Area Development Magazine - Q4 2014 by Area Development

SECURING QUALITY JOBS INCENTIVES

INDUSTRIAL MARKET RECOVERY

THE NEW FACE OF MANUFACTURING

AREADEVELOPMENT S I T E

A N D

F A C I L I T Y

P L A N N I N G

www.areadevelopment.com

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Q4/2014

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TAX EXEMPTIONS

AVAILABLE BUILDINGS O CCUPAA N C Y & OCCUPANCY CONSTRUCTION ONSTT R U C T I O N COSTS COSTS EENVIRONMENT N V I R O NTT

CO CORPORATE TAX RATE

TOP LOCATION FACTORS

ADVANCEDD ICT ICC T SERVICES CESS

ES S TAXTAXE

STATE & LOCAL INCENTIVES

LOW W UNION U PROFILE PROFILE HIGHWAYY ACCESS ACCESS S

SHH I PPII N G SHIPPING COSTS OSTS

SKILLED LAB LABOR BOR Energy Availability & Costs

TTRAINING R A IN IN G PROGRAMSS

LABOR COSTS

WHAT YOUR COMPANY MUST CONSIDER WHEN MAKING ITS NEXT LOCATION/EXPANSION DECISION

A D VA N C E D M A N U FA C T U R I N G IN M I S S I S S I P P I

Toyota Motor Manufacturing Mississippi — Blue Springs, Mississippi

INTELLECTUAL TALENT. A SKILLED WORKFORCE. UNLIMITED POSSIBILITIES. Success in today’s marketplace requires a competitive advantage – and companies are finding that advantage in Mississippi. The state’s higher education network provides a robust platform for building continued business success in the advanced manufacturing sector. Low energy rates, lean operating costs, nationally ranked speed of permitting and a highly skilled workforce create a winning formula for global companies to thrive. That’s why Toyota, GE Aviation, and Northrop Grumman are choosing Mississippi.

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MISSISSIPPI RANKS

MISSISSIPPI’S

TOP 10

ENERGY COSTS

STATES FOR

up to

20%

DOING BUSINESS LOWER THAN THE NATIONAL AVERAGE

MISSISSIPPI RANKS

Kiplinger, August 2014

Area Development Magazine, 2014

Discover all the possibilities at mississippi.org/manufacturing.

MOST TAX-FRIENDLY STATES FOR BUSINESSES

14/10/14 5:50 PM

MISSISSIPPI RANKS

5 TOP10 TOP TOP 5 STATES FOR IN ADVANCED MANUFACTURING

AUTOMOTIVE MANUFACTURING STRENGTH

SHIPBUILDING

Business Facilities, 2014

U.S. Department of Transportation MARAD Report, 2013

Expansion Solutions Magazine, 2013

Mississippi Is Topping The Charts In Advanced Manufacturing. A growing list of global manufacturers are finding their

GRAMMER Inc. will locate in Shannon, Miss., which will serve as

competitive advantage in Mississippi, helping them meet the

its U.S. headquarters. The company is investing $30 million in the

demands of today’s complex economy. The state’s low energy and

project and creating 650 new jobs for Mississippi’s workforce.

operating costs, nationally ranked one-stop permitting process,

Feuer and GRAMMER join an impressive list of global

customized incentives portfolio and highly skilled workforce combine

automotive advanced manufacturers that already call

to provide businesses with the strong, supportive business climate

Mississippi home, including Yokohama Tire Corporation, which is

industries require to thrive. As a result, Mississippi has garnered a

constructing a commercial truck tire plant in West Point, Nissan,

number of economic wins over the last year.

Toyota, PACCAR and more than 200 automotive suppliers. In

Direct foreign investment continues to play a big role in the

fact, more than 3.3 million vehicles have been manufactured

state, which is known for its strategic, centralized location that

in the state since the first commercial vehicle rolled off the

provides easy access to many U.S. and international markets –

assembly line 10 years ago at Nissan’s plant in Canton, Miss.

allowing companies to efficiently distribute their products. In September 2013, German company Feuer Powertrain GmbH,

To meet today’s workforce needs, advanced manufacturers have access to the robust training programs offered by the

announced the company was locating its first U.S. manufacturing

state’s 15 community colleges. These custom tailored workforce

facility in Tunica, Miss. A manufacturer of crankshafts for

training programs equip Mississippi’s workforce with the

the automotive and transportation industries, Feuer’s scope

necessary skills to ensure a quality product and a company’s

of business includes machining and processing ready-for-

success. Additionally, Mississippi’s four research universities

“

installation crankshafts. Feuer is investing $140 million in its new

provide access to world-class R&D opportunities in the

manufacturing facility and creating 300 new jobs.

automotive, aerospace, advanced manufacturing and health

Another German company that selected a Mississippi location

care industries. In Mississippi, innovation quickly moves from

over the last 12 months is vehicle supplier GRAMMER Inc., the

the research lab to commercialization through these strong

U.S. subsidiary of GRAMMER AG, which is the leading supplier of

partnerships.

automotive interiors and seating systems for commercial vehicles.

“

Made in Mississippi is a stamp of quality worldwide.

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Dan Bednarzyk, Nissan V.P. for Total Delivered Cost

An environment that supports growth is a top priority for Mississippi’s leaders, and the increasing number of industry leaders choosing to expand their business in Mississippi is a testament to that. With shovel-ready sites and a highly skilled workforce, opportunities are abundant in Mississippi. To learn more, visit www.mississippi.org or call the Locate in Mississippi team at 1.800.360.3323.

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CONTENTS

FEATURES

25 Securing Incentives With a Well-Paid Workforce

14 The New Face of Manufacturing Robotics, automated technology, and manufacturing intelligence are helping manufacturers to compete in the global economy.

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TAX EXEMPTIONS

AVAILABLE BUILDINGS

CO CORPORATE TAX AX RATE

OOCCUPANCY CC UPAA N CY & CONSTRUCTION ONSSTR TRUC UCTI CTIO ION ONN COSTS C OST OS T S ENVIRONMENT ENVIRO NTT

TOP LOCATION FACTORS

ADVANCEDD IICT CT SERVICES CESS

SXE S ES TAXE T TAXE TA

STATE & LOCAL INCENTIVES

17 Finding a Location That’s a Perfect “Fit”

LLOW W UUNION PROFILE PROFIL E PRO

A company that looks beyond the financial and real estate aspects of a community may find itself considering a location with advantages that can’t be traditionally measured.

HIGHWAY HWAYY AACCESS SS

SHI SHIPPING HIPPING NG COSTS OSTS

SKILLED LABO LABOR BOO R Energy Availability & Costs

TRAINING TRAINI NGG PROGRAMSS

LABOR COSTS

29 COVER STORY

20 Reality Check:

The articles in this section examine the top 10 factors from our Q1 2014 Corporate Survey that determine where companies will locate/expand their facilities. There’s an acute need for skilled labor and highway access is vital, but cost factors also figure prominently.

50 Revolutionary Advances in Life Sciences Pharma and biotech companies as well as medical-device manufacturers are transforming the healthcare sector.

54 Tesla’s “Gigafactory” —

Six “Wonders” of The Industrial Market Recovery

Top 10 Location Factors

As a growing number of states augment their business incentives with Quality Jobs programs, manufacturing, technology and other high value-add companies are well positioned to potentially reap significant and often enhanced tax and non-tax benefits.

Reno’s Game Changer

While several predictions about the shifting industrial real estate landscape have been borne out and others remain fluid, it seems that this real estate sector will continue to grow faster than others.

To win the Tesla project, Nevada offered a rich — and what will be a highly scrutinized — incentive package.

56 Urban vs. Suburban: Which Location Will Allow Your Company to Grow? Each has its appeal, but the answer is unique to all sizes and all types of high-tech firms.

Exclusive Online Content

www.areadevelopment.com

NOW ONLINE... JLL: Rising Seaport Activity Spurs Industrial Real Estate Growth Eastward Though Western seaports still remain active, concerns over supply chain disruptions have turned focus toward the East Coast.

In Focus: Enhancing the Sustainability of Existing Buildings Location Notebook: Mississippi

Area Development® Site & Facility Planning (USPS 345-510) is published five times per year (Q1/Winter, Q2/Spring, Q3/Summer, and Q4/Fall — and Annual Directory in December) at Richmond, VA, by Halcyon Business Publications, Inc., 400 Post Ave., Westbury, NY 11590. Periodicals postage paid at Westbury, NY, and additional offices. Single copies, $10. Yearly subscription U.S. & Canada, $75; foreign, $95.

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Volume 49 | Number 4 Q4/2014

Quote:

I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts. Abraham Lincoln, American President (1809–1865)

4 Editor’s Note

10 First Person

Expanding Economy’s Need for Skilled Labor

Larry Clinton, President/CEO, Internet Security Alliance (ISA)

DEPARTMENTS 6 In Focus Measure By Measure, Green and Productivity Goals Become Aligned

8 In The Know • Business Location Tracker • Advanced Robotics to Revolutionize the Manufacturing Industry

12 Front Line Front Line — Preparing for Takeoff in the Drone Industry

• Energy-Rich States Growing U.S. Economy, Shifting Global Balance • Positive Outlook for Middle Market Manufacturing Execs

Thriving 100%

Web Directory

Declining

Special Investment Report

90%

24%

80% 70%

Holding Steady

60 Ad Index/

45%

39%

31%

36%

58 Metro Atlanta

52%

60% 50% 66%

40% 30% 20%

53%

56%

61%

60%

40%

10% 10%

0% 2009

2010

2011

2012

2013

2014

Figure 1: Industry Business Conditions Overall

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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 2014 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 | Q4/2014

EDITOR’SNOTE

Q4/2014

Expanding Economy’s Need for Skilled Labor On the third anniversary of National Manufacturing Day — October 3, 2014 — the Labor Department reported that unemployment fell to 5.9 percent in September — the lowest level in six years! Analysts also predicted hiring would remain solid, as business investment and consumer spending are increasing, and the annual pace of economic growth is expected to remain above 3 percent. PwC’s Q3 2014 Manufacturing Barometer projects company revenue growth of 5.6 percent over the next 12 months, although there are concerns about the impacts of legislative/regulatory and tax policies. According to Bobby Bono, PwC’s U.S. industrial manufacturing leader, …”management teams believe they are making the right decisions to grow, but remain leery of external factors beyond their control.” The PwC report also indicates 52 percent of U.S. industrial manufacturers plan to add employees to their workforces over the upcoming year. More than 30 percent of those with such plans said the most sought-after workers are skilled laborers. This requirement was also on the minds of those who responded to the 2013 Area Development Corporate Survey: availability of skilled labor was their number-one concern in the location/expansion decision process. Interestingly, a lack of skilled labor is also cause for concern in the U.S. construction industry, where spending reached its highest level this summer since 2008. In this issue, we examine the availability of skilled labor factor and the next nine most important site selection criteria in more detail. The second-most-important factor is highway accessibility — not surprising considering it is “the lifeblood of robust commerce,” according to National Association of Manufacturers (NAM) President and CEO Jay Timmons. The nation’s aging infrastructure is in dire need of upgrades, and Congress needs to focus on long-term spending plans, Timmons further notes. NAM outlines its recommendations in a report entitled “Catching Up — Greater Focus Needed to Achieve a More Competitive Infrastructure.” Look for the 2014 Corporate Survey, which will be mailed out in November. Your responses will indicate if the factors detailed in this issue are still our readers’ primary concerns as they continue to open new and/or expand facilities in a steadily improving U.S. economy.

www.areadevelopment.com EDITORIAL E-mail: editor@areadevelopment.com Editor Geraldine Gambale Staff and Contributing Editors Lisa Bastian Cynthia Kincaid James Berger Beth Mattson-Teig Lisa Buddecke Phillip Perry Dale D. Buss Jim Romeo Dave Claborn Mali R. Schantz-Feld Mark Crawford Steve Stackhouse Clare L. Goldsberry Karen Thuermer DESIGN/PRODUCTION Art & Design Patricia Zedalis Production Manager Jessica Whitebook Production Assistant Talea Gormican EXECUTIVE Publisher Dennis J. Shea dshea@areadevelopment.com Sydney Russell, Publisher 1965-1986 ADVERTISING SALES William Bakewicz (ext. 202) billbake@areadevelopment.com Valerie Krpata (ext. 218) valerie@areadevelopment.com ONLINE SERVICES Digital Media Manager Justin Shea (ext. 220) jshea@areadevelopment.com Business Development Matthew Shea (ext. 231) mshea@fastfacility.com Web Designer Carmela Emerson BUSINESS SERVICES Reader Service Barbara Olsen (ext. 225) olsen@areadevelopment.com Circulation Gertrude Staudt circ@areadevelopment.com CONFERENCE SERVICES Program Manager Annie Gregson (212) 579-4469 annie@areadevelopment.com

Editor

EXECUTIVE OFFICES

2014 Editorial Advisory Board Justin T. Bickle Economic Development Specialist Niagara Bottling, LLC Rose Burden Executive Director, Southeast Area Negotiated Incentives Leader, Ernst & Young Christine Bustamante National Co-Leader, Global Location and Expansion Services, KPMG Gregory Burkart Managing Director, Specialty Tax Practice Leader, Duff & Phelps, LLC Dennis Cuneo Partner Fisher & Phillips LLP Tim Feemster Managing Principal, Foremost Quality Logistics Larry Gigerich Managing Director, Ginovus Stephen Gray CEO, Gray Construction

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Halcyon Business Publications, Inc.

Minah C. Hall Managing Director, True Partners Consulting LLC

John Morris Leader of Industrial Services for the Americas, Cushman & Wakefield, Inc.

President Dennis J. Shea

Scott Kupperman Founder, Kupperman Location Solutions, LLC

Kathy Mussio Managing Partner, Atlas Insight

Finance Mary Paulsen finance@areadevelopment.com

Dan Levine Practice Leader, Scott Redabaugh Managing Director, Location Strategies and Economic Development Jones Lang LaSalle Oxford Economics, Inc. Dick Sheehy Director, Advanced Planning & Jamie M. Lominack Real Estate Manager Site Selection, CH2M HILL Michelin North America Eric Stavriotis Senior Vice President, Bill Luttrell Senior Locations Strategist, CBRE Werner Global Logistics, Werner Enterprises, Inc. Thomas Stringer Esq. Director, Michael McDermott Consulting Manager, Business Advisory Services, Ryan & Company Global Business Consulting Jeff Troan Director, Economic Development Cushman & Wakefield Opportunities, Lockheed Martin Bradley Migdal Executive Managing Director, Dean J. Uminski Executive, Business Incentives Advisory Services, Site Selection Consulting, Crowe Horwath LLP Transwestern

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MANUFACTURING LEADERSHIP DRIVES GROWTH AND BUILDS BUSINESS IN WISCONSIN. A robust business climate, diversified industry growth and continuous innovation in high technology makes Wisconsin the place to be for manufacturers. It’s why we consistently rank among the nation’s top states in manufacturing. Wisconsin businesses have access to world-class technology research and development resources, which ensures that manufacturers here can tap the latest advanced manufacturing technologies quickly and cost effectively. We can better meet the needs of manufacturers now and in the future through the highly skilled and specialized workforce that comes from our strong technical college system. Plus, many companies in Wisconsin and those outside of the state gain a competitive advantage with access to the breadth and depth of our Tier I, Tier II and Tier III suppliers. Our enterprising start-to-finish supply chain integration reflects advanced thinking and delivers cost effectiveness that positions Wisconsin as a global leader in meeting the needs of OEMs. We show our commitment to manufacturing with bold policies and incentives, including the introduction of the Wisconsin Manufacturing and Agriculture Tax Credit, which virtually eliminates the tax on income for manufacturing activity in Wisconsin. To learn more about how the manufacturing tax credit can help you In Wisconsin, contact our Business Attraction Account Manager, Wade Goodsell, at 608.210.6813 or wade.goodsell@wedc.org. Learn more by visiting Select.InWisconsin.com.

In Wisconsin® is a registered trademark of Wisconsin Economic Development Corporation.

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INFOCUS

Measure By Measure, Green and Productivity Goals Become Aligned By Bob Best, Executive Vice President, Energy and Sustainability Services, JLL

Bob Best directs energy and sustainability business operations – with responsibilities that include new business development, energy reduction programs, client sustainability efforts, performance metrics, operating standards and training. He is a LEED® Accredited Professional through the U.S. Green Building Council and a Green Globes Professional through the Green Building Initiative. Best co-authored “Green + Productive Workplace: The Office of the Future…Today.”

AREADEVELOPMENT

Does going green mean your workforce becomes more productive? Sometimes — but not all green workplaces are created equal. Workplace and sustainability experts alike often champion “going green” as a way to not only achieve energy savings and social responsibility, but also to improve employee productivity. Plenty of anecdotal evidence and a fair amount of research support the idea that green initiatives, from workplace recycling to LEED certification, give employees a sense of camaraderie and pride, along with health benefits. But does this perceived symbiotic relationship go beyond the hypothetical? And where do sustainability programs end and employee resistance begin? Unearthing the hard evidence that a company’s sustainability programs are — or are not — enhancing productivity requires meaningful metrics that quantify both sustainability tactics and productivity impacts. Of course, many organizations already compile some sustainability and employee productivity data — but comparing these data sets to inform holistic strategies for specific facilities is an emerging concept. In fact, addressing this challenge is the focus of a new research report by the World Green Building Council titled “Health, Wellbeing & Productivity in Offices: the Next Chapter for Green Building.”

