Area Development's 30th Annual Survey of Corporate Executives & 12th Annual Consultants Survey by Area Development

th 30 ANNUAL

corporate survey

12th

ANNUAL

consultants survey By Geraldine Gambale, Editor

AREA DEVELOPMENT | Q1/2016

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corporate survey New facility and expansion plans are up slightly on a year-over-year basis, although finding skilled labor is once again top of mind.

NEARLY HALF THE RESPONDENTS BELIEVE the U.S. economy is on a continuous growth track.

s 2016 began, the global economy decelerated, oil prices sank, and the stock market plunged. Nonetheless, President Obama painted a rosy picture of the U.S. economy in his State of the Union address based on hiring numbers of the last two years, which were the best since the late 1990s. The Labor Department reported payrolls increased by 292,000 jobs in December 2015 alone, although most of these jobs are in the services sector. The optimists are hoping that an increase in hiring will lead to an increase in spending and, in turn, bump up economic growth, which is actually more dependent on the manufacturing and energy sectors and registered less than 1 percent in 2015’s final quarter. Mark Zandi, chief economist at Moody’s Analytics, commented on the remarkable consistency of employment growth over the last several years. And optimism about employment actually led the Federal Reserve to raise interest rates for the first time since 2008. However, Carl Tannenbaum, chief economist at Northern Trust, told The New York Times (1/8/16), “We certainly see the impact of global conditions in the manufacturing sector, where the strong dollar and weak commodities prices have diminished momentum substantially [although] the service side of the American economy is progressing unabated.” PwC’s Q4 2015 Manufacturing Barometer indicates U.S. manufacturers are being cautious in their hiring and capital spending plans because of the uncertain global economic CURRENT OPERATIONS outlook. They still anticipate OF RESPONDENTS: revenue growth, but at a more modest pace. Do our corporate Manufacturing — Durable Goods 17% Manufacturing — Non-Durable Goods 6% executive readers’ plans reflect Manufacturing — Other 12% this tempered optimism? Distribution/Logistics/Warehousing 10% Each year at this time — for 30 Financial Services/Insurance/ years, in fact — Area DevelopReal Estate 9% Data Processing, Software ment polls its readers to gauge & Other Computer-Related Services 4% their take on the economy as Hospitality Industry 2% revealed by their location and Healthcare/Life Sciences 2% expansion plans and site selecRetail Industry 3% Construction & Trades 13% tion priorities. Let’s take a look Other 21% at their responses to our Annual figure 1

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for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

Respondents titles: Business Unit Manager or Director

14%

Other

15%

Chairman, President, Partner, CEO, or Owner

45%

Real Estate, Facility, Dev. Mgr./Dir.

11% V.P., Secretary, or Other Corporate Officer

CFO, Controller, Financial Officer

7% figure 2

Corporate Survey to see if they align with the expectations expressed elsewhere. RESPONDENT PROFILE Of those responding to our 30th Annual Corporate Survey, just 35 percent are with manufacturing firms. Nearly 60 percent of these respondents represent the C-suite, i.e., they’re the owners or CEOs, CFOs, or other corporate officers. More than three quarters of these respondents make either the final location decision or the preliminary recommendation of where to locate or expand. It stands to reason, therefore, that 80 percent of the corporate respondents say executive management is significantly involved in the site selection process; and it’s no surprise that more than half say management of their operations or business units are also involved in this decision. More than 40 percent of the Corporate Survey respondents operate just one domestic facility, with about a quarter

operating five or more domestic facilities. The percentages are reversed when it comes to foreign facilities: just 29 percent of the respondents operate one foreign facility, while nearly 40 percent operate five or more. Thirty percent of the respondents employ 500 to 1,000+ people at their facilities worldwide, and 26 percent claim to be mid-sized in terms of employment (100-499 workers worldwide). Fully two-thirds of this year’s Corporate Survey respondents say their number of facilities has not changed over the past year. However, 28 percent did increase their number of facilities, with only 6 percent claiming a decrease (these are the same percentages as reported in our prior year’s survey). The Corporate Survey respondents are, however, more bullish on the economy than they were last year. Nearly half (48 percent) say they believe the U.S. economy is on a continuous growth track. Only 39 percent held that opinion in the prior year’s survey.

