price of energy for businesses, reducing their operating costs.

manufacturing products, Oregon has developed and main-

In 2012 the state government passed legislation that

tained a skilled work force ready for the modern manufac-

reduces red tape and costly mandates for small businesses,

turing environment.

which make up the majority of companies in Pennsylvania.

“With the number of Oregonians employed in manufactur-

The Small Business Regulatory Reform Act amends the

ing at 10 percent and growing, making high-quality products

Regulatory Review Act to require state agencies to consider

for the entire world is one of our state’s greatest economic

the impact of any proposed regulations on smaller businesses. “Manufacturing adds more than $70 billion in value each

strengths,” says Tim McCabe, director of Business Oregon. Top manufacturing sectors are computers and electronics,

year to our state’s economy and employs more than 570,000

food, wood products, fabricated metal, transportation equip-

Pennsylvanians,” says Governor Corbett. “Creating a business

ment, and machinery. Global companies like Boeing and Intel

climate where smaller manufacturers can prosper will grow

are undergoing billion-dollar expansions.

our economy and create more jobs for our citizens.”

Oregon is also experiencing the reshoring of key manufacturing operations, as companies choose to expand in the state rather than overseas. Examples include Mastercraft Furniture; Shimadzu, an advanced manufacturer of medical devices; and

■ ➨

SOUTH CAROLINA Big companies like BMW, Boeing, Continental, and

Michelin have invested more than $7 billion in new projects in AREA DEVELOPMENT | Q1/Winter 2013

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Page 24

South Carolina over the last two years, creating about 21,000

pany’s total investment in Texas to more than $13 billion. “Texas’ location, infrastructure, work force, and regulato-

jobs since January 2010. This represents a greater than 10 percent employment gain — one of the best in the country. Since January 2011, South Carolina has recruited more

ry environment continue to provide the manufacturing sector with a pro-business climate,” indicates Aaron Demerson,

than $5 billion in capital investment and more than 8,000

executive director of Economic Development and Tourism for

jobs to the automotive sector. New announcements include

the Office of the Governor. “These factors, combined with

Kiswire’s $15 million expansion in Newberry County, which

success stories like Samsung and Caterpillar, show why Texas

will meet the higher demand for steel cord. Tire maker

has consistently grown its economy and continues to be a

Michelin North America, which is the largest manufacturing

great state for manufacturing and business.”

employer in South Carolina and operates 18 production facilities in the state, announced it would expand its existing rubber production operations in Anderson County. The $200 mil-

■ ➨

WISCONSIN Wisconsin’s manufacturing companies employ about 17

lion project is expected to generate 100 new jobs and be

percent of the state’s non-farm work force, according to the

operational in 2014. In the last 21 months, the company has

BLS (November 2012) — nearly twice the national average (9

committed to invest a total of $1.15 billion and create at

percent). The state is home to 11,453 manufacturers that

least 870 total new jobs in South Carolina.

employ more than 450,000 (BLS, Nov. 2012) workers and sup-

In January 2013 South Carolina was recognized by IBMPlant Location International (IBM-PLI) as the top state for

port thousands more jobs in other industries. Key “driver industries” include wood products, transporta-

jobs linked to foreign investment. South Carolina placed first

tion equipment, and electrical equipment. Wisconsin’s top

above Texas and North Carolina, which were ranked second

three categories for international exports are industrial

and third, respectively, in the 2012 report.

machinery equipment, electrical machinery, and medical/sci-

“Hundreds of foreign firms employ tens of thousands of residents throughout our state, creating wealth and helping make

entific instruments. “We’re seeing significantly improved health of our manu-

the communities they’re in sustainable,” says Secretary of

facturing sector compared to two years ago,” comments Lee

Commerce Bobby Hitt. “The IBM-PLI report’s ranking is another

Swindall, vice president of Business and Industry

confirmation that people are taking notice of the economic

Development for the Wisconsin Economic Development

development successes we’ve had here in the Palmetto State.”

Corporation. “Wisconsin manufacturers are investing in new capital equipment as they experience rising demand for their

■ ➨

TEXAS

products overseas.”

Texas has a highly diversified economy, ranging from rich

Wisconsin has enacted recent policy enhancements that ben-

energy resources to high-tech industries like semiconductors,

efit manufacturers. For example, an income tax credit for manu-

electronics, aerospace, and information and communications

facturing, which starts in 2013 and will be phased in over four

technology. Oil and gas recovery and production technolo-

years, virtually eliminates state income taxes for manufacturers

gies continue to evolve, expanding the extent of productive

taking advantage of the credit. Businesses relocating to

reservoirs and reducing the price of natural gas — a big

Wisconsin will also be eligible for a two-year income tax holiday.

advantage for industries that rely heavily on natural gas as

Wisconsin has one of the highest-skilled manufacturing work forces in the nation, in part due to its strong technical

an energy source for manufacturing. According to the Texas Workforce Commission (TWC),

college system. The first of its kind in the nation (established

Texas manufacturing employed 850,300 in December 2012 —

1911), Wisconsin’s system serves one of every eight adults.

about 8 percent of the state’s nonagricultural employment.

With more than 800 specialized programs and 500 satellite

Texas added approximately 5,700 manufacturing jobs in 2012

training locations across the state to choose from, companies

and has consistently increased the total number of manufac-

know they can find highly trained workers with the skill sets

turing jobs every year since 2009.

they need.

Texas continues to attract innovative, advanced technology

“Wisconsin’s strong and diverse manufacturing sector has

companies to the state through its “deal-closing” Texas

helped our state tremendously during the economic down-

Enterprise Fund (TEF) — the largest of its kind in the country. For

turn and put us in a strong position going forward,” adds

example, with help from TEF, Caterpillar opened its $200 million,

Swindall. “We need more skilled workers in Wisconsin for the

hydraulic excavator manufacturing plant in Victoria last year.

manufacturing sector. We’re addressing that challenge

Also, with assistance from the TEF, in August 2012 Samsung com-

through a number of initiatives, including partnering with

mitted to an additional investment of up to $4 billion to

our technical college system and reaching out to high school

upgrade its Austin chip manufacturing plant, bringing the com-

students about the benefits of a career in manufacturing.”

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lthough the U.S. economy was growing at a healthy 3.1 percent rate in the summer of 2012, the Commerce Department reports there was a 0.1 percent contraction in the year’s final quarter — the first decline since the end of the recession in 2009. Some analysts say the slowdown was caused by Superstorm Sandy, which resulted in a cessation of exports and inventory growth along the East Coast. Others say that the impending “fiscal cliff” with its predicted government spending cuts and tax increases was to blame. Overall, 2012 GDP growth registered 2.2 percent, up from 1.8 percent in 2011. And there was also a 2.2 percent annualized gain in consumer spending, an 8.8 percent increase in business investment, and a remarkable 15.4 percent jump in housing investment, according to Commerce Department reports. How did manufacturers fare in 2012? The Institute for Supply Management (ISM) reports that manufacturers experienced uneven growth through much of 2012, with a weak global economy dampening exports. Nonetheless, as the year drew to a close, the ISM index of manufacturing activity jumped to 50.2 (seasonally adjusted) in December, indicating expansion, which we are now continuing to see in 2013. Also, orders for durable The 27th Annual Corporate Survey

Current operations of respondents:

FIGURE 1

Manufacturing — Durable Goods Manufacturing — Non-Durable Goods Manufacturing — Other Distribution & Logistics Warehousing Services Data Center/Processing/Software/ Other Computer-Related Services Financial Services/Insurance Real Estate Energy Industry Hospitality Industry Healthcare Industry/Life Sciences Retail Construction & Engineering Other

goods surged 4.6 percent in December 2012, although net manufacturing employment was relatively flat. Area Development’s survey of our corporate executive readers was conducted in late fall, however, just as the effects of Superstorm Sandy were being felt and talks of the impending “fiscal cliff” were heating up. Those events may have had some effect on our readers’ survey responses. Let’s examine the survey results to see what, if any, effect Respondent’s title: FIGURE 2 Other 11% Business Unit Manager 8%

Chairman, President, Partner, CEO, or Owner 40%

Real Estate Mgr./Dir.; Facility Mgr./Dir.; Development Mgr./Dir.; V.P. Real Estate 19% CFO, Controller, Fin. Officer 7% V.P., Secretary, or Other Corporate Officer 15%

Primary role in company’s location decisions: FIGURE 3 Not involved 6% Information gathering 10%

Final decision 46% Preliminary recommendation 38%

Number of facilities currently operated: FIGURE 4

22% 5% 13% 7% 2% 5% 4% 7% 1% 1% 3% 1% 10% 18%

Five or more 37%

One 34% Domestic:

Four 6%

Two 15%

Three 9%

One 29% Five or more 56%

Foreign: Two 7% Three 5% Four 2%

Annual Corporate & Consultants Survey

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these end-of-year events had on our readers’ location and expansion plans and priorities.

Responding Firms & Their Facilities There were more than 200 responses to our 27th Annual Corporate Survey of our readers, conducted in the fall of 2012. Nearly 90 percent of these individuals responded online — a sign of the everincreasing use/power of the Internet. Forty percent

Number of employees worldwide: FIGURE 5 Fewer than 20 22%

1,000 or more 29%

20-49 6% 50-99 8%

500-999 8%

100-499 26%

Change in the number of facilities during the past 12 months: FIGURE 6 Decreased number of facilities by 3 or more 4% Increased number of facilities by 3 or more 14%

Decreased number of facilities by 2 or fewer 6%

Increased number of facilities by 2 or fewer 15% Number of facilities not changed 61%

Primary reasons for those increasing their number of facilities: FIGURE 7 Increased sales/production/services 48%

Better access to new or existing markets 31%

New product line(s)/service(s) 19%

Result of merger/acquisition 25%

Other 7%

AREA DEVELOPMENT

of the respondents are with manufacturing companies, 9 percent represent logistics/distribution/warehousing establishments, and 10 percent are with construction and engineering enterprises (Figure 1). Importantly, 40 percent of the survey respondents are also the head of their companies, i.e., president, CEO, owner, etc. And another fifth are financial or other corporate officers (Figure 2). Nearly half of the respondents say they are responsible for their companies’ final location decisions, and another 38 percent make the preliminary recommendations (Figure 3). About a third of the respondents to the 27th Annual Corporate Survey say they operate just one domestic facility, and only slightly more than a third operate five or more domestic facilities. However, more than half of the respondents say they operate 5 or more foreign facilities, with another 29 percent claiming to operate just one foreign facility (Figure 4). Nearly 30 percent of the Corporate Survey respondents say their firms employ 1,000 or more people worldwide. A quarter are mid-sized in terms of employment, with 100–499 workers, and about a fifth of the respondents say their work forces are comprised of fewer than 20 individuals (Figure 5). Nearly 30 percent of the respondents to the 27th Annual Corporate Survey say they have increased their number of facilities over the past year, while 10 percent say they have decreased their number of facilities, and 60 percent of the respondents have not changed their number of facilities at all (Figure 6) — results that are remarkably consistent with the year prior’s Corporate Survey. Nearly half of the respondents who say they have increased their number of facilities needed to increase production in response to increased sales, and nearly a third needed better access to markets (Figure 7). Interestingly, more than half of those decreasing their number of facilities over the past year say they needed to lower operating and/or labor costs — with only 16 percent saying the shuttering of facilities was due to a decrease in product sales (Figure 8).

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Nearly half of the respondents who say they have increased their number of facilities needed to increase production.

2:29 PM

Page S5

Respondents’ New Facilities Plans

facilities, the South (Alabama, Florida, Georgia, Louisiana, and Mississippi) will garner the most new facilities planned by the respondents to our 27th Annual Corporate Survey — 16 percent. The South Atlantic region (North Carolina, South Carolina, Virginia, and West Virginia) and the Midwest (Illinois, Indiana, Michigan, Ohio, and Wisconsin) will each receive 13 percent of the respondents’ planned new facilities, closely followed by the Southwest (Arizona, New Mexico, Oklahoma, and Texas) with 12 percent and the Mid-Atlantic States (Delaware,

Almost half of the respondents to our 27th Annual Corporate Survey do not expect the U.S. economy to improve until 2015 or 2016 (Figure 9). The Corporate Survey respondents also say the sluggish economic recovery has caused their firms to put new facilities and expansion plans on hold (23 percent) and reduce their current employment (13 percent) or defer hiring Analysis additional workers (18 The survey results have focused on a theme that is familiar to most consultants in percent) (Figure 10). In fact, consistent with the prior year’s Corporate Survey results, just 22 percent of the respondents expect to open new facilities within one year, and 17 percent within two years. Another 13 percent have longer-range new facilities plans, and nearly half have no new facilities plans at all (Figure 11). Of those with new facilities plans, remarkably, a fifth expect to open five or more facilities. However, another 39 percent expect to open just one new facility, and a quarter of the respondents expect to open two (Figure 12). When it comes to the location of new domestic

our industry. Clients are still intending to make capital investment decisions; however, both the level of investment and the amount of new employment have been lackluster, and this trend could continue in the near future. In fact, consolidation activities have been more apparent recently in both industrial and office markets. These actions are being taken to both streamline operations as well as utilize existing capacity more efficiently. The 2012 survey indicates that the general belief is activity will pick up within one to two years, and judging from the minimal rate of significant new investment, I cannot disagree — although one bright spot we continue to hear from our clients is that there is a pending need for new capacity once confidence in the economy returns. Also, the cash reserves that are currently underutilized are quite large. Of significant concern to our industry, as well as our clients, is the inability of the legislative and executive branches to agree on anything meaningful regarding the economy — and it is the opinion of this consultant that the blame and finger-pointing is shared by everyone. I hope, by the time publication of this article occurs, I will have fingers pointed at me as a negative worry-wart who is overconcerned with our legislators’ ability to work together; however, I suspect this will not be the case at all. An encouraging realization from the survey comes from the comment that overseas manufacturers are having problems with product quality and rising labor and energy costs (each cited by a fifth of the Corporate Survey respondents), so much so that some are considering moving operations back to the United States. While this is encouraging from one perspective, it should be considered in the context of how important site selectors (and their clients) consider skilled labor. The availability of skilled labor factor was one of the highest ranked site selection factors (53.9 percent considered it “very important,” 35.5 percent considered it “important”), with highway accessibility (57 percent “very “important,” 33.1 percent “important”) listed as more significant. Economic development policymakers need to pay attention to the availability of skilled labor, since it will probably be the most important differentiating factor for site selection in the future.

By ED

MCCALLUM, Senior Principal • McCallum Sweeney Consulting

Annual Corporate & Consultants Survey

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Maryland, New Jersey, New York, and Pennsylvania) with 11 percent (Figure 13). It should be noted that in the prior year’s Corporate Survey, the largest share of the respondents’ planned new facilities were to be in the Southwest (15 percent), which outpaced all other regions by a wide margin. More than a quarter of the new domestic facilities planned by the current Corporate Survey respon-

Expect to open new facilities within: FIGURE 11

22%

25%

23%

17%

15%

18% 9%

13%

45%

43%

Primary reasons for those decreasing their number of facilities: 48% FIGURE 8 Decrease in product sales/services 16%

2012

Need to lower operating/labor costs 52%

1 year

2011 2 years

3 years

2010 4 years or more

No plans

Outdated facility 19%

Result of merger/acquisition 19%

Of those with new facilities plans, number to be opened within the next five years:

Other 26%

FIGURE 12

Five or more 21%

Four 0%

One 39%

Expect the economy to improve significantly by: Three 14% FIGURE 9 Q3 2013 - 12% Not until 2016 - 23% Two 26%

Q4 2013 - 9%

2014 - 31%

2015 - 25%

Location of new domestic facilities (as a percentage of total number to be opened): FIGURE 13

Effects of the sluggish recovery on facility plans:

New England (CT, MA, ME, NH, RI, VT) 8% Middle Atlantic (DE, MD, NJ, NY, PA) 11%

FIGURE 10

Still plan to open new facilities/expand 23%

South Atlantic (NC, SC, VA, WV) 13%

Still plan to increase hiring 20%

Mid-South (AR, KY, MO, TN) 9%

New facility/expansion plans put on hold 23%

South (AL, FL, GA, LA, MS) 16%

Closing/consolidating facilities 15%

Midwest (IL, IN, MI, OH, WI) 13%

Reducing current employment 13%

Plains (IA, KS, MN, NE, ND, SD) 3%

Hiring plans deferred 18%

Mountain (CO, ID, MT, UT, WY) 6%

Deferring capital spending 20%

Southwest (AZ, NM, OK, TX) 12%

Seeking new sources of funding/financing 8%

West (CA, NV, OR, WA) 8%

Seeking ways to optimize facilities/layouts 17%

Offshore (AK, HI, PR, VI) 2%

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dents will house manufacturing operations, and another 25 percent will be warehouse/distribution centers (Figure 14). Unfortunately, three quarters of the respondents say their planned new facilities will create fewer than 100 new jobs, with only about a fifth of the respondents saying the facilities will create between 100 and 499 jobs (Figure 15). Additionally, about 60 percent of the Corporate Survey respondents say the planned new facilities will represent less than $10 million in investment; just 28 percent say they represent between $10 million and $50 million in investment (Figure 16).

