Area Development Q1 Issue 2019

4 KEY CONCEPTS TO MAXIMIZING INCENTIVES

Annual Corporate & Consultants

SURVEY

ARTIFICIAL INTELLIGENCE IN THE SUPPLY CHAIN

AREADEVELOPMENT SITE

AND

FACILITY

PLANNING

CANNABIS:

THE LATEST INVESTMENT BUZZWORD

How should businesses operate in this changing environment?

THE ATTRACTION OF MID-SIZE MARKETS EDGE PLANNING in DATA CENTERS

Q1/2019

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10/12/2017 5:20:57 PM

CONTENTS

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Cover Story Cannabis: The Latest Investment Buzzword The legalization of cannabis in many states is creating opportunities for business owners and investors, as well as communities.

Employers Delve Into the Weeds of Cannabis Law As the laws involving cannabis use — for both medicinal and recreational purposes — evolve, businesses must figure out how to operate in a changing environment.

features

12 Four Key Concepts to Maximize Incentives In order to maximize your ROI, start the incentives process early, think holistically, target those incentives that have the greatest effect on NPV, and make sure you understand all the players involved.

15 Artificial Intelligence in Supply Chain Management Initially adopted by big tech companies, AI’s use has spread to manufacturing operations and their supply chains, despite cybersecurity and other concerns.

26 Mid-Sized Urban Markets Compare Well with Mega-Cities With their economic vitality and lower cost of doing business compared to their mega-city counterparts, growing mid-sized urban markets are succeeding in retaining and attracting high-wage jobs.

67 Edge Planning Considerations in Data Center Development Low-latency requirements, which surpass the capabilities of centralized cloud-delivered services and data centers, have given rise to the need for smaller data centers, deployed at the edge of their networks.

24 Accessing Talent Through a Dual Headquarters Move There are many lessons to be learned from the Amazon search for a second headquarters location, but establishing dual headquarters is more the exception than the rule.

Area Development® Site & Facility Planning (USPS 345-510) is published four times per year (Q1, Q2, Q3, and Q4) 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, $75; foreign, $95.

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Volume 54 | Number 1 Q1/2019

about AI

“

I’m increasingly inclined to think that there should be some regulatory oversight, maybe at the national and international level, just to make sure that we don’t do something very foolish…

With artificial intelligence we’re summoning the demon.

”

Elon Musk (1971 – ), technology entrepreneur and engineer, issued this warning at MIT’s AeroAstro Centennial Symposium in 2015.

special location report

62 Tennessee Builds on Its Business Retention and Attraction Efforts A commitment to manufacturing, its logistical advantages, and a workforce development push are at the core of Tennessee’s economic strength.

33rd Annual &15th Annual Corporate Survey

Consultants Survey

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Our survey results indicate that despite an uncertain operating environment and continuing concerns about the availability of skilled labor, plans for new and expanded facilities still are on the horizon.

departments

4 Editor’s Note

To Incent or Not to Incent?

6 In Focus

Taking Advantage of the Remote Working Trend

7 Front Line

What’s Driving Down FDI?

8 In Focus

Rise of Natural Disasters Affecting CRE Markets

10 First Person

Michael Kruklinski, Head of Region Americas, Siemens Real Estate

72 Ad Index/Web Directory online • Acing a Project’s Entitlement Phase • What Does Sustainability Mean in 2019?

• How to Build a Data Center and Keep the Lights On • Taking a Wider View of the Location Process • For Food Manufacturers, The Right Economic Development Partner Is Critical • Middle Market Investment Decisions • How to Navigate U.S. or Foreign Markets • The Comeback Kid: Textiles Are Returning Stateside

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 2019 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 | Q1/2019

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EDITORS NOTE

Q1/2019

To Incent or Not to Incent?

A

s we were putting our Q1 issue together, news broke that Amazon was cancelling its plans for a 25,000-employee HQ2 project in Long Island City, New York. Although the majority of New Yorkers were in favor of the project, there were those who saw the state’s offer of $3 billion in tax incentives — in spite of the $27 billion in tax revenue projected to be generated by the Amazon facility — as corporate welfare. They could also point to Foxconn’s broken promise of creating 13,000 manufacturing jobs in Wisconsin in exchange for $4.5 billion in tax incentives as an example of a corporate handout gone wrong.

In a recent report,1 Timothy Bartik, an economist with the Upjohn Institute for Employment Research in Kalamazoo, Michigan, looked at incentives nationally.

He estimated that incentives “tip” only about 20 percent of all projects — the remaining 80 percent of projects would happen anyway, even without the incentives, he noted. Yet, because many locations use incentives to help lure businesses, all states and cities feel they must provide incentives in order to compete for a project’s promised jobs and tax revenue. Former Delaware Governor Jack Markell explained this dynamic in a New York Times op-ed piece.2 He noted that companies see the offer of incentives as evidence that a locality is committed to their company’s future.

Our recent annual Corporate Survey — the results of which are presented in this issue — confirms the importance of tax exemptions and other state and local incentives to businesses, with more than 80 percent of the respondents rating these factors as “very important” or “important.” But, as Markell said, “It would be better for taxpayers if these kinds of cash incentives could be invested instead in such things as schools and infrastructure.”

A recent article in Inc.3 tends to agree — especially when it comes to building up “innovation ecosystems.” Without investment in education and infrastructure, a location cannot support high-value industries no matter what incentives they offer, the article noted. Nonetheless, incentives will remain in the economic development toolbox and if properly targeted and evaluated — e.g., to firms that invest in R&D or skills training, said Bartik4 — they can hold value for a community as well as a company. So, the question remains, to incent or not to incent?

1

https://research.upjohn.org/reports/225/ https://www.nytimes.com/2017/09/21/opinion/incentives-businesses-corporations-giveaways.html https://www.inc.com/greg-satell/to-drive-innovation-cities-need-to-look-to-ecosystems-rather-than-incentives.html 4 https://www.brookings.edu/wp-content/uploads/2018/02/report_examining-the-local-value-of-economic-development-incentives_ brookings-metro_march-2018.pdf 2 3

www.areadevelopment.com EDITORIAL Editor Geraldine Gambale editor@areadevelopment.com Staff and Contributing Editors Dave Claborn Mark Crawford Dan Emerson Tom Ewing

Tom Gresham Mark Schantz Steve Kaelble Karen Thuermer

PRODUCTION/DESIGN Production Manager Jessica Whitebook jessica@areadevelopment.com Art & Design Patricia Zedalis

EXECUTIVE Publisher Dennis J. Shea dshea@areadevelopment.com Sydney Russell, Publisher 1965-1986

ADVERTISING SALES William Bakewicz (ext. 202) billbake@areadevelopment.com Valerie Krpata (ext. 218) valerie@areadevelopment.com

ONLINE SERVICES Digital Media Manager Justin Shea (ext. 220) jshea@areadevelopment.com Web Designer Carmela Emerson

CONFERENCES/EVENTS Business Development Manager Matthew Shea (ext. 231) mshea@areadevelopment.com

CIRCULATION

circ@areadevelopment.com

EXECUTIVE OFFICES

Editor

Halcyon Business Publications, Inc. President Dennis J. Shea

2019 Editorial Advisory Board Aaron Ahlburn, Managing Director and Senior Director, Research, JLL Josh Bays, Principal, Site Selection Group, LLC Marc Beauchamp, President and CEO, The CAI Global Group H. Robert Boehringer, III, Managing Director, Global Location and Expansion Services, KPMG Brian Corde, Managing Partner, Atlas Insight, LLC Les Cranmer, Senior Managing Director, Savills Studley Kate Crowley, Principal, Baker Tilly

Amy Gerber, Executive Managing Director, Business Incentives Practice, Cushman & Wakefield

Bradley Migdal, Senior Managing Director, Business Incentives Practice, Cushman & Wakefield, Inc.

Stephen Gray, CEO, Gray Construction

Paul Naumoff, Principal, National Director of Tax Credits and Investment Advisory Services, EY

Minah C. Hall, Managing Director, True Partners Consulting LLC Scott Kupperman, Founder, Kupperman Location Solutions, LLC Dan Levine, Practice Leader, Location Strategies and Economic Development, Oxford Economics, Inc. Bill Luttrell, Senior Locations Strategist, Werner Global Logistics, Werner Enterprises, Inc.

Eric Stavriotis, Senior Vice President, Advisory & Transaction Services, CBRE Margy Sweeney, Founder & CEO, Akrete, Inc. Dan White, Senior Economist, Moody’s Analytics Joshua Wright, Vice President, Economic & Workforce Development, Emsi

Finance Mary Paulsen finance@areadevelopment.com Business/Finance Assistant Barbara Olsen (ext. 225) olsen@areadevelopment.com All correspondence to: Area Development Magazine 400 Post Avenue, Westbury, NY 11590 Phone: 516.338.0900 Toll Free: 800.735.2732 Fax: 516.338.0100

Dennis Cuneo, Partner, Fisher & Phillips LLP

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AREA DEVELOPMENT

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Maryland is a cybersecurity powerhouse.

Home to a high concentration of cyber engineers, 16 NSA/DHS Certified Centers of Academic Excellence in Cyber Defense, the U.S. Cyber Command and the NSA, Maryland has proven itself to be a secure neighborhood. Let’s talk business.

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IN FOCUS Taking Advantage of the Remote Working Trend

By Wood Caldwell, Principal, Southeast Venture

With the majority of employees worldwide spending at least a portion of their time working remotely, facility mangers need to alter their workspaces.

and sales.

WOOD CALDWELL is a principal at Nashville commercial real estate firm Southeast Venture and has more than 30 years of experience in commercial real estate development

The shape of office space has changed dramatically over the years — from the large, individual offices of the 1950s and 60s to the rows of cubicles in the 80s. Now, we’re seeing those cubicles shift into communal work areas with less square footage overall and fewer parking spaces, reflecting the 21st century’s newest office trend: remote working.

Remarkably, today a majority — 52 percent — of employees worldwide work away from the office at least once a week.1 In 2018, 85 percent of American companies offered this option to employees, and as more millennials enter the workforce, America’s workforce is taking full advantage of the opportunity.

According to an annual survey from FlexJobs,2 people seek flexible positions for work-life balance, saving time and eliminating commuting stress. The survey also reports that remote workers are more productive due to fewer distractions, interruptions from colleagues, and run-ins with office politics, to name a few factors. Because of these values of working remotely, com-

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panies are even beginning to offer this benefit in place of salary raises, and employees are happily accepting.

It’s clear that the remote working trend is unavoidable, and at first, it may seem bad for the commercial real estate industry, but that’s not necessarily true. The “ideal” workspace is never set in stone, so continually updating your spaces to stay ahead of the trend will avoid the negative consequences of inadaptability and become an opportunity for profit and growth.

Here are some tips for altering your workspaces:

Provide smaller individual workspaces.

For some time now, companies have been providing less square footage per worker. From 2010 to 2017, the average worker’s space was decreased nearly a third, from 225 square feet to 151 square feet.

Employees still typically have their own desks, but businesses are choosing to waive the concept of individual offices. Even upper-level executives are straying from large corner offices and choosing to surround themselves with coworkers to encourage collaboration. In such an office, employees work in communal areas and have only a few private spaces for meetings and other important matters that require privacy.

The value for businesses is simple: Companies don’t want to provide their employees space that isn’t being used. When fewer people show up to the office every day, there is less of a need for an abundance of space, and workers don’t mind because they have the option to work elsewhere.

Renovate your parking lot.

With fewer people working in your building, there will obviously be fewer cars in the parking lot.

Additionally, public transportation and the significant rise in ridesharing usage will alter America’s traffic and parking patterns in the coming years.

Cities have long enforced zoning

codes to mandate an adequate number of parking spaces, but in 2017, Buffalo, N.Y., was the first city to completely abolish city-wide minimum parking requirements for commercial and residential projects. Other cities across the country — from Seattle to Miami — are reducing their parking requirements or removing them altogether in certain areas.

The elimination of parking requirements can be a benefit to facility managers. Since fewer spaces are needed, they have the option of expanding a building into the parking lot to offer more rentable space or even renting a portion of the parking lot to a neighboring business.

Consider short-term rentals.

As the remote working phenomenon continues to grow, so does another: short-term rentals. And I don’t mean six-month office rentals; I’m referring to the rentals that last six weeks, or maybe even a few days. These are spaces for startup businesses, remote workers, and office-less companies that need to hold an afternoon meeting.

Flexible office space — aka, coworking space — has grown an astounding amount in the last decade. With only 14 nationwide locations in 2007, there are now more than 4,500 rentable coworking spaces3 that are used to host business meetings, one-on-one consultations, or individual workers who wanted to escape the monotony of their homes. As much as Americans love the flexibility of working remotely, that doesn’t necessarily mean they are itching to work from home. Coworking spaces offer these employees the unique combination of the independence of remote working and the quiet, collaborative atmosphere of an office.

If your building has a space you aren’t sure how to use, consider converting it to a short-term rental coworking space. All it takes is an open floor plan with plenty of seating and a few useful meeting areas, a strong WiFi connection, and

for free site information, visit us online at www.areadevelopment.com

even stronger coffee.

The remote working trend is here to stay, but that’s nothing to worry about. By using these tips and staying up to date on what companies want from their space, you can keep your facility relevant.

1

https://www.owllabs.com/state-of-remote-work https://www.flexjobs.com/blog/post/2018-annual-surveyfinds-workers-more-productive-at-home/ 3 https://www.statista.com/statistics/797546/number-ofcoworking-spaces-us/ 2

FRONT LINE

What’s Driving Down FDI?

By Dan Emerson

The fear of trade wars and protectionist policies are being blamed for the overall decline in global foreign direct investment.

In November 2018, Japanese automaker Mazda Toyota Manufacturing held a groundbreaking ceremony for a $1.6 billion plant in Huntsville, Ala., that will employ up to 4,000 workers. Masahi Aihara, president of Mazda Toyota Manufacturing, said the plant will have the capacity to build 300,000 vehicles a year beginning in 2021.1 Alabama is one of many states that have benefited from direct foreign investment (FDI) by companies that have opened U.S. manufacturing facilities, purchased equipment, hired workers, and created products and services in this country. However, some economic development experts say foreign direct investment is under-appreciated as a driver of economic prosperity in the U.S.

According to the Washington, D.C.-based Organization for International Investment (OFII), there are 7.1 million U.S. workers employed by international companies; international companies employ 20 percent of America’s manufacturing workforce; and more than 60 percent of the manufacturing jobs created in the past five years can be attributed to international companies.2 However, global FDI has been trending lower, the United Nations trade and development agency (UNCTAD) reported late last year.

Global foreign direct investment fell by 41 percent to $470 billion in the first six months of 2018, the lowest since 2005.

According to UNCTAD Investment Chief James Zhan, President Trump’s U.S. tax reforms were the main cause of the slump, which followed a 23 percent fall in 2017, as American firms repatriated a net $217 billion from foreign affiliates.3 “The investment flows are more policy-driven and less economic cycle-driven,” Zhan told a news conference, citing the U.S. tax reform and economic liberalization in China. “Overall, the global picture is gloomy, and the prospect is not so optimistic.”

International supply chains became an increasingly important driver of international trade until 2011 but have since stagnated, Zhan says. “It’s difficult to tell whether we are at a turning point (in globalization) or if this is only a slowdown.”

In the first half of 2018, China became the top destination for FDI, with $70 billion of inflows, a 6 percent rise. Flows into Europe fell by 93 percent. The United States was the third-biggest destination, with $46.5 billion of inflows.4

Comment From OFII According to OFII, FDI in the U.S. has declined 15 percent since 2000. One major reason is that the world has become a much more competitive place, says Aaron Brickman, a senior vice president with the Washington, D.C.-based

OFII. “The world is a vastly more competitive place for cross-border investment than it was 20 or 30 years ago. And, in some ways, the U.S. has been standing still and not reacting to global economic changes — and structural factors and improvements our competitors in other countries have been making,” Brickman told Area Development.

Brickman says a number of factors play a role in attracting FDI; they include infrastructure (roads, rail, bridges, communication), proximity to markets, access to markets through free-trade agreements, taxes, and the regulatory environment.

On the positive side, he notes that a number of cities, states, and regions have developed the ability to effectively work with inbound companies. “Deals don’t flow to nations; they flow to specific cities, towns, states, regions. We have seen some improvements over the last 10 to15 years with regard to how U.S. economic development organizations align themselves, prepare and strategize, and compete globally,” Brickman says.

Some factors that impact U.S. competitiveness have been changing for the better, Brickman says, citing the deregulatory and tax environments as areas “international companies are feeling more positive about. But, to reverse that long-term, downward trend is not about what takes place in one year or another, but rather structural improvements made in a more systematic manner over time.

It’s important to ensure that policymakers at all levels understand the importance of FDI and the benefits it brings.”

Brickman continues, “In some respects, trade uncertainty is removing, in at least the short-to-medium term, some of the benefits we have seen on the tax side, and that’s not a good thing.” For example, auto tariffs are viewed as the largest threat to U.S. competitiveness by company CFOs that OFII periodically surveys. Tariffs are a key factor for global companies considering expanding their existing operations AREA DEVELOPMENT | Q1/2019

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in the U.S. or locating here, and the jobs they would be creating, Brickman says.

The fact that U.S. manufacturing employees earn higher wages than those in foreign countries is not a negative factor for foreign countries considering the U.S. The kind of jobs created by international companies in the U.S. are inherently high-skill, high-expertise jobs, paying substantially higher average wages than paid by private-sector U.S. companies. “So, international companies are not selecting the U.S. as a low-wage destination.

They are coming here because of expertise and high skills,” Brickman explains.

Foreign companies contribute significantly to workforce development programs. As stated, within the last five years, more than 60 percent of all manufacturing jobs were created by FDI, and a quarter of all exports from the U.S. were made by those companies. They also account for 16 percent of all R&D performed by U.S. companies.