Side-by-Side Comparisons Drive Organizational Value Sustainability goals on their own certainly have significant bearing on a company’s bottom line. But the potential value of green workplace programs increases dramatically when it is strategically aligned with workplace productivity goals. For example, consider the “3:30:300” rule of thumb. If an organization spends $3 per square foot on annual utilities, $30 on rent, and $300 on payroll, a 2 percent improvement in energy efficiency results in savings of $0.06 per square foot — while a 2 percent improvement in productivity increases value by $6 per square foot. Implementing tactics that support both sides of equation will bring even greater benefit than those developed in isolation. The key is to use a metrics system that enables easy comparison of green and productive tactics within all applicable categories, such as energy, waste, and water use; space efficiency; and employee wellness and productivity. Evaluating dual line-item impacts in these categories exposes areas for improvement. For example, a facility achieving energy savings may achieve a high “green” score, but a low score in productivity because employees are too hot or cold. The right metrics will enable a company to quantify the impact on annual revenue. Using metrics will also allow managers to quantify the impact of program successes. For example, an office could be right-sized to achieve energy savings by eliminating underutilized space, while being thoughtfully reconfigured to improve productivity with workspaces that better accommodate the work performed within them. Both the energy savings and the productivity improvement can be measured to create a balanced view of the office redesign. Ultimately, the use of a wide range of metrics and related analyses will provide insights far beyond stating the face value of any single initiative. Enormous potential lies in analyzing data across these traditionally separate realms of sustainability and productivity. Side-by-side impact comparisons can support long-term strategic thinking that strengthens Certified LEED Gold, Max Planck Florida Institute for both sustainability and productivity efforts. It’s all in Neuroscience was designed to foster productivity and the integrated numbers. collaboration, along with sustainability. FOR FREE SITE INFORMATION, CALL 800-735-2732, EXT.

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IN THE KNOW Advanced Robotics to Revolutionize the Manufacturing Industry A report released in October from PwC in conjunction with The Manufacturing Institute reveals that industrial manufacturers across all industries are seeking to gain a competitive edge through the use of advanced robotics. Some 59 percent of the 120 manufacturers polled currently use some form of robotics technology. Industrial robots have become smarter, faster, and more affordable, and have developed advanced capabilities, such as sensing, dexterity, memory, and trainability, says the report titled “The New Hire: How a New Generation of Robots is Transforming Manufacturing.” Currently, there are 1.5 million industrial robots working worldwide, with 180,000 of them in the U.S. By 2020, the global industrial robot market is expected to reach $41 billion. “The manufacturing industry is primed for a more advanced integration of robotics, and the speed of adoption continues to increase with every dollar invested in these new technologies. At PwC, we see this as the ongoing progression toward the ‘factory of the future,’ as disruptive technologies such as 3D printing and robotics have the ability to significantly improve efficiency, quality, and operations,” says Bob McCutcheon, PwC’s U.S. Industrial Products leader.

Positive Outlook for Middle Market Manufacturing Execs According to the 2014 McGladrey Manufacturing & Distribution Monitor report, the majority of small and mid-size manufacturing and distribution companies expect solid growth over the next 12 months — and twothirds plan to add jobs during that period. In fact, these growing companies expect to increase their workforces by 6 percent, up from 4 percent in 2013.

well to 36 percent, up from 31 percent in 2013 (Figure 1). For furniture and fixture as well as building materials manufacturers in particular, the percentage of thriving companies is also up, rising to 33 percent from 27 percent in 2013.

Industrial sector executives report that they are already coming off a strong year but expect even better results over the next 12 months. While the majority of executives (69 percent) reported increases in domestic The number of thriving companies overall has risen as sales over the past year, 88 percent expect the next 12 months to bring further growth, Thriving Holding Steady Declining with an average 100% projected increase 9% 90% 24% of 8 percent. In 31% 36% 39% 80% addition, two 45% 70% thirds (67 percent) 52% 60% reported that they 50% expect their profit 66% 40% (before interest 61% 60% 56% 30% and tax) to rise 53% 20% over the next year, 40% with nearly a quar10% 10% 7% 5% 5% ter (24 percent) 3% 0% expecting increas2009 2010 2011 2012 2013 2014 es of more than 10 Figure 1: Industry Business Conditions Overall percent.

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Track business relocations and expansions on Area Development Online.

Studies/Research/Papers on Area Development Online.

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

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

BUSINESS LOCATION TRACKER Tesla Selects Reno, Nevada, Area for $5 Billion “Gigafactory” Tesla has chosen the Reno, Nevada, area for its new factory that will produce advanced batteries for its electric vehicles.

Magneti Marelli Opens Its First Michigan Manufacturing Facility Italy-based Magneti Marelli Holding USA officially opened its 100,000-square-foot exhaust system manufacturing plant in Independence Township, Mich., employing 75 people.

China-Based Haier Group Opens New Jersey Headquarters Haier America, a global leader in home appliances and consumer electronics, has opened its new headquarters in Wayne, N.J., bringing 200 staff members to the Garden State.

PVC Pipe-Maker to Locate New Factory in Paducah, Kentucky

Beef Processor to Locate $30 Million Facility in Ohio

A company that manufactures PVC pipe and fittings, Genova Products Inc., is establishing a $4.9 million production center in Paducah, Kentucky, with plans to create 125 jobs.

Tri-State Beef, Inc., has chosen Dan Evans Industrial Park in Bidwell, Ohio, for its new $30 million North American beef processing facility that will create nearly 250 new jobs.

Biomedical Firm Establishing Louisiana Headquarters Hub Renaissance RX is making an $8 million capital investment to establish its headquarters in the Central Business District of New Orleans, creating at least 425 new jobs.

Mars Petcare Opens First U.S. Innovation Center in Tennessee

Japanese Company Expanding at Georgia Location

Mars Petcare has opened a state-of-the-art, $110 million Global Innovation Center in Thompson’s Station, Tenn. The new campus contains R&D and lab space for the development of pet food innovations.

Haso USA Inc., a Tokyo-based manufacturer of personal-use cleaning products, will create 170 jobs and invest $7 million in a new location in Peachtree Corners, Ga.

Energy-Rich States Growing U.S. Economy, Shifting Global Balance Data released in late August by the Commerce Department indicate that energy-rich states saw the fastest economic growth in late 2013, as reported by The Wall Street Journal (8/20/14). Among these energy-rich states, North Dakota and Wyoming both experienced 8.4 percent GDP growth in Q4 2013; West Virginia, 7.5 percent; and Louisiana, 5.4 percent. Developing shale through the use of hydraulic fracturing is taking place in all four of these states. Speakers at an IHS CERAWeek energy conference held this past spring noted that the United States holds ample reserves of natural gas to help supply rising world gas demand, particularly for gas-fired electric power generation in Asia. “It’s clear that no country has found greater opportunity in recent years than the United States,” Joe Kaeser, Siemens AG president and CEO, told the conference attendees. “The U.S. will most likely become the world’s largest oil and gas producer this year. That’s affordability, availability, and sustainability all in one.” More good news for the U.S.: According to JLL’s 2014 Energy Outlook for North America, there are approximately 1.5 million energy-related jobs in the United States. Energy is among the fastest-growing industries, up 10.7 percent over the past five years, and the rate of energy job growth is 2.5 times faster than the national average during the same time period, says the JLL report. Furthermore, through 2020, JLL predicts energy-related employment will increase by another 5 percent, not including auxiliary services and jobs supported through expansion in the energy industry.

AREA DEVELOPMENT | Q4/2014

FIRSTPERSON LARRY CLINTON

PRESIDENT/CEO

According to a study from McAfee and the Center for Strategic and International Studies, cybercrime costs businesses worldwide more than $400 billion annually. Is the U.S. more vulnerable than other nations? Clinton: Actually, the U.S. industry’s cyber defense is generally better than that of other nations. According to the Ponemon Institute, U.S. business investment in cyber security has basically doubled to approximately $100 billion a year over the last five years. However, this spending has not been evenly spread over all enterprises, with some making a rather impressive effort to protect their electronic information and systems, while others have made minimal, and often inadequate, investments in cyber security. Is this just an IT problem? Clinton: No, cyber security is not a technology problem — it’s an enterprisewide risk management issue that corporations need to address in a holistic fashion. Actually, people are the number-one cyber vulnerability. Technology is just HOW cyber attacks occur. In order for us to solve the cyber security problem we need to address WHY they occur, i.e., the economic incentives all favor the attackers. Cyber attacks are cheap, easy to launch, and profitable. Cyber defense methods are generally a generation behind the attackers, and law enforcement is virtually nonexistent — less than 1 percent of cyber attackers are successfully prosecuted. How are manufacturers affected by cyber threats? Clinton: Successful cyber attacks threaten operational uptime and productivity. Threats may come from industrial spies, criminals, disgruntled insiders, “hacktivists,” or terrorists and affect profitability and business viability for manufacturers in a number of ways, e.g., theft of intellectual property or sensitive data; damage to manufacturing processes or products; damage to manufacturing systems or shutting down operations with denial of access attacks. Can threats come through the manufacturer’s supply chain? Clinton: Yes. Modern companies often have increasingly complex supply chains, with multiple choke points or opportunities for compromise — identifying where a

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INTERNET SECURITY ALLIANCE (ISA)

vulnerability is introduced or a compromise occurs can be daunting. Threat actors can, and do, exploit vulnerabilities along the supply chain in order to access private systems and steal secrets. Small businesses along the supply chain with little or no IT staff are increasingly used as easy first targets and stepping stones to get lucrative information. Is there an added risk when manufacturers use cloud-based technology? Clinton: Cloud-based technology, if implemented haphazardly and without appropriate oversight, may also introduce new security risks to manufacturers’ information and systems, possibly eroding confidentiality, integrity, or availability of data. One study found that 62 percent of IT professionals professed to have “little or no faith” in the security of data placed in the cloud, including 48 percent who had already put their data in the cloud. Is there any way to secure company information on employees’ personal devices used to conduct business? Clinton: While the use of personal employee-owned devices makes securing company information more difficult, there are measures that can be taken to mitigate some of these risks. According to the AFCEA Cyber Committee 2013 report on practical cyber security investment, these measures might include restricting employees from installing certain applications on devices brought into the company network, ensuring that the operating system and software applications utilized on these devices is patched with current updates, and restricting administrative privileges. Are the added costs of recovering information taken into account? Clinton: Yes. These costs are very large, but cleaning up in the wake of a cyber-incident can actually be more expensive than the direct impact of the crime itself. In addition to more tangible costs dealing with incident response — including things like PR campaigns or legal costs — there are other post-incident costs that are less tangible. These costs might include damage to the company brand, reputational loss, etc.

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Do today’s manufacturers invest enough time and money in securing their proprietary information and processes? Clinton: The manufacturing industry is becoming increasingly aware of the cyber security threats it is facing. Unfortunately, simply being aware that there is a threat is only the first step in addressing it, and there is no one size fits all solution. Each entity needs to do its own risk assessment (including risks associated with the partners/ vendors it is interconnected with) and install a program suited to its unique risk posture. What procedures constitute an effective security program? Clinton: The Internet Security Alliance recently prepared a Handbook for Corporate Directors that outlines the process we recommend for corporate entities to build their own effective security program. Since the Handbook was published in June it has been endorsed by the U.S. Department of Homeland Security, the Institute of Internal Auditors, and the U.S. Chamber of Commerce.

Are there other costs to industry of cybercrime besides financial? What are the long-range effects? Clinton: In a highly competitive global economy, business advantage often comes from insights or proprietary products that result from corporate R&D. If competitors are able to gain this insight through cyber theft of IP or business process information, it not only eliminates the competitive advantage for the original company which did the R&D but it also provides a massive disincentive for future R&D, thus inhibiting innovation and growth. Cybercrime is essentially a tax on innovation that slows the pace of growth by reducing the rate of return to innovators and investors.

THE ASSIGNMENT Area Development’s editor recently spoke with Larry Clinton, the president and CEO of the Internet Security Alliance, who noted that cyber security needs to be woven into corporate processes. When done successfully, it can help build competitive advantage.

When it comes to successfully expanding or relocating your business,

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AREA DEVELOPMENT | Q4/2014

Preparing for Takeoff in the Drone Industry

courtesy Ashima Devices

FRONTLINE

Ashima’s drones are made for law enforcement, fire and rescue, security, and global industrial and marine environments. They provide “situational awareness,” according to the Ashima website.

By Craig Guillot

s drones become smaller, more affordable, and easier to operate, they’re being eyed for use in everything from agriculture to construction and real estate. The Federal Aviation Administration (FAA) says there could be 30,000 of them in American skies by 2020, and according to the Association for Unmanned Vehicle Systems International (AUVSI), the business of manufacturing and flying drones could become an $82 billion industry within 10 years.

Designated Site Operators The FAA is expected to open the doors to commercial drone use as early as 2016, and many economic development organizations are already trying to attract drone manufacturers. Thus far, the FAA has selected six test site operators; the sites will serve as labs for developing drone policies and technologies. The operators include the University of Alaska, the state of Nevada, the North Dakota Department of Commerce, Texas A&M University (Corpus Christi), Virginia Tech, and Griffis International Airport (New York). These locations are already experiencing growth from manufacturers that want to build and test drones and components. For example, UAV (unmanned aerial vehicle) manufacturer Ashima Devices recently announced it would relocate its headquarters to Reno, Nevada, bringing 400 jobs to the area by 2018. Ashima cited an aviation-friendly environment, manufacturing infrastructure, and a qualified workforce as the top reasons for relocation. “Being a test site already gives us tremendous credibility with companies that are in the industry,” says Mike Kazmierski, president and CEO of the Economic Development Authority of Western Nevada (EDAWN). Many non-designated test sites are also appealing to drone companies. Horton Hobbs, IV, is vice president of

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Economic Development for the Greater Springfield Chamber of Commerce in Springfield, Ohio. He says the state’s aviation background and manufacturing sector has helped spark interest from the industry. The Ohio/Indiana Unmanned Aerial Systems (UAS) Center and Test Complex in the NextEdge Applied Research and Technology Park features 20,000 square feet of incubation space along with airspace. “[Drone companies] need manufacturing space and a place for testing. The manufacturing facility doesn’t need to be in an airfield but it should be close by,” Hobbs explains. There are a lot of manufacturers, suppliers, and developers “sitting on the sidelines,” Hobbs further notes. Regulations on how drones will be used will ultimately dictate the bulk of drone manufacturing, how they are tested, and where they will be built. “No one wants to jump through 500 hoops to do a 20-minute test flight. The government needs to be friendly and facilitate testing and development,” Kazmierski explains.

Getting in the Game Developers say getting in the game early will help build regions as drone manufacturing centers. North Carolina entered the drone industry back in 2012 with the founding of the NextGen Air Transportation Center at the Institute for Transportation Research and Education at North Carolina State University.“We’ve been very supportive of the industry. We’ve created a workforce to support it, and we’ve got lots of farmland to fly over,” says NextGen Director Kyle Snyder. Precision Hawk, a Raleigh, North Carolina-based company that collects and analyzes data collected by drones, recently raised $10 million in funding to support its growing business. The industry could create 1,200 jobs and generate more than $600 million in the state in the next 10 years, according to AUVSI.

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225, OR VISIT US ONLINE AT www.areadevelopment.com

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INDUSTRY SITE SELECTION REPORT

The New Face of Manufacturing Robotics, automated technology, and manufacturing intelligence are helping manufacturers to compete in the global economy. By Mark Crawford

Courtesy: Robotiq

.S. manufacturing has been severely battered over the last decade, losing millions of jobs to low-cost countries and the Great Recession. Even with the economic recovery well under way, competition from overseas is still strong and companies are reluctant to spend money. However, to stay competitive in the global marketplace they must maximize efficiency and reduce costs. This means investing in advanced equipment, automation, and robotics to speed up production, improve quality, and reduce or eliminate errors. One of the strongest technology trends in manufacturing today is the installation of robotic equipment. Technological advances have made robots more “aware” of their surroundings, using 360-degree sensors that allow them to operate safely, and with more dexterity, near human workers on the production line. Another design improvement is intuitive, easy-to-use software interfaces that improve production and efficiency. Robotic equipment has also dropped dramatically in cost and can be easily scaled to any size of operation, making it more accessible and affordable to smaller companies.

The Robot Gripper has been designed to give industrial automation the flexibility needed to automate processes including a high-mix of parts.