This year’s Corporate Survey respondents appear to have as much interest in South America as in Canada and Western Europe — historically our readers’ top two outward FDI choices. The survey respondents plan 12 percent of their new foreign facilities for each of these three regions (Figure 17). The

Location of new foreign facilities (as a percentage of total number to be opened): FIGURE 17 Canada 12% Mexico 8% Caribbean 0% Central America 2%

Types of new domestic facilities

South America 12%

(as a percentage of total number to be opened):

Western Europe 12% Eastern Europe 9%

FIGURE 14 Other 14%

Middle East 9% Manufacturing 28%

R&D 5%

Africa 6% Australia 2%

Shared Services 7%

Asia 28%

Back Office/Call Center 6% Data Center 4% Warehouse/Distribution 25%

Headquarters 10%

Location of new facilities planned for Asia (as a percentage of total new Asian projects):

Number of new jobs to be created at new domestic facilities:

FIGURE 18 Thailand 5%

FIGURE 15 500-999 - 5%

Singapore 9%

1,000 or more - 4%

100-499 - 18%

Vietnam 5% Fewer than 20 - 41% India 18%

China 64%

50-99 - 14%

20-49 - 19%

Types of new foreign facilities (as a percentage of total number to be opened):

Amount to be invested in new domestic facilities: FIGURE 19

FIGURE 16 >$100 million–$500 million 5% More than $500 million 1%

Other 12% R&D 10%

>$50 million–$100 million 7%

$10 million– $50 million 28%

Shared Services 14% Less than $10 million 59% Back Office/Call Center 10% Data Center 2%

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Year-over-year interest in Asia by the Corporate Survey respondents has declined somewhat.

prior year’s survey respondents had planned 20 percent of their new foreign facilities for Western Europe, 10 percent for Canada, and just 7 percent for South America. (In fact, in an interesting shift, FDI inflows to all of Latin America have been rising.) Year-over-year interest in Asia by the Corporate Survey respondents has declined somewhat. This year’s survey respondents say 28 percent of their new foreign facilities are planned for Asia, down from 33 percent of those planned by the prior year’s respondents. Two thirds of the new facilities planned for Asia will be in China (Figure 18). Nearly 30 percent of the planned new foreign facilities will house manufacturing operations, and there will be many more foreign back office/call center (10 percent of total projects) and shared services facilities (14 percent) than seen on the domestic front (10 percent in all) (Figure 19). Additionally, about a third of the Corporate Survey respondents say their new foreign facilities will create more than 100 jobs (Figure 20) — more than expected at the planned new domestic facilities. Investment expectations are similar, however. Sixty percent of the respondents say they will invest less than $10 million in new foreign facilities, and a quarter will invest between $10 million and $50 million (Figure 21).

dents also have no relocation plans, with only a fifth expecting to relocate within the next two years (Figure 24). Of those with relocation plans, a third cite high taxes and excessive government regulations as their reasons for moving, while a quarNumber of new jobs to be created at new foreign facilities: FIGURE 20 1,000 or more - 7% 500-999 - 7% Fewer than 20 - 38% 100-499 - 20%

50-99 - 18%

Amount to be invested in new foreign facilities: FIGURE 21 >$100 million–$500 million 3% >$50 million–$100 million 13%

$10 million– $50 million 24%

More than $500 million 0%

Less than $10 million 60%

Expect to expand existing facilities at present location within: FIGURE 22 16%

Respondents’ Plans to Expand or Relocate Half of the 27th Annual Corporate Survey respondents have no plans to expand facilities at their present locations — as was the case with the prior year’s survey respondents. Just 35 percent say they expect to expand facilities over the next two years (Figure 22). However, these expansions will not create many new jobs. More than 80 percent of those with expansion plans say their existing facility expansions will create fewer than 100 new jobs (Figure 23). Seventy percent of the Corporate Survey respon-

20-49 - 10%

21%

20%

19%

21%

7% 2%

5% 7%

50%

51%

47%

2012

2011

2010

19%

12%

1 year

2 years

3 years

4 years or more

No plans

Annual Corporate & Consultants Survey

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operation to offshore or a foreign facility back to the United States (Figure 26). Of those who say they will re-shore, a third cite social/cultural barriers as their reasons for doing so, and a fifth are concerned about rising foreign labor and energy costs, product quality issues, and difficulties transporting supplies/products (Figure 27). When asked about the issues preventing their companies from spending more of their earnings on investment in U.S. facilities, more than half of the respondents cite high U.S. tax rates/tax uncertainty and exces-

Analysis Here are some notable findings: • It is interesting to see that highway accessibility has finally been supplanted as the number-one site selection factor, though it still outranks availability of skilled labor, which I have always found perplexing. Upon further examination, I realize that this result is probably due in large part to the disproportionate share of survey responders who are in the manufacturing, distribution, and construction industries (approximately 60 percent of all respondents), rather than so-called knowledge industries (financial services, insurance, I/T, healthcare, etc., comprising less than 20 percent of the survey sample). Employers in these latter sectors might be expected to prize labor quality above accessibility. • The proportion of survey respondents who’ve increased their number of facilities outpaces those who’ve reduced facilities by a factor of three — this jibes with our experiences; the demand for new sites/locations is definitely on the rise. • What also is striking is the share of respondents who seem content to continue in their current global deployment. Despite all of the talk of “reshoring” only 3 percent of the respondents anticipate bringing a foreign facility back to the United States, while an equally small number plan to move offshore. • Finally, we note that fully 70 percent of corporate responders believe that incentives are somewhat or very important to their location decisions. This too is confirmed by our experiences and should help counter perceptions to the contrary that may have arisen as a result of recent negative and (in our opinion) biased coverage of incentives in the national media.

By ANDREW

SHAPIRO, Managing Director • Biggins Lacy Shapiro & Company

ter need to be in closer proximity to suppliers and/or markets served, and about a fifth are also concerned with healthcare costs and the quality of life at their present locations (Figure 25). Nonetheless, only 3 percent of the Corporate Survey respondents expect to relocate a domestic

Expect to relocate a domestic facility within: FIGURE 24 9%

10%

11%

14%

11%

4% 6%

6% 1%

9% 2%

Number of new jobs to be created by expansion: 70%

FIGURE 23

72%

66%

500-999 - 1% 1,000 or more - 2% 100-499 - 15%

Fewer than 20 - 49% 50-99 - 18%

2012 20-49 - 16%

S10

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3 years

2010 4 years or more

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sive government regulations; nearly 40 percent are also concerned about new healthcare regulations and, importantly, fully two-thirds are concerned about general economic instability (Figure 28).

Respondents Rank the Factors When making their site decisions, our Corporate Survey respondents consider and weigh the various site selection and quality-of-life factors. We ask them to rate the factors as either “very important,” Of those with plans, the primary reasons for moving from current location: FIGURE 25 High taxes 33% Excessive government regulations 31%

“important,” “minor consideration,” or “of no importance.” Their ratings are shown in (Figure 29). We then add the “very important” and “important” ratings in order to rank the factors in order of importance to this year’s respondents. The site selection and quality-of-life factors are ranked separately. The combined ratings/rankings appear in (Figure 30) along with the prior year’s survey combined ratings/rankings for comparison’s sake. Historically, labor costs and highway accessibility are the top ranked factors and this year is no different. Labor costs is ranked first among the site selection factors, considered “very important” or “important” by 90.8 percent of the respondents, closely followed by highway accessibility, with a combined importance rating of 90.1 percent. These two factors

Healthcare costs 19% Proximity to suppliers/markets served 26%

If so, reasons for re-shoring:

Poor infrastructure 17%

FIGURE 27

Labor costs 22%

Rising foreign labor costs 22%

Labor availability 17%

Rising energy costs 22%

Quality of life concerns 22%

Problems finding qualified and/or English-speaking labor 11%

Other 24%

Product quality issues 22%

Lack of robust utility infrastructure 11% Difficulties transporting supplies/products 22% Cost of transporting supplies/products 11%

Expect to relocate a domestic facility to an offshore location:

Social/cultural barriers 33% Other 22%

FIGURE 26 Yes 3%

No 97%

Issues preventing company from spending more of its earnings on investment in U.S. facilities: FIGURE 28 High corporate taxes/tax uncertainty 53% Excessive government regulation 55%

Expect to relocate a foreign facility back to the U.S.:

Highly litigious environment 25% High labor costs 25%

Yes 3%

Uncertainty about new healthcare regulations 39% Economic instability 66% Shortage of skilled labor 19%

No 97%

S12

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swapped positions from the prior year’s survey. Availability of skilled labor, which was ranked second (tied) in last year’s survey, is now ranked third among the site selection factors, with an 89.4 percent combined “very important” or “important” rating. In a related question, we asked our survey-takers if the relatively high unemployment rates throughout the nation are making it easier for them to find the labor they need. More than two thirds say this is not the case (Figure 31). About two-fifths of the Corporate Survey respondents say the unemployed are lacking basic reading and math skills; 75 percent say that, most importantly, they are lacking the more advanced skills that the respondents require, e.g., advanced welding, machine tool programming, etc. (Figure 32). As a result, the availability of unskilled labor factor showed the largest percentage decrease in importance (and the largest plus or minus change overall). This factor dropped 16 percentage points and five spots

12:13 PM

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Corporate Survey 2012*

FIGURE 29

Site selection factors

Very Important %

Important %

Minor Consideration

Of No Importance %

Labor Availability of skilled labor Availability of unskilled labor Training programs Labor costs Low union profile Right-to-work state

53.9 10.0 18.0 42.6 47.1 45.8

35.5 32.9 36.7 48.2 26.4 26.8

7.1 33.6 33.1 5.7 11.4 13.4

3.5 23.6 12.2 3.5 15.0 14.1

57.0 27.1 17.4 5.9 49.3

33.1 16.5 35.5 14.0 35.8

6.3 21.2 30.4 25.0 11.4

3.5 35.3 16.7 55.1 3.6

31.9 35.7 32.6 33.1

31.2 43.6 42.8 38.0

20.6 11.4 15.2 21.1

16.3 9.3 9.4 7.7

41.7 18.7 35.3 29.2 19.3 35.3 31.2 32.1 15.8 26.7 15.3

36.7 40.3 47.5 38.0 30.4 46.0 39.9 40.1 39.1 37.0 35.0

14.4 22.3 11.5 22.6 25.9 12.2 18.8 18.2 30.8 18.5 27.7

7.2 18.7 5.8 10.2 24.4 6.5 10.1 9.5 14.3 17.8 21.9

18.6 15.8 19.4 19.4 21.6 10.8 11.0 17.4 31.4

36.4 54.0 47.5 50.4 41.7 38.1 41.9 44.2 47.9

37.9 23.0 25.9 25.2 29.5 41.0 38.2 33.3 18.6

7.1 7.2 7.2 5.0 7.2 10.1 8.8 5.1 2.1

Transportation/ Telecommunications Highway accessibility Railroad service Accessibility to major airport Waterway or oceanport accessibility Availability of advanced ICT services Finance Availability of long-term financing Corporate tax rate Tax exemptions State and local incentives Other Available buildings Available land Occupancy or construction costs Expedited or “fast-track” permitting Raw materials availability Energy availability and costs Environmental regulations Proximity to major markets Proximity to suppliers Inbound/outbound shipping costs Proximity to technical college/training Quality-of-life factors Climate Housing availability Housing costs Healthcare facilities Ratings of public schools Cultural opportunities Recreational opportunities Colleges and universities in area Low crime rate

*All figures are percentages and are rounded to the nearest tenth of a percent.

Annual Corporate & Consultants Survey

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Combined Ratings* of 2012 Factors FIGURE 30

Site selection factors

Corporate Survey 2012 2012

2011

Ranking 1.

Labor costs

90.8

88.4 (2)**

Highway accessibility

90.1

93.8 (1)

Availability of skilled labor

89.4

88.4 (2T)

Availability of advanced ICT services

85.1

76.6 (13)

Occupancy or construction costs

82.8

85.9 (5)

Energy availability and costs

81.3

84.8 (7)

Corporate tax rate

79.3

86.0 (4)

Available buildings

78.4

76.3 (15)

Tax exemptions

75.4

83.6 (8)

10.

Low union profile

73.5

81.0 (10)

11.

Right-to-work state

72.6

77.5 (12)

12.

Proximity to major markets

72.2

83.0 (9)

13.

State and local incentives

71.1

85.9 (5T)

13T. Environmental regulations

71.1

76.4 (14)

15.

Expedited or “fast-track” permitting

67.2

72.4 (17)

16.

Inbound/outbound shipping costs

63.7

79.2 (11)

17.

Availability of long-term financing

63.1

70.0 (18)

18.

Available land

59.0

73.9 (16)

19.

Proximity to suppliers

54.9

67.8 (19)

20.

Training programs

54.7

50.6 (23)

21.

Accessibility to major airport

52.9

55.7 (21)

22.

Proximity to technical college/training

50.3

40.2 (24)

23.

Raw materials availability

49.7

52.8 (22)

24.

Railroad service

43.6

33.6 (25)

25.

Availability of unskilled labor

42.9

58.9 (20)

26.

Waterway or oceanport accessibility

19.9

24.5 (26)

Quality-of-life factors Ranking 1.

Low crime rate

79.3

82.0 (1)

Healthcare facilities

69.8

71.0 (2)

2T.

Housing availability

69.8

64.1 (5)

Housing costs

66.9

69.9 (3)

Ratings of public schools

63.3

68.8 (4)

Colleges and universities in area

61.6

56.6 (6)

Climate

55.0

52.2 (8)

Recreational opportunities

52.9

53.2 (7)

Cultural opportunities

48.9

42.8 (9)

*All figures are percentages and are the total of “very important” and “important” ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent. **(2011 ranking)

S14

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to 25th place and is now considered “very important or “important” by fewer than half of the Corporate Survey respondents — just 42.9 percent. A lack of skilled labor may be the reason that 57 percent of the respondents say they are very or somewhat dependent on contract or contingent workers (Figure 33). Although, at any given time, less than 25 percent of their work forces are comprised of contract labor, according to nearly 80 percent of the respondents (Figure 34). And, since availability of skilled labor is so important to our Corporate Survey respondents, it follows that proximity to technical college/training shows the largest percentage increase in combined importance rating — jumping 10.1 percentage points and now considered “very important” or “important” by more than half of the respondents — although this requirement is still ranked toward the bottom of the list at number 22 among the site selection factors. Training programs also jumped 4.1 percentage points in importance and three places in the site selection factor rankings. Interestingly, only seven

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of the 26 site selection factors have increased their combined “very important” or “important” ratings on a year-over-year basis. The factor showing the third-largest jump in its importance rating — increasing 8.5 percentage points — is availability of advanced ICT services, which is now ranked fourth

High unemployment rates are making it easier to find the necessary labor: FIGURE 31 Yes 32%

No 68%

among the factors by the survey respondents — up nine spots from 13th place in the year-prior survey and representing the biggest leap in the factor rankings. While advanced communication capabilities are important to manufacturers, they are even more vital to those operating data centers or providing financial/insurance or real estate-related services. This year’s Corporate Survey respondents are comprised of twice as many representatives of these types of firms as compared with the year prior’s group of respondents (16 percent vs. 8 percent) so this may account for the big jump in the rating and ranking of the availability of advanced ICT services factor. Additionally, the avail-

Importance of the existence of an available building in the site search: Many unemployed are lacking: FIGURE 35 FIGURE 32

Of no importance 11%

Basic skills (e.g., reading comprehension, mathematical competency, etc.) 39%

A minor consideration 15% Very important 45%

Advanced skills (e.g., advanced welding, machine tool programming, bioprocessing, etc.) 75%

Dependency on contract workers or contingent labor:

Somewhat important 29%

Importance of the existence of a shovelready/pre-certified site:

FIGURE 33 Very dependent 11%

FIGURE 36 Very important 18% Of no importance 28%

Not dependent at all 44% Somewhat dependent 46% A minor consideration 21%

Percentage of contract labor employed at any given time:

Impact of high energy costs on facility plans:

FIGURE 34

FIGURE 37 More than 50% - 7%

Affecting facility operations 28%

25–50% - 16%

No effect 60% Less than 25% - 78%

S16

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ability of these services is even more critical in the site selection factors at 18th place this year. emerging market locations and with many of this Moreover, when they are looking for available land year’s respondents planning new foreign facilities, for construction, 50 percent of our Corporate they may have more heavily weighted this factor. Survey respondents consider the existence of a Occupancy and construction costs maintained its shovel-ready or pre-certified site as very or somefifth place ranking among the site selection factors what important (Figure 36). from the prior year’s survey, considered “very Energy availability and costs is ranked sixth important” or “important” by 82.8 percent of the among the factors, considered “very important” or Corporate Survey respondents. Perhaps Analysis in a move to keep these costs down, our Both the survey results and my experience in different markets point to a survey respondents “positive hold” mode in effect. In other words, with lots of cash on hand, companies are also think available positioning themselves for growth and are getting ready to start investing into their businesses. Following are some observations about the Corporate Survey results: buildings are quite important. This factor • Even with the soft labor market, availability of skilled labor is still highly important. jumped in the rankCompanies are constantly looking for trained workers to fit their operations. This is a huge ings from fifteenth time and money saver for a company’s transition. place in the year-prior • Being the top expense, labor costs remain highly important as do low union profile and survey to eighth place right-to-work state. The goal continues to be “gets costs low for the long term.” this year — the sec• Highway accessibility maintains its “very important” to “important” status. This is a factor ond-largest jump in for office or industrial projects — shorten the time for trucks and employees to get in and out the rankings — considof the facility. ered “very important” • Technology continues to support all of our businesses and availability of advanced ICT or “important” by 78.4 services stays top of mind with many corporations when considering relocation. percent of the respon• All of the financial categories remain “very important” or “important,” which supports the dents. (Also see Figure need for any and all cost-cutting measures. 35 on this same question.) As a counter• Available buildings is high on the list so that companies can take advantage of any cost savings as soon as possible. point, that may be the reason that available • As stated above, any significant cost item — like energy costs, shipping costs, occupancy/ land showed the thirdconstruction costs — is found to be “very important” to “important.” largest percentage • Proximity to major markets is still important since flexibility remains highly advantageous decrease in the factor to corporations. ratings, dropping by • Quality-of-life factors drop down to “important” to “minor consideration” — falling short of 14.9 percentage points cost-savings measures. and considered “very • The overall rankings of site selection factors varied slightly with major movers being important” or “imporavailability of advanced ICT services, moving from 13th to 4th position, and available tant” by only 59 perbuildings moving from 15th to 8th. cent of the respondents, although it maintained its middle By BRETT HUNSAKER, Executive Vice President, Regional Managing Director • Newmark Grubb Knight Frank to low ranking among Annual Corporate & Consultants Survey

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“important” by 81.3 percent of the Corporate Survey respondents. It is hard to explain, therefore, why 60 percent of the respondents say energy costs are having no impact on their facility operations or supply/distribution networks (Figure 37). Nonetheless, 68 percent of the respondents say sustainable development is more important to their company now than in the past (Figure 38), and three quarters of the respondents are making energy-saving modifications to their facilities, while

Sustainable development is more important now than in the past: FIGURE 38 No 32%

Yes 68%

Measures being undertaken to reduce company’s “carbon footprint”: FIGURE 39

two thirds are recycling or re-using Availability of waste products advanced ICT (Figure 39). services showed the Corporate tax biggest leap in the rate, tax exempfactor rankings — tions, and state and up nine spots. local incentives historically rank high in importance among our Corporate Survey-takers. However, these factors took somewhat of a back seat this year. Corporate tax rate fell from fourth to seventh position (-6.7 percentage points); tax exemptions fell one spot to ninth (-8.2 percentage points); and state and local incentives fell an astounding eight spots (biggest ranking drop in the factors overall) from fifth (tied) to 13th (tied) position in the rankings (-14.8 percentage points). All three of these site selection factors are considered “very important” or “important” by less than 80 percent of the Corporate Survey respondents. Why this drop in the rankings of these factors?