“Over the last five years, we have seen some interesting trends with FDI in the U.S. from Brazil, Chile, Argentina, and Thailand showing strong growth. Some U.S.-based economic development organizations have been putting more effort into courting smaller economies that are growth markets for FDI,” Brickman notes. “It is vital for the U.S. to remain attractive to international companies and ensure that policies are in place for international companies to thrive and succeed.”

Despite the overall slowdown, money going into newly announced global startup projects, so-called greenfield investments, rose 42 percent in the first half of 2018, according to UNCTAD. Whether that trend will continue remains to be seen.

1

https://whnt.com/2018/11/16/mazda-toyota-manufacturing-breaks-ground-on-1-6-billion-auto-plant-in-huntsville/ https://ofii.org/our-focus/creating-high-quality-u-s-jobs/ creating-high-quality-u-s-jobs 3 https://www.reuters.com/article/us-global-economy-fdi/ global-fdi-falls-41-percent-in-h1-2018-after-trump-taxreforms-un-idUSKCN1MP25B 4 https://unctad.org/en/PublicationsLibrary/diaeiainf2018d1_en.pdf 2

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IN FOCUS Rise of Natural Disasters Affecting CRE Markets

ated greater cause for concern regarding those assets. With strong winds and heavy rainfall, hurricanes have proven to test the readiness of commercial properties. Damage totals can often be difficult to calculate, and costs to rebuild are not always an accurate reflection, as some assets are not rebuilt immediately or at all.

Construction Improvements

By Rick Kalvoda, Senior EVP, Altus Group

With the rise in natural disasters over the past few years and as climate change continues to be a challenge, resiliency is top of mind for commercial property executives.

RICK KALVODA, Senior EVP, is Global Head of Advisory at Altus Group, where he oversees valuation and valuation management services for over 100 of the largest global real estate fund managers with more than 8,000 real estate investments exceeding $600 billion in GAV. He is based out of Irvine, CA and has over 28 years of commercial real estate experience.

Following the wildfires on the West Coast and 2017’s trio of harrowing hurricanes, concerns may be in order for the commercial real estate industry. Last year’s Altus Group Real Confidence Executive Survey1 results revealed 46 percent of property professionals view climate change as a larger economic concern than geopolitical conflicts and terrorism. At first glance this might be surprising, but if you think about other risks like terrorism or political fallout, natural disaster risk is slightly more controllable. You may not be able to control the natural disasters themselves, but they tend to be location-specific, which means risk mitigation can be factored in with insurance and underwriting.

Hurricanes have proven to be very costly to the real estate industry, particularly to coastline regions, but we have recently seen a shift to inland properties that has cre-

Many cities are working to address the increasing frequency and intensity of natural disasters by directing development to less floodprone areas and increasing the required elevation to minimize water damage. The construction industry and governments are looking to improve construction materials, design, and building codes, while also calling for more rigid building methods that require roofs, walls, and foundations to be more secure.

They are also refining the windresistance of structures through improved building materials such as hurricane-resistant concrete blocks and glass windows.

There currently isn’t an immediate impact on property valuations on coastal properties. However, properties located in locations prone to natural disaster often encounter higher insurance costs to combat the possibilities of an occurrence. This doesn’t have a significant impact on owners as insurance is not a major property expense.

Many real estate owners, operators, and investors are now looking for higher-ground areas that are historically prone to less risk. Owners who do locate in areas that may be at a higher risk for a natural disaster typically design their buildings with this in mind. Some factors they may consider include avoiding known flood plains, larger setbacks from the coastline where possible, and incorporating storm water management into their design.

1

https://irei.com/news/depth-2018-altus-group-realconfidence-executive-survey-natural-disasters-concernstax-reform-trump-administration/

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NEW YORK STATE Is Building a Pipeline of Talented Workers

AMONG BUSINESS’ biggest challenges today is finding a skilled workforce — especially workers who possess STEM (science, technology, engineering, and math) skills. In response to this challenge and in order to attract the companies requiring these skilled workers, New York State is making investments in not only upskilling its current workforce but also in preparing the workforce of the future.

FOR EXAMPLE, New York State recently made available $27.5 million for workforce development and training programs to support its growing clean energy industry, which added 5,600 jobs last year alone bringing total employment in the industry to more than 151,000. The state also committed $15 million to its 64-campus State University of New York (SUNY) toward this goal. SUNY is the largest comprehensive public university system in the nation, serving 1.4 million students and 550,000 in credit-bearing courses and programs,

••

continuing education, and community outreach programs.

TECHNOLOGY companies can avail themselves of the resources provided by New York State’s Division of Science, Technology and Innovation (NYSTAR) programs. NYSTAR funds 13 Centers of Excellence to foster cooperation between the academic research community and the business sector and 15 Centers for Advanced Technology (CATs) to encourage greater collaboration between private industry and universities in the development and application of new technologies in life sciences, energy systems, materials processing, telecommunications, and more.

SUNY AND THE STATE’S DEPARTMENT OF LABOR are partnering with businesses to develop apprenticeship positions to address workforce needs. Some 2,000 new pre-apprenticeship and registered apprenticeship positions in advanced manufacturing and healthcare will be created over the next four to six years. Through these programs, individuals are able to learn in a real-life work environment while earning credentials and/or college credits while the state continues to build its workforce pipeline.

NEW YORK STATE is also home to the nation’s first tuition-free degree program, the Excelsior Scholarship. Recipients of the scholarship pledge to stay in New York post-graduation, and now the 4 million millennials in the state’s workforce are discovering that New York offers affordable places to live and work.

Millennials especially value work-life balance and are choosing to locate in New York State’s communities, which not only offer top-tier educational institutions but also cultural amenities and outdoor recreational opportunities.

Visit esd.ny.gov to learn more

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FIRST PERSON MICHAEL KRUKLINSKI HEAD OF REGION AMERICAS SIEMENS REAL ESTATE

What is the typical length of a corporate search for a new site?

Kruklinski: Site selection is not a process that is done overnight. It takes a thorough approach that involves input from a variety of experts — this can amount to a sizeable team working behind the scenes and typically takes a year from start to finish. Sometimes it can take a little less than that as we saw with Amazon’s HQ2; other times it will take longer. Keep in mind that what we saw with Amazon is only the publicly visible process — there is often much more research, planning, etc. occurring out of public view. And the Amazon HQ2 site selection process is a rare case. Most site selections are not as detailed, newsworthy or, in the case of New York, controversial. The duration of a site selection really depends on the complexity of the task (i.e. small office vs. multi-story building) and internal or external factors, such as budget, trends in the market, business operations, and availability.

Who should be on the site selection team?

Kruklinski: It should be a team with representatives from a diverse range of company divisions, including subject matter experts, employees, and management with decision power. While management is the obvious choice, you should also include staff from operations, real estate, human resources, and finance to define the site needs. In the end, the business leaders who will occupy the space need to support any major site selection decisions.

Will key employees be willing to relocate?

Has the labor pool at the new location been assessed?

Kruklinski: Those are very important questions. You should engage with human resources to conduct an analysis of where people reside and how the commute will be impacted, and do your best to keep key employees in the loop at some point in the process. HR’s expert input is required to help determine if the potential future site can support the growth requirements of the business by having access to the necessary labor pool.

In the event that relocation is chosen, the site you select will become the workplace for many of your employees for years to come. Think about how the move will affect their lives, and therefore the success of your

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business. A new geographic location may affect employee wages, benefits, and taxes. Prioritize roadways and public transportation access, as your site will be unsuccessful if employees can’t get to work easily.

How does a location search affect a company’s customers? Its suppliers?

Kruklinski: Any search must consider proximity to your most common customers and suppliers. That’s why your site selection team must include members from the business who understand the company’s customers and suppliers and the impact of any potential relocation. Site selection is about balancing multiple variables — there is no one-size-fits-all solution; there are multiple possibilities based on business priorities.

Examining a company’s customers and suppliers is especially critical in this era of extreme weather, when any delay in work can impact your bottom line. Business continuity is a key element to consider. Even if you stay away from designated flooding zones, are there structures nearby that could present risks to your facility during a heavy storm? Can you access the site during a disaster, or at least quickly get footage from security cameras? During Hurricane Harvey, for instance, it wasn’t the rising river but the nearby levees that were unexpectedly opened that caused flooding in the area.

What kind of ROI should a company expect when choosing the new location?

Kruklinski: The site selection process is an important investment in your business. Avoid cutting corners and

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engage experts as needed. The return is having a location that supports business needs and can accommodate future growth.

How do simulation technologies help the process?

Furthermore, negotiation is an important aspect of site selection. It may be difficult to get the best deal for both your business and the city when all the details of the selection process are available for competing forces to view.

Kruklinski: Siemens has used technologies like occupancy sensors to determine how many employees we have in a building at a given time. At one of Siemens’ U.S. offices, for example, we found that we had fewer employees on-site during peak hours in a particular area. Armed with this information, we can improve space functionality and utilization when we design a new space. When we look at new locations, we create multiple financial models and test-fits. Considering the business requirements and employee needs, we determine through multiple iterations the optimal seating configuration and occupancy costs.

Although the typical company is nowhere near the size of Amazon, what lessons can other companies extract from Amazon’s search for its HQ2 location?

How do market trends affect the final location decision?

So what is the ultimate goal of site selection?

Kruklinski: It is imperative to thoroughly understand market trends before selecting a site. Data can provide comprehensive information on the market and help property managers and brokers parse through the information. Knowing what is happening in a particular area, such as a boom in tech production or a dip in unemployment rates, is crucial to making informed decisions about your site. However, you should be wary of short-term trends. Events such as recent site closures or economic incentive packages are important but shouldn’t be the driving force behind your decision.

Is it wise to maintain confidentiality or should a company publicize its search like Amazon did?

Kruklinski: I think that process made sense for Amazon, but I wouldn’t recommend it for the typical site selection process. A site selection at Amazon’s scale and scope has different needs than what most businesses will encounter. Publicizing can lead to resentment from cities that went all out to win your business. And, as we’re seeing with New York, there is potential for negative press should the decision have to be reversed.

Kruklinski: Site selection isn’t an exact science, and during the course of the process, your needs and assessments may change. As such, you should go into the process with an open mind. What your needs are at the beginning of the search may not ultimately reflect what is best for your business in the end. And they may still evolve even when you think you’ve finalized all the details.

Kruklinski: The goal of corporate real estate site selection is to balance the space needs of the business with the total costs to occupy the space. While site selection could be a desktop exercise using a variety of real estate tools, the key to success is to engage directly with business stakeholders, owners, property managers, and brokers and to understand the market. And this is not something that we do on an ad hoc basis. Siemens conducts over 20 site selections per year across the Americas and site selection is a major part of proactive real estate portfolio management. We constantly monitor trends in the market when it comes to space, cities, and locations and align with our business to understand our needs. This allows us to create a long-term pipeline for site selection.

THE ASSIGNMENT Area Development’s editor recently asked Michael Kruklinski about what goes on behind the scenes when a company needs to choose a new location.

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INCENTIVES/COMMUNITY RELATIONS

Four Key Concepts to Maximize Incentives In order to maximize your ROI, start the incentives process early, think holistically, target those incentives that have the greatest effect on NPV, and make sure you understand all the players involved.

By Benton C. Blaine, Vice President, Infrastructure & Economic Development, McGuireWoods Consulting LLC

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s those in the economic development sector (should) know, no two projects are the same, no two locations are the same, and no two incentive programs are the same. From target incentives to key players involved in the deal — and everything in between — numerous factors determine the success or failure of a project. While there are a multitude of decision points involved in every site selection project, below are four key concepts to help maximize return on investment and project success.

Ensure Your Project Is Competitive by Starting Early Traditionally, the competitive nature of a project has been the first requirement in the legislation, policy, guidance, rulings, and applications of nearly every incentive program; yet somehow, it is often overlooked. In reviewing the myriad of text that surrounds most negotiated incentives currently available, the language generally states that the project “must be competitive” and does not say that the project “must have been competitive at one time but not necessarily now.” The latter is an exaggeration but does occur.

This stems from a fundamental flaw in the incentives process for many companies: they start the process too late. Incentives can take dozens of forms, solving hundreds of potential development and operational issues Use Application Cycles associated with a site or location. As such, incentives or Funding Windows to should be reviewed, at least preliminary, at the onset of a site search. Opportunity Zones, free-trade zones, Your Advantage Freeport exemptions, or special tax implications — when Many state and federal incentives now have considered with the labor, tax, and logistics factors — application cycles or funding windows. These may narrow a national or international search to a speapplications may be considered on a monthly, cific region.

By incorporating incentives earlier in the process, quarterly, semi-annual, or annual basis. By starting the incentives team can work with the state or local early, there is more flexibility within the applicaeconomic developer for cost-effective locations and coltion cycle, or a state may potentially offer more laboration opportunities. This early start helps avoid the incentives if funding can be accepted from one situation of frantically trying to negotiate incentives on a cycle versus another. The flexibility from an early site on which a contract is days away from being signed start also helps to avoid situations where a projon by the real estate team. If the location is flexible, an ect cannot be announced or move forward until early start may also come with offers for a reduced-cost incentives receive final approval. building or site. The land may have development issues, but if there is time (due to the early start) and the com-

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munity has the incentives, the desired result could still be achieved with a higher project return on investment.

Own Your Process It is common to review an incentives package that was provided to a company and correctly assume which department negotiated it. If there are large statutory credits with little tax liability and no negotiated incentives, it is likely a tax team was not involved, or the company started too late. A finance-led project tends to target the cash grants but miss the infrastructure benefits.

In short, departments tend to focus on incentives that matter to them, instead of thinking holistically.

Whoever runs the incentives process (including consultants) must have access to data and decision-makers in each department, including real estate, finance, tax, human resources, and operations. More importantly, they must use this information. This allows the incentives leader to maximize the incentives for the project or company, not just their respective vertical.

Collaboration between different internal verticals helps to determine where incentives can be used to ben-

CASE STUDY: How to Own Your Process Below is an example of steps taken during a project to maximize the return on investment: •U sed the incentives (and the time gained by starting the incentives process early) to turn lowcost municipal land into a better candidate than developer-owned land, cutting price per acre by 80 percent •H eld the project in a different tax entity, allowing it to take advantage of lucrative state investment tax credits •R ealized HR expected the sales staff to be reduced by 50 percent as clients transitioned to online purchasing, which kept the company from committing to an over-estimated employment count •U nderstood operations wanted to spend $10M over the life of the project on backup generators, when the utility would provide a substation on-site, avoiding the need

Understanding Target Incentives To understand the available incentives and what to be targeting, there is no substitute for good due diligence. Research and understand what incentives have been given to similar projects; what incentives the state, county, and city can legally provide; what restrictions are associated with lobbying; and options to change the policies or legislation.

For example:

•R eceiving statutory tax credits that cannot be used due to lack of coordination with the tax department • I nstead of choosing program A — $750k cash over four years — you select program B — $1.5m over 10 years, not considering the nearly six-figure annual compliance bill for program B •A ccepting a $100k grant instead of having the city build the $100k sewer line that (with additional hidden fees) costs the company over $500k

efit the project. For instance, the real estate team may want to exclude any site without utilities; however, if the operations team has ample leeway before production, there may be time for the community to install utilities (at their expense). As the price of pad-ready sites has dramatically risen recently, this strategy could materially reduce the project cost, keeping the finance team happy.

Target Incentives Economic development entities must be able to justify any given incentive package to their financial backers, whether they be private donors or taxpayers. A large cash grant could raise a red flag, but a benefit that stays within the community, even if the company leaves, is easier to rationalize. This is the fundamental reason for infrastructure and training grants. It is common for companies negotiating in-house to attain a modest amount of upfront cash, while overlooking infrastructure costs (roads, water, sewer, fees, utilities, etc.) that are 10 to 20 times the cost of their cash grant.

Focus on incentives that will have the greatest effect on the project’s net present value (NPV). This can be broken down into timing and value. While upfront grants AREA DEVELOPMENT | Q1/2019

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• Are there positions that provide transferable have the least NPV discount due to timing, infrastructure and training support usually skills, or positions where employees can occurs early in the project lifecycle and may work their way up the ladder?

As early as represent significantly higher value. In other • What community support do you traditionally words, infrastructure and training may not provide? possible, bring that early cash infusion into the project, Projects that create opportunities for but could end up having a greater NPV imeconomic mobility will stand out among the identify pact. Either way, both are usually better than competition when it comes time to secure insponsors, a 20-year tax credit. centive approvals. Failure to address economic With target incentives, always ask the advocates, mobility, or any of the topics above, will allow following questions: for the gatekeepers and media to create their • Is this incentive beneficial? gatekeepers, own spin, which rarely bodes well for projects, • Can we use all of it? sponsors, or stakeholders. and decision• When will we use it?

• What are the costs?

Advocates: It is common that due to project makers.

• Is there something else we would rather metrics, unforeseen circumstances, or just plain politics that an advocate will be needed have? for the project. Identify individuals that can • And, the one that is so often missed, what move the project over hurdles and through happens if we come up short on our gatekeepers, while giving the sponsor the support they projections? need.

This requires an in-depth knowledge of the project’s situation, the offering party’s situation, and the Gatekeepers: Gatekeepers can be city managers, counincentive. A common mistake of companies — and cil members, and members of the legislature, among commission-based consultants — is ignoring the risks many others. It is important to identify them early and and costs. Receiving $100k in training is great, but if a know (a) whether they are a true gatekeeper and can afproject requires adding two dedicated staff just for comfect the project, and (b) if provided the right solution, pliance, money may be lost on the deal. Similarly, if a they can turn from a gatekeeper to an advocate. Few project is one employee short on a 1,000-job project and things are more powerful than having a traditional gatethat triggers a full grant payback anytime in the next keeper as the project’s advocate. decade, ask if there is a way to amend the agreement. If not, that value may be transferred to another more flexDecision-Makers: Identify and understand who the deciible program. These decisions can only be made if there sion-makers are for the incentives involved; it may not be is a complete understanding of the compliance requireobvious. If city council asks for the city manager’s recments. Identify who will be doing the compliance and ommendation and has previously followed it 100 percent make sure the project is in agreement with them on time of the time, then the decision-maker is the city manager, required/cost of compliance. not council. Understand the decision-makers’ needs, predict their questions, position your project correctly, Understand the Players and provide solutions. n As the potential location list shortens, there should be more communication with the economic development officials. As early as possible, identify sponsors, advocates, gatekeepers, and decision-makers.