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According to the Robotics Industries Association, global robotics companies established record sales in the first half of 2013. A total of 10,854 robots valued at $679.3 million were ordered from North American robotics companies during that six-month period — an increase of about 2 percent over the same period the previous year. This increase is, in part, driven by a wider use of robots across multiple industries, including semiconductors, life sciences, food processing, injection molding, metalworking, medical equipment logistics/distribution, and even small, complex devices like cellphones. For example, Google and Taiwanese manufacturer Foxconn plan to use 10,000 assembly-line robots to manufacture the iPhone 6. The automotive industry continues to use industrial robots in creative ways. Robots have been developed for automotive assembly lines whose highly sophisticated vision systems allow them to “see” their surroundings and take on more intricate tasks, such as painting. An especially innovative robotic application is an exoskeleton “hand” that assembly line workers can wear, which reduces repetitive stress injuries and improves performance. “Although the automotive industry uses a large number of industrial robots in a production line, human workers still contribute to the final completion of the cars,” says Mathieu Bélanger-Barrette, an engineer with Robotiq, a Canadian robotics manufacturer based in St-Nicolas, Quebec. “Operations such as wiring installation and wheel installation remain human tasks. To reduce the weight applied on the human hand, Equipois has developed a bionic hand. This exoskeleton device reduces the stress produced by repetitive movement. It also adds 10 pounds of gripping force to the worker. The ‘gripper’ comes with sensors, actuators, and simulated nerves, muscles, and tendons that not only reduce fatigue, but also increase manual dexterity.” Auto manufacturer Tesla is also using cutting-edge robotics to manufacture its Model S. Tesla employees work alongside flexible robots to install the battery, motor, interior components, and miles of cabling. In fact, the company recently announced plans to install additional flexible robots 800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com

made by KUKA, a leading robotics firm in Germany, to expand production and keep up with consumer demand for the Model S and Model X crossover SUV. “For our customers, automation is the decisive key to higher productivity and greater cost-effectiveness,” says Wolfgang Meisen, director of corporate communications at KUKA Robotics. “It improves product quality, reduces costintensive use of materials, and minimizes the consumption of dwindling energy resources.”

Automated Technologies New manufacturing equipment, such as computer numeric control (CNC) machining centers, rely increasingly on automation. These sophisticated machines enable the micro-machining of complex, mission-critical parts with dimensional tolerances as tight as +/- 0.0001 inches. Complex profiles and shapes that once required multiple machining operations can now be completed on a single machine, reducing operational costs and shortening lead times. One of the biggest advantages of the new machines is being able to change parts quickly, with fewer set-ups. Because of these advancements in tooling and automation, secondary operations that were commonly performed on lathes and other machining centers are now done on a single machine, saving considerable time and money. Perhaps the most exciting part of automation and advanced machining equipment is that designers and engineers now have more

options for creating innovative parts and products, often from materials that were once considered too challenging to machine. “The machine operator is now an integral part of the layout, machine programming, and statistical control process,” says Dave Simak, marketing manager for Banner Service Corporation, an Illinois-based provider of medicalgrade metal materials. “Automation allows for lights-out operation and extends capacity for companies looking to continue production after the standard work day has ended.” An essential part of any advanced manufacturing operation is the use of sophisticated, automated vision inspection systems to inspect and pass/fail final products. System requirements vary according to the product’s specifications and requirements. For example, systems can be designed to take an image of each final product that is then compared to the actual dimensions in the imported CAD file with high precision. Optical visual-coordinatemeasuring machines can inspect complex contours in a matter of seconds. When manufacturers utilize automation, robotics, and vision systems in their production lines, it has been estimated that throughput can be increased by nearly 25 percent, with improved quality and less down time.

Manufacturing Intelligence Ties It All Together “Manufacturing intelligence” is a process by which

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manufacturing-related data is captured in real time, using sophisticated sensors and software, which is then analyzed to manage overall operations and maximize efficiency. These metrics are monitored on a regular (or continuous) basis and bring together a number of different cost centers to streamline the manufacturing process, improve quality, reduce downtime, and save energy. “Manufacturing intelligence strategies leverage a suite of reporting and analysis tools, interfaces, and dashboards designed to deliver contextual, localized, role-based information to help improve the system or process,” Rockwell Automation states on its website. “Reliable data collection and accurate, streamlined reporting is needed to put data into context and improve production performance. Displaying metrics in graphical representations and easyto-read reports provides powerful insight into performance history that can be used throughout operations to support continuous improvement.” Automation and robotics are critical tools for achieving continuous improvement and overall equipment effectiveness in the manufacturing setting. A good example of the impact of automation and manufacturing intelligence is GE’s $170 million battery plant in Schenectady, New York, which manufactures industrial batteries for power plants, cellphone towers, wind turbines, and other large installations. GE’s operations management team has designed an intricate manufacturing intelligence system

that analyzes a vast array of data that plant engineers can monitor 24/7. This can identify areas where improvements can be made, often through the implementation of automation or other advanced technologies. As reported in The Wall Street Journal, “GE can trace a product’s entire genealogy, from containers of dirt, sand, and salt to a bank of high-tech batteries supporting a nation’s electric grid. The data not only improve quality control — if a defect shows up at any point, GE can trace it back to its original source — but in the end give GE a powerful competitive weapon that’s virtually impossible to duplicate.” The various operations within the Schenectady plant are so automated, networked, and monitored that, despite its vast size (a footprint of about four football fields), the company won’t need more than 450 people to run at full production in 2020. “Manufacturing is undergoing a change that is every bit as significant as the introduction of interchangeable parts or the production line, maybe even more so,” says Michael Idelchik, vice president of advanced technology programs for GE Global Research, only a few minutes from the battery plant. “The future is not going to be about stretched-out global supply chains connected to a web of distant giant factories. It’s about small, nimble manufacturing operations using highly sophisticated new tools and new materials.” ■

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800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com16/10/14 10:24 PM

SITE SELECTION

Finding a Location That’s a Perfect “Fit” A company that looks beyond the financial and real estate aspects of a community may find itself considering a location with advantages that can’t be traditionally measured. By Justin Bickle, Economic Development Specialist, Niagara Bottling, LLC

ite location is a process that requires assessment of qualitative and quantitative information in order for a company to make calculated, lowrisk growth decisions. The implementation of an effective site selection strategy can take on many forms, dictated by the level of analysis a company chooses to take. During this process, manufacturers, specifically, are justifiably fixated on areas such as workforce, real estate and utility qualification, taxes, access to market, and incentives. The aforementioned are indispensably imperative components to making an educated, cost-effective conclusion, but a comprehensive location strategy will also carefully identify characteristics of a community that are not found in data sets. Much will be revealed when placing an emphasis on the careful evaluation of outlying qualities and characteristics of a local entity and its stakeholders. The development of a dynamic working relationship with the economic development organization managing the project or governmental entity under consideration is critical. Often marginalized and non-traditional evaluation aspects of this process could prove to be particularly damaging to a timely decision in the short term, but also into the future vitality of the operation.

Assembling an Internal Team Prior to the deployment of a location tactic, a company must engage in the internal formation of its project team. For those who undertake this practice internally, assembling an effective team will likely require the participation from departments such as HR, real estate, engineering/construction, economic/ business development, finance, legal, and so on.

Clearly defining roles, responsibilities, and metrics is essential, because an internal site location team will bring an assortment of personalities, backgrounds, and occupational and project-related responsibilities to the table. Failing to do so can result in not meeting critical timelines and metrics set forth in the project process. In order to successfully manage project specifics with EDOs and local stakeholders, a company must present an organized identity, so that all involved are relaying accurate information and timelines.

Defining a “Project Champion” Regardless of how exhaustive the site location analysis becomes, identifying someone who will advocate for the project on behalf of the company and provide a balanced assessment of local, regional, and

THE LOCATION PROCESS Assembling an Internal Team

Defining a “Project Champion”

Establishing a Community Fit

Receiving Service After Sale

AREA DEVELOPMENT | Q4/2014

state nuances is paramount. Procuring an institutional knowledge of items such as potential permitting obstacles or zoning restrictions and understanding the personalities of local stakeholders can be invaluable to the evaluation of a community, which is what makes defining a champion a necessary component of the process. Whichever level of economic development association the project champion originates from, a set of intelligence that cannot be duplicated by the company exists. It’s imperative that this person can be entrusted to preserve whatever level of confidentiality a company wishes to uphold, yet receive the confidence to effectively leverage connectivity to entities and individuals that advance specific aspects of the project.

Establishing a Community Fit As previously cited, the project champion can serve as a conduit to understanding intricate and subjective characteristics and personalities of a community — “fit” is one of them. More often than not, an inadequate number of resources are dedicated to thoroughly understanding the everyday characteristics of a community. Depending on when the working timetable to deliver a site location decision commences, some companies have the ability to place emphasis on incorporating “community fit” into their comprehensive analysis. Those who possess the financial, personnel, and timing wherewithal to make semi-frequent trips to an area during the site location process will cultivate a sense of the nontraditional metrics important to making a site location decision; e.g., the genuine interest in attracting your investment (service and financial aspect), sophistication level of the organization/community, and willingness to engage in meaningful conversations. In order for a company to fully assess the fit of a community, one must first break down its own prohibitive barriers by avoiding the projection of characteristics such as a sense of superiority, entitlement, and communicative isolation. One location can make absolute sense over another from a cost analysis outlook, but defining whether or not the project is supported and desired by the entity is similarly indispensable. Is there genuine interest in the project, aside from the pursuit of an entity simply securing a “win?” Will our questions be answered promptly? How can we ensure required approval processes will be met to maintain the project timeline? Is there confidence our investment will be safe in the community over the long-term? These are only a select few of the myriad of unknowns to be queried and confirmed when gauging the fit of a community. Manufacturers, in particular, are frequently required to engage in conversations with numerous bodies (e.g., city council, planning and zoning, water/wastewater authorities, etc.) in the pursuit of the approval and location of a project. One way to continue the valuation of the fit of a community is to engage in problem-solving practices, as opposed to an impersonal negotiation without communication. Actions speak much louder than words, and the same can be said for an entity or community that takes a proactive stance in addressing the project. Intimately involved localities

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bringing resources to the table enabling a company to obtain concise, comprehensive information demonstrate attentiveness to developing a fruitful partnership and addressing company needs.

Receiving Service After Sale It’s no mystery that the competitive landscape for attracting capital investment (financial and human) continues to become increasingly apparent throughout the United States, which is identifiable by the various economic development organizations (EDOs) and variance in available incentives programming. EDOs exist to promote their jurisdictions and attract investment (new and existing), which ultimately grows the economic base. Thus, it can be expected a company will encounter an infinite number of superlatives specific to how much of a perfect fit the community is, the ease and timeliness of approval processes, and value of incentives available. Localities that manage to not only express the positives of the municipality, but are also open and candid about local timing expectations as well as fees/costs — and creatively discuss prospective discretionary incentive opportunities — are often successful in competing for and attracting new investment. To a company experiencing the process, avoiding surprises during and after a site location decision is extremely important, which is why “service after sale” is indispensable. At the culmination of a successful attraction of investment, a project agreement that outlines the scope of work and incentives that a community has agreed to undertake and offer, coupled with metrics and compliance responsibilities of a company, is executed. The practice is the confirmation of a formal public/private partnership, yet meaningless if the timing commitments and services are not fulfilled. A community that remains involved and is accessible will assist a company in the timely occupation of a facility, which, in turn, enables the company to operate and begin servicing the customer base. A company often places an equally valuable emphasis on the service after sale component of the location process, as they do on incentive programming.

In Sum Financial vitality, combined with demographic and geographic deficiencies, is among the characteristics that will naturally produce certain limiting capabilities of a community or EDO. However, municipalities of any makeup own the ability to compensate for what they might lack in traditional metrics in the data set(s) with immeasurable qualities that often set them apart from outside competition. Designating time to this aspect of the site selection strategy may be uncharacteristic for some companies. Those who choose to investigate opportunities beyond the financial and real estate aspects of their evaluation could find themselves considering the inclusion of an area that might not make the most sense on paper, but possesses assets that reflect an assertiveness in meeting project specifics, maintaining communication, and affirming that a company’s short- and long-term timelines are met and its investment in the community is secure. ■ 800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com

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SITE REAL SELECTION ESTATE

Reality Check: Six “Wonders” of The Industrial Market Recovery While several predictions about the shifting industrial real estate landscape have been borne out and others remain fluid, it seems that this real estate sector will continue to grow faster than others.

courtesy Electrolux

By John Morris, Leader, Industrial Services for the Americas, Cushman & Wakefield

An Electrolux employee oversees advanced manufacturing robots that are applying an enamel coating onto the interior of stoves built at the Memphis plant.

hen the industrial real estate recovery began, the trends that likely would drive its transformation and progress became a favorite discussion topic among industry practitioners. Just a few years later, our sector continues on a solid, positive trajectory. Now feels like a good time to look at whether those early prognostications have played out. Our team recently completed a report that uses actual performance and continuing forecasts to assess how closely the industry is tracking to expectations. We reviewed a number of those initial predictions and tracked the outcomes, with an eye toward seeing how their performance could, perhaps, have far-reaching implications for the way companies

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should plan for the short-, medium-, and long-term.

P R IO O R P R EDICTION #1: To meet increasing customer delivery expectations, distribution centers (DCs) will be located closer to urban centers. The growth of e-commerce has fueled new DC projects in major hubs and key markets measurably. This is particularly true in and near higherdensity metro areas. For example, regions like Dallas, the Inland Empire, and Chicago have 16.5, 14.8, and 6.0 million square feet under construction, respectively. Each of these markets recorded more than eight million square feet of e-commerce deal volume FOR FREE SITE INFORMATION, CALL

during the last three years. New Jersey registered the greatest e-commerce activity as a percentage of new projects (including deals in excess of 200,000) — 32 percent since 2011. This is unsurprising, given that state’s sweetspot position within the most densely populated region of the U.S. Still, while big-box DC construction has been the big e-commerce story lately, it is not the only one. As e-commerce operations are being established for next-day and sameday fulfillment in large metro areas, the demand for smaller, infill facilities is also on the rise. Not only do shippers covet the proximity to FedEx/UPS ground-shipping centers these locations often bring, they gain the ability to fulfill and deliver orders to a large number of customers quickly. Multiple smaller and mid-size distribution centers that are well placed in urban infill locations minimize the time and distance spent on the final leg of delivery. Such centers are being used by major retailers as satellite locations and by small- and mid-size retailers as primary online fulfillment centers. Changing service requirements, elevated transportation costs, and access to labor are some of the reasons why concentrating around major population centers will continue to be a focus for these businesses. This is a trend still in motion, with the story incomplete. — Prediction Grade: B or Incomplete

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P R I O R P R EDI C TI ON #2:

P R I O R P R EDIC C T IO N #4:

Warehouse/distribution centers will continue to grow.

Supply of large, modern warehouse space will be constrained in prime hubs, pushing development activity into secondary markets.

Large is indeed big right now. Industrial buildings are setting new records for scope, as distribution centers greater than one million square feet become more prevalent in several markets. Half of these mega-projects have been constructed since 2000, with a quarter of the total inventory added since the beginning of 2007. The need to improve supply chain efficiency to save time, money, and fuel is a driving force behind the rise of giant DCs, which allow companies to experiment with different fulfillment strategies and respond to the demands of highturnover online retailing. To this end, Amazon, Procter & Gamble, TJ Maxx, Home Depot, and Walmart all moved forward with mega-sized distribution centers in 2013. Because these mega facilities and the operations within them often require significant land parcels to accommodate larger truck courts and parking areas, there is an inherent conflict limiting how much further this trend can continue; major parcels, in major markets, closer to an urban core are limited and, ultimately, finite. — Prediction Grade: A-

P R I O R P R EDI C TI ON #3: Clear heights will rise. Not only has the total square footage of new buildings increased substantially, but also the average clear heights have indeed risen. As direct-to-consumer sales require retailers to consolidate online and store-based fulfillment operations under one roof, higher ceiling height improves racking options, maximizes pallet capacity by 12 to 25 percent (in comparison to 32-foot clear height), and increases cube capacity by 7 to 15 percent. Another factor pushing distribution centers to the 36–40-foot range is the ability to incorporate mezzanines that facilitate order picking. As facilities grow, so does the adoption of automation to meet order fulfillment labor, speed, and accuracy. For example, e-commerce providers are harnessing radio frequency identification systems (RFID), which allow machines to store and retrieve goods on the basis of the label number assigned on the package. After big increases in 2012 and a modest slowdown in 2013, MHI data now shows 2014 rebounding with strong increases in both orders and shipments of material-handling equipment. Beyond operational advantages, these higher ceiling heights also provide strategic real estate benefits. Tenants can maximize their square footage, which may enable them to expand in place rather than relocate to accommodate growth. Many of the large new facilities rising today are buildto-suits. Developers are, however, getting in on the act by building some speculative product to higher specifications. In the Inland Empire, five new speculative construction projects with a 36-foot clearance are under way. And in the Dallas/Fort Worth market, seven new spec projects totaling 7.2 million square feet offer clear heights greater than 36 feet. — Prediction Grade: A

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The jury may still be out on this one. Although it is true that secondary markets have seen an increase in development, activity in primary markets remains stronger, particularly in core markets like the Inland Empire, Chicago, Dallas/Fort Worth, Houston, and Central New Jersey. But if top markets are not yet constrained, they likely soon will be — which means that secondary markets will see their fair share of development in the midterm. Companies seeking good highway access, proximity to intermodal or ports, and strong labor are finding it increasingly difficult to secure the right site in top markets. Limited availability and high land prices are making urban facilities more expensive, and neighboring submarkets are becoming increasingly land-constrained. Some tight markets will likely see some older stock demolished and rebuilt to meet some of the demand (examples can be found in Los Angeles, Oakland, and Orange County, California), but development also will spill into markets with land ready for construction, such as Phoenix and Indianapolis. It is interesting to consider the percent of industrial construction completions that occur in the top 10 markets, compared to all other markets, and use that data to discuss how this dynamic might help predict business cycle strength and duration. During the last significant real estate cycle we saw the percent of construction completions in top markets rise to near 83 percent at the peak in 2006, but then fall to 67 percent at the bottom of the cycle in 2009. In 2012, the percent of construction completions in top markets had risen back to 81 percent. By mid-year 2014, the level had fallen marginally, to 75 percent. We believe the fact that this ratio remains relatively high a few years into the current cycle is a sign that it still has plenty of room to run. Development capital will certainly move toward secondary markets as a business cycle matures. — Prediction Grade: B+ or Incomplete