LEED certification for new or existing facilities 20%

If so, percentage of the incentives initially estimated value secured:

Energy-saving modifications to existing facilities 75%

FIGURE 41 >75% to 100% - 13%

Installed on-site renewable generation 13% >50% to 75% - 11% Change of supply or distribution routes/methods 26% 10 to 25% - 53%

Recycling or re-use of waste products, etc. 66%

>25% to 50% - 23%

Other 4%

Company has had to repay incentives monies because investment and/or job creation obligations were not met: Company has received and utilized incentives in the past:

FIGURE 42 Yes 5%

FIGURE 40 No 46%

Yes 54%

No 95%

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Perhaps the Corporate Survey respondents are realizing that incentives can’t make up for high labor costs, poor highway access, a lack of skilled labor, or high energy or occupancy costs, i.e., they can’t make a bad deal good. Consequently, the respondents have adjusted their priorities. Interestingly, only slightly more than half of the respondents say they have received and utilized incentives in the past (Figure 40). Of those, three quarters say they have only secured up to 50 percent of the incentives estimated value (Figure 41). Fortunately, only 5 percent have had to repay incentives monies because investment or job creation obligations were not met (Figure 42). When considering all types of incentives, more than two thirds of the respondents believe tax incentives are the most important type, while near-

ly half also prefer miscellaneous incentives such as free land, utility-rate subsidies, and infrastructure support (Figure 43). Seventy percent of the respondents also feel that incentives can be important to moving a project forward in a specific location (Figure 44). And while nearly 70 percent of the respondents say that sustainability is more important now than in the past, two thirds of the Corporate Survey respondents note that communities are not offering specific incentives for green initiatives. Approximately 80 percent of the respondents also confirm they have not encountered any “green performance” requirements as a stipulation for receiving incentives (Figure 45). Overall, 19 factors show decreases in their combined “very important” or “important” ratings. The second-largest drop in the importance Analysis ratings (-15.5 percentage points) went to THE 2012 CORPORATE SURVEY continues to serve as the crystal ball into the minds inbound/outbound of corporate decision-makers. With over 80 percent of the respondents coming from the shipping costs, which C-suite or the real estate /operational disciplines, the respondents are clearly disposed fell five spots in the to being a part of the final decision-making process for corporate relocation matters. Their Corporate Survey rankthoughts appear to echo that the “new normal” of just plodding along is going to be the ings to 16th place. status quo in the economy for some time. With the election behind us — but the fiscal cliff Proximity to major and federal tax discussions ongoing — playing it safe seems to be the most common path forward. markets also fell in the rankings — three posiThe results indicate a continued focus is on managing costs and that any optimism in the tions to 12th place and economy is being cautiously managed. The facility decision-making process is now expected to monetize real estate assets through cost savings and incentives, while achieving skill set 10.8 percentage points value-add. for a combined 72.2 percent “very imporLabor again remains the most critical component of the process, as it should be. Unless tant” or “important” a product or service can be produced or performed to its maximum, no amount of cost savings or incentives could cover the loss differential. There is no question that the true rating. Proximity to balancing act in site selection involves maximizing labor and skill set value-add, while suppliers maintained minimizing the cost functions surrounding it. After labor, all of the other factors in the top its 19th place spot in 15 continue to be costs and those that influence the margins of the decision-making the rankings, but fell process. 12.9 percentage points Regions would be wise to focus their energies and funding, maximizing their value proposiin the combined tions to target industries that fit their labor sweet spots. importance ratings with a 54.9 percent combined score. The BY THOMAS STRINGER, Business Advisory Services • Ryan & Company

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Eighty percent of the respondents use site magazines like Area Development when making location decisions.

only explanation I can offer for the drop in imporsatisfied — are rated tance of these three related factors is the make-up and ranked separateof the pool of survey respondents. With fewer ly. Throughout the durable goods manufacturers represented by the survey’s history, low 27th Annual Corporate Survey respondents, these crime rate has been factors do not appear to be weighted as heavily. ranked the number-one quality-of-life factor, and Nevertheless, railroad service, which is always this year is no exception, with this factor receiving a near the bottom of the rankings (#24 among the 79.3 percent importance rating. If considered with site selection factors this year) actually saw the secthe other site selection factors, low crime rate would ond-largest increase in importance rating — jumpactually tie for seventh place. ing 10 percentage points to be considered “very All of the other quality-of-life factors are considimportant” or “important” by nearly half (43.6 perered “very important” or “important” by less than cent) of the Corporate Survey respondents. 70 percent of the Corporate Survey respondents. Increased fuel costs and highway congestion may Healthcare facilities and housing availability are be making shipping by rail a more economically attractive option Analysis than shipping over land when feasible for the The results of Area Development’s survey closely mirror the trends seen in today’s market: product. the southern part of the United States continues to not only heavily recruit new projects by Finally, our offering creative economic incentives, a strong work force, and low tax/regulations, but it is also Corporate Survey winning a majority of these new projects as 50 percent of new facilities are landing in the South respondents say their (South Atlantic, Mid-South, South, and Southwest combined) according to those responding to companies like to stick the Corporate Survey. together with other Thus, it is also of little surprise that new manufacturing facilities comprised more than a quarter firms in their industries, of new domestic facilities, as clients continue to be focused on overall operating costs and i.e., cluster. Seventy increased productivity. Furthermore, as it pertains specifically to locating new manufacturing percent of the responoperations, many clients are seeking business-friendly and stable environments that are almost exclusively right-to-work, which provides a tremendous advantage for the Southern States. dents say they take into Interestingly there have been some recent high-profile successes by Midwest states to pass consideration the exisright-to-work legislation, but it is too early to say what the effect will be on future projects, tence of businesses peralthough many companies have been carefully monitoring these changes. forming similar activiThe data also clearly highlights the overall impact that the economy is having on growth, with ties to theirs in the area many respondents showing little confidence in a speedy economic recovery and a limited of search (Figure 46), appetite to commit to large capital-intensive projects; however, there have been some notable with nearly 60 percent exceptions, specifically in the high-tech and oil and gas industry. As a result, assistance offered of the respondents sayin the form of discretionary economic incentives, especially tax credits and grants, will continue ing this factor is very or to play a role in helping to offset costs. Decision-makers will be looking for relevant tax credit somewhat important. programs that offer utility and are not simply prescriptive. Undoubtedly the competition for new projects will only heat up, and states with flexible incentive programs will be in the best position The quality of life to succeed. factors — which should be considered tiebreakers when all other site By CHRISTOPHER B. SCHASTOK, Vice President • Jones Lang LaSalle Americas requirements have been Business and Economic Incentives Annual Corporate & Consultants Survey

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Analysis AREA DEVELOPMENT’S 27TH ANNUAL CORPORATE SURVEY of its readers is an excellent reference for anyone involved in site selection and facilities planning. The complete set is an important record of long-term shifts in strategies and priorities. The first survey was published amid an extended period of economic growth following the tumultuous ‘70s, remembered for inroads made by foreign competition in the automotive sector and two oil crises. Among five recessions occurring during the period from 1969 to 1991, only two lasted more than eight months with highest monthly unemployment rates above 7.8 percent. During the 16-month 1973–1975 recession, peak unemployment was 9 percent, and during the

most important, tied for second place, followed by housing costs. Educational institutions in the area are considered after these basic needs are met, and an area’s climate and cultural and recreational amenities bring up the rear.

16-month recession occurring 1981-1982, peak unemployment was 10.8 percent. For manufacturers (especially automotive) in the Great Lakes region, it was one prolonged recession from late 1980 through 1984. With the exception of the oil crises, the other events were regarded as normal, short-term disruptions and, therefore, did not lead to structural changes. After a mild eight-month recession in 2001, the economy picked up for three to four years, and then began to exhibit underlying weaknesses, despite overall acceptable performance. By 2005 it was evident many durable goods manufacturers had reached unsustainable capacities. The Great Recession of 2007–2009 was a redefining moment. Unemployment peaked at 10 percent and remained near 9 percent for 36 months (’09–’11). GDP fell 5.1 percent (nearly twice the average of previous recessions). Tough issues had to be addressed rapidly and comprehensively. Manufacturing, led by automotive, made huge structural changes. Together, we took a lot of pain all at once. Like a major illness, the symptoms linger six years after the onset. We are now in transition from a system of “winners and losers” where permanent excess capacity led to increasingly desperate price competition (especially among suppliers) to a new system mandating lower fixed costs, higher productivity, and faster innovation through intense cooperation between OEMs and their supply chains and among suppliers at all levels. This is the first recovery in several decades for which we do not have sufficient capacity on standby to support near-term demand. The knee-jerk reaction used to be build quickly and build big. The new normal is to find productivity improvements within, build if you have to, and build as small as you can. This shows up across Area Development’s 2012 survey as caution in projecting the arrival of a fundamentally stronger economy, higher priority on issues that support improved productivity in existing operations, and, when necessary, smaller new locations with lower projections for capital expenditures and job creation. The good news is we are now clearly ahead of schedule in implementing large-scale changes that will help avoid mistakes of the past and lead to greater economic sustainability.

By DAVID MUNSON • David Munson & Associates, Inc.

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Respondents’ Sources of Information Eighty percent of the Corporate Survey respondents use site magazines like Area Development when making location decisions (see chart on page S26). Two thirds also use the Internet to satisfy their informational needs. Both of these numbers are up over last year’s survey. When searching the Internet, about 70 percent of the respondents are looking for data on specific locations, and around 60 percent for listings of available sites and buildings. The largest percentage (43 percent) start their informationgathering process one

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to two years in advance of making the location decision. Nearly two thirds of the respondents say they don’t wait very long after their initial information search to contact the locations of interest — a month to three months later. Nearly 90 percent of the respondents put up to five locations on their “short list” and also visit the same number before finalizing their location decisions. Three quarters make that decision any time between three months to one year after contact is made with representatives from the prospective locations. Interestingly, more than 60 percent of the respondents to our 27th Annual Corporate Survey say they don’t use site selection or business consultants in this process. Of the third that do, 57 percent say the consultants help with the final real estate transaction; about half use their services of comparative location analyses as well as feasibility

studies, incentives negotiations/management, and in the construction process.

Drawing Conclusions Although the 27th Annual Corporate Survey results show no dramatic upswings in location or

Communities are offering specific incentives for “green initiatives”: FIGURE 45 Yes 36%

No 64%

Have encountered “green performance” requirements as a stipulation for receiving incentives:

Yes 19%

Types of incentives considered most important when making a location decision: FIGURE 43

No 81%

Cash grants 28%

Tax incentives (tax credits, exemptions, etc.) 69%

Existence of businesses performing similar activities in the area of search is taken into consideration:

Other financial incentives (bonds, loans, etc.) 21%

FIGURE 46

Worker training incentives 32%

No 30%

Other incentives (land, utility-rate subsidies, infrastructure support, etc.) 44% Yes 70%

Importance of incentives to a project moving forward in a particular location:

Importance of this factor in the location decision:

FIGURE 44 Of no importance 7% Of no importance 12% A minor consideration 23%

Very important 23%

Very important 34%

A minor consideration 29%

Somewhat important 36% Somewhat important 36%

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expansion plans, there are noted changes in site as the debt ceiling and tax reform have yet to be selection priorities — perhaps as a result of the fully dealt with by Congress. lackluster economic recovery. Growth has been As 2013 begins, Bernard Baumohl, chief econoslower during this recovery than in previous ones. mist for the Economic Outlook Group, recently Nonetheless, there has been growth. In fact, the noted that an otherwise fundamentally sound ISM index of manufacturing activity for January economy is being slowed by a lack of finality in the 2013 jumped to 53.1 from December 2012’s seasoncongressional budget debate. “What a shame,” ally adjusted 50.2, with manufacturers also adding says Baumohl in a research note. “Companies are 4,000 net new jobs in January, the fourth consecueager to ramp up capital investments and boost tive monthly increase. hiring. Households are prepared to unleash five With this slow, uneven recovery, it’s no surprise years of pent-up demand.” then that nearly half of this year’s Corporate Survey In a January weekly address, President Obama respondents say the economy will not improve for said that signs of progress in real estate, manufacanother two or three years, i.e., until 2015 or 2016. turing, and job-creation point to the fact that 2013 Eighty percent of the year-prior survey Analysis respondents had thought it would THE AREA DEVELOPMENT 2012 CORPORATE SURVEY reflects some interesting improve by 2013 or movements compared to prior year surveys. The greatest movement up the list was that of 2014 — the projections the availability of advanced ICT services from 13th place to 4th place. While data centers keep getting longer. and call centers have been the main drivers of this criteria entering the top 10, the virtual And the nation’s “ecoexplosion of data and the emerging use of “big data” in the past two years has already had an immediate impact on corporations and the need for advanced connectivity wherever they nomic instability” locate — rocketing this new age criteria to fourth place on the list. In particular, e-commerce, a seems to be the culprit large ITC user, is here and making major impacts on business. for the lack of optimism expressed by the The high ranking of occupancy or construction costs (5th place) plus the need to move quickly has added greater importance to the finding of existing facilities (i.e., available corporate respondents. buildings, which moved from 15th to 8th position), particularly for buildings 300,000 square Worries about what feet and larger. Timing is also pushing the need for fast-tracking projects (i.e., expedited the future holds in the or “fast-track permitting now at number 15, moving up two notches from number 17). way of taxes and govAs residential construction rebounds, overall construction costs are going to rise. ernment regulations Surprising is the downward movement of two logistics-based criteria — proximity to major are curbing business markets along with inbound/outbound shipping costs. This may be explained by the investment and hiring significant decrease of manufacturing respondents over the past three surveys and significant plans and keeping the drop in warehouse distribution respondents compared to last year (from 22 percent down recovery from taking to 9 percent), keeping in mind that logistics plays a very minimal role in other types of off. Congressional activities. stand-offs — like the Also remember, criteria important to commercial real estate users (e.g., BPOs/call centers, one that brought the headquarters) are very different than those that are important to industrial users (e.g., nation to the edge of manufacturers, warehouse/distribution facilities) so the respondent pool greatly impacts the survey conclusions. However, some criteria overlap across all functions. This is why availability the fiscal cliff in late of skilled labor and highway accessibility are consistently among the top-ranked factors. 2012 — are keeping economic growth in check, and issues such BY

BILL LUTTRELL, Senior Locations Strategist • Werner Enterprises

Annual Corporate & Consultants Survey

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can be a year of economic growth. Ironically, the housing crisis brought the economy to its knees and now growth in housing may address its anemia. Just five years after the housing bust created a glut of empty homes, the country now doesn’t have enough — only 149,000 at the end of November 2012 and just 6,000 more than the lowest total on records dating back to 1963. This should spur the construction industry as well as consumer spending on furniture, appliances, and other durable goods, which should further boost manufacturing.

Now, if Congress can get its act together — and avoid further damage to business and consumer confidence — companies may also boost spending on equipment and facilities. Yet, with companies now inured by more than a decade of uncertain uneconomic conditions, it is doubtful we can turn back to the 1990s when more than 70 percent of our Corporate Survey respondents consistently had robust investment and facilities plans. We continue to expect modest growth as today’s corporate decision-makers continue to be as cautious as they are consistent in this regard.