Sponsors: Sponsors will help navigate the incentive process and present the project to the decision-maker(s).

Ask, what sponsor has the knowledge, zeal, availability, and respect to attain results for the project? The sponsor will most likely need to explain why incentives should be approved for the project. Provide this information early in the process by thoroughly answering the following questions, and use compelling case studies to help communicate your story: • Are there additional suppliers or growth that will occur because of this project?

• Are you an industry leader or using first-of-its-kind technology?

• Do you provide great benefits and training opportunities for your employees?

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Find the Right Location for Your Next Project.

FacilityLocations is a GIS map-driven, online economic development directory used to research potential locations during the business re-location or expansion process.

FacilityLocations.com for free site information, visit us online at www.areadevelopment.com

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ADVANCED TECHNOLOGY

Artificial Intelligence in Supply Chain Management Initially adopted by big tech companies, AI’s use has spread to manufacturing operations and their supply chains, despite cybersecurity and other concerns.

By Dan Emerson

Pervasive Use

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rtificial intelligence (AI), in the form of devices that act and react like humans, has been gaining momentum in transforming supply chain management. To work smarter, more and more companies are employing technologies including computer vision, machine learning, natural language processing, speech recognition, and robotics. Examples abound: • UPS uses an AI-powered GPS tool called ORION (On-Road Integrated Optimization and Navigation) to create the most efficient routes for its fleet, making changes in real time to account for road conditions and other factors. By optimizing delivery efficiency, the company estimates it saves $50 million a year.1 • Clothing retailer Gap Inc. is using AI-assisted mechanical arms to help sort clothing orders.2 • Connecticut-based XPO Logistics Inc. has begun roll-out of 5,000 intelligent robots throughout its logistics sites in North America and Europe. The robots are used to bring mobile storage racks full of products to workers who fill customer orders.3

AI is now being used in every aspect of managing supply chain and manufacturing operations, says Chris Noyes, a senior manager with Deloitte Consulting LLP. Product development is using natural language processing on social media data to understand customer feedback. Logistics managers are using advanced optimization algorithms to find better network configurations. Risk managers are using web crawlers and predictive algorithms to surface concerns. Procurement is using machine learning to classify (procurement) spend, providing a better data foundation for spend analysis.

In manufacturing, smart factories are embracing “Internet of Things” platforms with machine learning functionality to improve operations.

These platforms provide real-time visibility across every machine in the plant, Noyes notes. They record the decisions personnel have made, creating a data foundation that can be used to develop an intelligent agent. Predictive models identify anomalous behavior and guide maintenance activities.

Companies have been using AI to forecast future activity for some time, says Josh Nelson, a principal and supply chain consultant with The Hackett Group. “What has changed is that companies have access to more indicators and more structured data to understand what is happening, and more algorithms to better predict what is going to AREA DEVELOPMENT | Q1/2019

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THE EVOLVEMENT OF ARTIFICIAL INTELLIGENCE

23%

Rank Cybersecurity as Their #1 AI Concern

in the short term. With unknown factors (city or highway), a lot more has to Have Suffered be modeled and validated an AI Breach before you can roll it out in a big way.”

Another technology with Have Decided Not to great potential is blockLaunch AI Initiatives chain, Nelson believes. A blockchain is a growing list of records, which are conMaterial nected using cryptography.

Management Used as a distributed ledCompanies are also inger to record transactions, vesting heavily in material Are Moving Ahead with the encryption is employed management technology.

AI Initiatives Despite to prevent the data from Most of the use of autonoCybersecurity Concerns being modified by a hacker. mous vehicles is happening “We’re seeing a lot of diswithin the controlled enviSource: Deloitte’s State of AI in the Enterprise cussion about block chain ronment of a warehouse or in supply chain managesimilar building. With the ment. We’re going to see right software, autonomous companies doing more pivehicles can “work wonders lots and proof-of-concept work — uses like traceability” in that type of environment. Within four walls, there are in pharmaceutical inventories, for example. a lot of options out there,” Nelson says. Using driverless vehicles in the “outside” environment is very appealing to employers, due to driver shortages in the transportaThe State of AI tion industry. But that use is still in the emerging techObviously, cybersecurity is a major concern in using nology-prototype stages.

AI. In Deloitte’s recent State of AI in the Enterprise survey,4 One of the more immediate opportunities is the idea cybersecurity vulnerabilities ranked as a concern for half of having a remotely controlled drone system, which of respondents, with almost a quarter — 23 percent — would be initially used within the confines of a city. ranking it as the number-one AI/cognitive technology “There could be a plant with a warehouse down the road risk, according to Nitin Mittal, principal and Analytics & that shuttles material back and forth. Developing softCognitive Offering leader with Deloitte. Thirty percent of ware that will work in an external environment is much the respondents have slowed an AI initiative to address more complicated because more variables are involved cybersecurity concerns, and one in five has decided not than in a controlled environment,” Nelson notes. “And, to launch AI initiatives. with longer distances, there are regulatory hurdles.”

This apprehension is attributed to the potential of Another major category getting close to application is cyber-related liabilities surfacing for certain AI technolorobotic process automation (RPA), Nelson adds. “A numgies, Mittal says. For example, some machine-learning ber of companies have moved beyond the pilot stage models have difficulty detecting adversarial input or data and are looking to deploy it more broadly in areas like that is constructed specifically to deceive the model. Reaccounts payable. Machines would process and validate cent incidents where AI was used to create fake photos automated payments. That depends on having standardand videos of celebrities and politicians — and given ized processes in place. Then, over time, your technolthe prominence of AI-based image recognition — shows ogy ‘learns’, and you can enhance the robotic/automathat this could become a big area of risk in the future. tion elements. We’re very close to that,” he says.

Worst-case scenarios, like autonomous vehicles getting The more dynamic and nonstandardized an environhacked, also have life-threatening ramifications. ment is, the more difficult it is to factor in all of the variAlthough 32 percent of the Deloitte survey responables, Nelson points out. “Things that are more standard dents have suffered an AI-related breach within the last and contained lend themselves to being opportunities two years, 36 percent said they are moving ahead with happen.” They are using it to understand what is happening in major markets, so they can respond by changing production schedules and moving inventory to where it is needed to meet demand, Nelson explains.

32% 20%

BUT

36%

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AI initiatives despite cybersecurity concerns. “While no cybersecurity effort will prevent every attack, enterprises should improve their defenses by incorporating security from the beginning of the process and making it a higher priority,” Mittal advises.

For some companies, another challenge to implementing artificial intelligence in supply chain management is a tech skills gap. In Deloitte’s survey, 69 percent of respondents report that they are facing a “moderate, major or extreme” skills gap. Deloitte’s research suggests that the biggest skills currently needed are AI software developers (28 percent) and data scientists (24 percent) due to the need for innovation of new AI algorithms and systems.

Data also remains a top challenge when implementing AI initiatives, Mittal notes. Thirty-nine percent of respondents in the survey ranked data issues such as accessing/integrating data and privacy in their top three concerns, and 16 percent ranked them as number one. There are several reasons for this such as integrating siloed data (especially within organizations that have experienced acquisitions), analysis of unstructured data, privacy, and more. “All of this — while ensuring security — can be time-consuming, costly, and complex,” notes Mittal.

Another factor is trust, Mittal says. “Behavioral change remains an issue as humans and machines continue to learn how to work together. For example, an organization built a machine-learning system to support a sales team by predicting what prospects were likely to convert and which customers would churn. Though the system worked, the sales team was not prepared to accept its recommendations because they didn’t understand or trust the results that it produced. By bringing users of the systems into the design process of the new systems, they can experience first-hand how the technology works and how the insights are formed. In turn, the users who contributed to the development of the system will adopt it because they understand — and trust — the process.”

An Ongoing Process AI, which originated with big tech companies, was then adopted by large companies in other industries. Mid-sized companies are now making the investment as methodologies have been refined and tools are more standard,” says Chris Noyes of Deloitte. “For example, one midsize company we work with has leapfrogged from standard maintenance to cutting-edge machine learning-driven predictive maintenance. The biggest challenge for these companies will be attracting talent that thrives in the digital age, and they will need to partner with service providers to fill the gaps.”

Hackett Group’s Nelson says the roll out of these technologies will continue to happen on an incremental basis, over the next decade.

“It’s not going to be an overnight ‘red to green’ process,” he concludes.

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1

https://www.forbes.com/sites/blakemorgan/2018/09/17/5-examples-of-how-ai-can-be-used-across-the-supplychain/#303150f2342e https://www.technologyreview.com/the-download/609209/kindred-robots-are-learning-to-grab-and-sort-clothing-ina-warehouse-for-the-gap/ 3 https://news.xpo.com/en-us/news/1831/xpo-to-deploy-5000-collaborative-warehouse-robots-in-north-america-andeurope 4 https://www2.deloitte.com/insights/us/en/focus/cognitive-technologies/state-of-ai-and-intelligent-automation-inbusiness-survey.html 2

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COVER STORY

The legalization of cannabis in many states is creating opportunities for business owners and investors, as well as communities.

by R a n d a l M e y e r, Senior Vice President, M c G u i r e Wo o d s Cons u l t i n g

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s states move to legalize cannabis for either medical or recreational use,1 there is an opportunity for socially conscious investors to take advantage of a growing industry and help jump-start what could be a healthy sector for minority-owned businesses. Research shows that by 2025, the U.S. cannabis market is poised to reach $146.4 billion.2 Looking to states where cannabis is legal, many brick-and-mortar businesses are thriving because the demand for product is high and the supply is restricted. These businesses are able to draw a robust market to their areas.

It is not just urban areas that are poised to benefit. Rural areas are also well suited to gain from investment by cannabis companies. There are significant opportunities for development along any point of the cannabis growth chain, including cultivation, manufacturing, distribution, and retail. Many economically depressed areas in the southeast U.S. are prime areas for cultivating the cannabis plant, including Kentucky, Tennessee, and Oklahoma, and could provide much needed entry-level jobs and job training for these communities.

All points of the cannabis growth chain require specialized facilities that have to comply with special state and local laws, including security, cold storage, zoning, and social equity programs.

Rural areas can take advantage of the outdoor farming facilities needed for cultivation, while urban settings will need a grow-house facility to maintain temperature and humidity conditions. Distribution warehouses in any state need to have specialized security and equipment requirements but can be located in urban or rural areas. Manufacturing facilities have similar requirements and are typically located in industrial zones. Retail facilities can be located virtually anywhere depending on laws and always have special requirements for security, location, product separation, and on-site quarantines.

for free site information, visit us online at www.areadevelopment.com

Despite the promise that the cannabis market holds, marijuana remains a federally illegal Schedule I controlled substance.

However, during his confirmation hearing, U.S. Attorney General William Barr pledged not to go after marijuana companies that comply with state law. He recently put this pledge in writing, when responding to written questions from senators.

“As discussed in my hearing, I do not intend to go after parties who have complied with the state law in reliance on the Cole Memorandum,” he wrote.3 The Cole Memorandum refers to Obama-era cannabis enforcement guidance that was rescinded by then-Attorney General Jeff Sessions in 2018. The Rohrabacher-Blumenauer amendment also remains in effect, which prohibits the Justice Department from spending funds to interfere with the implementation of state medical cannabis laws.

Another rare risk, but a palpable one, is the potential for a private RICO suit against cannabis businesses. The Racketeer Influenced and Corrupt Organizations Act (RICO) is a federal Nixon-era law originally intended to combat drug cartels and organized crime, and it’s read broadly enough to allow average citizens to bring suit against businesses dealing in a controlled substance. In June 2017, the U.S. Court of Appeals for the 10th Circuit reversed a dismissal of a civil RICO lawsuit by a private plaintiff against a Colorado-licensed cannabis cultivator.

Ultimately, a federal jury found in favor of the cannabis cultivator, rejecting the neighbors’ claims that the smells and sounds of the facility damaged their property.

These risks, pitfalls, and restrictive tax laws previously made the cannabis industry tough to break into for investors. Businesses had difficulty raising enough capital to purchase their own real estate and develop specialized facilities. However, the Tax Cuts and Jobs Act of 2017 presented real estate investors and venture capitalists a lucrative gift in the form of Opportunity Zones, which changes the equation for the cannabis industry.

The newly created program provides significant benefits to investors — not only is the capital gains tax deferred on the gains invested in a qualified opportunity fund, partial and full reduction of the capital gains tax may be available to the investor depending on how long the investment is held. The tax benefits are significant, especially for those with large capital gains or investors with long time horizons — i.e., everyone in real estate. With more than 8,700 designated Opportunity Zones across the U.S., the program aims to spur investments in designated, economically depressed areas.

According to the Economic Innovation Group, the designated Opportunity Zones have an average poverty rate of 29 percent.4 The median family income is 40 percent lower than the nation median family income. As the United States recovered from the Great Recession, these areas have been left behind. However, none of that is to say that Opportunity Zones are not a good long-term investment. The tax breaks for investors help to mitigate the risk.

Moreover, private groups offer some assistance in guiding investors toward the zones most ripe for investment.

For example, a group consisting of Locus, Smart Growth America, the Center for Real Estate and Urban Analysis at George Washington University, and Strong Prosperous and Resilient Communities for Change has put together a large report grading the various Opportunity Zones “based on its Smart Growth Potential (SGP) as well as its Social Equity + Vulnerability Index score (SEVI).”5

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Opportunity Zones provide another way to defray costs and risks associated with the cannabis industry and employ unrealized capital gains to invest in marijuana-specific infrastructure.

Prior to the Opportunity Zone option, business owners looked to defray costs through antiquated arrangements, such as leaseto-own. Now Opportunity Zones provide a new source of capital and the chance for investors to get in on the ground floor of the fast-growing cannabis industry.

Real estate investors contemplating the cannabis market through Opportunity Zone investments should also consider engaging in publicprivate partnerships (P3) to encourage risk mitigation. As Brad Alexander, senior advisor with McGuireWoods Consulting, pointed out in a recent article,6 arranging publicprivate partnerships in Opportunity Zones helps subsidize the

cost of infrastructure and creates greater access to invest in noncommercial zones.

In addition to the risk-mitigating and opportunity-enhancing benefits of P3, the federal government has supported these investments with a directive. On December 12, 2018, President Trump signed an executive order establishing the White House Opportunity and Revitalization Council.7 The council is tasked “to encourage public and private investment in urban and economically distressed areas, including qualified Opportunity Zones. The council shall lead joint efforts across executive departments and agencies…to engage with state, local, and tribal governments to find ways to better use public funds to revitalize urban and economically distressed communities.”

Opportunities to pair qualified funds with P3 deals at all levels of government are unique investment structures for those interested in real estate and will likely intensify the growth of the cannabis industry. It is one of few industries that can strike the delicate balance of providing a profitable commercial investment opportunity, while bringing much needed capital and attention to underserved communities. With the benefits in play through the Opportunity Zone program, new and current business owners can take on additional risk, more easily navigate the cannabis infrastructure, and tackle the specialized requirements needed with the influx of capital realized through the newly created zones.

For savvy investors and economically depressed communities, the emergence of legalized cannabis — with the aid of Opportunity Zones and public-private partnerships — is a win-win.

Opportunity zones provide another way to defray costs and risks associated with the cannabis industry.

1

https://www.mwcllc.com/ideas/ideas/2018/12/cannabis-ballot-initiatives-states https://www.grandviewresearch.com/press-release/global-legal-marijuana-market https://www.forbes.com/sites/tomangell/2019/01/28/trump-attorney-general-pickputs-marijuana-enforcement-pledge-in-writing/#4dd95e5e5435 4 https://eig.org/wp-content/uploads/2018/12/OZ-Whitepaper-FINAL.pdf 5 https://narfocus.com/billdatabase/clientfiles/172/21/3281.pdf 6 https://www.cpexecutive.com/post/want-to-invest-in-opportunity-zones-think-p3/ 7 https://www.whitehouse.gov/presidential-actions/executive-order-establishing-white-house-opportunity-revitalizationcouncil/ 2 3

RANDAL MEYER, senior vice president on MWC’s federal public relations team and McGuireWoods counsel, collaborates with individuals and entities in the cannabis space on strategic planning and federal public relations. Randal championed the CARERS Act in 2016 while serving as counsel for Senator Rand Paul and has recently worked with leading members of the Senate in both parties regarding hearing questioning crucial to current cannabis policy determinations.

KARA HUNT, digital marketing specialist at McGuireWoods Consulting, contributed to this article.

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ttitudes have certainly come a long way when it comes to marijuana. A little over a quarter century ago, a U.S. presidential candidate admitted, “I experimented with marijuana,” but then famously qualified that statement with, “I didn’t inhale.” This year, a presidential candidate matter-of-factly stated, “I did inhale…I think it gives people joy, and we need a lot more joy in the world.”

Indeed, statutes and case law have evolved dramatically in the years between those two very different political admissions about cannabis use. In two-thirds of the states, residents can get a doctor’s note opening the door for them to use marijuana to alleviate certain medical conditions. And in a fifth of the states, residents are allowed to partake for their own recreational reasons.

One group of people who may be a bit less than overjoyed are those in corporate human resources and legal departments who have to figure out how to operate a business in the changing landscape. It’s challenging enough to navigate the waters in a single state, but countless companies operate in multiple jurisdictions, some in which marijuana use has been decriminalized, some where it’s just as outlawed as it always has been. “There’s not one state that does the same thing in the same way as another,” observes Christine S. Clearwater, president of the consulting firm Drug-Free Solutions Group based in Florida. “It’s a very confusing time.”