P R I O R P R EDIC C T IO N #5: Rising construction costs will present big challenges for new development. The first part of this prediction — that construction costs will rise — certainly has come true. However, new development is booming, with projects getting built and deals getting done. Construction costs for industrial product vary by city and market. Chicago, northern and central New Jersey, Los Angeles, and northern California are among the most expensive. Both New York/New Jersey and Chicago have seen the most significant average increases in construction costs (10 and 5 percent, respectively) in the last year. Material costs for construction of warehouse/distribution 800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com

projects, in general, have inched marginally upward in recent years. And, as the size of the potential site increases, some hard cost totals, on a per-square-foot basis (site work, foundation premiums, offsite improvements, shell), may see notable drops. According to Oltmans Construction, the building cost for a one-million-square-foot CTU building with 32-foot clear ceilings and ESFR sprinklers can be approximately $21.25 per square foot in southern California, compared to $30 per square foot for a 200,000-square-foot building. So, why are costs trending up? Rising labor costs and land constraints are the main culprits. Considering that construction labor costs have risen 2.8 percent in the last year alone, and that demand for industrial product has reached a recent high, we expect overall development costs to continue growing. Yet, within this context, virtually all of the top markets are seeing construction pipelines return to pre-recession levels. At mid-year 2014, Dallas/Fort Worth and the Inland Empire were leading the way, with 16 million square feet and 13.4 million square feet under development, respectively. As a market, Dallas absorbed more than 15 million square feet in 2013, and is set to add more than 20 million square feet in construction by the end of 2014. By the end of the year, new industrial construction nationwide will total 119 million square feet — more than double last year’s volume and the highest since 2008. — Prediction Grade: C

P R I O R P R EDI C TI ON #6: Reshoring will bring more jobs, capital investment, and subsequent demand for industrial space back to the U.S. We have good news here, but just how much remains unclear. While the debate still exists regarding how much manufacturing has returned to the U.S. from offshore locations, manufacturers are at the very least examining their options more closely. Not long ago, the labor cost advantages of China and India made them prime focuses for outsourced operations. Now locales like Mexico, Canada, and the southeastern U.S. are getting stronger consideration. In a 2012 Boston Consulting Group (BCG) survey, 37 percent of U.S. manufacturers with sales above $1 billion said they were considering shifting some production from China to the United States. Of the very biggest firms, with sales above $10 billion, 48 percent were considering reshoring. Respondents cited factors including rising wages and benefits in China, as well as stricter labor laws and more frequent labor disputes and strikes. At the same time that wages are rising in places like China, other supply chain costs are growing. BCG projects that, as soon as 2015, it will cost about the same to manufacture goods for the U.S. market domestically as it will in China for industries like computers and electronics, machinery, appliances, electrical equipment, and furniture. That inclusive calculation takes into account a variety of direct costs (e.g., labor, property, and transportation), as

“

As manufacturing continues to be more cost- and service-justified where demand is strong, it’s likely that the market for industrial space should remain resilient.

well as indirect costs such as the expected impact of greater supply-chain risks. Such factors were behind Apple’s recent initiative to bring manufacturing back to the U.S. In 2013, the company started manufacturing the new MacBook Pro models in Austin, Texas. This $100 million investment creates a closer-to-home supply chain. Components are made in Illinois and Florida, and the Macs will rely on equipment produced in Kentucky and Michigan. Apple also recently acquired a vacant 1.3 million-square-foot factory in East Mesa, Arizona, where it plans to manufacture sapphire glass for its products. This new plant represents a $1.5 billion capital investment, creating more than 2,000 jobs in engineering, manufacturing, and construction. Apple is not the only example. Electrolux selected Memphis as the location for a new 750,000-square-foot plant, where Electrolux and Frigidaire cooking ranges and ovens are now rolling off the line. The plant, a $100 million investment, employs 550 people and 700 more will be added in the next five years as production nears top levels. Additionally, GE has moved some appliance production from China and Mexico to Louisville. As a result, GE has doubled its workforce in Jefferson County, Kentucky, to about 6,000 since 2009. — Prediction Grade: A

In Sum Clearly, several industry predictions have proven true, a couple remain fluid, and one, perhaps, missed the mark (but only because the overall demand for space has been strong enough to power the market right through cost concerns). As e-commerce adoption continues to grow at about 15 percent annually, and as manufacturing continues to be more costand service-justified where demand is strong (like here in the U.S.), it seems likely that the market for industrial space should remain resilient. Here is a new prediction to end this discussion: the shopping and retailing evolution, shifting demand and service paradigms, current demographic market forces, and global growth dynamics will continue to drive growth in industrial real estate. While nobody can be sure how long this current economic expansion will continue, it seems to us that these factors will drive the development of industrial real estate faster than other property classes. Let’s agree to grade that prediction later. ■ AREA DEVELOPMENT | Q4/2014

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TAXES & INCENTIVES

Securing Incentives With a Well-Paid Workforce As a growing number of states augment their business incentives with Quality Jobs programs, manufacturing, technology and other high value-add companies are well positioned to potentially reap significant and often enhanced tax and non-tax benefits. By Bob Foley, Manager, Global Location & Expansion Services, KPMG LLP

eturn on Investment (ROI) — It’s a term that is widely thrown about in both business and government circles. Simply defined, ROI measures the amount of capital invested in a given venture and the corresponding net profit associated with such investment. ROI is often used as the metric of choice for corporate real estate and tax executives charged with determining which state and local jurisdictions offer the best investment environments. Politicians and public-sector economic development officials also lean on ROI analysis when crafting legislative incentive programs and determining appropriate levels of financial assistance for companyspecific business incentive proposals. Although the inputs and outputs inherent to public and private ROI models may differ, both models ultimately inform public and private decision-makers where limited corporate resources and government revenue might best be put to work.

Manufacturing as the Industry of Choice Economists have long held that employment within and capital investment made by high value-add companies provide more direct, indirect, and induced economic benefits. Given the choice between a “big box” retail outlet and manufacturing facility that is establishing operations at a publicly owned site, public officials often prefer the latter. Unlike the retail industry, the manufacturing

sector typically pays higher salaries, and has a more localized supply chain, with higher economic multipliers attached to per capita employment and capital investment. For example, the higher salaries paid by manufacturers directly impact state tax revenue via proportional increases to both state personal income and sales tax revenues. Indirect and induced economic benefits are realized when local suppliers hire additional employees to fulfill contracts with a manufacturer (indirect) and the new hires at the manufacturing facility and local suppliers increase household spending patterns (induced). Likewise, when determining which industries should be statutorily eligible for business incentive programs and to what extent companies should benefit from discretionary incentives, public officials and politicians will often choose manufacturing over retail. Why? In many cases, the answer is significantly higher ROI that results from higher salaries paid to workers. Competition among states to secure higher waged employment opportunities intensified with the onset of the 2008 recession. This competition was in large part responsible for the current proliferation of state sponsored “Quality Jobs” incentive programs.

Quality Jobs Incentive Programs The U.S. unemployment rate rose to a high of 10.2 percent in October AREA DEVELOPMENT | Q4/2014

Computing the Georgia Quality Jobs Tax Credit The amount of credit per eligible new job is:

When the amount the job pays is:

$2,500

At least 110% but less than 120% over the average county wage

$3,000

At least 120% but less than 150% over the average county wage

$4,000

At least 150% but less than 175% over the average county wage

$4,500

At least 175% but less than 200% over the average county wage

$5,000

At least 200% over the average county wage

of 2009, which represented a near doubling of the nation’s pre-crisis jobless rate.1 Some states fared far worse than the national average, with Nevada unemployment rates topping out at close to 15 percent at the recession’s peak, followed by Michigan and California at 12.5 percent and 12.4 percent, respectively.2 Rapidly increasing unemployment rates placed added strain on state budgets that were already experiencing widening shortfalls. The federal government responded by enacting the American Recovery and Reinvestment Act of 2009 (ARRA), a $787 billion stimulus package aimed to put the unemployed back to work via a variety of federal tax incentives, publicly funded infrastructure projects, and stopgap funding for state and local governments.3 At the same time, spirited debate was taking place in state legislatures across the nation regarding the states’ responses to the economic crisis. State incentive programs were front and center during these deliberations. Many state officials advocated that it was time to recalibrate and reload their economic development toolboxes, while others backed cost-cutting measures that sought to scale back or rescind incentive programs with an eye toward filling budgetary gaps. Ultimately, many states opted to either re-authorize existing programs (typically such re-authorizations included more stringent recapture and clawback provisions) and/or establish new job-creation initiatives with deeper incentives that were specifically designed to lure employers with highly paid workforces. Many of these so-called “Quality Jobs” programs in operation today were enacted or enhanced as part of larger state legislative responses to the 2008 recession. Currently at least eight states (including Colorado, Florida, Georgia, Iowa, Louisiana, Mississippi, New Mexico, and Oklahoma) have a “Quality Jobs” or similar program that provides enhanced benefits above and beyond the state’s traditional jobs program. The programs’ names may differ (e.g., Georgia Quality Jobs Tax Credit Program – QJTC; Florida Qualified Targeted Industry Tax Refund – QTI; and New Mexico High-Wage Jobs Tax Credit Program), but all of these state programs target high-wage workers and

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provide significantly enhanced tax benefits to participating employers over traditional job-creation tax incentive programs.

How the Programs Work Georgia’s “Quality Jobs” program is effective for tax years 2009 and beyond and provides significant tax incentives for companies that create at least 50 net new “Quality Jobs” in a given 12-month period. Annual tax benefits range in value from $2,500 up to $5,000 per newly created “Quality Job.”4 Actual per-job tax credits are based on the percentage that a position pays above the average wage of the county in which the job is located. (See accompanying chart for explanation of how the credit is computed.) Credits are awarded on an annual basis for a period of up to five years. Excess credits are eligible to be carried forward for 10 subsequent tax years. Excess credits may be applied to offset an employer’s payroll tax withholdings obligations. The withholdings tax benefit can be particularly attractive to manufacturers that are new to Georgia, have significant upfront capital investment requirements, and accordingly find themselves in net operating loss (NOL) positions in the “upfront years.” Other companies with NOLs, such as research and development firms, also may find the withholdings option attractive. Taxpayers must notify the Commissioner each year of their irrevocable election to take all or part of the credit against their withholding obligations by filing form IT-WH at least 30 days prior to the due date or actual filing (whichever is earlier) of the Georgia tax return. Louisiana’s version of “Quality Jobs” provides gross annual payroll tax rebates to qualified employers that execute rebate contracts with the Louisiana Department of Economic Development.5 Manufacturers and specified targeted high-wage industries that create at least five new jobs that pay at least $14.50 hourly are eligible to receive a five-year annual benefit that is equal to 5 percent of the applicable and incremental “Quality Jobs Payroll.” The incremental benefit increases to 6 percent for jobs that pay 800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com

“

at least $19 hourly. The City of expansion project could potentially New Orleans offers a companion qualify for up to $1.5 million in program to the Louisiana program Georgia Quality Jobs Tax Credits Quality Jobs incentive that entitles eligible employers to a over a five-year period.8 By itself, programs can be significant 2.5 percent rebate on sales and use this $1.5 million in Quality Jobs Tax and a great way to offset initial tax otherwise due for machinery, Credits represents 15 percent of costs associated with a newly equipment, and construction the proposed expansion project’s constructed or expanded materials.6 initial capital investment. Not a facility. bad ROI at all, especially when New Mexico’s High Wage Tax one considers that the above Credit Program offers refundable excludes any additional state and tax credits equal to 10 percent of local discretionary incentives such as local property tax wages and benefits for each new “high-wage job” up to a abatements, state development training grants, and qualified $12,000 per job maximum.7 The credit may be claimed in the sales and use tax exemptions that could move the ROI to year in which the eligible job is created and each of the three upward of 20 percent. ■ subsequent tax years. Eligible employers must pay their “high-wage employees” at least $40,000 annually ($60,000 1 http://www.bls.gov/opub/ted/2009/ted_20091110.htm 2 after June 30, 2015) if the job is located in an urban area, or at http://www.bls.gov/opub/ted/2011/ted_20110301.htm 3 In 2011, the expenditure estimate was increased to $840 billion; least $28,000 ($40,000 after June 30, 2015) if the job is located http://www.recovery.gov/arra/About/Pages/The_Act.aspx. 4 http://www.georgia.org/competitive-advantages/tax-credits/quality-jobs/ in a rural area. 5 6 7

A Significant ROI

The stand-alone tax benefits associated with “Quality Jobs” incentive programs can be significant and a great way to offset initial costs associated with a newly constructed or expanded facility. For example, let’s assume a Georgia company operating outside of the retail sector proposes to create 100 new jobs that pay at least $65,000 and invests $10 million at an existing Cobb County facility. This proposed

http://www.opportunitylouisiana.com/page/quality-jobs http://www.nola.gov/economic-development/business-services/tax-incentive-programs/quality-jobs/ http://www.nmpartnership.com/Tax_Incentives.aspx 2013 average annual salary for Cobb County was $53,040. Salary of $65,000 is between 120% and 150% of average county salary and therefore would qualify for “Quality Jobs” Tax Credit of $3,000 per job. See http://www.georgia.org/competitive-advantages/tax-credits/quality-jobs/

Note: This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

THIS ISN’T THE CENTER OF TULSA.

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Top 10 Location Factors Driving The Decision The articles in this section examine the top 10 site selection factors from our Q1 2014 Corporate Survey that determine where companies will locate/expand their facilities. There’s an acute need for skilled labor and highway access is vital, but cost factors also figure prominently.

FINANCING available ble landd PERMITTING I T TII N G

TAX EXEMPTIONS

AVAILABLE BUILDINGS O CCUPAA N C Y & OCCUPANCY CONSTRUCTION ONSTT R U C T I O N COSTS COSTS EENVIRONMENT N V I R O NTT

CO CORPORATE TAX RATE

TOP LOCATION FACTORS

ADVANCEDD ICT ICC T SERVICES CESS

ES S TAXTAXE

STATE & LOCAL INCENTIVES

LOW W UUNION PROFILE PROFILE HIGHWAYY ACCESS ACCESS S

SHH I PPII N G SHIPPING COSTS OSTS

SKILLED LAB LABOR BOR Energy Availability & Costs

TTRAINING R A IN IN G PROGRAMSS

LABOR COSTS

Factor articles written by Dale D. Buss AREA DEVELOPMENT | Q4/2014

1 Availability of Skilled Labor Availability of Skilled used to be done abroad — or businesses are locating factories and expanding in America

Availability of Skilled Labor

in situations where previously they might have looked to Asia — the greater availability of skilled labor in the U.S. tends to be one of the most important attractions. “If it’s a highly labor-intensive operation, it’s probably not coming back to the United

An Acute Need

States, but some of the things that are complicated types of manufacture and that are

A growing economy and an “onshoring” trend are fanning demand.

complicated machines and automated equipment.”

highly automated are,” says Dick Sheehy, director of Advanced Planning and Site Selection for CH2M Hill. “They need good, experienced, highly trained operators who can run

Multifaceted, Sophisticated Production And it’s not just cars, planes, and other big machinery and durable goods that are demanding advanced workforces. It’s also industries such as food processing, where Scott

WITH U.S. economic growth on

Kupperman does most of his work. In large part that’s because such businesses also are

a firmer footing, and demand

doing more multifaceted production, and on more sophisticated equipment, than before.

ticking up, the availability of

“That world is far more complex and automated, a lot more focused on innovation and

skilled labor has become the #1

manufacturing flexibility,” says the founder of Kupperman Location Solutions. “No one is

factor in site decisions, accord-

making just millions of cans of chicken noodle soup anymore. Now there may be hundreds

ing to latest survey of company

of different flavors, and lots of different ingredients, and eight different types of packag-

executives by Area Development

ing. That means being able to change things quickly in your manufacturing operations.

magazine, rising from the #3

And the skill sets are different and more advanced. People need to be able to learn on the

factor in the year-earlier survey.

fly, and troubleshoot and modify a food-processing line — and that’s not your $12-an-

Growing companies now apparently are more worried about adequately fulfilling de-

hour guy or girl. It’s someone who’s got significant training; it demands more sophistication. And our country is not rife with those people.” Kupperman’s’ final comment underscores an unfortunate reality that also leads com-

mand than generating it. Also

panies to stress the importance of the #1 factor: a shortage of qualified workers in many

adding to the urgency of this

places in America, in areas as diverse as skilled tradespeople who assist manufacturing,

criterion is that to the extent

to trained scientists and engineers who staff research-and-developments operations. In

more U.S. companies are “on-

Oakland County north of Detroit, for instance, where many automakers, suppliers, and

shoring” manufacturing that

affiliated companies conduct and are expanding research, product development, and

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Availability of Skilled Labor Availability of Skilled Labor Availabili engineering operations, there will be nearly 60,000 new

plant in Houston, told the newspaper. “What we need to work on is the supply.” The so-called “war for talent” at the white-collar level raged furiously in the mid-2000s

skilled-trades jobs and other

during the period of sustained U.S. growth, right before the financial collapse of 2008 and

high-demand occupations,

the Great Recession of 2009 and 2010. It may have resumed. “In many markets, the war

through 2019, that require less

for talent is back,” notes Susan Marks, CEO of Cielo, a leading provider of global talent

than a four-year college degree.

management and acquisition, based in Milwaukee. “If it was ever gone, it’s back. Compa-

“The baby-boomers are starting

nies are starting to find that they’ve really got to work harder than they’ve ever had to in

to age out of the workforce,”

this area. Yes, there are horrible pockets where the economy still isn’t doing well. But the

notes Oakland County Execu-

unemployment rate for people with college degrees is only about 3 percent.”

tive L. Brooks Patterson.