••

Corporate Information Sources Sources of site selection information used during the past 24 months: Site magazines (Area Development, etc.) B2B industry-related magazines

Length of time in advance of the location decision that the information-gathering process is begun: 80% 31%

(food, plastics, etc.)

General business magazines

57%

(IndustryWeek, etc.)

Financial publications

54%

3–6 months 6 months to 1 year 1–2 years More than 2 years

6% 39% 43% 12%

(The Wall Street Journal, etc.)

Promotional materials (e.g., brochures, etc.) Economic data aggregators

35% 44%

(incl. online resources)

Direct mail/e-mail

22%

Searched the Internet for site & facility planning information: Yes No

64% 36%

Information searched for online: Data on specific locations Contact information for economic development agencies Contact information for consultants and/or real estate professionals who can assist in the site search Listings of available sites and buildings (e.g., FastFacility) Industry-related news on websites (e.g., AreaDevelopment.com)

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Length of time after initial search that contact is made with the locations of interest:

71% 53% 41% 62% 49%

Within a month About 3 months later About 6 months later More than 6 months later

32% 32% 14% 22%

Number of locations/economic development organizations making the “short list”: 1-5 >5–10 More than 10

89% 10% 1%

Number of locations usually visited before finalizing the location decision: 1 or 2 Up to 5 More than 5

FOR FREE SITE INFORMATION, CALL

Length of time after initial contact that a site location decision is generally reached: 3–6 months 6 months to 1 year 1–2 years More than 2 years

30% 44% 24% 2%

Use of outside site selection or business consultants when site selecting: Use Don’t use

37% 63%

If outside consultants are used, services they are providing: Feasibility studies Global asset positioning Location studies/comparative analyses Incentives negotiations/management Site selection decision Construction Real estate transaction Human resources consulting Other

43% 5% 52% 43% 33% 47% 57% 16% 3%

26% 61% 14%

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9th Annual

or the ninth consecutive year, Area Development also asked the consultants who work with corporate end-users of facilities — as well as with economic development organizations, i.e., oftentimes consultants wear two hats — to tell us about their clients’ facility plans and priorities. More than 120 consultants responded to our 9th Annual Consultants Survey. However, since only 37 percent of those responding to our latest Corporate Survey say they use the services of consultants when site selecting, the facility plans and priorities of the responding consultants’ clients may be quite different than those of the Corporate Survey respondents. Let’s see just how different they are.

The Responding Consultants’ Clients More than 50 percent of the responding consultants say they have worked on projects for durable good manufacturers as well as for distribution/logistics firms. About a third have also worked with non-durable goods and other manufacturers, as well as with those in the healthcare/life sciences industries and those who provide data- and computer-related services (Chart A). More than 70 percent of the respondents to our Consultants Survey say they are providing location studies/comparative S28

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Consultants Survey analyses to their clients; two thirds are negotiating and managing incentives on their clients’ behalf; and 40 percent handle their clients’ real estate transactions (Chart B).

Percentage of respondents who have worked on projects in the following industries: CHART A

Manufacturing — Durable Goods Manufacturing — Non-Durable Goods Manufacturing — Other Distribution & Logistics Warehousing Services Data Center/Processing/Software/ Other Computer-Related Services Call Center Financial Services/Insurance Energy Industry Hospitality Industry Healthcare Industry/Life Sciences Retail Construction & Trades Other

58% 39% 31% 52% 26% 29% 18% 27% 24% 12% 30% 20% 11% 17%

Primary services required by their clients: CHART B

Feasibility studies Global asset positioning Location studies/comparative analyses Incentives negotiations/management Site selection decision Construction Real estate transaction Human resources consulting Other

49% 16% 72% 68% 77% 14% 40% 12% 8%

In terms of their employment numbers, client companies utilizing consultants’ services: CHART C

Small (20-99 employees) Mid-size (100-499 employees) Large (500-999 employees) Very large (1,000 or more employees) FOR FREE SITE INFORMATION, CALL

31% 52% 34% 36%

About half of the respondents say they work primarily with mid-size firms in terms of their employment numbers (100-499), while more than a third also work with companies employing 500 or more people (Chart C). Needless to say, nearly 90 percent of the responding consultants say executive management at their client firms is involved in the site selection process. The respondents to our 9th Annual Consultants Survey also say they work with their clients’ real estate (63 percent), tax and finance (54 percent), and other business unit management (55 percent) (Chart D). In fact, more than 60 percent of the responding consultants say their clients have gathered preliminary data prior to engaging their services. About half also say their client firms have narrowed down the geographic area in which they wish to locate, and a fifth actually claim their clients defer to them on the final location decision (Chart E). Interestingly, the consultants who responded to our survey are slightly more optimistic about the state of the economy than the respondents to our 27th Annual Corporate Survey: 33 percent of the consultants expect the economy to improve by the end of this year (Chart F), whereas only 21 percent of the corporate respondents expect it to do so. In fact, more than 40 percent of the responding con-

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sultants say their clients still plan to open new facilities or expand despite the sluggish U.S. economic recovery (less than a quarDepartments of clients’ organizations that are significantly involved in the site selection process: CHART D

Executive management Real estate Supply chain or logistics Tax and finance Information technology Operations or business unit management Human resources

87% 63% 38% 54% 16% 55% 36%

Clients who ask consultants to perform a location search have: CHART E

Not actively initiated the site selection process Already gathered preliminary data Already narrowed down the geographic area in which they wish to locate Already chosen several “finalist” communities Expect the consultant to narrow or make the location decision for them

17% 62% 53% 19% 22%

Expect the economy to improve significantly by: CHART F

By Q3 2013 By Q4 2013 By 2014 By 2015 Not until 2016

16% 17% 26% 22% 20%

Effects of the sluggish recovery on clients’ facility plans: CHART G

Still plan to open new facilities/expand Still plan to increase hiring New facility/expansion plans put on hold Closing/consolidating facilities Reducing current employment Hiring plans deferred Deferring capital spending Seeking new sources of funding/financing Seeking ways to optimize facilities/layouts

44% 17% 36% 25% 16% 22% 36% 18% 26%

Page S29

ter of the Corporate Survey respondents made that claim). Yet, a third of the responding consultants also acknowledge that some clients are putting facility plans on hold and deferring capital spending as a result of anemic economic growth (Chart G).

Clients’ New Facilities & Relocation Plans A quarter of the respondents to our 9th Annual Consultants Survey say most of their clients who expect to open new facilities plan to do so within one year; more than half say their clients will open new facilities within two years (Chart H). Two thirds of the responding consultants also say their clients will open just one new facility (Chart I) — fewer new facilities than our Corporate Survey respondents say they are planning, but perhaps this is because the responding consultants are only engaged by their clients on one project at a time. The respondents to our Consultants Survey are primarily working on domestic projects slated for the South Atlantic — North Carolina, South Carolina, Virginia, West Virginia (16 percent of the projects); the South — Alabama, Florida, Georgia, Louisiana, Mississippi (15 percent); and the Southwest (Arizona, New Mexico, Oklahoma, Texas (13 percent) (Chart J), regions that are also

heavily favored by our Corporate Survey respondents. When considering all of the new domestic facilities projects the responding Most of the clients that expect to open new facilities plan to do so within: CHART H

1 year 2 years 3 years 4 years or more

27% 59% 11% 3%

The number of new facilities the average client plans to open: CHART I

1 2 3 4 5 or more

67% 22% 5% 3% 3%

The domestic location projects consultants are working on are slated for the following regions (as a percentage of total new domestic projects): CHART J

New England (CT, MA, ME, NH, RI, VT) Middle Atlantic (DE, MD, NJ, NY, PA) South Atlantic (NC, SC, VA, WV) Mid-South (AR, KY, MO, TN) South (AL, FL, GA, LA, MS) Midwest (IL, IN, MI, OH, WI) Plains (IA, KS, MN, NE, ND, SD) Mountain (CO, ID, MT, UT, WY) Southwest (AZ, NM, OK, TX) West (CA, NV, OR, WA) Offshore

5% 9% 16% 11% 15% 11% 4% 6% 13% 7% 2%

(AK, HI, PR, VI)

Types of new domestic facilities clients are opening (as a percentage of total new domestic projects): CHART K

Manufacturing Warehouse/Distribution Headquarters Data Center Back Office/Call Center Shared Services R&D Other

31% 23% 12% 8% 7% 8% 9% 3%

AREA DEVELOPMENT | Q1/Winter 2013

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9th Annual

consultants are working on, about 30 percent will be manufacturing plants and a quarter will house warehouse/distribution operations (Chart K). As for expected new foreign facilities, the respondents to our Consultants Survey say many of the ones they are working on will be in Canada (17 percent) as well as Mexico (16 percent); 15 percent in Asia; and more than 10 percent in Western Europe as well as South America (Chart L). Interestingly, the respondents to our 27th Annual Corporate Survey also slated more than 10 percent of their foreign projects for each of these latter two regions, but far fewer for our neighbors to the north and south. Of those clients’ projects slated for Asia, China will garner the largest share — 29 percent (Chart M). More than a third of the responding consultants’ clients’ new foreign facilities will be manufacturing operations, with 17 percent expected to house warehouse/distribution centers (Chart N). Additionally, 28 percent of the consultants say they have seen an increase in the number of companies establishing foreign facilities as opposed to domestic ones (Chart O). Nonetheless, two thirds say their clients are not expecting to locate a foreign operation/facility back to the United States. Of the third of the consultants who say their clients will re-shore, S30

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Consultants Survey The foreign location projects consultants are working on are slated for the following regions (as a percentage of total new foreign projects): CHART L

Canada Mexico Caribbean Central America South America Western Europe Eastern Europe Middle East Africa Australia Asia

17% 16% 4% 6% 12% 11% 8% 5% 4% 2% 15%

New facilities planned for Asia will be located in the following locations (as a percentage of total new Asian projects): CHART M

China India Vietnam Singapore Malaysia Other Asian nation

29% 15% 11% 16% 12% 16%

Types of new foreign facilities clients are opening (as a percentage of total new foreign projects): CHART N

Manufacturing Warehouse/Distribution Headquarters Data Center Back Office/Call Center Shared Services R&D Other

38% 17% 5% 7% 8% 13% 11% 2%

more than half explain that this is because their clients are having product quality issues at their foreign facilities and are also concerned about the cost of transporting supplies/products from overseas. More than a third cite rising foreign labor costs, and nearly 30 percent say their clients are encountering rising energy costs as well as having problems finding qualified and/or English-speaking labor (Chart P). We also asked the Consultants Survey-takers about their clients’ domestic relocation plans. More than 80 percent say that their clients who expect to relocate a domestic facility will do so within one or two years. Of their clients planning relocations, proximity to suppliers/markets served as well as the need to lower labor costs, seems to be driving the decision (Chart Q). When asked why their clients are not spending more of their money on investment in U.S. facilities, about half of the responding consultants blamed high taxes and excessive government regulations, as well as uncertainty about taxes and regulations for 2013 and beyond (Chart R). The respondents to our 27th Annual Corporate Survey had similar concerns.

Number of companies establishing foreign facilities as opposed to domestic ones:

Clients’ Site Selection Priorities

CHART O

We also asked our Consultants Survey-takers to rate the site

Has increased over the last year Has not increased over the last year FOR FREE SITE INFORMATION, CALL

28% 72%

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selection and quality-of-life factors as “very important,” “important,” “minor consideration,” or “of no importance” in their clients’ location decisions. The importance ratings and corresponding rankings, along with last year’s consultants’ ratings and rankings of the factors, are shown in Chart S and Chart T. Before examining the specific factors, it should be noted that eight of the top-10 factors are rated “very important” or “important” by at least 90 percent of the responding consultants. However, only two factors (labor costs and highway accessibility) received importance ratings of more than 90 percent by the respondents to the 27th Annual Corporate Survey. Nevertheless, the respondents to our Consultants Survey consider the same three site selection factors as top priorities as do the respondents to our Corporate Survey —

Clients expect to relocate a foreign facility back to the U.S.: CHART P

Yes No

32% 68%

If so, reasons for re-shoring: Rising foreign labor costs Rising energy costs Problems finding qualified and/ or English-speaking labor Product quality issues Legal or regulatory problems Lack of robust utility infrastructure Difficulties transporting supplies/products Cost of transporting supplies/products Social/cultural barriers Other

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37% 26% 29% 54% 29% 14% 20% 49% 23% 20%

Consultants Survey in slightly different order. The responding consultants rank highway accessibility as the number-one factor, with a 98.3 percent combined “very important” or “important” rating, exactly the same as the prior year’s Consultants Survey’s respondents. Availability of skilled labor is ranked second with a 96.5 percent importance rating, and labor costs is ranked third with a 93 percent combined importance rating. In keeping with the importance of labor costs, the consultant’s tenth-ranked factor is low union profile, with an 89.2 percent combined rating, representing a seven percentage point year-over-year increase — the third-largest jump in importance among the site selection factors in the Consultants Survey. Nonunion labor is traditionally lower-cost than organized labor with its concomitant benefits. The responding consultants agree with the Corporate Survey respondents in that 61 percent say unemployment rates are not making it easier for their clients to find the labor they need (Chart U). More than 80 percent of the consultants also say the unemployed are lacking the advanced skills their client companies require (Chart V). This may be why only 49 percent of the respondents to our Consultants Survey rate availabilFOR FREE SITE INFORMATION, CALL

ity of unskilled labor as “very important” or “important,” similar to our corporate respondents, and placing this factor 24th in priority. Nevertheless, fully two thirds of the responding consultants believe that their clients are less than 25 percent dependent on contract or contingent labor (Chart W). This lack of skilled labor has resulted in huge increases in the importance of proximity to technical college/training as well as

Most clients that expect to relocate facilities plan to do so within: CHART Q

1 year 2 years 3 years 4 years or more

35% 48% 15% 3%

Of those clients who are planning a relocation, the primary reasons for doing so: High taxes Excessive government regulations Healthcare costs Quality of life concerns Labor costs Labor availability Proximity to suppliers/markets served Poor infrastructure Other

40% 37% 6% 16% 51% 40% 67% 11% 17%

Issues preventing clients from spending more of their earnings on investment in U.S. facilities: CHART R

High taxes Excessive government regulations Healthcare costs Proximity to suppliers/markets served Uncertainty about taxes and regulations for 2013 and beyond Labor costs Labor availability Poor infrastructure Quality of life concerns

44% 49% 33% 22% 56% 34% 26% 7% 1%

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training programs in general. These two factors show the greatest increases among site selection factors in their importance ratings by the consultants — jumping 19.4 and 13.2 percentage points, respectively, and now considered “very important” or “important” by more than three quarters of the responding consultants. Proximity to technical college/training also showed the largest percentage increase in importance in the Corporate Survey. The factor showing the biggest jump in the consultants’ rankings is expedited or fast-track permitting — up five spots from 10th place in the prior year’s Consultants Survey to fifth position this year. Consultants know the importance of speed to market and getting a client’s project up and running quickly. Consequently, in a related question, more than 80 percent claim the existence of an available building is very or somewhat important in their clients’ site searches (Chart X), and more than three quarters affirm the importance of a shovelready or pre-certified site (Chart Y).

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Consultants Survey 2012*

CHART S

Site selection factors

Very Important %

Important %

Minor Consideration

Of No Importance %

Labor Availability of skilled labor Availability of unskilled labor Training programs Labor costs Low union profile Right-to-work state

71.1 15.7 29.7 54.9 54.1 47.3

25.4 33.3 47.7 38.1 35.1 28.6

3.5 46.3 20.7 7.1 10.8 17.0

0.0 4.6 1.8 0.0 0.0 7.1

71.1 14.3 29.1 8.0 43.2

27.2 30.4 54.5 24.1 38.7

1.8 35.7 14.5 48.2 15.3

0.0 19.6 1.8 19.6 2.7

23.4 46.9 53.1 61.6

37.8 43.4 37.2 29.5

28.8 8.8 8.0 8.0

9.9 1.0 1.8 1.0

Available buildings Available land Occupancy or construction costs Expedited or “fast-track” permitting Raw materials availability Energy availability and costs Environmental regulations Proximity to major markets Proximity to suppliers Inbound/outbound shipping costs Proximity to technical college/training

46.8 52.7 37.8 48.2 20.9 39.3 29.7 51.3 36.4 43.2 24.5

33.3 33.9 50.5 44.6 44.5 50.0 51.4 41.6 44.5 33.3 50.9

16.2 8.9 9.9 4.5 24.5 9.8 17.1 7.1 17.3 18.9 22.7

3.6 4.5 1.8 2.7 10.0 1.0 1.8 0.0 1.8 4.5 1.8

Quality-of-life factors Climate Housing availability Housing costs Healthcare facilities Ratings of public schools Cultural opportunities Recreational opportunities Colleges and universities in area Low crime rate

8.9 8.8 10.7 16.7 26.3 7.0 6.1 18.4 26.1

42.9 48.7 42.0 52.6 47.4 36.8 48.2 61.4 52.3

38.4 37.2 42.0 26.3 21.9 46.5 35.1 15.8 18.9

9.8 5.3 5.4 4.4 4.4 9.6 10.5 4.4 2.7

*All figures are percentages and are rounded to the nearest tenth of a percent.

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Combined Ratings* of 2012 Factors CHART T

Site selection factors

Consultants Survey 2012 2012

2011

Ranking 1.