There are lots of complicating factors at play, and complex corporate policy issues. Just about everyone agrees that employees who are on the clock should not be under the influence of any substances, legal or not. But if they’re legally treating some medical issue under doctor’s orders, how should that be handled? If they legally smoke pot in their off hours, will it affect a random drug test a few days later? Even more important, are there residual effects that might impact their job performance the day after getting high?

What about interstate drivers covered by weed-unfriendly federal Department of Transportation regulations?

A good place to start is to sort out the different potential situations. Clearwater points out that 17 states have not changed their laws at all. Employers there, she says, “can go on complying with federal law.” And federal law is pretty clear in stating that marijuana is a Schedule I controlled substance and, as such, is illegal to

possess or use.

That leaves 33 states and the District of Columbia that have taken more localized action on decriminalizing marijuana. “Of those states, they fall into three basic areas,” says Dr. Todd Simo, chief medical officer at the employee background screening company HireRight. “About a third say that for employer purposes, you don’t have to perform any accommodations.”

Employers can still have a zerotolerance policy for drugs and can still fire people who violate that policy, even if their drug use is after-hours.

“For the next group, also about a third, medical marijuana use is protected,” Simo continues. “You cannot automatically have a derogatory employment decision based on the fact. You have to have a business reason.”

It’s similar in some ways to complying with the Americans With Disabilities Act, he says.

Companies need to consider the person and the job role to see if they can accommodate an employee who is an after-hours medical marijuana user. For some roles, such as truck drivers governed by federal law, there really is no way to accommodate a marijuana user. “But for a call center, I don’t know what business reason there would be,” says Simo.

Clearwater says making accommodations for users of medical marijuana is not unlike dealing with employees who have been prescribed other pharmaceuticals that could impact work performance or safety. Many companies have a protocol for that, and that protocol can be applied to medical marijuana.

“Don’t put them in a safety-sensitive position,” she says.

The remaining third of the states don’t provide much guidance, Simo says. There’s no

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statutory law nor case law dictating whether employers need to make any accommodations or not. In those areas, he says, “It’s up to employers to decide.”

That’s the high-level view. It gets even fuzzier when you get down in the weeds (no pun intended). There truly are few generalizations that can be made about this incredibly diverse legal landscape.

Consider, for example, the case of an employee with a doctor’s note, in a state where medical marijuana is permitted. If that state is Ohio, for example, “employers are not prohibited from refusing to hire, discharging or disciplining a person because of the use or possession of medical marijuana, nor are employers prohibited from establishing and enforcing a zero-tolerance drug policy,” observes Whitt Steineker, partner at the Bradley firm in Birmingham, Alabama. On the other hand, “a federal trial court in Connecticut recently held that an employer could not enforce its zero-tolerance drug policy against a medical marijuana user.”

“Some state laws have included language that prohibits workplace discrimination against registered medical marijuana patients,” notes Dori Stibolt, partner at Fox Rothschild in Florida.

“Alaska, Arizona, Delaware, and Minnesota all have medical marijuana laws that restrict employers from firing or disciplining employees for testing positive for marijuana. Under these types of laws, employers can still terminate employees for working under the influence or using marijuana at work.” That said, “recent court decisions in this arena are trending towards employees’

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AREA DEVELOPMENT

rights,” according to Stibolt. “The decision to hire or terminate an employee can be difficult and fraught with legal pitfalls.”

“This issue is very much in flux,” says Danielle Urban, partner in the Denver office of Fisher & Phillips. The concept of zero-tolerance is no longer as black-and-white as it used to be — depending on the jurisdiction, it’s anywhere from fine to complicated to impermissible.

“Simply put, in most jurisdictions there is no bright-line test for determining whether the use of medical marijuana can result in the lawful termination of employment under state law,” adds Domenique Camacho Moran, partner in the labor and employment practice of the real-estate development law firm Farrell Fritz in New York.

Making the issue all the more complex is the difficulty of tracking marijuana use through drug testing.

“Research raises questions about whether a positive drug test for marijuana is reasonably related to impairment in the workplace,” notes Moran.

As Simo points out, a marijuana user asked to take a urine or hair drug screen may test positive long after any impairment has worn off.

An oral fluid test, on the other hand, can have just the opposite issue. The test may come back negative even if the person is still impaired (though it’s a fairly safe bet that a positive result will reveal a presently impaired employee).

“Some employers have begun relying on other screenings to determine whether an employee’s marijuana use actually impairs job performance,” Moran says. “While these screenings have not yet been widely adopted, we expect to see increased use of alternative methods for evaluating compliance with drug-free workplace policies.”

Then there is the question of how to define impairment. Clearwater says an employee may smoke pot on a Sunday afternoon and not feel high on Monday morning, and yet still suffer some level of impairment that could be a problem at work. “Depth perception is the biggest one for most employers,” she says. Some research suggests depth perception issues can linger for 24 or even 48 hours.

“You can imagine how that might impact someone who is operating machinery or driving a forklift.”

As the laws involving cannabis use evolve, businesses must figure out how to operate in a changing environment.

The changing legal environment makes it challenging to keep company policies up-to-date, particularly for companies that operate in multiple jurisdictions with widely varying laws. “As frustrating and inefficient as it is for companies operating in multiple jurisdictions, unfortunately there is not a good way to have a single

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policy for all U.S. jurisdictions,” says Steineker.

How can employers deal with the legal messiness? “By taking and clearly stating their position on federal law precedence and having clear employment policies that are communicated often and through multiple employee communication channels,” says Cheryl Larson, president and CEO of the Midwest Business Group on Health.

“Most employers adopt a policy of federal law precedence,” she points out. That precedence goes beyond the Controlled Substances Act. “The Drug-Free Workplace Act of 1988 prohibits companies that receive federal contracts from allowing any type of marijuana use in the workplace. The U.S. Department of Transportation has issued guidelines that prohibit employees in safety-sensitive transportation jobs from using recreational or medical marijuana. The Occupational Safety and Health Act of 1970 requires all employers to provide a safe and healthful work environment.”

Andrew Bernstein, vice president of corporate sales for Crown Worldwide Moving and Storage, says his company must give federal law precedence where it applies, even though California law is much more permissive. “We have a lot of government contracts and work with companies doing government work, subject to federal mandates. In those cases, the nature of federal laws supersede what California is doing.”

For employees whose work is not governed by restrictive federal laws, it’s more a matter of common sense, he says. “We don’t want people coming to work high, and we never have. But it has not really been a problem.”

Still, many employers would like to stick as close to the zerotolerance restrictive approach as

possible. “Employers who wish to create a consistent policy that applies across multiple states with varying state laws on the use of marijuana should consider a continuing ban on marijuana in the workplace,” says Sarah Reiner, shareholder at GrayRobinson, a Florida law firm. “They should also add language to their drug and alcohol policies that places their employees and applicants on notice that, regardless of applicable state law, marijuana is still prohibited under federal law, and being under its influence or using it in the workplace continues to be prohibited and is grounds for discipline, including termination of employment.”

Clearwater advises clients with multiple locations to start with general policymaking and get specific as the location focus narrows. “Set up a policy that is the corporate policy, and an amendment for states” that have difference cannabis laws. “A policy needs to be compliant with federal law, the Health Insurance Portability and Accountability Act, the Americans With Disabilities Act, the Family and Medical Leave Act, statutory law, and case law,” she says.

Policies need to be clear on the subject of drug testing — when and under what circumstances it might happen. There’s no reason to abandon a testing policy aimed at ensuring a drug-free, safe workplace, Stibolt says. But it’s vital that the written policy “sets clear expectations for employees and states the legitimate purpose of such testing. That policy should be provided to all job applicants and published for all employees.” It should spell out just what a failed test means, and it must be applied consistently.

Beyond the legal considerations, should employers operating in marijuana-friendly locations with low unemployment rates be worried about overly restrictive policies that could turn away qualified applicants? Simo says that may not be all that big an issue just yet. For example, just because the laws in two thirds of the states allow medical marijuana, it doesn’t mean everyone’s jumping on that bandwagon.

His company coordinates lots and lots of drug tests for client companies. In 2017, of all the tests that came back positive for marijuana, just 1.4 percent involved people who had declared themselves to be medical marijuana users. And a fifth of those people were in states where medical marijuana wasn’t even legal.

Overall, in states where marijuana use has been decriminalized, the vast majority of tests still come back negative, he says. “It’s not like there aren’t a lot of good candidates out there.”

AREA DEVELOPMENT | Q1/2019

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SKILLED LABOR/INCENTIVES

Accessing Talent Through a Dual Headquarters Move There are many lessons to be learned from the Amazon search for a second headquarters location, but establishing dual headquarters is more the exception than the rule.

By George H. Pretty II, Partner, Parker Poe

T

he Amazon search for a second (and as it turned out, a third) corporate headquarters was an extravaganza the likes of which we may not see again. As an attorney who advises companies in the corporate relocation process, I followed this sweepstakes with special interest. Being the economic behemoth that it is, Amazon can rewrite the rules in ways that other companies cannot. Even before the extraordinary opposition to Amazon in New York City that led the company to reconsider its selection, this was a phenomenon that offered lessons we will ponder for years to come.

Tax abatements are important, but the prize will not necessarily go to the highest bidder.

Incentives will get a community into the game, but that is just the start. Amazon had its pick of tax incentives but did not take the highest bidder. Some of the offers were mindboggling. Maryland offered $6.5 billion in tax incentives and Montgomery County — adjacent to Washington, D.C., and not far from Arlington — offered $2 billion in infrastructure improvements.

Newark and the state of New Jersey offered $7 billion in tax breaks over a decade. Columbus, Ohio, and Philadelphia both offered more than $2 billion in state and local incentives, and Chicago promised a combined incentive and infrastructure

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AREA DEVELOPMENT

Amazon’s Seattle headquarters

package of more than $1.7 billion, including a separate train for Amazon employees. Atlanta, with backing by the state, offered $1 billion.

In the end, the bid went to New York City and Arlington. New York offered a package of subsidies, contingent on the creation of 25,000 jobs, worth $1.5 billion. Virginia and Arlington County offered direct subsidies of almost $600 million, assuming 25,000 jobs, and promised an additional $200 million-plus investment in transportation improvements.

Arlington’s incentives were modest by the standards of this contest. Having participated on many location-deal teams, the big incen-

tive numbers can be misleading because it is the net impact on the bottom line that matters. Virginia’s corporate tax rate is a modest 6 percent (Connecticut is 9 percent), and Arlington’s effective property tax is reportedly just 1 percent. With those numbers, Arlington’s $600 million looks considerably better without considering other tax effects.

Talent was the primary driver of Amazon’s decision.

From beginning to end, Amazon’s decision to create another headquarters was driven by its need for access to additional talent. About half of the promised 50,000 jobs

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will be tech jobs, many with the word “engineer” included in the title. Other high-paying jobs will be in accounting, marketing, HR, finance, legal, and all the specialties that corporations typically need. With New York out of the picture, many of those jobs will now be spread out among other Amazon offices.

Even before entering our current tight labor market, few cities could satisfy such a voracious appetite for talent. While some of the cities that offered big incentives may very well be wonderful places to live, they suffer from perception problems and need to rehabilitate their images to be attractive to the educated millennial workforce Amazon attracts.

Talent is generated two ways, both essential. One way utilizes a great education system, from K-12 to universities. For some companies, state-sponsored workforce training is a big plus, and manufacturing companies are practically begging states to emulate Germany’s high school apprentice programs. The second way leverages an urban environment where people with sought-after, portable professional skills want to live. Cities wishing to pursue future transformational projects must continue to assess whether or not they are benefitting from an inmigration of young, educated people. If not, they must assess what steps can be taken to increase in-migration.

Pushback usually dies down.

Both sides of the political spectrum have criticized incentives as corporate welfare, but that usually passes.

New York Gov. Andrew Cuomo famously joked he would change his name to “Amazon Cuomo” if that is what it would take to win Amazon. Cuomo penned a long response to charges that he “gave” Amazon $1 billion, saying in a nutshell, “A longstanding, essentially vacant site in Long Island City will see a $3.6 billion construction project and 25,000 to 40,000 permanent jobs at an average salary of over $150,000.” You will not lose an election when you bring in 25,000 jobs, no matter how you did it.

As this article was being written, Amazon responded to a growing local protest over the impact of the project on the culture of the local community and the size of the incentive amounts by terminating its pursuit of a location in New York City. To the extent companies running larger projects are concerned about the potential for longer-term local resistance initiatives, an effective community communications plan coupled with focused political due diligence can help avoid miscommunication between companies and communities. Both the New York City mayor and the state’s governor remained enthusiastic about Amazon, but a perfect storm of neighborhood opposition, philosophical objections to incentives, and required support from other state officials prompted Amazon to reconsider and not invest in a city where it believed it was not broadly welcomed.

Build it and they will come.

Infrastructure received a lot of attention in the Ama-

zon bid, with just about every city promising to build more. In this context, the highest infrastructure hurdle is transit, both in terms of time and cost. Amazon is regarded as having a workforce that wants to walk to work, or at least hop on a train and avoid a grueling freeway ride. That may be especially true with a millennial workforce that is displacing boomers, but every business that wants to locate in a central business district is thinking about this. There are a handful of cities — you know the names — that have a lot going for them, but the first thing that comes to mind is their hour-long commutes and feeble transit systems. New York City, of course, has the best transit system in the U.S., and the D.C. area has transit that is better than most.

Transit weaknesses are not easily addressed, and cities need to stop kicking that can down the road if they do not want to be regarded as a smog-choking last choice for corporate relocation in the years ahead. That will require a détente between urban and rural interests in many state legislatures.

Are dual headquarters a trend?

Amazon is not the first company to establish multiple headquarters, however in the near term it will remain an option for only a handful of companies. Keep in mind that this is not being done to manage Amazon more efficiently but was driven by the need for more talent. Other companies may do it for marketing purposes, yet that will continue to be unusual.

Amazon is a unique beast, but there are those who question whether these new locations will truly be coequals to Seattle. Even if it is a marketing ploy, the jobs are real, so I do not think Arlington will worry too much about that. For other companies, selling a new location as a co-headquarters probably is a good way to win additional incentives because of the prestige it brings to a city.

There are no losers in the Amazon sweepstakes.

The 236 cities that bid and did not get Amazon should value the thousands of hours they invested in their proposals as a graduate-level course in economic development and a visioning plan for their communities. Amazon put together a clear and detailed picture of what it needed, and the company’s wish list was not much different than what other service companies would seek in a headquarters location. Most of the unsuccessful bidders should regard this as an opportunity for a sober assessment of their strengths and shortcomings compared to other cities. And make no mistake, it is a competition that will only get tougher. n

GEORGE H. PRETTY II is a partner at Parker Poe in Charlotte, N.C. He advises domestic and foreign corporations on a broad range of business transactions, including expansion and relocation for headquarters and manufacturing operations.

He can be contacted at georgepretty@parkerpoe.com or 704.335.9073.

AREA DEVELOPMENT | Q1/2019

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MARKET ANALYSIS

Mid-Sized Urban Markets Compare Well with Mega-Cities With their economic vitality and lower cost of doing business compared to their mega-city counterparts, growing mid-sized urban markets are succeeding in retaining and attracting high-wage jobs.

By David J. Robinson, Principal, Montrose Group, LLC

E

prise more than 500 jobs are on the high-end, and the location for most of these projects, in large part, is in growing mid-sized urban markets.

Growing mid-sized urban markets are succeeding in retaining and attracting high-wage jobs because they illustrate economic vitality through increasing population, stable demographics, strong private-sector job performance,

ven before New York politics interfered with the Amazon HQ2 project, it was not the typical economic development project — not even counting the 50,000 jobs associated with it — but the decision of the company to end up in two major urban markets goes against recent corporate site location trends favoring mid-sized urban markets over mega-cities.

Any economic development project that is going to create 50,000 jobs will end up in large urban market — likely one of the top-10 mega-cities in the United States, primarily based upon the availability of that many skilled workers. However, in the age of automation, there are simply no other economic development projects with that many workers; in fact, the days of the 10,000-worker factory are over. Corporate site location projects that com-

MSA Largest Population Growth 2010–17 40% 35% 30%

20% 15% 10%

Fort Collins, CO

Destin, FL

Bismarck, ND

Boise City, ID

Hilton Head, SC

Dallas-Fort Worth, TX

Auburn, AL

San Antonio, TX

Fargo, ND

Naples, FL

Fayetteville, AR

Houston, TX

Daphne, AL

Charleston, SC

Provo, UT

Orlando, FL

Raleigh, NC

Redmond, OR

Fort Meyers, FL

St. George, UT

Midland, TX

Greeley, CO

Myrtle Beach, SC

0%

Austin-Round Rock, TX

5% The Villages, FL

Source: U.S. Census Bureau

25%

Figure 1

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AREA DEVELOPMENT

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a solid workforce pool, and a Economic Growth Comparison much lower cost of doing business compared to their megaGDP GDP Top 10 Largest urban counterparts. This does Select Mid-Sized MSAs Growth Growth MSAs GDP Growth 2016–17 2016–17 2016-17 not mean mega-urban centers (top 10 largest population cenKansas City, MO 1.2% New York, NY 1.3% ters in the U.S.— New York; Nashville, TN 4.1% Los Angeles, CA 2.8% Chicago; Los Angeles; HousPittsburgh, PA 3.7% Chicago, IL 1.5% ton; Dallas-Fort Worth; Miami; Washington, D.C.; Philadelphia; Charlotte, NC 3.5% Dallas-Fort Worth, TX 3.9% Atlanta; and Boston) are not Jacksonville, FL 3.5% Houston, TX 0.0% successful. These global cities Des Moines, IA 2.9% Washington, D.C. 2.1% offer massive consumer and Tampa, FL 1.7% Miami, FL 2.4% business markets, leading global industry sectors, an urban Raleigh, NC 2.7% Philadelphia, PA 1.4% renaissance, and connections Indianapolis, IN 2.5% Atlanta, GA 2.9% to markets through unmatched Columbus, OH 2.1% Boston, MA 2.8% airports. However, many companies are focused on the faster Source: Bureau of Economic Analysis pace of growth, lower cost of Figure 2 doing business, and a workforce large enough to serve most company needs in a mid-sized urban center.