Meanwhile, Harley Lippman, CEO of Genesis10, says that the crunch in qualified information-technology professionals has continued and that he expects it to be exacer-

“Middle-Skill” Jobs

bated as the economy continues to improve. These days, business for the New York-based

Across the U.S., by 2017,

technology staffing and consulting company is the best it’s been in three years, and one

an estimated 2.5 million new

major reason is that many IT-dependent companies still haven’t figured out the best way

so-called “middle-skill” jobs

to develop and nurture their own tech workforces.

— ones that require some training but not a bachelor’s degree — will be added to the

Training Programs States and localities have been responding to this need for some time, and never more

U.S. workforce, accounting

than now. This is particularly the case in “Flyover Country,” where many capable young

for nearly 40 percent of all job

adults get tempted to leave for the coasts, explains Eric Stavriotis, senior vice president at

growth, according to a recent

CBRE. “People are trying to outfit people who don’t meet the required skill set and get

USA Today analysis. The jobs

them into the workforce, and then keep that talented workforce at home and have them

typically pay from $13 to $20

not move off to San Francisco,” he says.

an hour in all sorts of areas

A number of states have done a particularly noteworthy job with training programs,

of what used to be known as

including Georgia, Louisiana, South Carolina, and Tennessee. Georgia’s exemplary pro-

blue-collar endeavors.

gram — Quick Start — is hailed by many company and consulting site selectors. It provides

Houston, undergoing big

training at no charge for many expansions and new operations primarily through the state’s

growth because of the new do-

technical college system. Quick Start also contracts private industrial trainers to provide

mestic oil boom, is expected to

supplementary efforts. The program has been instrumental in landing facilities such as a

add 100,000 of these jobs. “This

one-million-square-foot expansion that Toyo Tire is building in White, Georgia.

country is facing a shortage of

“The training Quick Start provided allowed us to focus on building and starting up the

that kind of talent,” Peter Cella,

plant,” James Hawk, chairman of Toyo Tire Holdings of Americas, told Chief Executive

CEO of Chevron Phillips’ chemi-

magazine. “There’s no doubt in my mind they saved us at least six months when we first

cal unit, which is building a giant

opened. And they’re still here helping.”

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2 HIGHWAY ACCESSIBILITY HIGHWAY ACCESSIBILITY HIGW One reason this factor may be even more important is the continued sweep of just-

HIGHWAY accessibility

in-time supply chains across the U.S. industrial landscape and the increasing consolidation of distribution and warehousing facilities. These two trends put an even keener edge on the ease of highway accessibility for the existing facilities that remain, and for

The Supplier/ Market Connection

larger new ones that are being built to handle broader geographic areas. “A lot of companies are reducing the number of warehousing operations that they may have scattered around the country and building fewer but larger distribution facilities,” says Dean Uminski, an executive in site selection consulting for Crowe Horwath LLP. “They need to be highly accessible; trucks need to be able to get in and out of there quickly; and they often need to be within one day’s drive of a huge chunk of the U.S. population.”

In-and-out is more important, but concerns are growing about highway quality.

Infrastructure Investment Is Critical If the Area Development survey were taken in the spring of 2014, later than its actual timing, another consideration might have been layered onto the others that make highway accessibility important: concerns about the nation’s long-crumbling transportation infrastructure and which states and cities have been experiencing it

JUST AS in the 2012 Area

most acutely, handicapping the companies and operations located there.

Development Corporate

This year’s record-harsh winter bashed many roadways, even principal ones like

Survey, in 2013 highway

interstates, and left crucial economic lifelines in tatters — or at least enough dam-

accessibility ranked as the

aged that they slowed activity for the rest of the year. Yet in Michigan, for instance,

#2 most important factor to

the governor and legislature were still debating a massive increase in funding to fix

corporate executives. Cer-

the state’s crumbling roads and bridges, a problem that has become severe enough

tainly that reflects the crucial

to put a crimp in its overall rising economic tide.

role of transportation costs

“If you think about the 10,000 miles across the state that your goods are moving on, a

and logistical efficiencies in a

big chunk of them could be gravel, Michigan Department of Transportation Director Kirk

U.S. and global market with

Steudle recently told a crowd of CEOs and other business leaders from across the state.

less and less margin for error in the supply chain.

This problem of an increasingly decrepit network of highways and bridges is true to one degree or another across the country, and politicians at the national level as well as at

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2 GWAY ACCESSIBILITY HIGHWAY ACCESSIBILITY HIGWAY ACCESSIBILITY HIGWAY Most Cost-Effective State Highway Systems* 1. WYOMING

the state level have only paid lip service to the situation. States cut their budgets for spending on infrastructure by 3.8 percent in 2009 and by an accelerated 5.7 percent in 2010 and haven’t made up much of the lost ground since the Great Recession officially ended. Exacerbating the problem for site locators is the fact that the infrastructure crisis

2. NEBRASKA

remains largely unabated, even while the gradual strengthening of the U.S. economy and

3. SOUTH DAKOTA

a quickening pace of business expansion and construction is placing even more of a pre-

4. SOUTH CAROLINA

mium on dependable and efficient highway systems — a situation that hasn’t been seen

5. KANSAS 6. NORTH DAKOTA

since the last time the economy was humming, mid-last decade, when all the roads and bridges were a decade younger. “We’ve seen a major uptick in industrial deals in the last two years, and highway accessibility and quality is important in those deals,” concludes

7. NEW MEXICO

Eric Stavriotis, a senior vice president at CBRE’s Economic Incentives Group.

8. MISSISSIPPI 9. MONTANA 10. KENTUCKY

*Source: Reason Foundation’s 21st Annual Highway Report, which measures the condition and cost-effectiveness of state-owned roads in 11 categories, including pavement condition on urban and rural interstates, deficient bridges, unsafe narrow lanes, traffic fatalities, administrative costs, and total spending on state roads. The study’s rankings are based on data the states reported to the federal government for 2012.

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3 labor Costs labor Costs labor Costs labor Costs But labor costs remain a huge factor in many location decisions, and nothing il-

labor C CostS s

lustrates this truth better than the monumental drama early in 2014 that determined where Boeing would build its 777X aircraft. The aerospace giant got proposals to host the massive program from 22 states and played off its own growing, lower-cost

The Costs vs. Quality Dilemma Although still of great importance, labor costs have taken a back seat to other factors.

South Carolina operations against its relatively expensive unionized labor base in the Seattle area. While many states propose millions of dollars in tax breaks and other incentives to lure airplane-manufacturing jobs, Boeing’s decision came down to its two existing operations — and their relative long-term labor costs. It strong-armed the International Association of Machinists and Aerospace Workers into voting (51 percent to 49 percent) to approve a package worth tens of millions of dollars in wage, benefit, and retirement concessions to land the 777X for Washington. In doing so, Boeing called the bluff of union leaders and politicians who argued that Boeing wouldn’t leave its Seattle-area skill base and existing infrastructure behind over something as baldly bottom-line-oriented as labor costs.

THE IMPORTANCE of the

outright cost of labor eased in the latest Area Development

Decreasing Emphasis on Rock-Bottom Costs Overall, there are reasons that labor costs are easing in their relative importance as

survey, to the #3 factor, com-

a site selection factor. For one thing, the continued movement of low-skill jobs out of

pared with its ranking as the

the United States, still bound for places like China and Mexico, essentially puts less

#1 factor in the prior year’s

emphasis on the appeal of rock-bottom labor costs as a factor in site location deci-

survey. Nonetheless, labor

sions among domestic locations. At the same time, the fact that labor costs in many

costs scored 90.8 percent in

low-wage countries are rising relative to U.S. levels eases some of the pressure on

importance, the same abso-

companies to secure the cheapest possible labor in America.

lute value as the year earlier,

“There’s also greater recognition that the quality of labor is increasingly important,

but lower in the rankings

and because with the economic recovery the availability of good people is getting

because survey respondents

tighter, companies are willing to pay more and are willing to be not quite as cost-

became more concerned

sensitive,” says Larry Gigerich, managing director of Ginovus.

about other things.

Yet like Boeing, many companies still look intently at labor cost differentials.

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3 sts labor Costs labor Costs labor Costs labor Costs labor Costs labor Indexed Unit Labor Costs in the Manufacturing Sector of Selected Countries, 2000–2012

Presumably that is what Reliance Worldwide, for example, did in deciding to open a new plant in Cullman,

200

Alabama, to launch U.S. production of an innovative 180 160 140 Canada 120

plumbing-connection system. In September, the Atlanta(2000 = 100)

China (economy-wide)

based company announced that it would invest $50 million to create 130 jobs over five years to manufacture its SharkBite system in the town where it already has a plant that makes other plumbing components. Previously,

South Korea Germany

United States 2000 2001 2002

2003

100 80

2004 2005

2006

2007 2008 2009 2010 2011 2012

Source: Economics and Statistics Administration analysis of data from the Bureau of Labor Statistics; International Labor Comparisons program and National Bureau of Statistics of China

SharkBite was made only in Australia. And while the company and Alabama officials cited the state’s offer of employee screening and training as a lure, no doubt Reliance also was attracted by Alabama’s low labor costs — notably, the consultants ranked

Alabama #1 for low labor costs in Area Development’s Top States For Doing Business survey. This advantage serves as an anchor for the state, which has been happy to supplement with other attributes.

AREA0172.indd 1

AREA DEVELOPMENT | Q4/2014 23/10/13 2:00 PM

occupancy/CONSTRUCTION Costs occupancy/CONrecovery at varying paces, increasing demand and nudging up prices. So companies are casting a

OCCUPANCY/ CONSTRUCTION

more critical and anxious eye at this massive element of the cost equation, industry experts say. Land and Construction Costs Such costs typically are the second-most-important cost consideration for companies after the

On An Upward Trend Land costs remain the biggest wild card, but construction costs have been rising as well. OCCUPANCY and construction

cost of labor, says Eric Stavriotis, a senior vice president at CBRE’s Economic Incentives Group. Of course, some key options affect occupancy or construction costs, most crucially a company’s decision whether to erect a new facility or move into an existing building. If a company can wait the several months or even few years required to put up a new facility, or if a greenfield site is crucially important for some reason such as facility specialization, then this factor enters heavily into its considerations. Construction costs include site acquisition, site preparation, and installing infrastructure. The most variable of these costs, consultants say, is land and associated infrastructure development, because their varying prices around the United States reflect foundational geographic and economic factors as well as intra-market specifics that typically dwarf any variations in the actual costs of erecting a building. “There are pretty significant differences in land costs across the country,” notes Scott Kup-

costs continued to be top of mind

perman, founder of Kupperman Location Solutions in Chicago, whose clients typically need sites

for site selectors, moving up one

for light manufacturing or distribution. Similarly, he says, pre-development, roadway, and other

spot in the rankings in Area Devel-

utility-infrastructure costs also can be highly variable depending on potential site locations. “One

opment’s latest Corporate Survey.

site may cost you $1 million and another site might cost you $7 million,” he explains. “So land

Occupancy or construction costs

is more of a blank canvas, more of a question mark, and less predictable than the actual costs of

also indexed higher on an absolute

construction going vertical.” And, Stavriotis notes, land prices overall “have come back up after

basis in the most recent version,

the recession.”

with a score of 87.4 in 2013 compared with 82.8 in 2012. The higher importance reflects not only the continued proportional significance of occupancy and

Companies also have a lot to think about when it comes to construction costs per se. Those also have been rising lately and are “extremely high right now,” Stavriotis says. “Money is still cheap, but if you look at what kind of risk a contractor has to take to build a building right now, from an insurance perspective, and what it costs to get the right [labor] trades to do it, that’s expensive.” Meanwhile, occupancy costs also have been ticking up. A semi-annual survey by CBRE Global

construction costs in companies’

Research and Consulting found that global prime office occupancy costs, for example, rose by 2.3

overall cost equation, but also the

percent year-over-year, and that the 3.3 percent increase in the Americas was the biggest boost for

fact that such costs are continu-

any region because the U.S. economy is re-emerging as one of the world’s best-performing. Office

ing to ratchet up as the U.S. and

demand by high-tech and energy-related businesses in markets such as Seattle, San Francisco, and

global economies proceed with

Houston surged the most, with suburban Seattle posting the largest annual increase, 19.4 percent.

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AREADEVELOPMENT

FOR FREE SITE INFORMATION, CALL

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A ECON OM IOW IC

Location Fort Dodge, IA 50501 Available Acres: 447

Location F90 & R16 Van Meter, IA 50261 Available Acres: 288

Transportation Summary Nearest Interstate: I-35 is 20 miles away Nearest 4-Lane Highway: Highway 20 is 5 miles away Nearest Commercial Airport: Des Moines International Airport (DSM) 90 miles Rail Served: Yes Property and Area Description This site is centrally located within the NAFTA corridor. The site has all of the components for large industrial utility users and infrastructure consumers.

Global leaders such as Cargill, Valero and CJ Bio America are tenants within the Iowa’s Crossroads of Global Innovation. Utilities Summary Electric & Natural Gas Distribution: MidAmerican Energy Company Telecommunications Local Service Providers: WebsterCalhoun Cooperative Telephone Sewer & Water Distribution: City of Fort Dodge Contact Kelly Halsted 515-995-5500

Transportation Summary Nearest Interstate: I-80 is 2 miles away Nearest 4-Lane Highway: Highway 6 is 7 miles Nearest Commercial Airport: Des Moines International Airport (DSM) 19 miles Rail Served: No Property and Area Description Located just southeast of the community of Van Meter and only a few miles from the Des Moines

IOWA FALLS / HARDIN COUNTY INDUSTRIAL SITE

WEST METRO INTERSTATE AND RAIL PARK

Location JJ Avenue &140th Street Iowa Falls, IA 50501 Available Acres: 245

Location I-80 and Highway 6 Dexter, IA 50070 Available Acres: 255

Transportation Summary Nearest Interstate: I-35 is 21.2 miles away Nearest 4-Lane Highway: US 20 is 5.1 miles away Nearest Commercial Airport: Mason City Municipal Airport (MCW) 58 miles Rail Served: Yes Property and Area Description This land is between the Canadian National and Union Paciﬁc rail lines. Rail Preliminary Design is nearing completion on connection

track and manifest yard. Electric service borders north and south boundaries, gas transmission line is also present. Utilities Summary Electric Distribution: Midland Power Cooperative Natural Gas Distribution: Alliant Energy, Northern Natural Gas Telecommunications Local Service Providers: Mediacom, Century Link Sewer & Water Distribution: City of Iowa Falls Contact Cindy Litwiller 641-648-5604

Transportation Summary Nearest Interstate: I-80 zero miles Nearest 4-Lane Highway: Highway 6 zero miles Nearest Commercial Airport: Des Moines International Airport (DSM) 35 miles Rail Served: Yes Property and Area Description Bordered by I-80, Highway 6 and Iowa Interstate Railroad, this is

NT AUTHO ME RI OP TY EL V E

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E R TIFI

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READY WHEN YOU ARE.

SIT E

Metro. This land is currently agricultural. Utilities Summary Electric & Natural Gas Distribution: MidAmerican Energy Company Telecommunications Local Service Providers: Paetec, Century Link Sewer & Water distribution: City of Van Meter Contact Linda Wunsch 515-987-2020

an ideal site for warehousing, distribution center, manufacturing or other uses requiring rail or interstate access. Large water and electric supply are on site. This site also has access to a large, highly educated workforce. Utilities Summary Electric & Natural Gas Distribution: MidAmerican Energy Company Contact Linda Wunsch 515-987-2020

iowaeconomicdevelopment.com/SiteLocation/CertiﬁedSite

AREA0305.indd 1

30/07/14 4:13 PM

advanced ICT advanced ICT advanced ICT advanc electricity and sound transportation systems. Such capabilities are especially critical for

advanced ict

certain kinds of operations such as data centers, shared-service facilities, and call centers. “It’s one of those boxes that you need to be able to check,” says Ginovus’ Larry Gigerich.