Highway accessibility

98.3

98.3 (1)**

Availability of skilled labor

96.5

93.6 (4)

Labor costs

93.0

96.3 (2)

Proximity to major markets

92.9

93.8 (3)

Expedited or “fast-track” permitting

92.8

86.4 (10)

State and local incentives

91.1

88.3 (7)

Tax exemptions

90.3

86.9 (9)

Corporate tax rate

90.3

85.0 (11)

Energy availability and costs

89.3

88.4 (6)

10.

Low union profile

89.2

82.7 (13)

11.

Occupancy or construction costs

88.3

87.1 (8)

12.

Available land

86.6

92.7 (5)

13.

Accessibility to major airport

83.6

80.3 (15)

14.

Availability of advanced ICT services

81.9

81.2 (14)

15.

Environmental regulations

81.1

79.0 (17)

16.

Proximity to suppliers

80.9

83.9 (12)

17.

Available buildings

80.1

79.1 (16)

18.

Training programs

77.4

64.2 (20)

19.

Inbound/outbound shipping costs

76.5

76.5 (18)

20.

Right-to-work state

75.9

75.0 (19)

21.

Proximity to technical college/training

75.4

56.0 (23)

22.

Raw materials availability

65.4

61.2 (22)

23.

Availability of long-term financing

61.2

63.0 (21)

24.

Availability of unskilled labor

49.0

51.4 (24)

25.

Railroad service

44.7

38.2 (25)

26.

Waterway or oceanport accessibility

32.1

26.1 (26)

7T. 9.

Quality-of-life factors Ranking 1.

Colleges and universities in area

79.8

69.6 (4)

Low crime rate

78.4

76.6 (2)

Ratings of public schools

73.7

76.8 (1)

Healthcare facilities

69.3

69.4 (5)

Housing availability

57.5

66.1 (6)

Recreational opportunities

54.3

52.2 (9)

Housing costs

52.7

72.1 (3)

Climate

51.8

52.7 (8)

Cultural opportunities

43.8

58.6 (7)

*All figures are percentages and are the total of “very important” and “important” ratings of the Area Development Consultants Survey and are rounded to the nearest tenth of a percent. **(2011 ranking)

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Proximity to major markets is ranked fourth by the consultants, with a combined “very important” or “important” rating of 92.9 percent. Two other market-access factors — railroad service and waterway or ocean port accessibility — also show increases in their importance ratings, although the consultants still rank them at the bottom of the list of site selection factors considered by their clients in the location search. State and local incentives is ranked sixth among the site selection factors, and tax exemptions and corporate tax rate are tied for seventh position; all three of these factors are considered “very important” or “important” by more than 90 percent of the responding consultants. This is not surprising considering 61 percent of the consultants say incentives have always been of great importance to their clients (Chart Z). Remember, 70 percent of the Corporate Survey respondents say incentives are very or somewhat important to moving a project forward in a particular location.

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Three quarters of the responding consultants say tax credits, exemptions, and the like are most important to their clients, and more than half say worker training incentives are equally important (Chart AA). Unfortunately, almost 30 percent of the consultants claim that

High unemployment rates are making it easier for clients to find the necessary labor: CHART U

Yes No

39% 61%

Many unemployed are lacking: CHART V

Basic skills

37%

(e.g., reading comprehension,

mathematical competency, etc.)

Advanced skills

83%

(e.g., advanced welding, machine tool programming, bioprocessing, etc.)

Clients’ dependency on contract workers or contingent labor: CHART W

Less than 25% 25–50% More than 50%

67% 20% 13%

Importance of the existence of an available building in clients’ site searches: CHART X

Very important Somewhat important A minor consideration Of no importance

46% 37% 11% 5%

Importance of the existence of a shovel-ready/pre-certified site in clients’ site searches: CHART Y

Very important Somewhat important A minor consideration Of no importance

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39% 37% 17% 8%

Consultants Survey their clients have had to repay incentives monies because job creation or investment obligations were not met (Chart BB). Nearly half of the consultants responding to our 9th Annual Consultants Survey also have found communities offering incentives for “green initiatives,” although only 23 percent say their clients have encountered “green performance” requirements as a stipulation for receiving incentives (Chart CC). This is important since energy availability and costs is considered “very important” or “important” by 89.3 percent of the responding consultants, placing this factor in ninth position. In fact, more than 40 percent of the consultants say high energy costs are affecting their clients’ facility operations (Chart DD). Two thirds also say sustainable development is more important to their clients now than in the past (Chart EE). In response to this, three quarters of the consultants say their clients are making energy-saving modifications to their facilities; about two thirds say their clients are also recycling or re-using waste products; and more than half claim clients are seeking LEED certification for new or existing facilities (Chart FF). Finally, in a response similar to that given by the Corporate Survey respondents, 85 percent FOR FREE SITE INFORMATION, CALL

of the responding consultants say their clients consider the existence of businesses in the area of search performing similar activities to theirs, with the same percentage considering this factor as very or somewhat important (Chart GG). In the separate ranking of quality-of-life factors, the

Relative importance of incentives to clients when making location decisions: CHART Z

Have always been of great importance Are more important now than in the past Are less important now than in the past

61% 31% 8%

Type(s) of incentives clients consider most important when making a location decision: CHART AA

Cash grants Tax incentives (tax credits, exemptions, etc.) Other financial incentives (bonds, loans, etc.) Worker training incentives Other incentives (land, utility-rate subsidies,

63% 74% 28% 53% 53%

infrastructure support, etc.)

Clients have had to repay incentives monies because investment and/or job creation obligations were not met: CHART BB

Yes No

29% 71%

Communities are offering specific incentives for “green” initiatives: CHART CC

Yes No

46% 54%

Clients have encountered “green performance” requirements as a stipulation for receiving incentives: Yes No

23% 77%

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respondents to our 9th Annual Consultants Survey consider colleges and universities in area the number-one factor, with nearly 80 percent rating it as “very important” or “important” — a 10.2 percentage point increase Impact of high energy costs on clients’ facility plans: CHART DD

Affecting facility operations Affecting supply/distribution network decisions No effect

42% 23%

over this factor’s ranking in the year-prior survey. The responding consultants consider low crime rate nearly as important, ranking it second, followed by educational and housing factors. With housing costs having dropped dramatically over the last few years in many parts of the country, this factor showed the largest decrease in its com-

CHART EE

67% 33%

Consultants’ Information Sources Sources of site selection information used during the past 24 months: Site magazines (Area Development, etc.) B2B industry-related magazines

Measures being undertaken by clients to reduce company’s “carbon footprint”:

General business magazines (The Wall Street Journal, etc.)

LEED certification for new or existing facilities Energy-saving modifications to existing facilities Installed on-site renewable generation Change of supply or distribution routes/methods Recycling or re-use of waste products, etc. Other

Promotional materials (e.g., brochures, etc.) Economic data aggregators

77% 23% 32% 62%

55% 46% 78%

(incl. online resources)

Direct mail/e-mail Personal visits

43% 84%

Searched the Internet for site and facility planning information:

11% Yes No

Existence of businesses performing similar activities in the area of search is taken into consideration by clients: CHART GG

85% 15%

Importance of this factor in clients’ location decision: Very important Somewhat important A minor consideration Of no importance

51%

(IndustryWeek, etc.)

CHART FF

53%

74% 40%

29% 56% 10% 5%

Firm maintains its own site selection database: Yes No

55% 45%

(food, plastics, etc.)

Financial publications

Yes No

bined importance rating among all factors considered by the consultants — site selection and quality-of-life (-19.4 percentage points). And the cultural opportunities factor showed a 14.8 percent decrease in importance, achieving only a 43.8 percent combined importance rating and ranking last among quality-of-life factors on the consultants’ list.

48%

Sustainable development is more important to clients now than in the past:

Yes No

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90% 10%

Information searched for online: Data on specific locations Contact information for economic development agencies Contact information for other professionals who can assist in the site search Listings of available sites and buildings

87% 87% 40%

Number of locations/economic development organizations making clients’ “short list”: 1-5 5–10 More than 10

83% 16% 2%

Number of locations you/client usually visits before finalizing the location decision: 1 or 2 Up to 5 More than 5

26% 59% 15%

Length of time after a client engagement that a site location decision is generally reached: 3–6 months 6 months to 1 year 1–2 years More than 2 years

33% 55% 11% 1%

66%

(e.g., FastFacility)

Industry-related news on websites

57%

(e.g., AreaDevelopment.com)

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Consultants’ Sources of Information Similar to the Corporate Survey respondents, nearly three quarters of the responding consultants have used magazines like Area Development as a source of information when site selecting for their clients over the past two years. A similar percentage has used economic data aggregators. Needless to say, personal visits to areas of interest remain the top source of information as

Consultants Survey claimed by 84 percent of the consultants. More than half of the consultants who took our survey maintain their own site selection database; yet nearly all (90 percent) also search the Internet for site and facility planning information. They are primarily looking for data on specific locations and contact information for economic development agencies (87 percent). Two thirds are seeking

listings of available sites and buildings, e.g., utilizing FastFacility. More than 80 percent say between one and five locations make their clients’ “short list,” and nearly 60 percent say they and their clients generally visit up to five locations before making a final site selection decision. And, 88 percent of the respondents claim their clients usually reach a site decision within one year of engaging their services.

••

Sponsors FLORIDA Crystal Sircy Senior Vice President, Business Development Enterprise Florida 800 N. Magnolia Ave., Ste. 1100 Orlando, FL 32803 1-877-YES-Florida Fax: 407-956-5599 www.eflorida.com csircy@eflorida.com INDIANA Harold Gutzwiller Hoosier Energy P.O. Box 908 Bloomington, IN 47402 812-876-0294 or 812-360-4796 Fax: 812-876-5030 www.tdl.HoosierSites.com hgutzwiller@HEPN.com IOWA Debi Durham, Director Iowa Economic Development Authority 200 East Grand Avenue Des Moines, Iowa 50309 515-725-3000 www.iowaeconomicdevelopment.com info@iowa.gov KENTUCKY Erik Dunnigan, Commissioner Kentucky Cabinet for Economic Development 300 W. Broadway Frankfort KY 40601 800-626-2930 Fax: 502-564-3256 www.ThinkKentucky.com/newenergy econdev@ky.gov

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MICHIGAN Dusty Duistermars Project Manager - Site Consultants, Business Attraction Regional Attraction Michigan Economic Development Corporation 300 N. Washington Square Lansing, Michigan 48913 517-763-4156 1-888-565-0052 www.MichiganAdvantage.org/AD duistermarsd@michigan.org

TENNESSEE Allen Borden Assistant Commissioner, Business Development Tennessee Department of Economic & Community Development 312 Rosa L. Parks Avenue, 27th Fl. Nashville, Tennessee 37221 615-532-1294 Fax: 615-741-5829 www.tn.gov/ecd www.selecttennessee.com Allen.Borden@tn.gov

NEW YORK Patrick Doyle Director, Business Development Broome County Industrial Development Agency P.O. Box 1510 Binghamton, NY 13902 607-584-9000 Ext. 103 Fax: 607-584-9009 www.bcida.com pjd@bcida.com

TEXAS Aaron Demerson Executive Director Texas Office of the Governor – Economic Development & Tourism P.O. Box 12428 Austin, Texas 78711 512-936-0101 Fax: 512-936-0080 www.TexasWideOpenforBusiness.com locatetx@governor.state.tx.us

OKLAHOMA Jim Fram Senior Vice President, Economic Development Tulsa Regional Chamber One West Third Street, Suite 100 Tulsa, Oklahoma 74103 918-560-0231 800-624-6822 Fax 918.585.8386 www.GrowMetroTulsa.com jimfram@tulsachamber.com

VIRGINIA Mike Lehmkuhler Vice President, Business Attraction Virginia Economic Development Partnership 901 East Byrd Street P.O. Box 798 Richmond, VA 23218-0798 804-545-5722 www.yesvirginia.org info@Yesvirginia.org

FOR FREE SITE INFORMATION, CALL

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Logistics operations have special considerations when relocating or expanding. Indiana is known for excellent road, rail, and air transportation, as well as a favorable business climate and abundant sites. Better yet, Hoosier Energy can help facilitate every step of the process. Learn more at tdl.HoosierSites.com.

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AREA0016.indd 1

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Kentucky Governor Steven L. Beshear

THERE’S A NEW ENERGY DRIVING KENTUCKY We’re turning Kentucky into the epicenter of the advanced automotive manufacturing industry. Our four major auto assembly plants and vast network of suppliers provide a thriving, integrated automotive ecosystem, which helped attract $600 million in new investments last year alone. We’ve also opened a new user-facility laboratory as part of an innovative partnership with Argonne National Laboratory and our universities to improve plug-in and hybrid automotive batteries. Need room to grow? Kentucky offers three certified megasites, all prime development opportunities for large-scale manufacturing facilities, as well as hundreds of additional shovelready sites and available buildings to fit your specific needs. Coupled with our already low business costs, Kentucky’s incentive programs – which are among America’s most aggressive and effective – can also lower your company’s bottom line. We’re only skimming the surface. Find out how you can tap into the Kentucky energy. Together, anything is possible.

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REAL ESTATE OUTLOOK

2013: Bricks to Clicks? Growth in “e-tailing,” as well as Class I railroad investment, is having a noticeable impact on the demand and development of industrial space. By Craig Meyer, International Director and Head of Americas Industrial Practice, Jones Lang LaSalle

The high absorption and low development levels of quality big-box space will have an impact on the market in 2013. Location-sensitive industrial users will either need to pay more for high-end space, or lease in buildings with less-than-optimal operational efficiency potential.

Clicks Change the Industrial Landscape

politically and economically charged environment caused many corporations to press pause on their decision-making in 2012. However, demand for “bigboxes” (>400,000 square feet) dominated the industrial real estate headlines. As more companies required modern space offering greater functionality for sophisticated logistics systems, occupancy and rental rates in those buildings increased faster than the overall market. High-end industrial space — e.g., with high ceilings and sprinkler systems to accommodate sophisticated logistics automation systems — reached 97 percent occupancy in California’s Inland Empire and are approaching a similar level in most major logistic hubs. Developers in 2012 took a cautious approach to building new big-box space amid the economic uncertainty and restrictive lending environment.

One-third of all demand for big-box space in the United States in 2012 was tied to multi-channel retailers or “etailers,” and e-commerce is growing at three times the rate of traditional retail. The shift in consumer buying patterns is changing the retail sector from “bricks and mortar” to “bricks and clicks.” Retailers are tapping multiple channels to sell their merchandise and are increasing online sales operations rather than increasing their real estate footprints, and this shift requires an entirely new distribution model. E-tailers require spacious buildings with 36-foot clear ceiling heights to accommodate high-end racking systems. New-generation industrial is up to five times more labor-intensive than traditional retail distribution facilities, requiring more parking, mezzanine build-outs, increased building automation, and other features that are difficult or impossible to retrofit in older buildings. With consumers expecting at least the option for next-day delivery and the added labor intensity of the facilities, locating near major population centers is a must. Approximately 35

percent of retail-related industrial demand is in the Northeast, notably in eastern Pennsylvania and central New Jersey, followed by around 27 percent in southern California markets such as Los Angeles and the Inland Empire. With e-commerce expected to grow by 11.5 percent and m-commerce (mobile) by a staggering 48 percent, demand for these highly specialized retail distribution centers will continue to increase in 2013 and beyond.

Development Renaissance? With the pressure to find big-box space, when will we see increased new development? Soon — in fact, the Inland Empire is leading the way with 9.9 million square feet already under construction followed by plans for a further 11 million square feet of new space in 2013. Philadelphia, at 8.3 million square feet, is not far behind. Consolidation into modern space continues as distributors endeavor to optimize their real estate, labor, and transportation costs. But again, that space is becoming scarce — a reality that will drive build-to-suit and speculative development activity across even more markets next year. Other areas we have earmarked for positive demand in the coming year are locations that have profited from Class I rail investment that provides intermodal options for shippers. Intermodal is the fastest-growing mode of transportation. Its appeal is driven by fuel- and carbon-efficiency, as well as by capacity constraints in the trucking industry that look to worsen as new regulations take effect in 2013. AREA DEVELOPMENT | Q1/Winter 2013

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Norfolk Southern’s Crescent Corridor expansion, which stretches from New Orleans to New York, will impact the industrial real estate markets in Memphis, Atlanta, Charlotte, Harrisburg, and northern New Jersey. Also, CSX’s National Gateway — being developed to bring doublestacked containers inland from

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Hampton Roads and Baltimore to the logistics hubs in Pennsylvania and Ohio — will also have a noticeable impact on industrial space demand as progress unfolds. We expect to see small- to midsize industrial users who have been dormant in most markets contribute to new demand in 2013. Market

2013: New Demands, Challenges in Office Market More investment is needed by the private sector in order for full office recovery to take hold. By John Sikaitis, Director of Office Market Research, Jones Lang LaSalle

vacancy rates will continue to decrease at a measured rate, as new speculative and build-to-suit development slowly but steadily accelerates. However, tight financing conditions and slow rental growth will keep development levels below par, and prime-quality space will remain at a premium.

allowances decreased by 4.3 percent, which indicates a continued market tightening. The national vacancy rate declined to 17 percent at the end of 2012 from 17.6 percent 12 months earlier. Of the 44 U.S. office markets JLL tracks, 84.1 percent experienced occupancy growth during 2012. Despite the slight tightening of overall occupancy levels, the pace of the office recovery declined 19.4 percent in 2012 compared to the vibrant market experienced in 2011. California and Texas alone accounted for 60.3 percent of the country’s total net absorption.