A data-driven corporate site location process illustrates that mid-sized urban nomic success of mid-sized communities compared to markets compete well with the mega-cities across the mega-cities. Figure 2 illustrates how many mid-sized United States. Our analysis of mid-sized urban markets communities are outpacing larger mega-cities in overall compared to mega-city markets is based upon researcheconomic growth. ing how much these markets are growing by population, macroeconomic and private-sector job growth, strength Job Growth and Other Demographic Data of the demographic profile, and the cost of doing busiThe non-farm private payroll measure is another imporness in a select group of mid-sized urban markets comtant metric in determining economic success of a region. pared with the 10 largest mega-city regions in the U.S. As Figure 3 illustrates, other than the booming Texas markets in Houston and Dallas-Fort Worth, the mid-sized cities compete very well in private-sector job growth.

Population Growth Demographic data is another important economic Population growth is an important measure of the measure in which mid-sized cities are on par if not far economic vitality of a region. Growing populations ahead of their mega-city counterparts. Targeted midprovide a larger pool of workers and illustrate overall sized and mega-cities have similar population growth economic strength and an expanding market in which rates just below 10 percent, as well as the percentage companies can gain customers. Mega-cities have a tradiof their populations with bachelor’s degrees (around 36 tional advantage when it comes to population — if New percent), and poverty rates very close to the same range.

York City were a state it would be the 12th largest in the However, the median average income in the mid-sized nation just ahead of Virginia, with a high population dencommunities is actually slightly higher than in the megasity making it relatively easy to connect people with jobs. cities, but the cost of living factors — such as median However, many mid-sized urban markets have been home values — are double in the mega-cities compared growing faster than their larger mega-city cousins. As to their mid-sized city counterparts, with higher gross Figure 1 illustrates, from a population standpoint, of the residential rents and a much longer worker commute top-25 growing Metropolitan Statistical Areas (MSAs) in time as well. the U.S., only two — Dallas-Fort Worth and Houston — Another critical advantage for mid-sized cities is the laare from the mega-city category. In fact, the mega-city bor force participation rate. All regions have skilled workregions are growing but the majority of this growth has force issues, and while mega-cities have a larger overall been below 10 percent over the last seven years — expool of workers, they actually have a substantially lower cept, of course, for the booming state of Texas with proportion of their residents engaged in the workforce.

Houston and Dallas-Fort Worth’s population growth in the double digits.

This population growth success of mid-sized urban Continued on page 66 markets is supported by the stronger overall macroecoAREA DEVELOPMENT | Q1/2019

27

33rd & 15th

Annual Corporate Survey

Annual Consultants Survey

Our

Survey Results

indicate that despite an uncertain operating environment and continuing concerns about the availability of skilled labor, plans for new and expanded facilities still are on the horizon.

Combined Ratings* CORPORATE SURVEY Site Selection Factors

2018

2017

Ranking 1. Availability of skilled labor

90.5

88.8 (3) **

2. Labor costs

89.1

91.1 (2)

3. Highway accessibility

87.2

91.3 (1)

4. Corporate tax rate

86.7

83.2 (8)

5. Tax exemptions

83.0

85.9 (5)

6. Quality of life

82.8

87.2 (4)

7. State and local incentives

82.5

81.3 (9)

8. Energy availability and costs

77.8

76.0 (13)

9. Available buildings

76.7

75.9 (14)

10. Occupancy or construction costs

76.1

85.9 (5T)

11. Available land

75.6

76.9 (10)

12. Low union profile

74.4

71.4 (18)

13. Proximity to suppliers

72.8

76.4 (12)

14. Proximity to major markets

71.8

84.6 (7)

15. Right-to-work state

70.2

74.7 (15)

16. Training programs/technical colleges 69.9

72.8 (16)

16T. Environmental regulations

69.9

70.2 (19)

18. Inbound/outbound shipping costs

69.2

71.8 (17)

19. Expedited or “fast-track” permitting

64.9

76.7 (11)

20. Accessibility to major airport

62.7

56.4 (21)

21. Availability of long-term financing

60.5

64.6 (20)

22. Availability of unskilled labor

59.4

52.0 (24)

23. Raw materials availability

55.6

56.0 (22)

24. Water availability

51.6

55.3 (23)

25. Availability of advanced ICT services 50.0

42.7 (26)

26. Railroad service

46.6

29.9 (28)

27. Proximity to innovation commercialization/R&D centers

41.5

44.7 (25)

28. Waterway or oceanport accessibility 34.1

31.2 (27)

* All figures are percentages and are the total of the “very important” and “important” ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent. ** 2017 ranking

By Geraldine Gambale, Editor

AREA DEVELOPMENT | Q1/2019

29

CORPORATE SURVEY

Respondents’ Profile & CURRENT OPERATIONS Manufacturing— Durable Goods Manufacturing— Non-Durable Goods Manufacturing — Other Distribution/Logistics/Warehousing Data Processing, Software & Other Computer-Related Services

28% 6% 13% 14% 3% 4% 1% 1% 1% 3% 10% 16%

Finance, Insurance, Real Estate Energy Industry Hospitality Industry Healthcare/Life Sciences Retail Construction & Trades Other

R

ecent national surveys show a decline in business optimism. Although they don’t see a recession

coming in 2019, the National Association for Business Economics (NABE) is less optimistic about business expansion.1 Only two thirds of those

responding to an NABE poll taken at the end of 2018 expect to see U.S. economic growth exceed 2 percent in 2019. (U.S. GDP growth was 4.2 percent in Q2/2018, 3.4 percent in Q3/2018, and down to 2.6 percent in Q4 of last year.)

The U.S. manufacturing sector also showed signs of weakness. The Institute for Supply Management (ISM) index registered 54.1 in December 2018, reflecting a two-year low, with new orders decreasing to

Respondents’ titles: Chairman, President, Partner, CEO, or Owner

53%

51.1, the most in almost five years.

“There’s just so much uncertainty going on everywhere that businesses are just pausing,” Timothy Fiore, chairman of ISM’s manufacturing survey committee, said in a Bloomberg

3%

Other Business Unit Manager or Director

6%

13% 8%

Real Estate Mgr./Dir.; Facility Mgr./Dir.; Development Mgr./ Dir.; V.P. Real Estate

17%

CFO, Controller, Financial Officer

V.P., Secretary, or Other Corporate Officer

interview.2 “No matter where you look, you’ve got chaos everywhere.

Businesses can’t operate in an environment of chaos. It’s a warning shot that we need to resolve some of these issues.”

Part of that ongoing chaos includes rising tariffs on steel and aluminum — including that coming from Canada and Mexico — as well as the continuing trade war with China. As trade talks with

30

AREA DEVELOPMENT

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Primary role in company’s location decisions: China continue a roller-coaster ride, congressional approval of the new United States-Mexico-

Not involved Information gathering

5%

13%

Canada Agreement (USMCA) is far from certain. Last September, Ford CEO Jim Hackett said the

29%

Trump administration’s tariffs on imported steel and aluminum would cost the company $1 bil-

53%

Final decision

Preliminary recommendation

lion. 3 And if Ford is hurting, small manufacturers will be hurt even more by increasing tariffs as they operate on slim profit mar-

Number of facilities currently operating worldwide:

gins. Needless to say, increases

Domestic:

in production costs are often

Five or more

passed on to consumers, affecting their purchasing power and further slowing economic growth.

To assess the effects of the current operating environment for busi-

Four Three

nesses, especially manufacturers,

their site selection priorities and plans for the years ahead, as well

7%

53%

9%

Two

Foreign (of the 18% who operate foreign facilities):

as the effects of taxes and tariffs

One

on these plans. Their responses are presented herein.

WHO ARE the Corporate Respondents?

Nearly half (47 percent) of the

One

16%

Area Development surveyed our corporate executive readers about

15%

5%

Five or more

52%

33%

Two

10%

respondents to our 33rd annual Corporate Survey are with manu-

Four

facturing firms, and 14 percent say distribution/logistics/warehousing are the primary functions of their companies. More than half (53 per-

AREA DEVELOPMENT | Q1/2019

31

CORPORATE SURVEY

cent) are the lead persons (owner, chairman, CEO, etc.) at their companies. It follows then that 53 percent are responsible for their companies’

Number of people employed worldwide (all facilities): 1,000 or more Fewer than 20

17% 500-999

22%

final location decisions.

More than half also say their firms operate just one domestic facility, while just 18 percent of the respondents say they also operate two foreign facilities. A quarter of the

7%

14%

25%

20-49

facilities employ 100–499 people in total. Yet 22 percent claim their

15%

100-499

corporate respondents say these

50-99

firms employ fewer than 20 people, while 17 percent say they employ more than 1,000 workers all told.

Three quarters of those responding

Change in the number of facilities during the past 12 months: Decreased number of facilities by 4 or more

to the Corporate Survey state there were no changes in their companies’ number of facilities over the last

1%1% 4%

Decreased number of facilities by 3 or fewer

Increased number of facilities by 4 or more

18%

Increased number of facilities by 3 or fewer

year, while 22 percent did increase their number of facilities.

Apparently, the Tax Cuts and Jobs Act (TCJA) of 2017 had a limited effect on the corporate respondents’ facility plans of 2018

Number of facilities not changed

76%

— nearly 80 percent say the act had no effect — but nearly 40 percent believe it will affect their future facility plans. This is in agreement with the results of the NABE poll: 84 percent of the respondents to that survey said the 2017 TCJA has not spurred them to change their hiring or investment plans.

Surprisingly, two thirds of the respondents to Area Development’s Corporate Survey also say

Continued on page 37

32

AREA DEVELOPMENT

the new tariffs on aluminum and

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NEW YORK STATE IS BUILDING THE IDEAL BUSINESS ENVIRONMENT

HERE’S WHY BUSINESS IS THRIVING IN NEW YORK STATE

A highly educated talent pool World-class infrastructure Business-friendly programs and incentives Largest public university system in the U.S. Rich diversity Unparalleled quality of life

More More than than QUALITY QUALITY OF OF LIFE LIFE

$5.4 $5.4billion billion

STRATEGIC STRATEGIC INVESTMENTS INVESTMENTS

Businesses Businesses and and people people lovelove NewNew YorkYork State.

State.

WithWith a lowa cost low cost of living of living in most in most areas, areas, revitalized revitalized city city centers, centers, 180 state 180 state parks parks — including — including the world-famous the world-famous Adirondack Adirondack ParkPark — and — and a wealth a wealth of arts of and arts and culture, culture, it’s unmatched it’s unmatched as a as place a place to work, to work, live, live, and and play.play.

toto job job creation creation and and community community development development projects. projects.

NewNew YorkYork StateState is investing is investing heavily heavily in industries in industries that that benefit benefit future future generations. generations.

This This includes includes a $620 a $620 million million initiative initiative to fuel to growth fuel growth in the in life the life science science cluster cluster and and $27.5 $27.5 million million for workforce for workforce development development and and training training in the in state’s the state’s cleanclean energy energy sector. sector.

INFRASTRUCTURE INFRASTRUCTURE UPGRADES UPGRADES

HIGHLY HIGHLY EDUCATED EDUCATED WORKFORCE WORKFORCE NewNew YorkYork StateState is home is home to the to nation’s the nation’s largest largest public public university university system system offering offering free free tuition tuition for eligible for eligible students, students, and and it is the it is only the only statestate with with two Ivy twoLeague Ivy League schools. schools.

It’s #2 It’sin#2 the in U.S. the U.S. for math for math and and physical physical science science degrees, degrees, #2 for #2the for number the number of resident of resident scientists scientists and and engineers, engineers, and and #3 in#3 high-tech in high-tech employment. employment.

NewNew YorkYork StateState has committed has committed $150$150 billion billion to to massmass transit, transit, affordable affordable housing, housing, schools, schools, parks, parks, and and sustainable sustainable energy. energy.

Another Another $100$100 billion billion has already has already beenbeen put to put work to work rebuilding rebuilding roads, roads, bridges, bridges, tunnels, tunnels, and and airports, airports, including including a plan a plan to transform to transform JFK JFK International International Airport Airport into into a 21sta 21stcentury century hub hub and and a redesign a redesign of LaGuardia of LaGuardia Airport.

Airport.

In addition, In addition, the Build the Build Now-NY Now-NY program program offers offers Shovel Shovel Ready Ready Certification Certification for high-tech for high-tech manufacturing, manufacturing, warehouse warehouse distribution, distribution, logistics, logistics, and and multi-tenant multi-tenant business business and and technology technology parks. parks.

New New York York is is #1#1 in in the the Northeast Northeast in in total total number number ofof STEM STEM graduates. graduates.

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The Effects of Tax Cuts, Tariffs, and a Skilled Labor Shortage on Facility Plans

Analysis

Last year we saw a great deal of activity even with uncertainty created by tariffs and the trade war with China. For many site selectors, activity levels in 2017 and 2018 were the highest in recent years, across multiple industries, both office and industrial. In general, there was activity in nearly all parts of the country. The Corporate Survey shows that in 2018, new facility plans were minimally affected by these items.

The new tariffs and trade war will have only a slightly greater impact on future new facility plans, according to the survey.

There were also questions regarding whether the Tax Cuts and Jobs Act of 2017 would spur business expansions. Typically, growth driven by tax cuts doesn’t occur immediately, which the survey validates as it shows that growth related to the tax cuts was minimal in 2018; however, the impact of the tax cuts on future plans is projected by nearly twice as many respondents.

Over the last few years we have seen a change in staffing plans for many industrial facilities. Manufacturing and distribution facilities continue to automate, requiring increased capital investment but with a reduction in headcount. This is substantiated by the survey — 71 percent of the respondents say their new domestic facilities will add fewer than 100 jobs.

While this is a positive news in a tight labor market, the challenge is finding an employment base with the required skill sets. While the headcount requirements have declined, those positions now require a higher skill set. It is no surprise that availability of skilled labor is now the number-one site selection factor.

Finally, an interesting result in the survey is related to total headcount to be created at new foreign facilities: 43 percent of the Corporate Survey respondents say their new foreign facilities will create 100–499 jobs, which is twice the percentage indicated for 100–499 headcount creation in new domestic facilities.

B y A m y G e r b e r , E x e c u t i v e M a n a g i n g D i r e c t o r, B u s i n e s s I n c e n t i v e s P r a c t i c e , C u s h m a n & Wa k e f i e l d

steel had no effect on their 2018 facility plans, nor will they affect their future facility plans. And, interestingly, more than 70 percent

WHAT ARE Corporate Respondents’ Plans for New Facilities, Expansion, or Relocation?

say the trade war with China did not affect 2018 facility plans and

Bearing those results in mind,

will not influence facility plans go-

40 percent of the respondents to our

ing forward.

Corporate Survey say they plan to

Survey Continued from page 32 AREA DEVELOPMENT | Q1/2019

37

What’s your region’s competitive advantage?

L E T D ATA G U I D E Y O U R S T O R Y

EconomicModeling.com

CORPORATE SURVEY

Did the Tax Cuts and Jobs Act of 2017 have an effect on new facility plans in 2018 and/or will it influence future plans?

Did the new tariffs on aluminum and steel have an effect on facility plans in 2018 and/or will it influence future plans?

2018 Plans:

2018 Plans: Yes

21% No

32% No

79%

No

38

68%

Future Plans:

Future Plans:

39%

34%

Yes

61%

No

Yes

66%

open new domestic facilities within

56 percent of the respondents say

the next five years. About half of

fewer than 50 jobs will be created by

those facilities will be located in the

their new domestic facilities.

southern portion of the U.S. — the

The newly authorized Opportu-

South Atlantic, Mid-South, South,

nity Zones are drawing interest from

and Southwest regions. More than

a third of the respondents who say

a third will be manufacturing facili-

they are considering locating in an

ties and nearly 30 percent will serve

OZ. A product of the Tax Cuts and

warehouse/distribution purposes.

Jobs Act of 2017, Opportunity Zones

However, only a fifth of the re-

are designed to encourage invest-

spondents say these new domestic

ment in low-income communities

facilities will be mid-sized in terms

nationwide by allowing investors to

of employment (100-499 workers);

qualify for preferential tax treatment.

AREA DEVELOPMENT

Yes

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CORPORATE SURVEY The Role of Public Policymakers and the Private Market in Location Projects

Analysis

Skilled labor and the cost of doing business top the priorities of corporate site selectors in 2018. The retirement of the baby-boom generation — mixed with a booming economy — is creating skilled workforce challenges across a wide range of industries and in communities big and small. Companies in the corporate site location process are responding to this challenge by conducting their own workforce studies to ensure a site has the workers they need. Communities competing for these jobs have a leg up by training and certifying their workforces before a company comes knocking.

Another important insight from the 2018 Corporate Survey is the continued role that the cost of doing business at a site has on the final location decision. In fact, six of the top-10 corporate site selection factors are tied to the cost of doing business at a site. Labor, energy, and occupancy/construction costs as well as local, state, and federal tax policy and exemptions/incentives all top the list of issues of concern for corporate site selectors.

The survey results illustrate the role public policymakers and the private market play in corporate site location projects. Ensuring a community has a large pool of skilled workers, affordable and reliable energy sources, a competitive real estate market, and a tax policy attractive to companies all happen before a company looks at a site. Tax incentives can help level the playing field for the higher cost of doing business in some regions and can be a final, critical piece of the corporate site location process. However, a high cost structure can be too high for even tax incentives to make a difference.