Companies Look to Visionary Locales

Need for Operational Talent

“Unlikely” locales have become big players in providing this capability.

was to find engineering talent to work on a facility,” notes John Morris, leader of

THE RISE OF “big data” in

need for engineering-operations talent has transited to the need for IT talent.”

nearly every industry vertical has

In significant ways, the need for ICT capabilities in a locale is strongly related to the availability of a local workforce that can support a company’s heavy reliance on high technology. The relationship reminds some corporate site selectors of how the industry was emphasizing a sort of precursor of IT talent, i.e., engineers, a decade ago. “If you go back to projects from that era, one of the challenging tactical needs

Industrial Services for the Americas at Cushman & Wakefield. “Now there’s the same sort of need for operational talent to work at a facility, but because the operations and automation in the building are so much more computer-driven, much of that

That helps explain why some of the cities that perform best in this criterion are

promoted continued impor-

America’s well-established centers of high technology. These include Austin, Texas, and

tance of a robust information

Provo, Utah, which are consistently ranked among the nation’s top centers of high-tech-

and communications technol-

nology startup and early-growth-stage activity. They were the first cities — along with

ogy (ICT) infrastructure as a

Kansas City — to get Google Fiber, the company’s nascent ultra-high-speed Internet

site selection factor. In the

service. And in 2014, Google announced that it is taking steps to expand the service to

most recent Area Development

34 other municipalities in nine metro areas: San Jose, California; Salt Lake City; Phoenix;

Corporate Survey, availability of

San Antonio; Nashville; Charlotte; Raleigh-Durham, N.C.; Portland, Ore.; and Atlanta.

advanced ICT services ranked as

Atlanta is an example of cities that don’t come to mind as digital hotbeds but al-

the #5 factor, with an impor-

ready fare well in advanced-ITC infrastructure. The city supports a booming health-IT

tance score of 84.6 percent.

and medical-devices industry with companies such as McKesson Technology Solu-

Corporate decision-makers now regard advanced ICT capabilities — telecommunications

tions, C.R. Bard, and CardioMEMS. All told, Georgia leads the nation with more than 200 health-IT companies and more than $4 billion in annual reported revenue. Visionary thinking and leadership in ITC infrastructure also can vault some unlikely lo-

and wireless, Internet capability,

cales to the front of the pack in this factor. Chattanooga, Tennessee, is the best example

fiberoptic networks, backup

of that. Thanks to the establishment of its ultra-high-speed Internet that began in 2008,

systems, and the software that

the mid-size city has become home to a burgeoning local tech scene and the relocation

integrates it all — as another

of a number of businesses that have been drawn by the fast Internet and an accompa-

aspect of infrastructure that

nying “smart” grid. IT-services firm Claris Networks moved its 85-person operation from

now amounts to table stakes

nearby Knoxville, Tennessee, to Chattanooga mainly because of the network. “It’s logical

for potential locations, along

for every city to do it, but that doesn’t mean it’s going to happen,” Hunter Lindsay,

with factors such as reliable

Claris’ regional director, told CNNMoney.

AREADEVELOPMENT

FOR FREE SITE INFORMATION, CALL

800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com

Doing Business in

NEW YORK STATE In 2014, START-UP NY, a game-changing initiative that creates tax-free zones to attract and grow new businesses across New York State, was formally launched. START-UP NY seeks to accelerate job creation and entrepreneurialism across the state on a large scale. The State University of New York (SUNY) campus system, City University of New York (CUNY), and private university and college communities serve as the framework of the START-UP NY program to attract growing businesses from around the globe. Under the program, businesses have the opportunity to operate completely tax-free for 10 years on eligible campus space and land. Businesses partner with the state’s higher education institutions and are able to access industry experts and advanced research laboratories. START-UP NY helps eligible companies to lower their overall tax burden, thereby reducing the cost of doing business.

Creating Jobs The dozens of companies participating in START-UP NY are projected to invest over $80 million and create more than 1,700 new jobs in tax-free areas, such as those at SUNY Buffalo, Rochester Institute of Technology (RIT), Cornell University, Stony Brook University, and SUNY Downstate Medical Center. Among these is Datto, Inc., which recently opened offices in downtown Rochester in a building owned by RIT. Datto, a global provider of backup, disaster recovery, and “intelligent business community” solutions, is committed to creating over 70 jobs over the next few years. According to Datto’s founder and CEO Austin McChord, “RIT has been instrumental in helping support and guide us through the START-UP NY process…there is an unlimited, untapped potential in the area, and I hope we start a wave of other companies moving to Rochester, driving the economy, and taking advantage of the vast talent pool in the region.” Some 500 new jobs will be created over the next five years as Liazon Corp., a national leading provider of private online benefits exchanges, expands its technology and operations in Buffalo under the sponsorship of SUNY Buffalo. The company will hire graduates from computer science, business, accounting, marketing, and other departments, as well as pursue research collaboration and curriculum development with the university by identifying necessary skills for graduates. Spurring Business Commercialization “Significantly, these first waves of approved businesses align with the core research sectors of SUNY’s Networks of Excellence, a key part of Governor Cuomo’s Innovation Agenda,” noted Dr. Tim Killeen, president of the Research Foundation for SUNY and SUNY’s vice chancellor for research. “The Networks support the mission of START-UP NY by bringing together SUNY’s top scholars and industry experts to spur research and business commercialization opportunities in high demand areas such as health, neuroscience, energy, materials, and advanced manufacturing.”

To learn more about the START-UP NY program, find answers to frequently asked questions, and search for eligible space, visit www.startup.ny.gov

AREA DEVELOPMENT | Q4/2014

Available Buildings Available Buildings Available B can locate and rehab an existing building rather than putting up a new one. “Most

Available Buildings

projects still prefer an existing building instead of taking the time and expense to build from the ground up,” says Kathy Mussio, managing partner at Atlas Insight. Scott Kupperman, founder of Kupperman Location Solutions, notes that “there were

Can’t Get Much Tighter

a lot more options with existing buildings during the recession. But in the past two years,

Companies are now facing the bottom of the barrel in existing spaces.

building. They think it should take six months and it actually takes 14.”

quality buildings have been snapped up by developers, investors, and users. Meanwhile, many national developers are being far more cautious about starting to build right now. That is an issue, mostly because companies tend to not allow enough time from the point where they determine they have a requirement to the time they actually need to be in a

The Default Position “The default position remains that if a company can find an existing building that will work for them, they can get into it faster and at a better price point, and that’s

THE SQUEEZE on vacant, ex-

the preferred approach,” says Larry Gigerich, managing director of Ginovus. “The

isting facilities keeps growing

challenge we’re starting to see in some markets — and that will grow in particular in

as the U.S. economic recov-

the next 24 months — is the quality of what’s left, particularly on the industrial side.

ery takes hold, which is why

We’re getting down to some buildings that aren’t in very good shape and won’t work

the available buildings factor

for many businesses.”

climbed to #6 in the 2013

Genova Products Inc. is one company that has managed to beat the increasing

Area Development Corporate

odds. It now is leasing a 100,000-square-foot factory in Paducah, Kentucky, that

Survey from #8 in the 2012

once housed Infiniti Plastic Technologies Inc. The maker of PVC pipe and fittings plans

survey — and from #15 in

to grow from about 15 jobs currently to about 125 jobs there. “The building was

the 2011 survey! This criterion

constructed to create at least 100 jobs in the plastics industry and that’s exactly what

was rated 83.3 percent in

Genova is proposing to do,” said an official of McCracken County.

importance. The reason is clear: Now

In this environment, some of the most fortunate companies are those that can work with their own existing space to accommodate their needs for expansion. For

that we are in a clear growth

instance, Smoker Craft Inc., a metal and fiberglass boat manufacturer, plans to invest

mode, companies seeking

$4 million to expand its operations center in New Paris, Indiana, in the next few years

industrial, distribution, R&D

by renovating and equipping its own 500,000-square-foot production facility there.

facilities, and office space

And with the uptick in the economy, U.S. warehouse vacancy rates also continue

increasingly are pressed to

to decline, says Colliers International, which conducts a quarterly review. Vacancies

find existing buildings that

fell over a period of six quarters to a nationwide rate of just 7.7 percent during the

will accommodate their needs.

second quarter of 2014, the firm reported. The lowest vacancy rate was in the West;

And companies are well aware

in Los Angeles, the rate dipped below 2.5 percent. At the same time, that region also

of the vast cost savings they

booked 40 percent of net leasing activity and 25 percent of all transaction activity dur-

can realize if they somehow

ing the period.

AREADEVELOPMENT

FOR FREE SITE INFORMATION, CALL

800-735-2732, EXT. 225, OR VISIT US ONLINE AT www.areadevelopment.com

ES S TAXTAXE

Corporate Tax Rate Corporate Tax Rate Corporate that is there for the long term,” says Dean Uminski, a site selection consulting executive

Corporate Tax Rate

for Crowe Horwath. “Incentives go away, but in the long term, you’re stuck with rates. And a number of states now are moving to revise their corporate tax structure and trying to attract business for the long haul without incentives. Other states are going to a single

Lower Rates = Stronger Economies But have we hit a “tipping point” in how low rates can go?

sales tax or an apportionment for income tax. So states that haven’t revamped their tax structures might be of less consideration to some companies.” Indeed, company site selectors look at the broad array of taxes in a state — including personal income taxes, sales taxes, and even estate taxes, as well as corporate tax rates — when evaluating what kind of overall tax burden would come with a particular location. And in a number of states — including Ohio, Missouri, Colorado, Kansas, and Michigan — recently enacted packages have included substantial cuts in or restructuring of these other taxes. But corporate tax rates alone are a telling indicator. In the aggregate of economic performance, which is an important criterion to companies considering sites, lower corporate

CORPORATE TAX rates

tax rates outshine higher ones. The American Legislative Exchange Council evaluated 10-

remained a high concern for

year economic-performance data for the 50 states and correlated that with the eight states

those corporate executives

with the lowest corporate income-tax rates and the eight states with the highest.

polled by Area Development,

The conclusion: “States with low or no corporate income taxes are outperforming

ranking #7 among the loca-

their high-tax counterparts.” Included in the former group were Nevada, Wyoming,

tion factors. The ranking was

Texas, Ohio, Alabama, North Dakota, and Colorado, whose top marginal corporate in-

identical to a year earlier, but

come tax rates averaged 2.46 percent — versus an average of 11.8 percent in the eight

the factor scored higher in

states with the highest such rates.

importance, at 82.4 percent, up from 79.3 percent. The reason was simple: a

At the same time, however, states need to balance their desire for attractiveness on this score with other fiscal and economic priorities. In Kansas, for instance, the extent of incumbent Gov. Sam Brownback’s cuts in a variety of personal and business taxes

state’s corporate tax rate is

became a lightning-rod issue in the 2014 re-election campaign because the cuts made

usually a bedrock indicator of

it difficult for the state to fund all of its programs, and Standard & Poor’s even down-

its business-friendliness and a

graded the state’s credit rating from AA+ to AA.

simple but substantial num-

“We talk to C-suite people who say that we’ve hit a tipping point on corporate taxes

ber that has a huge long-haul

now because of examples like Kansas,” notes Larry Gigerich, managing director of Gino-

impact on the financial perfor-

vus. “They’re saying that there are basic services that governments provide, and if states

mance of a new plant or other

cut taxes too much, they don’t have the revenue to do it. They want states to be able to

facility. Tax rebates and other

pay for services and infrastructure and workforce development.”

incentives can offset the overall

And, of course, corporate tax rates have become a major issue on the global business

corporate tax rate, but only to a

stage. In 2014, a number of major U.S. companies proposed or carried out big acquisi-

certain extent.

tions of foreign companies largely in order to qualify themselves for the significantly

“The tax rate is something

lower national corporate tax rates in other countries. AREA DEVELOPMENT | Q4/2014

8 State & Local Incentives State & Local Incentives S tural differentiators such as corporate income taxes. Plus, many companies now are

State & Local Incentives

finally opening their capital-expenditure purse strings after the long recession and its aftermath, and they are eager to strike the best deal for building facilities that have been dormant on the drawing boards for some time.

Special Lures Figure More Heavily With big money at stake, states are more careful to make sure they are getting what they pay for. THE IMPORTANCE of state

“Incentives have taken on an increasing importance weighting in the decisionmaking process,” says Kathy Mussio, managing partner at Atlas Insight. “Since the 2008 recession, companies have been seeking ways to help increase project-cost feasibility on an initial go/no-go basis as well as to keep overall operating costs down on an ongoing basis.” Another reason for the greater interest in incentives, explains Eric Stavriotis, senior vice president at CBRE, is that most companies now have more flexibility about where to locate than, say, in the era before the Great Recession. “Incentives weren’t as widely utilized,” he says. “But now many companies can deliver what they make from everywhere. Incentives are more important for companies in figuring out the best place for them to be. And so states and localities want to be at that table.”

Some High-Profile Cases One of the highest-profile examples in 2014 of the importance of incentives was

and local incentives smashed

the $1.25 billion package of tax and other incentives that Nevada offered Tesla to

up through the ranks of site

get the electric-vehicle company to build its so-called “gigafactory” for making bat-

selection factors to #8 in

teries in the Reno area. Although the incentives package was not the largest offered

Area Development’s most

to Tesla (San Antonio’s was reportedly higher), when combined with other factors, it

recent Corporate Survey from

did help Nevada to win the plant which is expected to produce up to 22,000 direct

#13 a year earlier.

and indirect jobs and inject up to $100 billion into Nevada’s economy over the next

The emphasis on companyspecific incentive packages

20 years. In this case, Nevada had to throw in a bunch of tax offsets even though the state has

rose in part because states

no corporate income tax. Instead, Nevada relies heavily on a sales tax, a tax on business

have begun evening out their

machinery and equipment, and property taxes, as contrasted to some other states that

differences in important struc-

competed for the Tesla complex that limit such taxes, including Texas. So more than half

SITE FACTOR SPONSORED BY:

SUGAR LAND. Building Partnerships with Business. 44

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8 s State & Local Incentives State & Local Incentives State & Local Incentive of the $1.25 billion total in Nevada incentives consisted of a sales-tax exemption alone. “That’s what they had to come up with just to be on a level playing field

TOP 11

Tax Incentive Deals Nationwide:

plex in Chattanooga, Tennessee. And, with the amount of incentives skyrocketing, more corporate site selectors are running into a greater determination by

WASHINGTON: Boeing

$8.7 billion

with some of the others,” notes Dennis

NEW YORK: Alcoa

$5.6 billion

states to ensure that the deals end up

Cuneo, a partner at Fisher & Phillips.

WASHINGTON: Boeing

$3.2 billion

generating sufficient numbers of jobs,

OREGON: Nike

$2 billion

with their long-term spinoff economic

tive-laden deals lately, including South

NEW MEXICO: Intel

$2 billion

benefits, and not just a massive initial

Carolina’s promise to Boeing of $120

LOUISIANA: Cheniere Energy

$1.7 billion

dose of capital investment. On the oth-

million in exchange for adding 2,000

PENNSYLVANIA: Royal Dutch Shell

$1.65 billion

er hand, says Dean Uminski of Crowe

MISSOURI: Cerner Corp.

$1.64 billion

MICHIGAN: Chrysler

$1.3 billion

MISSISSIPPI: Nissan

$1.25 billion

NEVADA: Tesla

$1.25 billion

There have been other huge incen-

jobs at a factory near Charleston that builds 787s, and Volkswagen’s deal for another $178 million in benefits for adding 2,000 jobs at its assembly com-

Source: Good Jobs First

Horwath, companies still want to be rewarded for making those investments through creative use of incentives such as upfront grants for land acquisition.

WHERE OPPORTUNITY ABOUNDS. WHERE DEVELOPMENT IS CELEBRATED. WHERE INTERNATIONAL CORPORATIONS CALL HOME. SUGAR LAND. Success Thrives Here.

B u i l d i n g P a r t n e r s h i p s w i t h B u s i n e s s | Sugar Lan d Eco De v.co m | 281.275.2229

AREA0277.indd 1

AREA DEVELOPMENT | Q4/2014

14/05/14 2:53 PM

Low Union Profile Low Union Profile Low Union P debated all day long,” notes Eric Stavriotis, senior vice president at CBRE, “but the reality is

LOW UNION PROFILE

that a lot of management folks have been burned by them and they want to avoid them.” Kathy Mussio, managing partner at Atlas Insight, notes that union presence “can be a first-screen go/no-go to some companies, regardless of whether a state that is not right-to-

Unions Still a “No-Go” Factor for Many The rise of rightto-work has changed the equation.

work can demonstrate that it has very low private unionization rates.” She adds, “The bottom line is that some percentage of companies will only consider right-to-work states.”

Correlation Between Growth and Low Union Influence Thus the addition of Indiana and Michigan to the ranks of right-to-work states over the last two years has given corporate site selectors more hope that they can avoid unions even in the traditional industrial Midwest, which has been a bastion for labor organizations for decades. It more readily puts these states into consideration, not only because of the lack of concern about union hamstringing per se, but also because there has been a strong correlation between economic vigor and lack of unionization. In important measures — including net domestic migration, nonfarm payroll employment, personal income, and gross state product — the 23 right-to-work states (as of

HAVING a low union profile

study date), on average, vastly outperformed not only the average of all states, but es-

ranked as slightly more impor-

pecially the average of 27 non–right-to-work states over the decade that ended in 2013,

tant in Area Development’s

the American Legislative Exchange Council found. There’s a similar correlation between

latest Corporate Survey, up one

the strongest growth states and low union influence: The nine states having union mem-

position to #9. But in a similarly

bership rates below 5 percent in 2013 were topped, in order, by North Carolina, Arkan-

incremental sense, U.S. unions

sas, Mississippi, South Carolina, and Utah, according to the Bureau of Labor Statistics.

overall actually may have gained some ground over the last year. If they had their druthers,

Foreign Companies Union Avoidance Foreign companies establishing U.S. locations tend to be especially interested in

most companies would prefer

avoiding unions, says Dick Sheehy, director of Advanced Planning and Site Selection for

to locate and operate without

CH2M Hill. “Most American companies understand the union issue and make decisions

unions because labor contracts

accordingly, but we have to educate some international clients on what it means to have

typically add significant fixed

unions,” he says. “A lot of them haven’t been unionized and probably never will be.”

costs and because their work

Still, the pendulum that has swung so decisively against unions over the last few

rules deny important flexibility

decades may be slowing or even beginning to shift the other way. For one thing, says

and efficiency in operations that

John Morris, leader of Industrial Services for the Americas for Cushman & Wakefield, for

increasingly must compete on a

company decision-makers, “the conversation around union avoidance is less significant

global basis. Unions also tend to

now than it was a couple of years ago.” Meanwhile, the bellwether United Auto Workers

stand in the way of building a

union is demonstrating new determination on issues including organizing southern auto

cohesive company culture. “The

plants and rolling back two-tier wages. And overall U.S. unionization in 2013 held at

perception of unions can be

11.3 percent, the same rate as in 2012, according to the Bureau of Labor Statistics.