The Growth Engine

he U.S. office market experienced steady but mild improvements throughout 2012 with year-end analysis showing the 11th consecutive quarter of national occupancy growth and eighth straight quarter of rent increases, with these gains mostly realized in tech-heavy and energy-rich geographies. The fourth quarter presidential election and avoidance of

AREA DEVELOPMENT

the “fiscal cliff” set the stage for a broader recovery in 2013. National net absorption totaled 7.5 million square feet in the fourth quarter, bringing the total to 28.2 million square feet of space absorbed during all of 2012. Rents increased 3.1 percent over the course of the year, while rent abatement concessions fell by 10.8 percent, and tenant improvement FOR FREE SITE INFORMATION, CALL

A major source of recent leasing activity and new requirements in nearly all geographies came from the home mortgage industry. We predict that if housing momentum keeps up, you can expect homebuilders to return to growth and come back into the market for more space over the next 18 months. Consequently, geographies throughout Florida as well as growing markets such as Phoenix, Atlanta, Orange County, and Las Vegas are likely to be some of the leading office market segments over the next two years. The conclusion of the 2012 presidential election also brought some certainty that translated into office demand. The Affordable Care Act (ObamaCare) and the Wall Street Reform and Consumer Protection Act (Dodd-Frank) seemed certain of implementation after the election, evidenced by a recent spurt of government office requirements on the market. We calculated that the federal government leased more space in Metro D.C. in the

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L I V E .

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Workforce Data and Population Statistics Cost of Living, Tax and Utility Information Lubbock Business Park and Lubbock Rail Port Available Real Estate and Interactive Maps

800.687.5330 | Lubbock, Texas

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six weeks following the election than in the preceding 10 months. New requirements for space to operate state-sponsored healthcare exchanges have emerged in Sacramento, Baltimore, Central Florida, and other markets. We expect that state and federal exchanges will likely span several million square feet across the country. To administer and enforce healthcare reform, government agencies such as the Health Resources and Services Administration and the IRS also may take extra space in Washington, D.C., and regional

radtional office tenants are adding headcount, but their real estate footprints are shrinking as they move to increasingly efficient floor plates and spaces.

economies. However, despite the gains in rent and occupancy experienced in 2012, the U.S. office sector faces significant challenges to demand that threaten long-term growth prospects. Traditional office tenants — banks, law firms, accounting and consulting firms — are adding headcount, but their real estate footprints are shrinking as they move to increasingly efficient floor plates and spaces. In fact, Jones Lang LaSalle has found through its research that banks and law firms that relocate thereby reduce their space needs by an average of 15 percent. We expect this trend will continue for the next several years as many more companies continue to right size.

The Year Ahead One of the top emerging commercial real estate trends to watch in 2014 is “collaborative office consumption,” which involves the short-term subleasing of space, by large corporate occupiers or owners, to temporary users on very small scales and with very short lease durations. The area of lease can vary from as little as one desk or one conference room, to as large as an entire floor plate. The duration of lease can be as short as

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one hour or as long as one month. This emerging trend has incredible benefits and opportunities for large corporations and small, growing companies. JLL Research has documented that an average corporate office maintains a steady-state vacancy of up to 30 to 40 percent, due to permanent employees who are traveling, on leave, or working remotely. With the appropriate workplace design and security, collaborative office consumption can unlock valuable capital and allow companies to monetize their temporarily vacant

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real estate. For small companies, start-ups, and consulting firms, collaborative office consumption provides their employees with temporary space exactly when they need it and where they need it. To date, there are more than 5,500 spaces available for collaborative office consumption on various websites throughout the nation. This number appears to be growing by the thousands each month. Overall, in order for a full recovery to take root in the U.S., companies need to return to the market and invest in technology, equipment, real estate, or human capital at a faster clip than we saw in 2012 and at rates similar to those experienced in other recoveries. Until this happens, this trend contributes to the stabilization, but not necessarily tightening, of the office sector recovery in the short-run, but it may also affect the larger economic picture over the longer term. While the United States is in a better economic position than most other developed countries, especially among the private sector, market players are searching for the confidence domestically and globally to reinvest the capital they have been sitting on to fuel future growth.

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

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LOGISTICS/SITE SELECTION

Regional Supply Chains: A Win for OEMs and Their Locations Regional sourcing is helping manufacturers save time and money; with that in mind, savvy suppliers are moving closer to the end users of their products. By Clare Goldsberry

Kentucky Governor Steve Beshear speaks at the announcement of iwis’ new plant.

fter more than a decade of moving manufacturing offshore to China, Southeast Asia, and India for the cheap labor, big OEMs are slowly moving back to the United States in a re-shoring trend. One major factor driving this trend is the extremely long supply chain involved in manufacturing globally to supply OEMs in the states. Supply chain disruptions — including natural disasters such as the tsunami in Japan — have hurt manufacturers over the past two years, leaving OEMs rethinking their strategy.

“Buy It Where You Build It” Issues such as shipping time and

costs, and the additional inventory that must be stocked to mitigate all the risks involved with global suppliers, have added exponentially to the overall cost of manufacturing, creating the strategy for regional sourcing. Streamlining this lengthy pipeline — through strategies such as Toyota’s model of “buy it where you build it” — is the goal of many supply chain managers. That’s not to say that all manufacturing is coming back to North America, or that the U.S. will once again become the manufacturing powerhouse it once was. It does, however, provide a model that says it makes sense to have suppliers close to the manufacturing plants in the coun-

tries in which those goods are sold. Toyota, for example, is projecting that it will build more vehicle models in North America “as a hedge against a strong yen,” and in 2012 announced plans to hire some 3,500 workers and invest $1.6 billion in its North American manufacturing plants. Erlanger, Ky., where Toyota’s North American headquarters is located, and the states of Kentucky and Michigan, where Toyota has engineering facilities, have benefited from the company’s decision to manufacture in North America, one of its largest markets. A shorter supply chain reduces the costs of transporting goods from the supplier to the manufacturer, and during a period when fuel hit record highs earlier in 2012, having suppliers close-by saved both money and time. It also means less inventory sitting on the shelf, in crates on a ship in the middle of the ocean, and in warehouses in Asia ready to be shipped. Over the years during which major OEMs went offshore to manufacture, the lean practice of the “just-in-time” inventory model became one of “just-in-case.” Having regional suppliers also means flexibility in the supply chain. In many industries, such as automotive for example, quantities vary with demand. Regional suppliers can adjust their production schedules to meet the demand of their OEM customers. More plants in more strategic locations regionally mean that inventory carrying costs are less for both the OEM and the suppliers. AREA DEVELOPMENT | Q1/Winter 2013

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Regional Suppliers Winning the Game As OEMs locate smaller, more focused manufacturing plants throughout the United States, they have encouraged their suppliers to locate facilities nearby. Industrial Molds Group, a supplier of molds, and its sister company, Pyramid Plastics, which provides molded plastic components, made a commitment to locate a facility near their Tier 1 customer’s automotive systems assembly facilities in Mexico and the Southwest. When approached by their customer to bring the parts supply closer to its assembly plants, Rockford, Ill.based Industrial Molds Group agreed to site a second injection molding facility in San Antonio, Texas, to service the customer and help shorten the company’s supply chain. Tim Peterson, vice president of the familyowned company, comments, “Obviously we can’t put a facility next to every customer’s plant, but given the customer requirements and the opportunities we see in that region, we believe it was a good business decision.” Lou Longo, partner with Plante & Moran, PLLC, a CPA and management consulting firm, notes, “Those who are willing to locate a new facility to become a regional supplier are winning the game.” However, he also notes that smaller companies, such as Tier 2 and Tier 3 suppliers, tend to be more reluctant to extend their reach to accommodate customers in other regions globally or of North America. “There’s a lot of resistance to that strategy as we go down the tiers and these companies tend to be a bit myopic,” Longo says. “They do business on personal relationships, so there’s not the need to consider what others outside their region want, such as customers that need suppliers to serve them in another region, or their competitors that want to take business away from them.”

Industry Hubs Attract Specialty Suppliers Certain regions of the United States have become home to specific kinds of industries, which in turn have attracted specialty suppliers that can serve a

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variety of companies in these industry segments. For example, the central coast of California has long been known as Silicon Valley for its manufacturing of computers, computer components, and other electronic equipment. Salt Lake City has been a hub of activity in the medical device industry for more than 40 years, and continues to attract medical device manufacturers and those companies that supply that market segment. The automotive industry has shifted somewhat over the past couple of decades, from the Detroit area where the U.S. Big 3 have traditionally operated, to the Southeast, where foreign multinational vehicle-makers have established a huge presence, bringing with them not only suppliers from their home countries of Japan, Korea, and Germany, but also attracting U.S. suppliers that want to extend their reach from GM, Ford, and Chrysler to supply Nissan, Toyota, BMW, Volkswagen, Mercedes, Honda, and others. States including Kentucky, Mississippi, Alabama, the Carolinas, as well as Ohio and Indiana have reaped the rewards of being known as an “automotive region.” Indiana’s manufacturing sector expects a boost from the automotive industry. With vehicle sales up 14.5 percent for the first nine months of 2012 over the same period in 2011, Indiana is hopeful that production output will rise. Honda Manufacturing of Indiana is spending $40 million at its Greensburg plant in preparation for a 25 percent increase in production of its Civic vehicles. Henniges Automotive, headquartered in Auburn Hills, Mich., recently announced a $2.2 million capital investment and the addition of 64 new manufacturing jobs at its plant in Reidsville, N.C. The global company makes vehicle sealing and anti-vibration devices and supplies the automotive industry through a number of regional facilities throughout the world. In 2011 Henniges added a mold shop for building the company’s plastic injection molds in-house at the Reidsville facility. Other North American facilities are located in Iowa, Oklahoma, and Tennessee. Auburn, Ala., has landed a new manufacturing plant for German auto FOR FREE SITE INFORMATION, CALL

supplier Rausch & Pausch, which is expected to create 105 jobs within five years. The company, which is based in North Bavaria and produces solenoid valves, control blocks, and other auto parts, plans to have both its U.S. headquarters and a production facility in Auburn. And Florence, Ala., will be home to a new plant for Tasus Corp., a producer of plastic automotive parts, whose clients include most major North American vehicle manufacturers. Tasus is investing $19.1 million in the project. Another German automotive supplier, iwis, has announced it will invest $12.5 million to site its first U.S. manufacturing plant in Murray, Ky., to supply a number of automotive OEMs in the region. In addition to being home to Toyota’s North American headquarters, Kentucky is also home to GM and Ford manufacturing plants that currently employ more than 70,000 people.

Locations With International Perspective Plante & Moran’s Longo notes that business and economic development groups need to keep an international perspective of their specific location: “They need to focus on offering good logistics such as international airports, skilled labor and talent in their given area, and an international connectedness to that region,” Longo explains. “They need an emphasis beyond just the regional location from the U.S. perspective, but rather how do they get to the world.” Kentucky has just such an international focus when it comes to attracting European suppliers to serve the Southeast region’s automotive industry. Erik Dunnigan, Commissioner of the Department for Business Development, Kentucky Cabinet for Economic Development, says, “These suppliers are not just supplying one OEM, but as many as possible. They want to work with all the OEMs in the auto industry throughout this region.” And with the increasing demand for developing regional supply chains, he anticipates more companies coming to the area to supply OEMs in many industries. This is how regional suppliers are finding success.

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

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Powerful

Trends PUBLIC POWER

UTILITIES MEET THE

RELIABILITY,

COST, AND

SERVICE NEEDS OF DEMANDING

CUSTOMERS. BY STEVE STACKHOUSE

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A MESSAGE FROM THE APPA CHAIR 2012 Public power utilities offer their customers the best of both worlds: the latest in sustainable energy advancements and technology; and reliable, low-cost electric service that few others can match. Combined with our longstanding principals of customer accountability and responsiveness, it is no wonder that across America, public power communities remain the first choice for businesses looking to thrive and grow. As we have seen in recent years, a communityâ&#x20AC;&#x2122;s economic stability is directly linked to the vibrancy and strength of its local business sector. This is why each year, public power utilities and the American Public Power Association (APPA) work hard to bring forward programs and policies that will support local business development. Businesses large and small benefit from our competitive rate structures that give them access to affordable, reliable power. We also work hand-in-hand with new businesses coming into our communities, assisting them in the planning and development process by providing energy-usage projections and cost-saving recommendations. For members of the APPA, the work we do is not just a job, but also a passion. We are passionate about your success because it is integral to the future of the communities we serve. We value our business partnerships and remain committed to providing all of our customers with exceptional, reliable electric service at the lowest rate possible.

PHYLLIS E. CURRIE

Chair, American Public Power Association Board of Directors General Manager, Pasadena Water and Power

AREA DEVELOPMENT

FOR FREE SITE INFORMATION, CALL

800-735-2732, EXT. 225, OR VISIT US ONLINE AT WWW.AREADEVELOPMENT.COM

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A BUSINESS CLIMATE LIKE NO OTHER

If your business is looking to grow green, there’s no better place to locate your next expansion than Austin, Texas. Home to the nation’s leading programs for renewable energy, green building and conservation, Austin Energy empowers businesses with all of the necessary tools to create a successful environment. More than just money-saving rebates and incentives, Austin Energy provides expert, one-on-one consultation services free to businesses. In fact, we can partner with you at any phase of your expansion process or construction project to help create a responsible, sustainable and successful future. For more information about Austin Energy’s booming commercial environment and available incentives, visit austinenergy.com/go/commercialrebates or call 512-482-5346. To learn more about locating in Austin, visit austintexas.gov/economicgrowth, or call the Economic Growth and Redevelopment Services Ofﬁce at 512-974-7819.

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PUBLIC POWER UTILITIES By offering great rates, reliable service, energy-efficiency measures, and attentive service, public power companies are creating a win-win situation for their customers as well as the communities they serve.

lectricity is electricity, right? Well, not exactly. Your basic light bulb might not know the difference between one community’s electric utility and the utility that’s powering another town. But the needs of today’s industrial customer are a lot more complicated than the 60 watts of juice that bulb is craving. Consider the demands facing the Omaha Public Power District. “One of the things we’re working on is attraction of data centers to our service territory,” says Roger Christianson, OPPD’s manager of economic development. That quest has been going well. In fact, last fall Fidelity Investments picked the metropolitan Omaha community of Papillion for a $200 million data center. Yahoo!, Cabela’s, and CoSentry have chosen the area, too. And it’s easy to see why such projects are attractive to economic development officials. As Christianson notes, “They’ve been great customers — 24/7, large amounts of power, including significant amounts of power in off-hours, allowing us to keep costs down for all customers.”

Great Rates and Reliability, Too Of course, such customers want great rates, and Christianson says OPPD’s are 26 percent below the national average. But equally important, data centers absolutely must have power that’s reliable. It has to be clean, uninterrupted power, or the sensitive equipment of a data center could be toast. For OPPD, reliability is a clincher. “We have a great record of reliability, 99.98 percent,” Christianson says. Attentive customer service is icing on the cake. Christianson boasts that the utility has a dozen J.D. Power and Associates awards

AREA DEVELOPMENT

for customer service. Indeed, when the Fidelity deal was announced, the local chamber CEO told the Omaha WorldHerald, “OPPD’s nationally competitive rate structure and recognized quality of service were crucial in our combined efforts to attract this project.” Here’s the interesting thing — check that first “P” in “OPPD.” It’s short for “public.” OPPD is a public power utility, not a private-sector, for-profit utility owned by investors. Though it has for years been politically fashionable to believe that the public sector can’t deliver when it comes to quality, service, and cost, who can argue with J.D. Power or Yahoo! or Fidelity Investments? America’s public power utilities are out there on the forefront when it comes to meeting the precise and demanding technological needs of customers, as well as keeping up with other industry trends. “In recent years we have seen increased interest by organizations in not just the low-cost energy commodity, but also high-quality power requirements and significant redundancy in their electric supply,” says Rick Nelsen, economic development manager for the Nebraska Public Power District (NPPD). “A good example of this would be the needs of a data center when compared to a more traditional industrial customer.” Ed Grant, economic development project manager for power and water provider Salt River Project in Arizona, has also found that reliability is of paramount importance for customers such as data centers. Some seek enhanced services such as dual feeds, and “in some cases we are able to provide multiple feeds from different sources,” he says. Meanwhile, some customers install their own diesel backup generators to enhance reliability even further.

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Tony Cannon, general manager and CEO of Greenville Utilities in North Carolina, agrees that for many companies seeking sites these days, “Power quality and reliability are the top issue.” But he adds that the customers concerned with such things aren’t just the obvious high-tech users. “There has been a shift over the past 10 years to more sensitive equipment, even in manufacturing operations. It’s much more sensitive to power fluctuations,” he explains. The utility responds not only by striving to deliver that reliability, but also by delivering information to help customers stay informed about the quality of the power. Cannon notes, “We measure performance indicators directly related to power quality and reliability, and we’re able to provide them with real-time information. They analyze the information to make sure the power is meeting their requirements.” And, Cannon’s utility can assist customers that require emergency backup power. “We’ve done some onsite generation installations ourselves, where we own and operate the generation facility,” he says. Rodney Gonzales, deputy director in the Office of Economic Growth and Redevelopment Services for the city of Austin, Texas, has also found that power quality and reliability questions are not just for data centers. Samsung, for example, has invested large sums to develop manufacturing in the area. “With regard to Samsung,

[the company was] looking for redundant power; it needs it for its high-tech manufacturing.” “We have two Prime Power Parks, one in Gastonia and one in Albemarle, offering redundant power for sensitive operations,” adds Brenda Daniels, manager of economic development for ElectriCities in North Carolina. “The Prime Power Parks are ideal for manufacturers that have a critical need for continuous power supply.”