By Dave Robinson, Principal, The Montrose Group, LLC

Only 14 percent of the Corporate Survey respondents have plans to

Of this smaller percentage, a third

open new foreign facilities within

are still slated for China and a third

five years. A quarter of the new for-

for Vietnam. Two thirds of all new

eign facilities are slated for Western

foreign facilities will house manufac-

Europe and a fifth for Mexico. De-

turing operations, and 43 percent

spite the fact that the respondents

of the survey respondents say their

claim the trade war with China is

foreign facilities will employ 100–499

not influencing facility plans, just 13

people all told.

percent say they have plans to open

40

and 27 percent in the 2016 survey.

When it comes to expansion

new Asian facilities. This is down

plans, 43 percent of the respondents

from 21 percent in the 2017 survey

to our annual Corporate Survey say

AREA DEVELOPMENT

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Did the “trade war” with China have an effect on facility plans in 2018 and/or will it influence future plans?

Plan to open a new (not relocate an existing) facility within the next five years:

2018 Plans:

41% 26%

Yes

No

Yes

59%

74%

No

Plan to open new domestic facilities within five years: Future Plans:

40% 29%

Yes

No

Yes

60%

71%

No

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

(CT, MA, ME, NH, RI, VT) 8%

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

Manufacturing

35%

Middle Atlantic (DE, MD, NJ, NY, PA) 9%

Warehouse/ Distribution 29%

South Atlantic (NC, SC, VA, WV) 7%

Headquarters 11%

Mid-South

Data Center

5%

Back Office/Call Center

5%

Shared Services

5%

(AR, KY, MO, TN) 9%

South (AL, FL, GA, LA, MS) Midwest

20%

(IL, IN, MI, OH, WI) 17%

R&D 5% Plains

(IA, KS, MN, NE, ND, SD) 7%

Mountain

(CO, ID, MT, UT, WY) 4%

Southwest

(AZ, NM, OK, TX) 13%

West

Other 5%

(CA, NV, OR, WA) 7%

AREA DEVELOPMENT | Q1/2019

41

CORPORATE SURVEY Total new jobs to be created at new domestic facilities: 1,000 or more

500-999

100-499

2%

they will expand a domestic facility within the next five years, but nearly

7%

half say those expansions will create

34%

20%

Fewer than 20

fewer than 20 jobs. Nearly 90 percent have no plans to expand foreign facilities. A quarter of the respondents

15%

say their foreign expansions will cre-

22%

50-99

ate fewer than 20 jobs, with another quarter saying their foreign expan-

20-49

sions will create 50–99 jobs.

More than 80 percent of the corporate respondents have no plans

If company is planning new domestic facilities, it is considering locating in a newly created Opportunity Zone:

to relocate an existing facility within the next five years. Of those that do have relocation plans, more than 60 percent will relocate domestically,

Yes

32% No

with just 4 percent relocating to an offshore or near-shore location. Similarly, only 4 percent plan to relocate

68%

a foreign facility back to the United States.

WHAT ARE Corporate Respondents’ Site Selection Priorities?

Plan to open new foreign facilities within five years: Yes

14%

As in years past, we asked our survey-takers to rate the location factors they consider when making new facility, expansion, or relocation plans as either “very important,” “important,” “minor consideration,” or “of no importance.” We then add the

No

86%

“very important” and “important” ratings together in order to rank the factors in order of importance.

It’s no surprise that availability of skilled labor is the corporate

42

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Analysis

New Versus Old Economy: Different Hotspots, Different Strategies

One challenge in interpreting the survey results is that manufacturing and distribution account for 61 percent of profiled projects but only 10 percent of U.S. employment.

Consequently, respondents are most bullish on the South, Midwest, and Southwest. Ask instead which states attract the most venture capital, and California, Massachusetts, and New York become the top destinations. The same bias is evident in international responses. In Asia, for example, respondents indicate that 66 percent of new projects will go to China or Vietnam, whereas the top three Asian destinations for U.S. investment are Singapore, Australia, and Japan.

One reason that site selectors and many economic develop-

ment officials might be more attuned to manufacturing is that these projects tend to be more geographically mobile, or at least willing to consider far more locations. However, that bias might result in important trends being overlooked. For example, manufacturing and technology clients are beginning to describe workforce requirements using very different terminology. Those from manufacturing still use traditional occupational titles such as “machine operator” or “quality assurance technician,” whereas technology clients increasingly describe workforce requirements in terms of the unique cluster of skills required for each position.

Each would agree with the key survey finding that qualified labor is concern number one; but how they go about defining and filling new positions is beginning to diverge greatly, and this trend is likely to speed up in tandem with the introduction of AI in the workplace.

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AREA DEVELOPMENT | Q1/2019

43

CORPORATE SURVEY Location of new foreign facilities (as a percentage of total number to be opened): Canada 17% Mexico 21% Central America

4%

South America America 4%

Western Europe

25%

Eastern Europe 17% Asia 13%

respondents’ No. 1 factor in the location decision, considered “very important” or “important” by more than 90 percent of the respondents.

Skilled labor is necessary in order to realize the potential of robotics and artificial intelligence that is driving Industry 4.0. Labor costs are ranked No. 2 in the Corporate Survey, followed by highway accessibility, which historically has held the first or second spot, slipping to the No. 3 ranking.

Other cost factors ranked among the top-10 include corporate tax rate (No. 4), tax exemp-

Location of facilities planned for Asia (as a percentage of total number to be opened there):

China

33%

Malaysia 17%

Vietnam

33%

Other 17%

tions (No. 5), state and local incentives (No. 7), energy availability and costs (No. 8), and occupancy and construction costs (No. 10).

Corporate tax rate actually jumped four spots in the rankings. When considering state and local incentives, more than 60 percent of the survey respondents consider tax incentives most important, as well as other incentives such as land,

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

Manufacturing

Total new jobs to be created at new foreign facilities: 1,000 or more

67%

Fewer than 20 7%

W a r e h o u s e / Distribution

17%

Back Office/Call Center

5%

Shared Services

5%

R&D 5%

44

AREA DEVELOPMENT

100-499

14% 14%

20-49

43% 21% 50-99

for free site information, visit us online at www.areadevelopment.com

CORPORATE SURVEY

Analysis

Labor — Availability, Costs, and Access to the Workplace — Is Paramount

Labor concerns are continuing to rocket up the list of important site selection factors, finally culminating with the top spot in this year’s annual Corporate Survey, and rightly so. Concerns about finding and retaining top talent continue to be a major conversation point for all of the projects that we are working on as the economy continues to demonstrate strong figures and consumer confidence, all while the unemployment rates are at historic lows.

Rounding out the top three spots are also labor considerations — labor costs and highway accessibility. While many people previously believed highway accessibility to only be a logistics issue for raw materials and finished goods, today we are finding that this factor also crosses over to the labor side, as more people want to live closer to urban or heavily developed suburban areas but have the ability to get to work easily. Hence the interstate has become even more critical to the site selection process.

It was curious to see that the factor that fell the largest

number of spots this year is proximity to major markets, as this fell from 7th place down to 14th place in this year’s survey. This may be due to changing demographics, where more millennials are reaching the age where they have started families, thereby forcing them out of urban markets. It is likely though that they aren’t going far, and so developed suburbs are seeing a strong boom.

Construction concerns tumbled in this year’s ranking with fast-track permitting falling from the 11th spot last year to 19th spot on this year’s list, as well as occupancy or construction costs falling to 10th place this year as opposed to 5th place last year. This may be due to companies realizing that their facility planning directly impacts their employee recruitment and retention rates, as they continue to build in higher-cost areas as well as include amenities in their facilities that will make them desirable places to work.

Overall, we are optimistic after seeing the results that confidence remains high, and site selection projects appear to be squarely on the mind of many companies moving forward!

B y B r i a n C o r d e , M a n a g i n g P a r t n e r, A t l a s I n s i g h t L L C

Plan to expand an existing facility within the next five years:

No

46

51%

AREA DEVELOPMENT

49%

Plan to expand existing domestic facilities within five years:

Yes No

57%

43%

Yes

for free site information, visit us online at www.areadevelopment.com

utility-rate subsidies, and infrastructure support.

Total new jobs to be created by domestic expansions:

Quality of life slipped two spots in the rankings to No. 6, although it is still considered “very important” or “important” by more than

4%

6%

100-499

10%

80 percent of those responding to the Corporate Survey. Corporate site selectors realize that tech-savvy

1,000 or more

500-999

46%

13%

50-99

Fewer than 20

millennials, who now make up the

21%

largest portion of the workforce at 35 percent,4 value a work-life balance.

20-49

They want to locate in places that can provide cultural and recreational opportunities as well as a sense of

Plan to expand existing foreign facilities within five years:

community.

Although, according to the Bu-

Yes

reau of Labor Statistics, union membership for private-sector workers

11%

actually dropped slightly in 2018 to 6.4 percent from 6.5 percent in 2017,5 nearly three quarters of the survey respondents rated low union

89%

No

profile as “very important” or “important,” ranking it No. 12 among the factors up from No. 18 in the previous year’s survey. This is one reason that the less unionized Southern States are capturing a greater

Total new jobs to be created by foreign expansions:

percentage of new facilities.

The location factor showing the biggest increase in importance (16.7 percentage points) is railroad

1,000 or more 8%

service, although it only ranks No. 26 among the factors. Rail transport is

Fewer than 20

500-999

100-499

8%

17%

seen as a cost-effective supply chain

17%

solution and has become a driver of corporate growth. The U.S. Depart-

20-49

25%

ment of Transportation projects that demand for rail freight transporta-

25%

50-99

tion, measured in tonnage, will in-

AREA DEVELOPMENT | Q1/2019

47

Plan to relocate an existing facility within five years:

Of those with relocation plans, will relocate a domestic facility to off/near shore: 4%

Yes

Yes

19% No

81% No

Of those with relocation plans, will relocate a U.S. facility to another domestic location:

96%

Of those with relocation plans, will relocate a foreign facility back to the U.S. (reshoring): 4%

No

Yes

38%

62%

Yes

No

Corporate Strategy and Analysis Critical to Optimizing Site Selection

96%

Analysis considering tax incentives the most important type of incentive when making a location decision (compared to cash grants at 20 percent).

Over the past year, as a result of the Tax Cuts and Jobs Act (TCJA), we have seen tax incentives and corporate tax liability become an increasingly important factor in our clients’ site selection process. In changing the corporate tax rate, TCJA impacted the pricing of tax credits and added complexity to multi-state tax evaluation.

TCJA also changed the rules around taxability of incentives through modifications to IRC Section 118.

Another major component of TCJA was the creation of the Opportunity Zone program. According to the survey, 32 percent of companies planning new domestic facilities are considering locating in a newly created Opportunity Zone. By doing so, companies are able to benefit from multiple federal tax advantages including deferring or reducing their capital gains tax burden and receiving a step-up in basis.

The results from this year’s Area Development Corporate Survey are consistent with our observations in the market. The survey ranked the importance of the corporate tax rate in site selection decisions at No. 4, a jump of four spots from No. 8 in 2017. Incentives that help mitigate tax liability have become increasingly valuable to companies, with 62 percent of respondents in the survey

With a new tax code impacting incentives and location decisions, the inclusion of a tax strategy and analysis has become critical to optimizing site selection and expansion decisions. This is a reality that we have experienced first-hand with our clients in 2018 and also rings true when reviewing the Area Development Corporate Survey results.

By Kate Crowley, Principal, Baker Tilly LLC

48

AREA DEVELOPMENT

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CORPORATE SURVEY* Site Selection Factors

Very Important %

Important Minor Of No % Consideration % Importance %

Labor Availability of skilled labor

59.6

30.9

7.5

2.1

Availability of unskilled labor

17.6

41.8

35.2

5.5

Training programs/ technical colleges

28.0

41.9

29.0

1.1

Labor costs

53.9

35.2

8.8

2.2

Low union profile

40.4

34.0

21.3

4.3

Right-to-work state

48.9

21.3

20.2

9.6

Transportation/Telecommunications Highway accessibility

52.1

35.1

9.6

3.2

Railroad service

14.4

32.2

38.9

14.4

Accessibility to major airport

23.1

39.6

30.8

6.6

Waterway or oceanport accessibility

5.5 28.6 44.0 22.0

Inbound/outbound shipping costs

26.6

42.6

19.2

11.7

Availability of advanced ICT services

17.8

32.2

35.6

14.4

Finance Availability of long-term financing

19.8

40.7

35.2

4.4

Corporate tax rate

35.6

51.1

8.9

4.4

Tax exemptions

40.4

42.6

16.0

1.1

State and local incentives

49.5

33.0

15.3

2.2

Other Available buildings

31.1

45.6

17.8

5.6

Available land

40.0

35.6

16.7

7.8

Occupancy or construction costs

39.1

37.0

19.6

4.4

Expedited or “fast-track� permitting

33.0 31.9 28.7

Raw materials availability

26.7

28.9

27.8

16.7

Water availability

24.7

26.9

26.9

21.5

Energy availability and costs

41.1

36.7

14.4

7.8

Environmental regulations

34.4

35.5

20.4

9.7

Proximity to major markets

29.4

42.4

19.6

8.7

Proximity to suppliers

22.8

50.0

16.3

10.9

Proximity to innovation commercialization/ R&D centers

12.8

28.7

33.0

25.5

Quality-of-life factors

38.7

44.1

9.7

7.5

6.4

* All figures are percentages and are rounded to the nearest tenth of a percent. ** 2017 ranking AREA DEVELOPMENT | Q1/2019

49

CORPORATE SURVEY

Corporate Survey Reflects the “Mid-Cap Movement”

Analysis

crease 88 percent by 2035.6 Oddly enough the factor showing the largest decrease in its importance rating is proximity to major markets, dropping 12.8 percentage

Interesting to note in the survey results is the mix of respondents and where the growth is coming from.

points to a 72.8 percent combined

A few key statistics of note: • 76 percent of respondents have fewer than 500 worldwide employees;

to No. 14 among the factors. With

•7 6 percent of respondents have not had any change in their number of facilities in the last 12 months; •4 1 percent of respondents plan to open a new facility in the next five years; and •4 9 percent of respondents plan to expand an existing facility in the next five years.

These results mirror the “mid-cap movement” that we have been seeing in the economy recently. No doubt, there is still a significant amount of deal flow from the Fortune 1000s, but mid- cap companies (e.g., less than 500 employees, likely less than $750M in sales) are poised to grow significantly in the next five years, and this is very positive for our industry. From food manufacturing to robotics to fintech, mid-cap companies are innovating at a staggering pace and punching above their weight in terms of their ability to compete.

These companies can do more with less (e.g., 76 percent have not grown the number of locations in the last year) but are quickly reaching the critical threshold of growth where they need to expand in terms of capacity, headcount, and access to new markets. This is a healthy sign for the overall economy and a welcome diversification for markets in which these companies will grow.

By Eric Stavriotis, Senior Vice President, Advisory & Transaction Services, CBRE

“very important” or “important” rating and seven spots in the rankings consumers now expecting next-day or even same-day delivery of goods, one would think proximity to major markets would have only increased in importance. According to one consultant’s survey analysis, changing demographics might be the reason for this factor’s decrease in importance.

Also puzzling is the 11.8 percentage point decrease in the importance rating and eight-place drop in the rankings for expedited or “fast-track” permitting. This factor is now ranked No. 19 among the site selection factors although nearly two thirds of the respondents still consider it “very important” or “important.”

Finally, we asked our Corporate Survey takers whether they use outside consultants when site selecting and only 30 percent of the respondents say they do. With that in mind, let’s explore the responses of our 15th Annual Consultants Survey.

50

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Importance of a shovel-ready/pre-certified site: Of no importance

11% 17%

Consider weather-related factors and geological events in the location decision:

Very important No

34% Minor consideration

38%

34%

66%

Somewhat important

Consider whether there are businesses performing similar activities in the area of search:

Use outside consultants when site selecting:

30% No

38%

No

62%

Yes

Yes

Yes

70%

LOCATION. LOCATION. LOCATION. The best LOCATION on the web to help with your corporate LOCATION needs.

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AREA DEVELOPMENT | Q1/2019

51

CONSULTANTS SURVEY

WHO ARE the Consultants’ Clients?

While the majority of those responding to our Corporate Survey say the TCJA, new tariffs on alumi-

Most of the respondents to our

num and steel, and the trade war

15th annual Consultants Survey (85

with China did not have a significant

percent) say they have worked on

effect on new facility plans in 2018,

projects for durable goods manu-

nor will they have a significant effect

facturers; more than 70 percent

on future plans, those responding to

have also worked with distribution/

our 15th annual Consultants Survey

logistics/warehousing firms; and 45

disagree — which may be because

percent with projects in the finance,

of the difference in size between the

insurance, real estate sector (a sec-

corporate respondents’ companies

tor that only comprises 4 percent of

and the consultants’ client com-

the Corporate Survey respondents).

panies. Nearly two-fifths of the re-

More than 90 percent of these

sponding consultants say the TCJA

responding consultants claim they

affected their clients’ facility plans

perform location studies/compara-

in 2018, and more than half say it

tive analyses for their clients and

will affect their clients’ future facility

are involved in the negotiation and

plans. Two thirds of the responding

management of incentives pro-

consultants also say new tariffs on

grams. About three quarters of the

aluminum and steel affected their

respondents claim their clients re-

clients’ 2018 facility plans, and more

quire them to make the actual loca-

than 70 percent say it will affect fu-

tion decision.

ture plans. And more than half of the

More than 40 percent of the re-

consultants say the trade war with

sponding consultants say that — in

China affected their clients’ 2018

terms of employment numbers —

plans, with nearly three quarters

they provide services to very large

believing it will have an effect on

firms of 1,000 or more employees.

their clients’ new facility plans going

A third of the respondents provide

forward.

services primarily to mid-size firms of 100–499 workers, and a fifth to large firms having 500–900 employees.

(Remember, more than half of the

WHAT ARE Their Clients’ Plans for New Facilities, Expansion, or Relocation?