AREADEVELOPMENT

FOR FREE SITE INFORMATION, CALL

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ENERGY AVAILABILITY & COSTS ENERGY AVAILABILITY & CO prices, to a lack of consumer panic about oil supplies despite geopolitical turmoil abroad, to a

ENERGY AVAILABILITY & costs

mini-boom in the sale of large SUVs that not so long ago were considered dinosaurs. When it comes to site selection, too, “a lot of corporate decision-makers are now viewing America’s position from an energy perspective as much better than in a long time,” says Larry Gigerich, managing director at Ginovus. “There’s more comfort about supply, at least setting

Factor Is Losing Currency Rising supply and falling prices are easing this factor’s importance. THE COST and availability of en-

aside coal-fired plants in certain parts of the country. In fact, from a natural-resources standpoint, the growing concern isn’t energy but water.” Adds John Morris, leader of Industrial Services for the Americas for Cushman & Wakefield, “There is a general declining concern over energy costs in this country right now.” Still, Morris notes, energy availability and costs “should remain a big concern” in the business, and “many people have sort of gone to sleep on that idea.” There remain many reasons that corporate decision-makers continue to take a close look at the issue. Manufacturing plants and data centers are huge energy-users — so for that reason alone, energy remains a top-10 factor, says Eric Stavriotis, senior vice president at CBRE. What’s more, such energy-intensive projects will continue to keep the cost of electricity and the

ergy has been dropping in impor-

reliability of the grid in competing locations at the forefront of siting decisions. A large, capital-

tance as a site selection factor,

intensive dairy-manufacturing company, for example, recently was choosing from sites across

ranking #10 in the 2013 Area

six states in the Midwest and West with assistance from Dean Uminski, a consultant for Crowe

Development Corporate Survey,

Horwath. “They still had some concerns about the grid being outdated in some areas,” he explains.

down from its #6 position a year

“And they were seeing wider variations in electricity costs than in site and labor costs.”

earlier. The drop seems to reflect a persistent weakness in natural

Recent Data

gas prices as well as a steady rise

The most recent data from the U.S. Energy Information Administration underscores this

in alternative-energy capabilities

caution. Average commercial electricity rates rose by only 4 percent in July 2014 for the year to

across the country.

date over a year earlier, to 10.69 cents/kwh from 10.25 cents/kwh. But rates in the contigu-

A more relaxed attitude about

ous 48 states were as high as 14.63 cents/kwh in the New England States and as low as 8.25

energy costs and availability has

cents/kwh in the West South Central States of Arkansas, Louisiana, Oklahoma, and Texas —

taken hold in the corporate com-

where economies also tend to be relatively healthy.

munity, and a huge reason for

A rising interest of corporate decision-makers is the availability and cost of “green” energy

that is the boom in U.S. hydrocar-

such as solar power, wind power, and other renewables. Renewables already increased their

bon exploration and production,

share of global power production to 22.7 percent in 2012 from 18.7 percent in 2000, accord-

thanks to the revolution enabled

ing to the Worldwatch Institute.

by horizontal drilling and hydrau-

“Many of our clients want to be fully green or have a high profile of green,” notes Dick

lic fracturing. A resulting, nascent

Sheehy, director of Advanced Planning and Site Selection for CH2M Hill. “By definition, it’s dif-

sense of national “energy secu-

ficult for them to go to areas that have low energy costs because they’re not green. But most

rity” has promoted everything

companies are planning on cap-and-trade or some sort of carbon tax that will make hydrocar-

from a plummeting in natural-gas

bons more expensive, so renewables will become relatively less expensive.” AREA DEVELOPMENT | Q4/2014

Sponsors Arizona

Iowa

Texas

CITY OF PEORIA

IOWA ECONOMIC DEVELOPMENT AUTHORITY (IEDA)

CITY OF SUGAR LAND

With a population of 165,000, Peoria, Arizona’s highway accessibility in the fast-growth Northwest Greater Phoenix region via the SR-Loop 101, SR-Loop 303, and the US-60 make it the smart choice for businesses who require the best connections to talented, highly-skilled workers, shovel-ready sites, and award-winning recreational amenities and master-planned communities. Jeanine Jerkovic Economic Development Manager City of Peoria Economic Development Services Department 9875 N. 85th Avenue Peoria, AZ 85345 623-773-7735 • Fax: (623) 773-7245 jeanine.jerkovic@peoriaaz.gov http://peoriaed.com/ED

Georgia GEORGIA DEPARTMENT OF ECONOMIC DEVELOPMENT (GDECD) The Georgia Department of Economic Development (GDEcD) plans, manages, and mobilizes state resources to attract new business investment to Georgia, drive the expansion of existing industry and small business, locate new markets for Georgia products, inspire tourists to visit Georgia, and promote the state as a top destination for arts events and film, music, and digital entertainment projects. Robert Payne Director of Account Management Georgia Department of Economic Development 75 5th Street NW, Suite 1200 Atlanta, GA 30309 404-962-4000 communications@georgia.org www.Georgia.org

The Iowa Economic Development Authority (IEDA) is a public-private partnership endorsed by the Governor and Iowa legislature. We focus on educating start-up companies and helping existing companies become more innovative while retaining and attracting companies that are creating jobs. Our role is to make Iowa a great place for business. Debi V. Durham Director Iowa Economic Development Authority 200 E. Grand Ave. Des Moines, IA 50309 515-725-3000 or 515-725-3010 business@iowa.gov http://www.iowaeconomicdevelopment.com/

AREADEVELOPMENT

CANADA

Kansas/Missouri/ Oklahoma

Ontario, Canada

JOPLIN REGIONAL PARTNERSHIP

We are the people-powered economy. What is the best part of Brampton? The people are. At 34.7 years, Brampton has the lowest median age among Canada’s largest cities. Brampton residents represent more than 209 different cultures and speak more than 89 languages. This young, educated, and multicultural work force of over 190,000 strong continues to grow at a rate of 4 percent annually. Brampton is home to 25 private career colleges and schools, with 19 postsecondary educational institutions within an hour’s drive. Many of the country’s most innovative and intelligent individuals are located in and around Brampton. Sohail Saeed Director of Economic Development and Tourism City of Brampton Economic Development Office 2 Wellington Street West Brampton, ON L6Y 4R2 Toll-free: 1-888-381-BRAM edo@brampton.ca www.peoplepoweredeconomy.ca

For companies seeking a central location in the United States, excellent transportation connections and capable, hard-working, low-cost labor forces, the Joplin region is a great place to call home. Central, connected, capable. The Joplin region is a great place for your business. Kevin Welch Director Joplin Regional Partnership 320 East 4th Street Joplin, MO 64801 417-624-4150 • Fax: 417-624-4303 kwelch@joplincc.com www.joplinregionalpartnership.com

Kentucky KENTUCKY CABINET FOR ECONOMIC DEVELOPMENT When it comes to building the ideal workforce, you want flexibility, and you want easy. You need workers with specific skills, and you need to get them trained quickly and efficiently. You want solutions. Kentucky gets it, and we have all the tools to help you create the skilled workforce you’ve always dreamed of. Mandy Lambert Commissioner, Department for Business Development Kentucky Cabinet for Economic Development Old Capital Annex 300 W. Broadway Frankfort, KY 40601 800-626-2930 Mandy.Lambert@ky.gov www.ThinkKentucky.com

Sugar Land is aggressive in its recruitment by providing multi-faceted incentive packages to companies bringing a large capital investment and new jobs. The city continues to be successful in attracting high-profile, regional and international corporations in a variety of industries — energy, engineering, technology and research, software development and manufacturing. Jennifer May Director of Economic Development City of Sugar Land 2700 Town Center Blvd. North Sugar Land, TX 77479 281-275-2229 • Fax: 281-275-2217 ecodev@sugarlandtx.gov www.sugarlandecodev.com

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INDUSTRY REPORT

Revolutionary Advances in Life Sciences Pharma and biotech companies as well as medical-device manufacturers are transforming the healthcare sector. By Mark Crawford

ajor economic, social, and regulatory factors are having big impacts on the life sciences and medical device industries. A fast-growing aging population — the baby boomers — is intent on staying healthy and active and expects life science, biotechnology, and medical device companies to keep them that way. Also, the Affordable Care Act’s (ACA) full impact on the life sciences/medical devices markets is still unknown. About 32 million previously ineligible Americans will have health insurance coverage, which means a bigger market for medical device manufacturers. With the ACA’s emphasis on pay-forperformance instead of pay-for-service, healthcare systems and hospitals are eager for medical innovations that improve quality of care and reduce risk — good news for companies in this sector. According to Deloitte LLP’s Terry Hisey, vice chairman and U.S. life sciences sector leader, 2014 is expected to be a good year for U.S. life sciences companies. “The country will see a fair number of ACA initiatives, such as health insurance exchanges, moving from proposed and enacted to implementation,” he says. “ACA-related pharmaceutical industry fees, a new medical device tax, and lower government drug prices, however, could negatively impact growth.” The ACA and its associated fees and taxes have created a level of disruption and uncertainty — this unease, however, can also represent opportunities for innovative companies to become new leaders and gain market share. For

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example, with ACA’s emphasis on reimbursement for performance, healthcare systems, pharmaceutical and biotechnology companies, and medical device manufacturers are targeting products and devices that will reduce healthcare costs, such as less-invasive surgical procedures, shorter hospital stays, and improved disease management.

Transforming Healthcare One developing trend is increased interest in patient-centered “medical homes” — a model of care that includes integrated care delivered by a primary-care team of physicians and other specialists, the use of telemedicine and “virtual visits,” selfmonitoring of health conditions, and home-care services. This emphasis on at-home care and personalized medicine has led to a rapid increase in the development of multi-functional, at-home medical devices and wearable sensors/devices that can transmit accurate health data in real time to physicians, call centers, and the patients themselves. Another hot area of life sciences research is cell therapy, which has huge potential for personalizing medicine and improving rates of successful treatment for serious diseases. This rapidly expanding field of gene therapy can repair damaged genes in diseased cells, using the patient’s own DNA. “We now have the technology to generate stem cells from a sample of

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the patient’s skin, correct the genetic mutation in those cells, and return the ‘gene-corrected’ cells back to the patient for therapy,” says David Rowitch, professor of pediatrics and neurological surgery at the University of California-San Francisco. “These cells have the advantage of containing the patient’s own genetic code, so they escape rejection by the body’s immune system.” According to JLL’s 2014 Life Sciences Cluster report, based on employment concentration and growth, as well as funding and patents, the top-10 U.S. life sciences clusters are located in the metro areas of Boston, San Francisco, San Diego, Raleigh-Durham, New Jersey/New York, Los

Angeles/Orange County, Philadelphia, Maryland/Metro D.C., Minneapolis-St. Paul, and Seattle. Yet, emerging clusters in Denver, central/southern Florida, Chicago, Cleveland, Salt Lake City, Dallas/Fort Worth, Indianapolis, Atlanta, and Wisconsin are starting to compete with established clusters, supported by attractive incentive packages, incubator assistance, and public-private partnerships. Some of these regions are starting to score big successes. For example, in Madison, Wisconsin, Exact Sciences Corporation recently announced the Mayo Clinic will be the first health system to offer its new product Cologuard®,

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the first and only FDA-approved, noninvasive DNA screening test for colorectal cancer. “Cologuard represents a significant advancement in identifying colorectal cancer at its most treatable stage,” says Vijay Shah, chair of Mayo Clinic’s gastroenterology department. “We believe this new tool will promote patient and community public health and may move more patients to get screened earlier — a critical step in beating this prevalent and preventable cancer.”

Medical Device Sector

Products that combine a device with a drug and/or biologic are at the forefront of life sciences/ medical device research and development.

Association, advanced medical technology helped reduce the duration of hospital stays by 58 percent between 1980 and 2010. Today the industry employs about two million U.S. workers and generates nearly $150 billion in annual revenues. Although the ACA has significantly increased the patient pool for medical devices, it also hit the medical device industry with a 2.3 percent excise tax to help cover the insurance for these new participants. Medical device manufacturing is highly competitive, and many companies were already struggling with costs prior to the announcement of the tax. According to the U.S. Chamber, the medical device tax has already resulted in a job loss of 33,000 in the medical device industry, with 132,000 more job losses expected. The tax has sobered growth prospects, slowed investment and R&D, and delayed hiring. In an effort to offset the tax losses, medical device companies hope to sell more products to emerging markets like China, India, and Brazil.

The U.S. medical device industry is the largest in the world and is known for its innovation and groundbreaking products. It continues to design devices and implants that incorporate smaller and complex designs and advanced materials to create lessinvasive procedures. These products bring down the cost of healthcare by delaying or eliminating the need for surgery, reducing hospital stays, and improving patient outcomes. According to the Advanced Medical Technology

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Top medical device clusters in Minnesota, Indiana, Massachusetts, and California are key contributors to their state economies. For example, in California, medical device manufacturing encompasses 300,000 direct and indirect jobs and generates nearly $60 billion for the state’s economy. Minnesota employs about 300,000 life science employees and is home to the Mayo Clinic, the largest integrated medical center in the world. In Minneapolis/St. Paul, 22 percent of employees work in the medical technology sector; in fact, the Twin Cities are first in total per capita employment in that sector. Massachusetts continues to be a world-class medical device cluster. Medical devices are its biggest export, comprising about 13 percent of its international trade. This vibrant cluster continues to attract investment. For example, GE Healthcare Life Sciences recently announced it plans to open a new $21 million, 160,000-square-foot U.S. headquarters building in Marlborough, creating more than 220 new jobs. “Our new facility in Massachusetts will position us for continued innovation and competition in such a fast-paced, innovative industry,” states Kieran Murphy, president and CEO of GE Healthcare Life Sciences. “We will be close to industry leading talent, customers, and world-class academic and medical institutions across all the industry sectors we serve, from biotech and pharma to diagnostics and medical devices.” Emerging states include Ohio, Florida, and Georgia. In Florida, more than 60,000 workers in the medical device sector generate about $12.5 billion in annual revenues. Georgia’s medical device industry is growing rapidly, anchored by the Centers for Disease Control, the Georgia Institute of Technology, and Emory University’s biomedical engineering program. In Ohio, Cleveland is becoming a highly respected medical device cluster. Medical device companies work closely with the region’s biomedical research organizations, including the highly acclaimed Cleveland Clinic and its affiliated Cleveland Clinic Innovations. Another Cleveland Clinic affiliate, the Lerner Research Institute, focuses on biomedical engineering, genomics, molecular cardiology, stem cell biology, and cancer research. “Cleveland Clinic and its affiliates have been leaders in spurring medical device design and development in the Cleveland area,” comments Brian Hrouda, director of sales and marketing for Norman Noble, a Cleveland area contract manufacturer for the medical industry. “Their research and development teams have been very successful at implementing the steps required to commercialize new medical device technologies.”

combination products include biologically or drug-eluting implants or stents, surgical meshes with antibiotic coatings or biological gels, drug delivery devices, bone graft implants with antibiotic-loaded cements, inhalers, transdermal patches, and intraocular implants. Transparency Market Research reports that the global market for drug-device combination products is expected to grow from about $70 billion today to $115 billion in 2019, representing a compounded annual growth rate of 7.9 percent. “There are combination products under development today that involve many more things than just drugs, biologics, and medical devices,” says Michael Drues, president of Vascular Sciences, a Grafton, Massachusetts, consulting company. “They involve a variety of technologies, foods and nutraceuticals, and even cosmetics, or so-called ‘cosmeceuticals.’” Drues explains that combination products are gaining popularity because they hold the promise of not simply preventing the damage from a disease or injury from getting worse, but actually reversing or erasing the damage. “This is not the next evolutionary advance in medicine,” he notes. “This is a revolutionary advance. It is a change in the whole ethos of how we approach medical problems that everybody in the medical world, and for that matter, people outside the medical world, can get excited about.” ■

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“Combination devices” — products that combine a device with a drug and/or biologic — are at the forefront of life sciences/medical device research and development. Examples of therapeutic or diagnostic

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LOCATION NOTEBOOK

Tesla’s “Gigafactory” — Reno’s Game Changer To win the Tesla project, Nevada offered a rich — and what will be a highly scrutinized — incentive package. Will the bold gamble pay off? By Dennis Cuneo, Partner, Fisher & Phillips LLP; DC Strategic Advisors LLC

Tesla began production of its Tesla Model S sedan in 2012.

wo years ago, Micki Maynard, the former Detroit Bureau Chief of The New York Times, wrote an article in The Atlantic headlined “Reno Just Wants To Be Normal.” She noted that in its past iterations, Reno has been identified as a haven for silver miners, divorce-seekers, and gamblers — and that civic leaders were trying to remake its economy and image, to capitalize on its proximity to California’s high-tech industry and the natural beauty of the nearby Sierras and Lake Tahoe. On September 4th, Reno took a giant step toward that goal when Nevada Governor Brian Sandoval announced that Tesla had picked the Reno area for its $5 billion “gigafactory,” which will produce advanced batteries for Tesla vehicles. The Tesla battery plant was a highly prized project, with five states named as finalists for the project. Governors Rick Perry of Texas and Jerry Brown of California made highly publicized personal pitches for the plant, and for

AREADEVELOPMENT

good reason. The economic impacts are substantial: 6,500 direct jobs, an estimated 16,000 spin-off jobs, and a $100 billion economic impact over 20 years — which will add a 20 percent boost to Reno’s economy, according to the Governor’s Office for Economic Development. “Game changer” is an overused phrase, but aptly describes the impact of this project on the Reno community and the state as a whole.