Green and Efficient Low rates are, of course, an obvious way to keep energy costs under control. But customers are also turning to these public power providers to help them use less power, and are finding their services helpful. “NPPD and its wholesale partners work with all classes of customers as it relates to using energy efficiently and effectively,” Nelsen explains. “We have a dedicated staff that are technically competent in the most current energy-efficiency applications and many times can offer incentive programs to our customers who utilize these practices, so their payback is accelerated.” “Many businesses have shown an interest in energyefficiency measures, which often provide a positive return on investment (ROI) in as little as two years,” says Susan Borries Reed, manager of economic development for the Indiana Municipal Power Agency (IMPA). IMPA’s manager

power

Business. Here, it has its own culture. You’ll find proof in our abundant land, power, facilities, business and tax incentives. Yet you can also discover art and music festivals doing a booming business. Run or bike 35 miles of riverside trails on 1,400 acres of dedicated greenway. Or settle in where the median price of home ownership runs a comfortable $155,000. Obviously, this city hasn’t forgotten that corporations are only as satisfied as the people who work there. Call or go online to find out why so many are happy here. 1.800.552.3333 I www.sanantonioedf.com

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of energy efficiency walks customers through various programs and connects them with rebates that help pay for energy-efficiency improvements, she explains. It’s a winwin situation. “Businesses are able to use technology to produce the same end product while reducing their energy consumption, while IMPA is able to delay our need to build additional generation,” she points out. “Often, it’s more cost-effective to invest in energy efficiency than to build generation.” “For every kilowatt-hour that they don’t use, that’s a kilowatt-hour that we don’t have to generate,” Cannon concurs. “It helps with long-term capital planning, because the generation we have now is cheaper than generation we have to build.” The planet is a winner, too. Using less energy reduces the customer’s carbon footprint — and such environmental concerns are also increasingly high on the list of customer demands that utilities are working hard to meet. Take the data centers, for example. Christianson points out that those data centers looking in the Omaha area are often part of companies based on the West Coast, where green is an especially popular color of business. That makes them eager to be earth-conscious even when they’re picking sites away from home.

Public power utilities across the country are responding to the trend. “We have a goal of having 10 percent of our generation in wind by 2020, and we have a number of wind farms we’re participating in,” Christianson says. “Nebraska has very high wind potential in the central parts of the state; we have three wind farms in central Nebraska, and we’re partners in another in the southeast tip of the state.” The utility also has a power generation plant fueled by a landfill, churning out 6.2 megawatts of power from the methane venting off the decaying garbage. “The concept of reducing an organization’s carbon footprint comes up with increasing frequency when meeting with our business customers,” Nelsen adds. “From that respect, NPPD is fortunate to have a highly diversified generation fleet, and in 2011 more than 40 percent of NPPD’s generating resources were carbon-free. Additionally, we are well over halfway to our corporate goal of 10 percent renewable generation by 2020.” “We offer renewable energy options for those interested in reducing their carbon footprint,” says Lisa Lewis, vice president of corporate communications and media relations for CPS Energy in San Antonio, Texas. “And we have a rebate program in place that aids businesses in replacing older technology with newer, more efficient options.”

UTILITIES

Global market access. Excellent labor force. Centralized transportation routes. Low energy costs. Thousands of businesses have already discovered what makes Nebraska a place of unequaled potential. There’s ample opportunity for you, too. Consider this your personal invitation to enjoy everything that makes business in Nebraska great.

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APPA

Sites.nppd.com NEBRASKA PUBLI C PO WER DI S T R IC T

800.282.6773, ext. 5534 | econdev@nppd.com

AREA DEVELOPMENT

FOR FREE SITE INFORMATION, CALL

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In a unique “green” arrangement, “We can allow [customers] to buy into a solar farm — they can buy shares in that,” says Grant of Salt River Project. But just how green are customers becoming? It all depends on their priorities. As Grant points out, though green power pricing is becoming more competitive all the time, there are still usually cheaper ways to go. “The concept of keeping a low total cost of ownership is balanced with the need to be green. In a perfect world, you would be able to be green and cost-efficient, but they’re very much independent of one another.” Grant has observed that among data center users, the ones most interested in environmental issues are those building their own centers. Collocation customers, those using some of the capacity of a shared data center, are often particularly keen on minimizing costs, while “enterprise customers are going to place a higher premium on being green and are looking for the associated public-relations benefit.”

Attentive Service The customer-service angle is another area where public power utilities are trying to set themselves apart. It actually comes rather naturally, as they can legitimately argue that customers really are king — because they’re not-for-profit, owned directly or indirectly by the communities they serve, and don’t have shareholders to please — just their customers. In fact, large industrial customers expect and receive a lot of attention. “We have key account reps who are assigned to our larger customers,” Christianson explains. The economic development operation at OPPD tries to attract businesses, help them in their site search, and find them the location assistance they need. Once they’re on their way, “we turn them over to a key account executive who is responsible for getting the service in. And then if they have a problem, they have a single point of contact available 24/7. That really helps in our customer service,” and helps the utility earn awards. OPPD is not alone when it comes to

award-winning service. Salt River Project has been a J.D. Power winner, too. In the rating company’s 2012 “Electric Utility Business Customer Satisfaction Study,” Salt River Project’s overall customer-satisfaction index was 741 of a possible 1,000, according to Grant. And it was highest in the nation in five of the six customer-satisfaction factors: power quality and reliability, billing and payment, corporate citizenship, price, and customer service.

BLUEPRINT FOR SUCCESS: Economic Development Solutions in North Carolina

Proven, comprehensive economic development solutions in North Carolina. North Carolina’s Public Power communities are among the best places in the country to live and do business. ElectriCities’ seasoned, experienced Economic Development staff is dedicated to helping these communities continue to grow and prosper. From site selection to targeted recruiting to grant assistance and marketing, we’ve got all the tools and expertise you need to successfully develop your business.

Brenda Daniels Manager, Economic Development 800.768.7697, ext. 6363 bdaniels@electricities.org www.electricities.com

AREA DEVELOPMENT | Q1/Winter 2013

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The key account manager concept is important at Salt River Project, too, Grant says. “When a prospect walks in the door and wants to engage SRP, once they start to nail down their parameters, we start to transition to the key account manager process.” Borries Reed points out that responsive service also stems from the fact that the control is totally local, the management is local, and the employees are local. “Public power employees are your neighbors, people who are in the community,” she says. “They’re invested in making sure your company is doing well.”

Price Is Right Then there’s the matter of energy rates. Without a profit to make, public power utilities can price their product based more closely on the cost. Also, any extra revenues can be pumped right back into improving service and technology. “Because we’re a not-for-profit utility, whatever we’re able to generate in margins, we are able to reinvest in the system and create jobs,” Cannon says. “Cost-based electric rates generate revenues that are used strictly to keep rates low, while allowing for investments in necessary maintenance, construction, and upgrades to power plants, substations, and transmission lines,” Nelson explains. Grant adds, “We’re not profit maximizers, we’re cost minimizers.” Nelson says there are a lot of things public power utilities can do to build advantages into the rate

Nebraska

Rick Nelsen, CEcD Economic Development Manager Nebraska Public Power District • 1414 15th Street • PO Box 499 Columbus, NE • 68602-0499 • 402-563-5534 • 800-282-6773 Ext. 5534 • Fax: 402-563-5090 http://econdev.nppd.com/ • econdev@nppd.com

North Carolina ELECTRICITIES OF NORTH CAROLINA, INC. ElectriCities is a not-for-profit government service organization representing 70+ N.C. cities and universities owning electric distribution systems. A site selection professional can receive detailed reports from our extensive databases on dozens of N.C. sites within 48 hours of a request. Brenda Daniels, Manager, Economic Development ElectriCities of North Carolina, Inc. • 1427 Meadow Wood Blvd. • Raleigh, NC 27604 • 1-800-768-7697 ext. 6363 • Cell: 919-218-7027 www.electricities.com • bdaniels@electricities.org

AREA DEVELOPMENT

•

SPONSORS Texas

NEBRASKA PUBLIC POWER DISTRICT Nebraska Public Power District is Nebraska’s largest electric utility, with a chartered territory including all or parts of 86 of Nebraska’s 93 counties. NPPD and public power utilities work with their local, regional, and state economic development organizations to position communities and regions for economic growth, to assist with the expansion and retention of existing industry, and to attract new businesses.

structure. For example, major users such as data centers can plug into NPPD’s economic development rate for large customers. “This incentive allows for a discounted retail electrical rate for up to five years if the site achieves certain consumption, load factor, and certification requirements.” Additionally, because of the direct or close ties to local government, the economic development departments of public power utilities tend to be especially connected with others involved in local development. NPPD, for example, has aided in the site searches of numerous companies, according to Nelsen. “Services range from supplying requested information to guiding firms through the entire site-selection process. This can include gathering community proposals, identifying informational and financial resources, or facilitating final negotiations at the local level,” he says. In many cases, public power utilities are also tied in directly with other utility services — municipalities that own their own electric systems also are often the local providers of water, natural gas, sewer, and sometimes even phone and data communications services. “We’re able to help [customers] with a lot of other things,” Cannon says of Greenville Utilities, provider of not only electricity but also natural gas, water, and wastewater treatment. “We’re a one-stop shop for all of their utilities; we can help with the permitting process, zoning issues, and other issues that they come across.”

CITY OF AUSTIN The Austin metropolitan area is home to 1.7 million residents and offers a prized quality of life, talented work force, and extraordinary business opportunities. Austin Energy’s Economic Growth and Redevelopment Office supports expansions and locations to the area through a number of economic development programs. Ben Ramirez, Interim Economic Development Program Manager City of Austin Economic Growth and Redevelopment Services Office • 301 W. 2nd Street • Austin, Texas 78704 • 512-974-7819 • Fax: 512-974-7825 www.austintexas.gov/economicgrowth ben.ramirez@austintexas.gov SAN ANTONIO ECONOMIC DEVELOPMENT FOUNDATION (SAEDF) The San Antonio Economic Development Foundation (SAEDF) is a private, nonprofit organization. Since 1975, SAEDF has provided businesses with information to assist in the analysis of establishing or relocating a facility in San Antonio. Professional assistance with relocation analysis is handled with confidentiality and at no cost to our clients. John E. Ellis, Vice President of Communication and Membership San Antonio Economic Development Fdtn. • 602 E. Commerce St. • San Antonio • Texas 78205 • 800-552-3333 • 210-226-1394 • Fax: 210-223-3386 www.sanantonioedf.com • edf@sanantonioedf.com

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Location. Location. LocationScout.

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INCENTIVES

Making a Business Case for Incentives Incentives are only part of an area’s economic development strategy, and they are a necessity for companies and areas struggling to compete in challenging economic times. By David J. Robinson, Principal, The Montrose Group, LLC

ighty billion dollars — that is the amount local and state governments spent in a year on economic development incentives, according to recent reports. These incentives are public subsidies used to create wealth through retaining and attracting companies and jobs. In challenging fiscal times, some are asking whether an $80 billion public subsidy for business is justified. The answer is yes — economic development incentives are part of a successful strategy to retain and attract companies in the United States, constitute only a small portion of the U.S. economy and local and state budgets, and — most importantly — can be both a successful offensive and defensive approach to address cost-of-doing-business issues and reshape and diversify regional and state economies. Economic development incentives are part of — not the whole — regional and state jobs strategy. Company retention and attraction campaigns identify optimal sites that are zoned and ready for development with infrastructure in place in a region with an available work force and good quality housing, healthcare, and other amenities. More sophisticated communities will work to address cost-of-doing-business issues

and determine which of their own growing industries should become a public priority to further diversify their economies. Winning local and state economic strategies involve more work than throwing tax breaks at a company.

A Policy Reward Owner and employee financial benefits need to be aligned with company goals. It’s a fundamental management principal. Without that alignment, profits are unlikely to follow. Companies will use salaries, bonuses, stock options, and other financial incentives based on the employees’ and company’s performance to reward worker performance. The same is true in public policy formation. Government rewards positive behavior and punishes negative. Economic development incentives are just one area of public policy where government rewards positive behavior, i.e., the creation of jobs and capital investment. Just as stock options create an incentive for a company’s employees to care about the performance of their employer, economic development incentives create a major incentive for private companies to grow in a region or state. The vast

State and local incentives helped secure the $600 million Airbus SAS final assembly plant in Mobile. (Shown here: Airbus Chief Executive Fabrice Bregier and Alabama Gov. Robert Bentley)

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majority of economic development incentives are performance-based. In essence, a company only receives the tax credit, tax abatement, grant or loan if it meets the jobs and capital investment numbers promised. Many tax credits are also created to support priority industries. As an example, states that target manufacturers may offer a sales tax credit for the purchase of manufacturing machinery.

decline of the industrial Midwest created an opportunity for the Southern States to create a manufacturing industry from scratch. Additionally, the urban challenges of cities have forced the aggressive use of economic development incentives to entice businesses and residents to stay. Thus, all parts of the nation have a reason to focus on creating companies and jobs through a proactive economic development strategy.

A Drop in the Bucket America’s top policy priority is to improve the performance of the U.S. economy. While economic development incentives are only a small portion of the strategy needed to improve the American economy, these public subsidies have the policy advantage of being an investment in companies looking to grow jobs and make capital investments. The question is not just how to do this but how much government money can be devoted to solving this challenge — $80 billion may sound like a lot of money, but it is a drop in the bucket of the $15.8 trillion U.S. economy. More importantly, it is estimated by the Government Accountability Office that $2 trillion is spent by local and state governments, so $80 billion to retain and attract new jobs looks like a small number when compared to total local and state government spending in a nearly $16 trillion dollar economy. This number looks even smaller when compared to government funding for stimulus programs, bank rescues, and other efforts to restart the economy. Finally, $80 billion may be, in fact, too small of an investment considering the global economic threats on the horizon. The United States has the largest economy in the world — constituting more than 20 percent of the world’s GDP. However, a recent Organization of Economic Co-Operation and Development study estimated that by 2030, the Chinese economy will represent well over 20 percent of global GDP and will be larger than the U.S. economy. In a nation with the highest corporate tax rate among the industrialized world, and labor wage rates far above China and other emerging economies, economic development incentives are a fact of life if regions, states, and the United States want to compete in a global economy.

“

Midwest Addresses Cost of Doing Business Without economic development incentives, the Midwest would have little chance of competing against the South — not to mention Europe or Asia. The Midwest has been battling the South and global markets to keep its high-wage manufacturing jobs for decades. Labor costs are often the prime driver in a corporate site location project. According to the U.S. Department of Labor, Midwest labor costs are over $2 more an hour than those in the South, and more than double the wages in Brazil, triple the wages in Taiwan, and four times the wages in Mexico. The traditional industrial states also struggle with other high costs of doing business. The biggest industrial states — Ohio, Michigan, Pennsylvania, Indiana, Illinois, Minnesota, and Wisconsin — are not among the top 10 states in the State Business Tax Climate index (created by the Tax Foundation), in the Workers’ Compensation Premium Rates comparison (except Indiana), or in national electric rate comparisons. Thus, the Midwest and other traditional industrial states use economic development incentives to both play defense and retain existing manufacturers and to lure 21st century high-tech projects as well. Two recent examples in the Columbus, Ohio, area are worthy of note. The state of Ohio used its billion-dollar-plus, voterapproved, technology-based economic development program known as the Third Frontier to make a $5 million grant to Honda for redevelopment of the automaker’s major research facility. The Honda manufacturing facilities located just northwest of Columbus not only provide thousands of direct high-wage jobs, but have also lured more than 200 Honda suppliers to the central Ohio marketplace. In addition, Columbus recently enjoyed the announcement of a major “big data” project involving at least 500 high-wage jobs from IBM. The City of Columbus granted a 65 percent income tax credit as well as an annual cash payment that will cost Columbus an estimated $5.9 million over six years. Add in a state of Ohio Job Creation Tax Credit of 60 percent over eight years, and the incentives are just too big for corporations to ignore. When Columbus is competing against states that do not have a municipal income tax, aggressive local economic development incentives are a must to win major projects.

ECONOMIC DEVELOPMENT INCENTIVES OFFER BOTH A GOOD DEFENSE TO THE HIGH COST OF DOING BUSINESS AND AN OFFENSIVE STRATEGY FOR TRANSFORMING A STATE FROM A LOSER INTO A WINNER.