Corporate Survey respondents say their firms employ fewer than 100 people.)

52

AREA DEVELOPMENT

Almost all of the responding consultants — 94 percent — say their

for free site information, visit us online at www.areadevelopment.com

Combined Ratings* CONSULTANTS SURVEY clients plan to open a new domestic facility within five years. As with

Site Selection Factors

2018

2017

Ranking

the corporate respondents’ new

1. Availability of skilled labor

100.0

100.0 (1)**

facilities, about half of these will be

1T. Proximity to major markets

100.0

98.3 (2T)

opened in the southern half of the

1T. Highway accessibility

100.0

95.0 (5)

United States: the South Atlantic,

4. Labor costs

98.1

98.3 (2)

Mid-South, South, and Southwest

5. State and local incentives

98.0

96.6 (4)

regions. A quarter of these will be

6. Available land

96.1

95.0 (5T)

6T. Available buildings

96.1

95.0 (5T)

6T. T raining programs/ technical schools

96.1

91.7 (10)

6T. Energy availability and costs

96.1

90.0 (11)

planning foreign facilities, 62 per-

6T. Proximity to suppliers

96.1

90.0 (11T)

11. Tax exemptions

94.1

93.3 (9)

cent of the responding consultants

11T. Environmental regulations

94.1

75.0 (18)

say their clients are — and these are

13. Inbound/outbound shipping costs

88.0

88.2 (14)

scattered worldwide. Most of their

14. Expedited or “fast-track” permitting

86.3

88.3 (13)

15. Accessibility to major airport

84.4

95.0 (5T)

15T. Low union profile

84.4

80.0 (16)

15T. Corporate tax rate

84.4

70.0 (21)

18. Availability of advanced ICT services

84.3

67.8 (22)

18T. Occupancy or construction costs

84.3

85.0 (15)

20. Right-to-work state

78.5

78.3 (17)

21. Water availability

78.4

55.0 (24)

22. Quality-of-life

78.0

71.2 (20)

23. Raw materials availability

76.5

66.6 (23)

ter of the consultants’ clients’ new

24. Proximity to innovation commercialization/R&D centers

76.0

51.8 (26)

foreign facilities will house manufac-

25. Availability of unskilled labor

72.0

71.6 (19)

turing operations, but about a fifth will

26. Railroad service

54.9

53.3 (25)

serve as back office/call centers.

27. Waterway or oceanport accessibility

44.0

41.6 (28)

28. Availability of long-term financing

43.1

41.7 (27)

manufacturing plants and a fifth will be warehouse/distribution facilities.

Whereas 86 percent of the Corporate Survey respondents are not

clients’ new facilities will go to Canada, Mexico, and Western and Eastern Europe, with slightly more going to Asia. China will garner about a quarter of their clients’ Asian projects, but about a fifth will be located in India and Malaysia, with slightly fewer in Singapore. In comparison, the Corporate Survey respondents say they’ve no plans for new facilities in India or Singapore. More than a quar-

About 90 percent of the consultants also say their clients have domestic facility expansion plans, and nearly half say they have foreign facility expansion plans within the next five years. More than 75 percent of

*A ll figures are percentages and are the total of the “very important” and “important” ratings of the Area Development Consultants Survey and are rounded to the nearest tenth of a percent. ** 2017 ranking

AREA DEVELOPMENT | Q1/2019

53

CONSULTANTS SURVEY the Consultants Survey respondents

CLIENTS’ OPERATIONS

Respondents worked on projects in the following industries:

say their clients also have plans to relocate an existing domestic facility within the U.S. in the next five years, but only 19 percent say their clients

Manufacturing— Durable Goods Manufacturing— Non-Durable Goods

85%

Manufacturing — Other

49% 35%

Distribution/Logistics/ Warehousing

72%

Data Processing, Software & Other Computer-Related Services

38%

Finance, Insurance, Real Estate

45%

Energy Industry Hospitality Industry Healthcare/ Life Sciences Retail Construction & Trades Other

are planning to offshore or near-shore an existing domestic facility. As for relocating a foreign facility back to the U.S. or reshoring, 14 percent of the consultants claim their clients did this in 2018 and 30 percent say their clients will do so this year. Again, remember that nearly all — 96 percent

22% 9% 38% 6% 3% 12%

of the Corporate Survey respondents have no offshoring or reshoring plans.

Again, this could be a function of their size and/or industry sector.

WHAT ARE the Consultants’ Site Selection Priorities?

The consultants were also asked to rate the site selection factors as “very important,” “important,” “minor consideration” or “of no importance.” It should be noted that

Primary services required by their clients: Feasibility Studies

46%

Global Asset Positioning

20%

Location Studies/ Comparative Analyses

91%

Incentives Negotiations/ Management Location Decision Real Estate Transaction Other

54

AREA DEVELOPMENT

In terms of their employment numbers, companies utilizing consultants’ services are generally: Small (20-99 employees)

92% 78% 46% 11%

Mid-size (100-499 employees)

5%

Large (500-999 employees)

33% 20%

Very large (1,000 or more employees)

42%

for free site information, visit us online at www.areadevelopment.com

whereas every site selection factor received a “of no importance” rating from some of the Corporate Survey respondents, only seven of the 28 factors were considered “of no importance” by any of those re-

Clients who have asked consultants to perform a location search have: Not actively initiated the site selection process

42%

Already gathered preliminary data

64%

Already narrowed down the geographic area in which they wish to locate

65%

Already chosen several “finalist” communities Expect the consultant to narrow or make the location decision for them

sponding to the Consultants Survey.

Did the Tax Cuts and Jobs Act of 2017 have an effect on clients’ facility plans in 2018 and/or will it influence their future plans?

2018 Plans: 39% 61%

Yes

29%

No

Future Plans: 42%

Yes No

Did the new tariffs on aluminum and steel have an effect on clients’ facility plans in 2018 and/or will it influence their future plans?

Did the “trade war” with China have an effect on clients’ facility plans in 2018 and/ or will it influence their future plans?

2018 Plans: 62% 38%

Yes No

Yes No

2018 Plans: 56% 44%

Yes No

Future Plans: 72% 28%

55% 45%

Future Plans: Yes No

73% 27%

AREA DEVELOPMENT | Q1/2019

55

CONSULTANTS SURVEY Interestingly, 100 percent of the respondents to our 15th annual Consultants Survey rated three factors as “very important” or “important” — availability of skilled labor, highway accessibility, and proximity to major markets, all with a No. 1 rank, with

Clients plan to open a new (not relocate an existing) domestic facility within the next five years: Yes No

New England (CT, MA, ME, NH, RI, VT)

3%

Middle Atlantic (DE, MD, NJ, NY, PA)

8%

Mid-South (AR, KY, MO, TN) South (AL, FL, GA, LA, MS) Midwest (IL, IN, MI, OH, WI)

56

AREA DEVELOPMENT

Types of new domestic facilities to be opened by clients (as a percentage of total number of projects): Manufacturing Warehouse/ Distribution Headquarters Data Center Back Office/ Call Center

11% 15% 11%

Other

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

8%

Offshore (AK, HI, PR, VI)

As companies look to satisfy their

Shared Services

7%

West (CA, NV, OR, WA)

among all the site selection factors.

14%

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

Southwest (AZ, NM, OK, TX)

the highest “very important” score

94% 6%

Domestic location projects consultants are working on are slated for the following regions (as a percentage of total number of projects):

South Atlantic (NC, SC, VA, WV)

availability of skilled labor receiving

15% 7% 1%

R&D

24% 21% 14% 7% 13% 9% 11% 2%

Clients plan to open a new (not relocate an existing) foreign facility within the next five years: Yes No

62% 38%

for free site information, visit us online at www.areadevelopment.com

need for skilled workers, it’s there-

or “important.” Since more than 90

fore no surprise that training pro-

percent of the consultants say they

grams/technical schools received a

provide incentives negotiation/man-

96.1 percent combined importance

agement services to their clients, it’s

rating from the consultants, ranking

only natural that they consider this

in a tie for No. 6.

latter factor a primary consideration

Availability of skilled labor was the only factor receiving a combined importance rating over 90 percent in the Corporate Survey, but 12 factors received a combined importance rating over 90 percent from the responding consultants. In fact, more

Asian projects consultants are working on are slated for the following nations (as a percentage of total number of projects):

than 98 percent of the responding consultants also consider labor costs

China

as well as state and local incen-

Singapore

tives — ranking No. 4 and No. 5, respectively — as “very important”

India Malaysia Vietnam Other

Foreign location projects consultants are working on are slated for the following regions (as a percentage of total number of projects): Canada Mexico Caribbean Central America South America Western Europe Eastern Europe Middle East Africa Australia Asia

15% 15% 4% 5% 6% 17% 13% 3% 1% 2% 19%

26% 17% 20% 20% 7% 11%

Types of new foreign facilities to be opened by clients (as a percentage of total number of projects): Manufacturing Warehouse/ Distribution Headquarters Data Center Back Office/ Call Center Shared Services R&D Other

28% 15% 5% 8% 19% 13% 10% 1%

AREA DEVELOPMENT | Q1/2019

57

CONSULTANTS SURVEY in the location decision. More than

Innovation and R&D centers, which

80 percent consider cash grants or

are often affiliated or work in part-

tax credits and exemptions as the

nership with universities, are link-

types of incentives that are most im-

ing the academic and “real world.”

portant to their clients when making

Companies can avail themselves

location decisions.

of new technologies through these

According to CBRE, demand for industrial real estate has been exceeding supply for nine consecutive

relationships and bring innovative products to market more quickly.

Water availability showed the sec-

years, driving the vacancy rate to an

ond-largest increase in importance,

historic low of 4.3 percent. It follows

increasing by 23.4 percentage points

7

that 96.1 percent of the respondents to the Consultants Survey rate both available land and available buildings as “very important” or “important,” also in the No. 6 spot.

The factor showing the largest jump in importance — 24.2 percentage points and now considered “very important” or “important” by

Clients plan to relocate an existing domestic facility within the U.S. in the next five years: Yes No

77% 23%

three quarters of the responding consultants — is proximity to innovation commercialization/R&D centers.

Clients plan to relocate an existing domestic facility to off/near shore within the next five years: Clients plan to expand an existing domestic facility within five years?

Yes No

Yes No

91% 9%

Clients plan to expand an existing foreign facility within five years?

Clients have relocated a foreign facility back to the U.S. (reshored) in the recent past or are planning to do so in the near future: Reshored in 2018

Yes No

58

AREA DEVELOPMENT

19% 81%

44% 56%

Plan to reshore in 2019 No reshoring plans

14% 30% 66%

for free site information, visit us online at www.areadevelopment.com

CONSULTANTS SURVEY* Site Selection Factors

Very Important %

Important Minor Of No % Consideration % Importance %

Labor Availability of skilled labor

70.6 29.4 0.0 0.0

Availability of unskilled labor

18.0 54.0 28.0

0.0

Training programs/ technical schools

21.6

74.5

3.9

0.0

Labor costs

56.9

41.2

2.0

0.0

Low union profile

27.5 56.9 13.7

2.0

Right-to-work state

17.7

0.0

60.8

21.6

Transportation/Telecommunications Highway accessibility Railroad service

62.8 3.9

37.2 51.0

0.0 45.1

0.0 0.0

Accessibility to major airport

17.7

66.7

15.7

0.0

Waterway or oceanport accessibility Inbound/outbound shipping costs

2.0 42.0 54.0

2.0

32.0

56.0

10.0

2.0

5.9

78.4

15.7

0.0

3.9

39.2

47.1

9.8

Corporate tax rate

27.5

56.9

15.7

0.0

Tax exemptions

33.3

60.8

5.9

0.0

State and local incentives

52.9

45.1

2.0

0.0

Availability of advanced ICT services

Finance Availability of long-term financing

Other Available buildings

31.4

64.7

3.9

0.0

Available land

45.1

51.0

3.9

0.0

7.8

76.5

15.7

0.0

Occupancy or construction costs Expedited or “fast-track� permitting

19.6 66.7 13.7

0.0

Raw materials availability

5.9

70.6

19.6

3.9

Water availability

7.8

70.6

19.6

2.0

Energy availability and costs

35.3

60.8

3.9

0.0

Environmental regulations

15.7

78.4

5.9

0.0

Proximity to major markets

41.2

58.8

0.0

0.0

Proximity to suppliers

25.5

70.6

3.9

0.0

Proximity to innovation commercialization/ R&D centers

6.0

70.0

22.0

2.0

Quality-of-life

16.0 62.0 22.0

0.0

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

AREA DEVELOPMENT | Q1/2019

59

CONSULTANTS SURVEY Importance of incentives to clients when making location decisions: Are of great importance

48% 39%

Are less important now than in the past

13%

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

85% 82%

Other financial incentives (bonds, loans, etc.)

16%

Worker training incentives

68%

Of no importance

84%

27% 53% 16% 3%

Clients consider whether there are existing businesses performing similar activities to theirs in the area of search: Yes

93% 7%

Clients consider weather and geological related factors in the location decision: Yes No

90% 10%

to a combined importance rating of

and now receiving a 94.1 percent

78.4 percent. Every industrial pro-

importance rating and ranking

cess uses water, as does all energy

No. 11. While many environmental

production at some point, increasing

regulations have been rolled back

the importance of this factor in site

under the current administration,

consideration.

consultants may realize that it’s

The environmental regulations

60

Minor consideration

No

Tax incentives (tax credits, exemptions, etc.)

Other incentives (land, utility-rate subsidies, infrastructure support, etc.)

Very important Somewhat important

Are more important now than in the past

Cash grants

Importance of a shovel-ready/ pre-certified site in clients’ site searches:

now a given to build sustainable

factor showed the third-highest

facilities and submitting to the low-

increase in the ratings, with a 19.1

est standards might not be advan-

percent increase in importance

tageous in the long run.

AREA DEVELOPMENT

for free site information, visit us online at www.areadevelopment.com

The only factor showing a dou-

No. 6 among the factors, although

ble-digit decrease in importance

its combined importance rating isn’t

is accessibility to major airport,

that much higher at 82.8 percent.

decreasing 10.6 percent points and

As companies continue to try and

dropping from No. 5 to No. 15 in

attract tech-savvy millennials, who

the rankings. Whereas accessibility

seek a work-life balance and are pro-

to major airport is still considered

jected to make up 50 percent of the

“very important” or “important” by

workforce by 2020,8 the quality of

84.4 percent of those responding to

life factor might become even more

the Consultants Survey, other factors

important for both corporate execu-

seem to have taken precedence.

tives and the consultants with whom

Other factors also take prece-

they work.

dence over quality of life. While

1

78 percent of the consultants give

2

this factor a combined importance rating, it is only ranked No. 22 among the site selection factors. In comparison, the Corporate Survey respondents ranked quality of life

https://www.industryweek.com/economy/us-growthoutlook-weakens-survey-business-economists https://www.bloomberg.com/news/articles/2019-01-03/ u-s-factory-gauge-falls-most-since-2008-as-orders-output-cool 3 https://www.cbsnews.com/news/ford-ceo-steel-aluminumtariffs-will-cost-automaker-1-billion/ 4 http://www.pewresearch.org/fact-tank/2018/04/11/ millennials-largest-generation-us-labor-force/ 5 https://www.bls.gov/news.release/union2.nr0.htm 6 http://www.bnsf.com/in-the-community/economicimpact.html 7 https://www.cbre.us/research-and-reports/2019-US-RealEstate-Market-Outlook-Industrial-Logistics 8 http://www.mrinetwork.com/articles/industry-articles/ millennial-insights-for-the-2020-labor-market/

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AREA DEVELOPMENT | Q1/2019

61

Tennessee

SPECIAL LOCATION REPORT

Tennessee Builds on Its Business Retention and Attraction Efforts A commitment to manufacturing, its logistical advantages, and a workforce development push are at the core of Tennessee’s economic strength.

W

hen economic development experts in Tennessee discuss their state, they tout its strength in manufacturing and its status as a logistics hub. The state has become a particularly crucial home for the automobile manufacturing industry, but it’s not solely a manufacturing-heavy region. Tennessee also increasingly is attracting innovative, technology-oriented businesses, especially to Nashville, which has gathered press plaudits as a burgeoning Silicon Valley.

Rachel Buchanan, director of Economic Development for the Blount Partnership in Blount County, Tennessee, says Tennessee has many features of a business-friendly state, such as one of the lowest tax burdens in the country and a state government that is ambitious about promoting business-friendly policies.

Buchanan and Clay Walker, CEO of NETWORKS Sullivan Partnership, both point to the tenure of Gov. Bill Haslam, who served as the state’s governor from 2011 to 2019, as a period when economic development assumed a prominent place in the state political picture and important strides were made to attract corporate investment. Under Gov. Bill Lee, who succeeded Haslam this year, they are seeing a similar emphasis.

“It’s definitely a priority here,” Buchanan says.

The continued growth of companies that already have a large presence in Tennessee helps signal to companies that the state is a place where they can thrive. There’s a great deal of job growth and reinvestment from existing industries across the state, and that makes Tennessee a very attractive destination for new projects as well.

Workforce Development Via Higher Education In today’s economic development climate, where skilled labor remains a challenge for a wide range of industries, “a capable workforce is almost everything,” Walker says. John Bradley, senior vice president for Economic Development with the Tennessee

Valley Authority, says 10 years ago being able to offer “a good site” was almost all that was needed — but increasingly a skilled workforce is just as important.

Tennessee has emphasized building a pipeline of talent to attract major employers. The focus has been on advanced manufacturing. And Buchanan notes that workforce investments in the state have paid dividends. “The focus on workforce readiness and programming has been a huge selling factor to companies and industry,” she says. “It shows them that we are investing in our people in a way that will directly benefit them.”

The centerpiece of Tennessee’s workforce development efforts is the Tennessee Promise. Funded through the state lottery, Tennessee Promise is a last-dollar scholarship program that pays for state students’ tuition and mandatory fees at numerous postsecondary institutions that offer two-year, associate degrees — after other financial aid has been exhausted. Participating schools include community colleges, technical colleges, and some four-year colleges with two-year programs.