A Plan to Diversify the Nevada Economy Two years ago, Governor Sandoval issued a new strategic plan for economic development, focused on diversifying Nevada’s economy. The website for the Nevada Governor’s Office of Economic Development is aptly titled “diversifynevada.com.” The Economic Development Agency of Western Nevada (EDAWN) undertook a similar initiative at the regional level. Technology companies such as Apple and Microsoft have set up operations in Reno, and a downtown street nicknamed “Start-up Row” now hosts more than 20 high-tech start-ups. The announcement by Tesla is the capstone of this diversification effort and will likely have wide-ranging impacts that go beyond its immediate economic benefits. By securing this project, Reno has burnished its image and is now a player in the economic development big leagues. As a relative newcomer to the area, I can attest that Reno has evolved into a city that attracts well-educated, FOR FREE SITE INFORMATION, CALL

sophisticated residents. Board members and former CEOs of several Fortune 500 companies now call Reno home. The downtown has undergone a major renovation. Bike lanes crisscross the city. The Truckee River Whitewater Park is located in the heart of the downtown. To be sure, gaming is still an important part of the Reno scene — but it no longer monopolizes the economy. In fact, one of the largest employers in Reno is the University of Nevada, and innovative schools, such as the Academy of Arts, Careers and Technology, are putting a laser focus on preparing students for high-tech careers. The city has a growing arts scene, and hosts a number of festivals and new restaurants. One of those festivals, “Burning Man,” is held in a desert setting close to Reno. It attracts a number of technocrats from Silicon Valley. In local parlance, we call them “Burners,” and Elon Musk is among them.

Winning the Tesla Project To win the Tesla project, the state offered the richest incentive package in its history — estimated at $1.25 billion, which drew criticism from the conservative Nevada Policy Research Institute and the liberal Progressive Leadership Alliance at the local level, and Richard Florida and Good Jobs First at the national level. Nevertheless, the Nevada legislature unanimously approved the incentive package in a two-day special session. When compared to the packages

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offered by other states for mega-projects, the per-job incentives are at the lower end of the scale. Nevada, which lacks the resources of the larger states that competed for the project, did not offer a substantial amount of up-front cash. The net value of San Antonio’s incentive offer was actually higher than Nevada’s, and included significant up-front incentives, as reported in San Antonio Express-News on Sept. 10th. The Nevada package consisted mostly of performance-based tax abatements and credits that reduce the state’s risk if projections about the project turn out to be too optimistic. Tesla is required to invest $3.5 billion in the state before any of the tax abatements kick in, and has agreed to donate $37 million to Nevada schools over the next five years. At the announcement, Tesla’s CEO Elon Musk cited speed of permitting and the agility of the state and local officials as the primary reasons for selecting Nevada. The proximity of Reno to Tesla’s vehicle plant in Northern California and Nevada’s renewable energy portfolio also factored into the decision, as well as the nearby Lake Tahoe area which is familiar to many of Tesla’s executives. A week prior to the Tesla announcement, Ashima Devices, a manufacturer of unmanned aerial devices (drones), announced it was moving its headquarters from Pasadena to Reno, and is expected to create 400 jobs in the Reno area. When the drone project was announced, the Reno Gazette Journal commented that it could be a “tipping point”

for the Reno economy and “the start of something big.” A week later, with its announcement of the world’s largest and most advanced battery plant, Tesla put a big exclamation point on that comment. To be sure, the Tesla project is not without its risks. Tesla is a relative newcomer to the auto industry, and will build the first-of-its-kind factory in the world. Starting up a factory of this size, with new technology, is a daunting task. Tesla’s CEO has proven his skeptics wrong in the past, and Tesla’s current market cap of $35 billion speaks to the confidence of its investors. There’s an old Latin proverb — audentes fortuna iuvat — fortune favors the bold. In my opinion, the Tesla project is a bold gamble by the state of Nevada and Reno — but one worth taking. ■ Note: As we went to press with this issue, the Reno Gazette Journal reported a big increase in interest for available-for-lease space in proximity to the location of the new Tesla gigafactory, as noted by Tom Miller of Reno-based Miller Industrial Properties in his third quarter report.

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TESLA joined the 50 companies relocating to Reno–Sparks over the past 3 years. Find out why. Contact Stan Thomas, E.V.P Marketing and Competitive Expansion at (775) 829-3731 or Joel Grace, V.P Marketing at (775) 829-3720.

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SITE SELECTION

Urban vs. Suburban: Which Location Will Allow Your Company to Grow? Each has its appeal, but the answer is unique to all sizes and all types of high-tech firms. By Julia Georgules, VP and Co-Lead, High-Technology Research Group, JLL

t’s not difficult to understand why technology companies capture our attention. They offer innovative work environments, high-paying jobs, and a small degree of celebrity that comes with developing the world’s next big things. The focus of that innovation and mystique has always been on California’s Silicon Valley, a suburban-style community with urban values. Millennials (those born after the early 1980s) and baby-boomers (those born between 1946 and 1964) work hand-in-hand for our technological future. It is a true melting pot of culture where families can settle down or baby-boomers can enjoy all of the luxuries of upscale living. There is no other location in the world like Silicon Valley. Once tech companies start looking beyond the familiar confines of northern California, real estate portfolio and location questions become key in determining a firm’s growth potential. Where is the next generation of talent, and how can my company create a workplace strategy that will attract millennials and yet be comfortable for baby-boomers? Will it make more sense for my company to be in an urban or suburban environment? What sort of space do we need for future growth? The answers to these questions are different for every firm. The key to urban vs. suburban or balancing millennial interests and boomer practicality is deciding which location and workplace strategy will accommodate growth. In 2012, Motorola Mobility — a subsidiary of Google at the time — announced that it would be moving its headquarters from Libertyville, Illinois, to Chicago for employee attraction and retention. Employment applications increased by 28 percent following the announcement. Unsurprisingly, when Lenovo purchased Motorola Mobility in January, it decided to keep and expand its new Chicago location. Urban strategy worked for Motorola, but there are examples on both sides of the fence. It is important for tech firms to look at all the variables when making a strategic decision on workplace and location strategy.

Appealing to Millennials Approximately 25 percent of the overall workforce is under 30 years old, and this is projected to rise to 50 percent by 2020. This millennial prominence is undoubtedly even greater among tech firms. While the Mark Zuckerbergs of the industry capture our attention, there are plenty of baby-boomers in the mix, too. They tend to occupy top positions within most tech firms and will continue to do so for the next five to 10 years. In fact, across all industries, 36 percent of CEOs are over 55. Generation X (those born between 1965 and 1981), on the other hand, will be around longer. Many over-30s remember and often prefer the old days when workers had more personal space, perhaps even a private office. In addition to personal preferences, it is not uncommon for aging workers to have vision, hearing, or other physical limitations that must be addressed in office ergonomics. While millennials may dictate the standard for tech workplace design soon, the gap between workers’ ages is currently at a historic high, and facilities need maximum flexibility to include something for everyone.

Community Is More Important Than Urban or Suburban Many tech pundits say that to recruit and retain the most desired workers, firms have to operate in the urban epicenter

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of edgy cities such as San Francisco, New York, Seattle, or Boston. Well…maybe. There is a tradeoff between price and location. These office spaces are among the priciest in the United States, and it’s not a given that everyone wants to work downtown. Millennials will average 30 years of age by 2020, and in a recent survey, they preferred the suburbs by 2 to 1 as a long-term place to live. In a pattern seen in previous generations, many young professionals enjoy the rush of city life in their 20s, but opt for suburban attractions such as affordable housing and good schools as they age and start families. Like their employers, they are also being priced out of the downtown market with exorbitant rents for tiny living quarters. More important than city or suburb, however, is a sense of community, where tech workers can find an identity, rich culture, dining, shopping, and entertainment prospects — and thousands of highly educated young professionals just like them. Suburban cities can convey a sense of cool like Palo Alto; Cambridge as an alternative to downtown Boston; or Boulder to Denver. In their pursuit of growth, many tech-industry leaders such as Google, Facebook, and Amazon cover all employee preferences by dividing their flagship facilities into urban core and desirable suburban locations. As established tech hubs become saturated with competition, more and more tech companies are expanding into new markets simply to capture new talent.

The Cost and Benefit of Suburban Living

suburban real estate over a Class A building in downtown. Nevertheless, downtown Palo Alto has experienced such high demand in recent years that the office market is just 3.6 percent vacant with an average asking rate over $86 per square foot, beating New York City’s Plaza District at $85 per square foot. It also has a very high cost of living. Beyond the Valley though, some suburban markets like Dallas and Austin are experiencing economic recovery and expansion far ahead of others owing to their unique attributes and amenities. The appeal of opening an additional location or starting a new business altogether is obvious. Dallas has long been an attractive city for both residents and businesses, claiming no personal income or business taxes, while continually adding jobs and providing a low cost of living. Additionally, its sheer size allows it to maintain many of the lifestyle amenities important to urban dwellers. Austin, Texas, offers access to talent through the University of Texas, walkable amenities both downtown and in South Austin, and a highly favorable business environment for start-ups. Average rental rates for apartments are 38 percent lower than New York City and 66 percent lower than San Francisco. Many recession-ravaged suburbs are still recovering from lost industries and company shutdowns, which have left a legacy of unemployment and economic despair, but in many ways these now offer highly attractive environments for growth and favorable real estate conditions. Detroit has started welcoming companies focused on automotive technologies, while Phoenix has become an affordable option for companies to capitalize on lower wages, while employees enjoy a lower cost of living.

In fact, across all industries, 36 percent of CEOs are over 55.

Urban markets, like San Francisco and New York, are attracting droves of tech innovators that would not consider relocating to a neighboring suburb, fearing they would lose their edge and potentially their best and brightest employees. Is that concern legitimate? Not in all cases. As economic recovery and expansion spreads across the U.S., high-tech companies in growth mode are exploring new ways to innovate and compete in a market that’s become more discerning in the services and products it chooses to consume. Understanding how a company’s location plays a role in its expansion has become paramount to its success and ability to maintain its market share. But the question of whether one should locate in an urban location over a suburban one isn’t simple. Tech companies locating outside an urban core must compensate for the city’s convenience of having all of the personal necessities workers need close at hand. Professionals who are expected to work long hours want to spend minimal time running errands. Exemplified by Google’s corporate headquarters in Mountain View, California, many suburban tech campuses have a wide variety of on-site services including elaborate cafeterias, exercise facilities, laundry and dry cleaning, hairdressers, gas and auto servicing centers, and even physicians. The farther a facility is from a central business district, the more the company will have to spend to develop these facilities. But this cost is often a pittance compared to the cost savings of

Is There a Right Decision? The question of whether or not a company should locate in a suburban or an urban center depends entirely on the needs of the company. Google, which consumes nearly the entire city of Mountain View, continues to thrive in Silicon Valley with the ownership and leasehold of nearly 10 million square feet. While it maintains a location in every urban market across the country, the opportunity to create a mega campus, building by building, was made possible by suburban sprawl in an area that offers favorable living conditions for Google’s employees. These stories demonstrate that it’s not necessarily a question of suburban vs. urban, but what’s best for the growth and success of the company. The answer is unique to all sizes and all types of high-tech firms. In JLL’s High-Tech Office Outlook, we’ve examined the real estate environment, the market characteristics, and the reasons that each of 34 markets appeal to high-tech companies. They aren’t all Silicon Valley, but they all offer unique qualities that have enabled the high-tech industry to grow. Understanding what location means to your company and its ability to source talent and grow revenue will remain a top driver in company success. ■ AREA DEVELOPMENT | Q4/2014

Metro Atlanta CIAL INVESTMENT REPORT SPECIAL INVESTMENT REPORT SPECIAL INVESTMENT REPO

T’S NOT EVERY DAY THAT A FORTUNE 500 COMPANY PICKS UP AND MOVES its home base to an entirely new part of the country. But sometimes it just makes sense to be closer to the action. In the case of PulteGroup, a homebuilding giant that was founded in Michigan, the company’s portfolio was increasingly weighted in areas outside Michigan and the Midwest. Nearly three-quarters of the business was elsewhere by 2000, shifting primarily toward the South and West, and a dozen years later it was more than 90 percent outside of the Midwest. So, last year PulteGroup announced that its home base was moving to metropolitan Atlanta. It was a big deal, worth hundreds of new jobs. Equally impressive, the PulteGroup headline is just one of many reports of good economic news in metro Atlanta, according to Brian McGowan, executive vice president and chief operating officer at the Metro Atlanta Chamber. “One thing that is clear in this region is that the economy has turned up again,” he says. “In the last year and a half we’ve seen an exponential increase in activity in all sectors.” That activity includes more than 400 new Georgia jobs announced earlier this year by Verizon Wireless, including opportunities in customer service, retail, network, and information technology. Then there’s the $10.8 million athenahealth investment announced last year, worth about 500 high-paying jobs with the cloud-based provider of services for electronic health records, practice management, and care coordination. And coffee lovers aren’t the only people raving about the plans that Keurig Green Mountain announced to open a manufacturing facility in Douglas County — that means $337 million in investments and about 550 new jobs over the next five years.

Economic Diversity and Growth Expect the good news to continue. A recent report from PNC Financial Services Group predicted that Atlanta would be a “top performer” this year and next. The South is leading the nation when it comes to economic growth, and that bodes well for Atlanta. Robust job creation is in the forecast, along with a continued drop in the unemployment rate. A U.S. Conference of Mayors report expects the jobless rate to drop as low as 5.3 percent by 2016. Opportunity-seekers from around the country are taking note, McGowan says. “We’re seeing the in-migration of people from other places, including the West Coast and New York,” he points out, explaining that new arrivals like the low cost of living, the quality of life, and the abundance of job possibilities. “Atlanta has an extremely diverse economy,” he continues. The 29-county metro area enjoys the nation’s third-largest concentration of Fortune 500 headquarters, behind only New York and Houston. It has the nation’s 10th-largest metropolitan economy, and the world’s 44th-largest, according to the U.S. Conference of Mayors. There’s growth across a wide range of industry sectors, including biosciences and health, information technology, mobility and other technologies, supply chain operations, advanced manufacturing, clean tech, and global commerce. “We’re going to continue to target these sectors,” McGowan says. Lesser-known, perhaps, is the fact that the area ranks third in the country for film and television production, and fifth in the world, he says. It’s also a hotbed for learning, with some 277,000 students enrolled in 66 colleges and universities. Getting people and products from here to there is a snap from an Atlanta location. In terms of passenger volume, HartsfieldJackson Atlanta International Airport is the busiest airport in the world, and 80 percent of the U.S. population is no more than two hours away by air. It takes two days or less to reach 80 percent of Americans by truck, which explains why the area is among the national leaders in distribution. Also helpful is the proximity of the Port of Savannah, which the Georgia Ports Authority says is the fourth-largest container port in the country and the fastest growing.

International Connections According to Jorge Fernandez, the Metro Atlanta Chamber’s vice president of global commerce, metro Atlanta is a prime place to make international connections. “There are over 3,000 international companies in Georgia, By Steve Stackhouse

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and 2,300 in the metro area,” he points out. At the chamber, he says, “from an international perspective, our task is to do three things: market Atlanta, recruit companies, and help companies find opportunities overseas. Our global commerce practice goes both ways — inbound foreign direct investment and outbound companies looking for international opportunities.” The same factors that drive the overall economy attract the global players, according to Fernandez. Beyond the critical mass of global commerce, they pick the region for its role as an economic engine of the Southeast, its transportation advantages, its talent pool and educational assets, its cost-competitiveness and friendly business climate, and its quality of life. McGowan has been pleased that the boom in local activity includes developments important to quality of life. “You see growth in cultural affairs and quality of life, the things you need to attract 25- or 30-year-olds,” he points out. He cites a range of positive activities, including new sports facilities, the Atlanta BeltLine transportation and economic development effort, the dawn of the modern Atlanta Streetcar system, advancements in the Underground Atlanta shopping and entertainment district, development of the Ponce City Market downtown, and the opening of the

National Center for Civil and Human Rights and the newly relocated College Football Hall of Fame.

Growing Pains With growth, there can be growing pains, McGowan acknowledges. “As we’re continuing to grow, transportation infrastructure is becoming an issue,” he says. Moving people efficiently throughout the region is an ongoing question, and the failure of a transportation tax didn’t help matters. “A lot of discussion is going on about other approaches for raising money to help solve transportation issues. We know that if you are not addressing infrastructure issues, you’re not going to continue to grow.” And the metro area continues to grapple with the need to think regionally as it addresses challenges. “This is one of the largest metropolitan regions in the U.S., but we’re very fragmented,” McGowan says. “A big challenge is to come together, to work together to solve things like transportation and workforce development.” But even as the area works on its challenges, leaders such as McGowan are pleased with the successes and the refreshing signs of growth. “There are not many places you can drive in Atlanta,” he says, “without seeing a construction crane somewhere.” ■

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