Good Defense and Better Offense The investment by local and state governments in economic development incentives also is supported by the fact they produce private-sector jobs and capital investment if done correctly. In sports parlance, economic development incentives offer both a good defense to the high cost of doing business and a strong offensive strategy for transforming a region or state from a loser into a winner. Incentives are also a 50-state game. For example, the

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Reshaping the South Alabama is a global manufacturing powerhouse, and economic development incentives have been key to making that happen. Alabama not only has attracted three auto assembly plants but also recently landed an Airbus facility that will produce thousands of jobs. While Alabama has half the population of Ohio, the two states have the same number of auto assembly plants. Just consider the factors that shaped Airbus’ decision when comparing Alabama to Ohio. Ohio is home to GE Aviation, the U.S. Air Force Research Lab, NASA Glenn Research Center, and NetJets. Yet Alabama landed a high-profile global aviation project. How? Incentives and a strong rebirth of manufacturing in Alabama helped it to land the project. The Alabama deal did not happen because of the weather. State and local incentives totaling nearly $158.5 million helped secure the $600 million Airbus SAS final assembly plant in Mobile. Local incentives will total $33.6 million between the city, county, and airport for a project that will create 1,000 direct jobs, but have an overall economic impact estimated to be at $162 million over three years. The state and local governments will have their return on investment within three years and the region will benefit for decades from this addition to the global aviation industry. Moreover, Alabama has translated the success of

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three global automakers into a manufacturing success story for the state. If the state can build cars, it can surely build airplanes.

Urban Revival The Midwest and South are not the only places to use economic development incentives to create wealth. Incentives have been an essential part of the revival strategy of struggling downtowns throughout the United States. Take Times Square — the iconic “capital” of New York City. New York City has a story to tell when it comes to addressing crime and using economic development incentives to breathe life back into this area. The city successfully attacked the crime and blight issue in Times Square. However, New York officials recognized safety was not enough. They needed the high-paying jobs the region is known for to locate in the area to create a long-term economic success. Enter economic development incentives: New York City used a range of tax incentives to recruit major companies to Times Square. Morgan Stanley received a $40 million abatement; Disney received a $25 million low-interest loan; and Ernst & Young obtained a $20 million incentive package — and there were more. Businesses are no longer avoiding Times Square. The economic development strategy to save Times Square is an impressive American success story.

A recent economic impact study indicated Times Square represents only 0.1 percent of New York City’s land area, but 5 percent of New York City’s jobs, and the district generates 10 percent of the city’s economic output. Times Square is host to 200,000 jobs, with approximately 70 percent of them in finance and the creative industries. Indirect economic impact of Times Square adds an additional 190,000 jobs throughout New York City, and data from even a couple years ago estimates the neighborhood contributes $1.1 billion in annual taxes to New York City, and $1.3 billion in annual taxes to New York State.

Key to Competitiveness Winning in a global economy is hard work, and $80 billion in economic development incentives is a small price to pay for global economic competitiveness. States and cities have no choice but to use economic development incentives to retain existing companies, recruit new global investment, and revitalize once thriving but now struggling neighborhoods. To not use these economic development incentives would be a sign of surrender in challenging economic times. David J. Robinson, is a principal in the Montrose Group, LLC, and adjunct professor for an Economic Development Policy course at the Ohio State University John Glenn School for Public Affairs.

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GOVERNMENT REGULATIONS

Federal and State Legislative Moves to Boost Competitiveness Understanding the competitive economic climate across the United States, Congress and state legislatures continue to propose new legislation to compete in today’s economic environment. By Jason Hickey, President, Hickey & Associates, LLC

he upcoming year will prove to be another in a subsequent annual period of reform and legislative debate over economic development and public incentives monies. This legislative and incentive update provides a national recap of the state legislative activities that have resulted in laws related to business incentives and economic development initiatives passed in late 2012, or under consideration in the early part of 2013.

Federal Incentive Programs With the passage of the American Taxpayer Relief Act of 2012 or “Fiscal Cliff Bill,” this summary also includes federal incentive programs that have been extended or modified as outlined below: Work Opportunity Tax Credit: The American Taxpayer Relief Act of 2012 extended a provision allowing businesses to receive a tax credit for new hires

from certain targeted groups. The tax credit extended through 2013 equals 40 percent of the first $6,000 of wages paid to new hires. Returning Heroes and Wounded Warriors Work Opportunity Tax Credits: In addition to the above Work Opportunity Tax Credit extension, the legislation also extends a provision allowing businesses to claim a tax credit for hiring qualified veterans in certain target groups through 2013. New Markets Tax Credit: The federal New Market Tax Credit (NMTC) program, which provides a mechanism for indirect financial support for businesses in low-income communities, was extended through 2014. Empowerment Zone Tax Incentives: The legislation extended Empowerment Zone authority by which certain economically depressed census tracts are eligible for special tax incentives through 2013. Production Tax Credit for Qualified Renewable Energy Facilities: To avoid a fiscal cliff for developers of wind energy, the legislation extended their production tax credit through 2013. The existing credit had expired on December 31, 2012. Congress did not extend the popular Section 1603 program from the American Recovery and Reinvestment Act, which allowed for a grant in lieu of a tax credit for certain renewable energy facilities. Biofuel Incentive Tax Credit: The legislation included tax credits and depreciation rules that support celluAREA DEVELOPMENT | Q1/Winter 2013

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losic ethanol and revived, retroactively, a biodiesel tax credit that had expired at the end of 2011. Algae was also included as a qualifying biofuel. Film Tax Credit: The tax credit extension allows qualifying productions to write down the first $15 million of expenses from their corporate tax bill through 2014.

State-Level Legislation ALABAMA Alabama voters passed a constitutional amendment that allows the state to refinance existing bonds that were used to provide industrial incentives through the Alabama Capital Improvement Trust Fund. This effectively allows the government to borrow more money to pay for economic development incentives, as long as the total debt does not exceed $750 million. A bill prefiled for the 2013 legislative session would require the state to track its spending on economic development projects to reveal the effectiveness of funds used to attract business to Alabama. A version of the legislation had been introduced in 2008, 2009, and 2010 as well, but faces strong opposition from Secretary of Commerce Greg Canfield. COLORADO Governor John Hickenlooper announced the Advanced Industries Accelerator Act bill, which is designed to create new high-skill jobs, increase exports, create stronger partnerships between educational institutions and industry, and promote Colorado’s research and development activities. The act will provide grants to advanced industries that are looking for funding for proof of concept research and development, early-stage

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capital and retention, and infrastructure. The program would be managed by the Colorado Office of Economic Development and International Trade. A task force set up to examine Colorado Enterprise Zones is expected to introduce a reform bill changing the current program. These changes include adding a $1 million cap on annual capital-investment tax credits; investing 50 percent of the money saved in enhanced Enterprise The Zone

Production Tax Credit for Qualified Renewable Energy facilities has been extended tax through credits 2013. for companies

FLORIDA The Florida Department of Economic Opportunity (DEO) has created a compliance unit within the Division of Strategic Business Development (SBD) that will serve as a single point of contact to manage tax-refund and grant-performance review responsibilities. INDIANA Incoming Governor Mike Pence is planning to separate the leadership of the Department of Commerce and the Indiana Economic Development Corporation (IEDC). The Governor’s intention is to deploy both agencies in an effort to lure more jobs to the state. Victor Smith has been named the state’s new Commerce Secretary and Eric Doden has been appointed CEO of the IEDC.

that hire workers in the zones, train new workers, and offer healthcare, adding the other 50 percent to the legislature’s general fund; and a reexamination of all current Enterprise Zone boundaries by 2014, with a schedule to update boundaries every 10 years. Governor Hickenlooper is expected to back the recommendations of the task force.

MICHIGAN Governor Rick Snyder signed the Workplace Fairness and Equity Act making Michigan the 24th state to approve right-to-work legislation. The legislation makes it illegal to require financial support of a union as a condition of employment. The bill covers all public and private workers, with the exception of police and firefighters, who are allowed to maintain closed union shops.

DISTRICT OF COLUMBIA Mayor Vincent Gray signed the Technology Sector Enhancement Act of 2012 that provides enhanced tools for the District’s tech industry and expands existing incentives to provide benefits to all qualifying technology businesses. Local start-ups will qualify for five years of corporate income tax abatement starting when they become profitable.

NEW JERSEY Governor Chris Christie announced the release of $26 million in support of three economic recovery initiatives to assist businesses and workers affected by Hurricane Sandy and to invest in New Jersey’s future growth. Recovery4Jersey, Skills4Jersey, and Opportunity4Jersey involve the investment of training dollars to connect the unemployed to job opportunities for

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Hurricane Sandy recovery and to also build the skills of existing workers. Information on applying for the programs can be found through the New Jersey Business Action Center. Assembly Commerce and Economic Development Chairman Albert Coutinho has introduced new economic development legislation that would revamp and streamline the state’s economic development tax incentives. The bill would merge five state tax-incentive programs into two, with one focused on economic development and the other on job creation. NEW MEXICO State lawmakers have introduced a jobs package including new tax credits for green energy programs and a repeal of the annual $50 million cap on film incentives for in-state movie and television productions. NEW YORK Governor Andrew Cuomo proposed many economic development initiatives during his 2013 State of the State address. These initiatives included promoting technology transfer from higher education to business, reforming workers’ compensation and unemployment insurance for businesses and workers, making New York the leader in the clean-tech economy, improving the work force, and marketing New York to focus on upstate economic development. OREGON Governor John Kitzhaber signed the Economic Impact Investment Act, which allows the Governor to enter into qualifying investment contracts with companies committing to a minimum of 500 jobs and $150 million in capital investment over a five-year period. PENNSYLVANIA Governor Tom Corbett signed the Keystone Works bill which will help connect unemployed Pennsylvania residents with employers who are looking to fill open positions. Unemployed workers have the opportunity to receive training with an employer while continuing to receive unemployment compensation benefits.

The law also provides employers incentive to hire trainees once the training is complete. Governor Corbett also signed the Promoting Employment Across Pennsylvania Act, which allows companies that create a minimum of 250 new jobs to keep 95 percent of the personal income tax paid by employees. The job creation must take place within a five-year period, with 100 jobs being created in the first two years. The employer may also pay the personal income tax withheld from its employees and then receive a rebate of that personal income tax from the state. The program allows a maximum of $5 million per year and will expire on January 1, 2018. RHODE ISLAND Governor Lincoln Chafee established a $1 million emergency loan fund to assist businesses that have been negatively affected by Hurricane Sandy. The loans are made available

through the Rhode Island Economic Development Corporation Small Business Loan Fund, with the funding set aside specifically for storm assistance. SOUTH DAKOTA South Dakota House Minority Leader Bernie Hunhoff says they expect to see a lot of economic development proposals during the 2013 legislative calendar. Last November a large project development fund was defeated by voters. WYOMING A Wyoming Senate legislative committee passed a bill pushing for more natural gas filling stations in the state. The bill offers a state-backed loan of up to $1 million to build the filling station and allots a maximum of $5 million for the program. The goal of the bill is to incentivize business and the public to buy vehicles powered by natural gas.

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ASSET MANAGEMENT

Preparing for the New Lease Accounting Standards While the new accounting standards will provide more financial transparency, they may lead to a false picture of a firm’s financial health. By David Kamen, Vice President, Global Portfolio Strategy, Global WorkPlace Solutions; and Ron Zappile, Manager, Strategic Real Estate Consulting Services; Johnson Controls

he Financial Accounting Standards Board (FASB) has been developing a global accounting standard to increase the visibility of companies’ lease liabilities to investors. This means that the way that corporations report leased assets will fundamentally change — and that includes the way that they report real estate leases. Not only will the new standard create a significant accounting issue, but it will also require corporate real estate teams to capture and report information about their leased portfolios. The final rules are expected to be announced this coming summer, and corporations will be required to report to that standard beginning in 2015 or 2016. In order to provide this needed financial transparency, FASB has proposed that the majority of leased assets no longer be reported as operating leases. Therefore, these assets should be hidden from investors as part of monthly profit and loss expenditure, as a so-called off-balance sheet debt. While this debt may not be apparent by analyzing a company’s financial statements, it is real and could lead to a serious overestimation of a company’s financial health. According to a 2005 Securities and Exchange Commission (SEC) report, off-balance sheet operating lease debt amounts to $1.25 trillion for all U.S. financial statement issuers. Therefore, FASB has proposed changes that would affect a wide range of companies’ expenses and leases, including the real estate assets. In short, once the accounting changes take effect, companies’ perceived debt in their accounting statements could increase enormously.

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The Current Situation Today, real estate leases are categorized as either operating leases or capital leases. The majority are operating leases and booked as a rent expense on the tenant’s income statement. From an investor’s or lender’s perspective, however, this future debt is currently not recognized on the company’s balance sheet. In 2012, FASB met with the International Accounting Standards Board (IASB) to classify how various leases should be reported. While a definitive answer has not been decided, it appears that all long-term leases, or those more than one year in length, will appear in some form or another on companies’ balance sheets. On the whole, leases of property would be straight-line leases, meaning they will

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require equal payments spread out over the lifetime of the lease. Many have argued that transferring these obligations to the balance sheet will affect financial ratios, which could ultimately impact borrowing rates and cash flow. It has also been widely contested that these changes could create a rise in demand for short-term leases because of their continued exclusion from the balance sheet. This would be a negative for both the lessor and lessee. Lessees demanding short-term leases would pay a premium for the flexibility of short-term agreements, while lessors would lose the security of long-term agreements and this could result in a lack of investment in the upkeep of their property.

Time to Prepare Once the final rules are announced this summer, there will not be a lot of time to prepare before they take effect in 2015 or 2016. To plan for the new lease accounting standards, companies can consider the following tips. 1. Capture essential data for all leases. The critical information that should be recorded for all leases includes, but is not limited to, lease commencement and expiration dates, option notification dates and terms, rent and income escalations, additional rent contingencies, security deposit and tenant allowance information, and any landlord-provided incentives, including free rent and tenant improvements. 2. Validate processes. Companies will be required to capture the above lease information and review their assumptions on a quarterly basis. Ensure that the lease abstraction process — from lease to lease abstract to insertion into the intelligent software system — is complete and robust. Use dry runs to ensure items are not missed and to identify system enhancements. Employ the same activities to test 10K reporting and make sure the balance sheet and annual reports production process is sound. A helpful way to analyze these processes may be to develop organizational process maps for large lease portfolios. 3. Take advantage of intelligent software. Use real estate management

software that is capable of producing the necessary calculations and can integrate with your existing enterprise resource planning systems. These systems tie multiple databases together to produce seamless total cost of occupancy reporting. A strong real estate portfolio database tracks the details from operations, then feeds high-level detail into a financial database so that expenses may be processed, revenue can be invoiced, and charge-backs assessed. This provides the foundation for total cost of occupancy reporting and planning. 4. Make data accessible. Provide access to data and reporting that supports your company’s response to and readiness for the new rules. While a client’s financial component of an enterprise resource planning (ERP) system will provide all necessary FASB and IASB reporting, it is important that the real estate system, as part of a total ERP package, can capture the essential data for historical and forecasting purposes. These real estate systems capture the details required for reliable executive support system reporting and effective company decision-making. 5. Analyze the situation. Assess the impact of the new lease accounting standards on the value of the company’s lease obligations on a capitalized basis. This is done by calculating the total cash payments of leases, any anticipatory changes in the total lease term length and the imputed interest expense, and then repaying the costs over the anticipated length of the lease. This process can be completed following these steps: • Calculate the impact on the company’s financial ratios, including profitability, liquidity, and leverage. Determine whether the company would be breaking any debt covenants it holds with lenders. • Assess the impact on earnings before interest, taxes, depreciation, and amortization (EBITDA) and the company’s overall tax structure liabilities at the federal, state, and local levels. Analyze how any early lease terminations or cancellations would affect potential capital gains and losses for early write-offs of tenant improvements. • Analyze the impact of U.S. gener-

ally accepted accounting principles (GAAP) and any related tax changes on the company’s deferred tax position. The change may result in bigger spreads between cash rent for tax and interest, and amortization for book values. • For lessors, assess the impact on the company’s owned properties, including valuation issues. The change will result in possibly shorter leases but higher cap rates. • Assess the potential impact on closing and transaction costs, such as money spent on attorneys, accountants, appraisers, and other specialists, as well as mortgage recording taxes and transfer taxes. Added time and additional analysis will all lead to more billable hours to be accounted for. • Re-assess lease principles against the company’s own decision-making. The factors that should influence a company’s decision to lease or own equipment or property should be those that alter its underlying fundamentals. These include the net present value impact of cash flows, the value of the flexibility that comes with shortterm leases, and alternate uses for the assets. The proposed accounting rule changes would alter none of these, so a well-planned asset ownership strategy does not need to be amended. 6. Communicate. As with any new processes — especially those with visibility to management, the board of directors, and outside investors and analysts — it is important to minimize the impact of frequent and constant communication within the organization. Work with the accounting or finance teams collaboratively to make the process more relevant to the overall corporate initiatives and to raise awareness and validate the importance of the real estate group in this opportunity.

More Developments to Come It is important to realize that FASB continues to debate numerous aspects of the proposed new lease accounting standards. It is possible that significant changes may still occur before the final standard is issued. Companies should continue to pay attention to updates and developments in early 2013. AREA DEVELOPMENT | Q1/Winter 2013

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HERE’S

YOUR NEXT

INNOVATIVE SOLUTIONS An educated workforce backed by one of the most generous R&D incentive

BIG IDEA

programs in the world

COST-EFFECTIVE PRODUCTION Lower labour, land, R&D incentives and taxes keep overall production highly competitive according to KPMG study

JUST-IN-TIME DELIVERY Trade agreements make the ﬂow of goods easier, faster and less expensive

Innovation happens every day in Ontario, Canada. The entrepreneurial spirit of the visionary talent and considerable investment in R&D generates products and services that shine on the world stage. Add real value to your supply chain. Make Ontario your next big idea.

YourNextBigIdea.ca/Source Paid for by the Government of Ontario.