“It’s hugely important because a lot of people use the Tennessee Promise to get a technical degree and sometimes use it to earn credits toward a fouryear degree,” says Buchanan. “It’s really helped with an immediate need because it’s improved the pipeline of technical workers.”

In addition to the Tennessee Promise, the state offers Tennessee Reconnect to boost the preparedness of its workforce. The program helps adults older than 25 attend higher education institutions, whether they are returning to school or attending for the first time.

Bradley points out that the technical degrees that many students are pursuing through the statewide programs help prepare graduates for high-paying jobs — not the low-wage work sometimes associated with “blue-collar” jobs and associate degrees.

And, in his first legislative initiative, in early February, Governor Lee announced the Governor’s

By Tom Gresham 62

AREA DEVELOPMENT

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AREA0791.indd 1

27/04/18 6:55 PM

Tennessee SPECIAL LOCATION REPORT Investment in Vocational Education (GIVE) to expand access to vocational and technical training for Tennessee students. The GIVE initiative is a twopronged approach that utilizes regional partnerships to develop work-based learning and apprenticeship opportunities.

A Logistics Hub One of Tennessee’s enduring, inherent advantages is its location. “We have a God-given gift in that we’re centrally located in the Southeast,” Bradley says. “We’ve got a great rail system. We’ve got a great interstate system for trucks. We’ve got companies like FedEx and UPS that are here so it’s a logistics manager’s dream. [From] Tennessee, you can reach most of the population of the United States overnight.”

Economic development organizations across the state have labored to create sites where companies can quickly move in and get to work with the infrastructure and utilities in place to support them without added investment of time and resources.

“We’ve really spent a lot of time with the state and with the local communities preparing to get sites ready for companies, because when companies come in, they’ve got to hit that market as quickly as possible,” Bradley explains.

Many of the sites the TVA has played a role in developing are located in rural communities, and Gov. Lee has demonstrated a particular interest in boosting rural economic development. “Our unwavering commitment to rural Tennessee will carry on with Governor-elect Lee,” Economic Development Commissioner Bob Rolfe told the Upper Cumberland Business Journal. “In just three short years, we were able to increase our job commitments in rural

Volkswagen’s Chattanooga assembly plant

64

AREA DEVELOPMENT

The FedEx global hub in Memphis

Tennessee from 28 percent to nearly 50 percent, and I am confident that we will build upon this momentum in the new administration.”1 In actuality, Tennessee has distinctive regions with their own strengths, although Nashville’s rise as an internationally recognized draw for innovative companies can sometimes overshadow the success of other major cities in the state, such as Memphis, Chattanooga, and Knoxville, as well as the strides that rural communities in Tennessee have made with attracting manufacturing clients.

Major Industries The automotive industry’s presence in the state is particularly impactful. Tennessee is host to three major assembly plants (Nissan in Smyrna, General Motors in Spring Hill, and Volkswagen in Chattanooga) and more than 900 auto suppliers. In addition, Nissan’s North American headquarters is in Franklin.

According to the Tennessee Department of Economic and Community Development, the state has automotive operations in 88 of its 95 counties and boasts a concentration of automotive workers that is more than four times the national average — with more than 134,000 automotive workers in the state.

The auto industry’s impact in the state is obvious because automotive suppliers, such as Denso, which has three production facilities in Athens, bloom around auto manufacturing facilities. “If you took all of the suppliers in our region and added them up, they employ a lot more people than the actual automotive manufacturers themselves,” Bradley says.

“The downstream impacts are just huge.”

In addition to automotive, Tennessee has a strong aerospace culture. The state’s economic development organization says the aerospace cluster includes 52 companies. In Sullivan County, for instance, people employed in aircraft parts manufacturing grew 199 percent between 2011 and 2016 as the region pushed to take advantage of an aerofor free site information, visit us online at www.areadevelopment.com

312 Rosa L. Parks Ave. space industrial park with direct access to runways Nashville, TN 37243 and cargo facilities.

615-741-1888 The presence of the Oak Ridge National Laboraallen.borden@tn.gov TNECD.com tory, the largest U.S. Department of Energy science and technology laboratory, has also helped spur development in a wide range of related fields, such as material sciences.

Finally, Tennessee’s unemployment rate remains very low, despite the fact that the state is seeing more capital-intensive business such as data centers and OEMs employing automation and robotics moving in. “The impact of that is that jobs are actually trending down,” Bradley notes. “But that’s not necessarily a bad thing.

Pellissippi Place is a mixed-use community in East Tennessee with a business focus on I think the jobs that are coming in technology, research and development, and commercialization. It is a collaborative are of a higher quality because of effort of four local governments that are seeking to further R&D innovations in the that capital investment.” n Oak Ridge Technology Corridor/Innovation Valley.

1

https://www.ucbjournal.com/governor-elect-bill-leeappoints-bob-rolfe-as-tnecd-commissioner/

Blount Partnership The Blount Partnership, an accredited economic development organization, is a cooperative effort between the county’s key development organizations: Blount County Chamber of Commerce, Blount County Economic Development Board, and Smoky Mountain Tourism Authority. The partnership has received national recognition for its innovation and effectiveness.

Located in Blount County, Tennessee, near the cities of Maryville and Alcoa, Pellissippi Place will foster innovation and product commercialization, and so much more. It’s unique in that all three components—business, commercial, and residential—are being planned from the beginning.

Be part of a vibrant community built on a compact, walkable scale with places for working, living, shopping and recreation. With magnificent mountains, broad rivers, a feeling of spaciousness, it’s a location and that lends itself to outdoor recreation nearly year-round.

Bryan Daniels, President/CEO Blount Partnership 201 S. Washington St. Maryville, TN 37804 855-257-3964 infodesk@blountpartnership.com www.blountindustry.com Tennessee Department of Economic & Community Development It’s no accident that some of the biggest and most respected brands in the world have chosen to call Tennessee home. We provide companies a central location with unparalleled infrastructure, a highly qualified workforce backed by game-changing education reform, a low tax burden, and a collaborate environment with a business-friendly administration.

Allen Borden, Deputy Commissioner, Business, Community and Rural Development Tennessee Department of Economic & Community Development

www.pellissippiplace.com

AREA DEVELOPMENT | Q1/2019

65

Mid-Sized Urban Markets

Cost of Doing Business

Mid-sized cites also enjoy a significant advantage compared to their larger mega-city counterparts when it comes to the cost of doing business. Cost of doing business in a corporate site location context is generally determined by a company’s labor and real estate costs as well as government taxes. Mega-cities, with their large population concentration, rarely win when it comes to a cost-of-doingbusiness comparison primarily driven by higher wage rates and very Private Sector Job Growth expensive real estate. With average asking rents in Manhattan over Non-Farm Non-Farm Select Mid-Sized MSAs Mega-Cities Payroll Growth Payroll Growth $70 a square foot, mid-sized cit2017–18 2017–18 ies do not lose the real estate cost advantage very often. The industrial Kansas City, MO 1.70% New York, N.Y. 1.10% real estate market also compares Nashville, TN 1.70% Los Angeles, CA 1.90% well for the mid-sized cities where asking rents are generally five and Pittsburgh, PA 1.20% Chicago, IL 90% six times less than for their urban Charlotte, NC 2.40% Dallas-Fort Worth, TX 3.00% counterparts.

Jacksonville, FL 2.10% Houston, TX 3.90% Mega-cities will not make up Des Moines, IA 3.40% Washington, D.C. 1.80% ground on the cost of doing business factor from a labor cost standTampa, FL 2.20% Miami, FL 2.40% point. In fact, Figure 4 illustrates the Raleigh, NC 3.30% Philadelphia, PA 1.50% average wage rates for computer Indianapolis, IN 2.30% Atlanta, GA 2.20% and mathematical occupations, key Columbus, OH 1.90% Boston, MA 1.90% to the information technology sector, are nearly $13,000 higher per Source: Bureau of Labor Statistics worker in the mega-cities compared to the mid-sized cities. While the Figure 3 example is a slim slice in one industry, it illustrates the benefits of mid-sized cities from a wage rate perspective.

Computer & Mathematical Continued from page 27

Occupation Wage Comparison

Select Mid-Sized MSAs

Computer & Mathematical Occupations

Kansas City, MO

$79,800

Nashville, TN

$77,920

Pittsburgh, PA Charlotte, NC

Computer & Mathematical Occupations

New York,N.Y. $102,610 Los Angeles, CA

$94,110

$78,930

Chicago, IL

$87,810

$90,170

Dallas-Fort Worth, TX

$92,030

Jacksonville, FL

$79,150

Houston, TX

$94,200

Des Moines, IA

$83,090

Washington, D.C

$106,550

Tampa, FL

$76,910

Miami, FL

$75,980

Raleigh, NC Indianapolis, IN

$90,920 $77,600

Philadelphia, PA Atlanta, GA

$90,560 $113,100

Columbus, OH

$91,110

Boston, MA

$97,870

Source: Bureau of Labor Statistics

Figure 4

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Mega-Cities

Taxes

AREA DEVELOPMENT

Finally, taxes vary mainly based upon the state in which the city is located. Many states permit their municipalities to use a municipal income tax. For communities like Columbus, Ohio, for example, this creates a competitive disadvantage compared to states like Texas and Florida that do not have income taxes at all, but Ohio and its cities also aggressively use tax incentives to negate any competitive disadvantage their local tax code provides.

Of course, the mega-city is not dead — Amazon proved that. However, mid-sized cities are highly attractive locations for companies looking for a skilled workforce, affordable cost of doing business, and access to a million-plus customers. n

for free site information, visit us online at www.areadevelopment.com

EDGE PLANNING CONSIDERATIONS IN DATA CENTER DEVELOPMENT Low-latency requirements, which surpass the capabilities of centralized clouddelivered services and data centers, have given rise to the need for smaller data centers, deployed at the edge of their networks.

I

n a world where an estimated 6.1 billion smartphones will be in operation by 2020, traditional paradigms for how data is processed and stored have given way to a variety of prospective data center alternatives available to businesses. This doesn’t mean that dedicated and collocated data center options don’t, and won’t, continue to exist, but it does mean that they’ve been augmented by a host of new prospective solutions with new arrows regularly being added to the quiver.

New technologies and capabilities like IIoT, IoT, Augmented and Virtual Reality (AR/VR) are providing an abundance of opportunity for data center operators and providers to undertake a variety of activities including improving their internal operations,

enhancing customer experiences, and delivering new products and services to their customer bases.

The common thread that defines this evolution is the increased degree of time sensitivity, referred to as latency, associated with the transmission and processing of information to perform the necessary operations.

These low-latency requirements surpass the capabilities of centralized cloud-delivered services and data centers. Thus, organizations planning to implement applications ranging from sensor-based tracking and purchasing systems, to enhanced diagnostic ability via instantaneous patient record or radiological image access, to enabling customers to download video content with no perceived delay

By Chris Curtis, Co-Founder and SVP, Development & Acquisitions, Compass Datacenters; and Allen Tucker, Managing Director and Leader, Mid-Atlantic Data Center Solutions, JLL

Continued on page 70

AREA DEVELOPMENT | Q1/2019

67

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Selecting the right building material is a crucial component of data center planning. Fabcon structural precast panels provide benefits at any Tier level. The combination of thermal performance, structural capabilities, speed of installation, and durability make structural precast a perfect value-based building material for Tier III and Tier IV buildings.

Fabcon’s VersaCore+Green sandwich™ and Edge™ wall sysRobin Brown East Region National C/I Manager 610-216-6017

tems meet the criteria for sustainability, providing buildings with a higher percentage of recycledproduct content (up to 58%), and a higher level of energy efficiency.

Both products meet criteria for continuous insulation standards, offering thermal performance of 28.2 and 16.8, respectively. The panels’ exceptional load-bearing capabilities support equipment loads and protect data from potential weather-related or security damage.

Fabcon’s panels offer a high level of impact resistance and security — they stand up to Mother Nature’s threats. In a study to determine the debris impact of resistance of Fabcon panels for tornado and DOE 1020-02 protocols (conducted by the Wind Science & Engineering (WISE) Research Center at Texas Tech University), it was determined that all tested panels David Stanton West Region National C/I Manager 614-376-9397

Building with precast panels over other forms of construction is beneficial, even before a structure is complete. Both site-cast and masonry construction styles monopolize job sites, sometimes for months. That keeps other contractors from getting their work done and lengthens construction cycles. Fabcon’s panels, by contrast, are manufactured year-round in a controlled environment with consistent, documented quality and always arrive at the jobsite ready to install. It’s not uncommon for a Fabcon crew to erect a 50,000-square-foot building in about a week.

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Edge Planning Continued from page 67

need to place compute and storage functionality as close to the customer as possible. The combination of these elements has given birth to the need for smaller data centers, deployed at the edge of their networks to support these new low-latency requirements. However, just like the process of implementing any data center solution includes questions that must be answered, edge data centers are no different. For example, seemingly trivial matters like, “Where am I going to put these things?” must be addressed. Since the devil is always in the details, the key element of successful edge implementation is, of course, planning.

Catching the Wave: Proceed with Caution Edge data centers are a vital element in the coming “wave of the future” regarding solutions that will bring things like content and processing power continually closer to end-users. Naturally, the common reaction tends to be, “I’ve got to get me some of those.” However, the real data center and development professional knows that haste may not only make waste but leads to undesirable consequences as well, so proper planning is essential before the first PO (purchase order) is even a gleam in IT’s eye.

Elements of the Planning Process The process for determining edge data center requirements, configurations, and geographic locations relies on both business and technical evaluations.

Business Considerations — Establishing a network of edge facilities is a little more involved than purchasing a few units advertised as “edge data centers” and locating them in the hinterlands. The business phase of these initiatives is devoted to examining the project based on existing IT structures and operations to define its scope and provide the objective data required to translate the business requirements into the physical template(s) to effectuate. The answers to three basic questions facilitate the business portion of your edge planning: 1. What is the current data center structure, and which applications reside in each facility?

While evaluating the requirements for an edge data center project may seem superfluous, since it’s

70 •

dataCENTERS

already known that the underlying requirement is to put specific functionality closer to end-users, virtually all edge initiatives will be contingent on the existing network and, oftentimes, existing applications.

Based on the inherent inter-relationship between the existing core and its desired augmented edge, existing and proposed applications must be reviewed to determine things such as their latency and security requirements. In other words, what is the optimal as well as maximum level of acceptable latency?

2. Who are the “end-users” (internal and external) to be supported and what are their specific requirements (i.e., what is required to provide the necessary level of service?)

Essentially, this effort is designed to develop specific profiles of the “end-users” of the edge-centric application(s) and establish the satisfaction criteria for each group. For example, an initiative to provide medical personnel with faster access to patient records and radiological information will be used differently by a physician whose primary requirement may be speed and administrative staff whose focus is on ease of usability and information security.

3. Where are prospective “end-users” located, and how many reside in each geographic area?

This analysis isn’t conducted solely to identify new edge locations but also to determine the required configurations for each edge data center. Depending on a variety of factors, the number of applications to be supported and user volume, for example, the quantity of hardware such as racks and servers may vary between locations, thereby requiring more than a single edge data center.

The answers to these geographic questions have a substantial impact on implementation planning.

Physically, edge data centers do not fit neatly within many municipalities’ code structures. As a result, additional time should be built into implementation plans to compensate for potential issues regarding permitting requirements, zoning, and even municipal jurisdiction disputes until precedents are set to address a rapidly growing number of edge installations.

Technical Considerations — Just as form follows

function, the business analysis findings must be translated into physical requirements. The specifications documented in this phase serve as the basis for multiple activities including vendor review and selection, identifying the potential need for site acquisition and development support, and the physical requirements for each site. The process of making these determinations focuses on developing answers to the following questions: 1. Based on the business analysis, what are the configuration requirements (racks and cabinets) for each desired location?

Each site should be looked at individually to determine its initial, and potentially future, hardware, power, and cabling needs to accelerate the delivery process and clarify site requirements to simplify data center installation.

“

to

operate remote data centers, organizations must take a look at how these network extensions will impact current operations.

2. What are the physical requirements (fiber, power, etc.) for each location and are there known existing sites that meet these criteria and/or will additional locations need to be identified and acquired?

Indeed, the ability to locate edge facilities on existing corporate property is desirable, but due to the inherent remote nature of an “edge” site relative to both existing corporate locations and proximity to end-users, the site selection process for edge data centers will be similar to that of larger core facilities.

As a result, access to fiber and power, site availability, and the need for site development will continue to be primary evaluative criteria.

3. How will you implement edge units at existing corporate locations versus newly purchased sites?

Edge implementations can typically be expected to take place in multiple locations within an abbreviated time, and requirements may vary between a corporate-owned site and

“greenfield” sites. Processes and procedures may vary by individual location.

4. Who will perform the necessary pre-installation and installation activities at each location?

Since pre-installation and installation support varies between equipment providers and/or end-users, specific entities need to be identified who will be responsible for: • Obtaining all required site development and building permits • Coordinating all related scheduling • Interfacing with utility and fiber providers • Supervising the physical installation of the facility • Determining if these responsibilities differ between sites

5. What is the support plan for these new implementations?

Edge locations can be spread over a broad area or within a narrowly defined region, but in each case, they will be physically separate from each other. These geographic considerations mean that your support plan needs to determine who — the end-user or the data center provider — will monitor your sites and perform routine maintenance, emergency support, and spare parts availability.

In Sum Implementing data centers has always been a detailed and complex exercise. Edge data centers will have a multiplicative effect on these processes. Operating and monitoring remote data centers necessitates that organizations take a hard look at how these network extensions will impact current modes of operation. Edge data centers will provide a powerful tool for the implementation of emerging applications, enhancing the end-user experience and increasing customer satisfaction, but will also present new sets of challenges that require careful analysis and planning. •

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