Primary role in company’s location decisions: Not involved Information gathering

17%

4% Final decision

Preliminary recommendation

44%

35% figure 3

Departments significantly involved in the site selection process/project: Executive management Tax and finance

81% 23%

Real estate

30%

Information technology

16%

Supply chain or logistics

19%

Operations or business unit management

55%

Human resources

14%

figure 4

Number of facilities currently operating:

Domestic: Five or more

24% One

Four

42%

7% Three

14%

Two

13% Foreign: One Five or more

39%

29% Two

18%

Four

Three

figure 5

AREA DEVELOPMENT | Q1/2016

Number of people employed worldwide:

Analysis

1,000 or more

21% Fewer than 20

The question I asked from the Corporate Survey data was, “What can both state and local economic development organizations do to best prepare for the predominant number of projects that may occur in the foreseeable future?” It will be some combination of understanding the subject matter expertise of the decision-maker, project sizes and types, where projects originate, how the prospect will find information and, lastly, what’s included in the winning EDO toolkit? Between 50 percent and 80 percent of the project decisions will be made by executive management and operations positions, while subject matter experts in other functions will be part of the location decision-making process in less than a third of the decisions. In addition, manufacturing and warehouse/distribution facilities make up more than 50 percent of all new domestic projects. About 50 percent plan to open new facilities, but more than 80 percent of the new domestic facilities projects represent less than $50 million in investment. Eighty-five percent of the respondents will use general business magazines to obtain site selection information, but 90 percent will receive their information from site magazines, such as Area Development, coupled with site information gained from robust local and state EDO websites. From an inventory perspective, prepared EDOs will have a strong mix of small/medium-sized sites coupled with in-depth, searchable websites with demographic information. Regarding staffing, the ED project team will have key members with real experience in manufacturing and/ or distribution who can speak the language of the decision-maker. For marketing outreach, since many decisions will be domestic, it will be key for EDOs to maintain a good business retention program, while concurrently becoming much more effective and consistent in international target-marketing to maximize long-term effect. The EDO that has these traits coupled with proven training solutions, will earn their place in the winner’s circle.

By Von Hatley, Managing Director, Jones Walker Consulting, LLC NEW FACILITIES PLANS Some 49 percent of those responding to our Corporate Survey say they plan to open new facilities within the next five years (a 3 percent increase over the prior year’s survey). Of those, 87 percent say these facilities will be in the U.S., and just a quarter plan on locating these new facilities in a foreign location.

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Nearly 70 percent of those with plans for new domestic facilities say they will open them within the next two years. Nearly 60 percent say they’ll open one or two domestic facilities, but a fifth say they’ll open five or more. More than half of these new facilities will be in a southern region of the U.S. — 17 percent of the total planned projects are

27%

500-999

20-49

10% 100-499

50-99

26%

figure 6

Change in the number of facilities during the past year: Decreased number of facilities by 4 or more Decreased number of facilities by 3 or fewer

Increased number of facilities by 4 or more

11%

Number of facilities not changed

Increased number of facilities by 3 or fewer

66%

17%

figure 7

Believe the economy has achieved a continuous growth track:

Yes

48%

52%

figure 8

slated for the South; 16 percent for the Southwest; 13 percent for the South Atlantic; and 9 percent for the Mid-South. Whereas the prior year’s Corporate Survey respondents had planned 20 percent of their new facilities for the Midwest, the respondents to the 30th Annual Corporate Survey say only 10 percent of their new facilities are slated for that region of the U.S. Plans for the types of new domestic facilities to be opened did not change much year over year: 29 percent of the respondents’ total planned new domestic facilities will house manufacturing operations, 22 percent will serve as

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

Location of new domestic facilities (as percentage of total number to be opened): New England (CT, MA, ME, NH, RI, VT) Middle Atlantic (DE, MD, NJ, NY, PA)

8% 4%

South Atlantic (NC, SC, VA, WV)

Plan to open any new facilities (domestic and/or foreign) within the next five years:

Yes

49%

51%

If yes, plan to open new domestic facilities within the next five years: No

13% Yes

87%

If yes, plan to open new foreign facilities with the next five years:

Yes

25%

75%

figure 9

Plan to open new domestic facilities within: 5 years

4 years

17%

2% 3 years

1 year

13%

43%

2 years

26% figure 10

Number of new domestic facilities to be opened: Five or more Four

20% One

39%

Three

15% Two

20% figure 11

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warehouse/distribution facilities, and 8 percent represent new headquarters projects. Most of these new domestic facilities will create fewer than 100 jobs, say three quarters of the Corporate Survey respondents. And the majority of the respondents (59 percent) also plan on spending less than $10 million to establish these facilities. Once again, these results are quite similar to those of our prior year’s Corporate Survey. Although fewer of our respondents have plans for new foreign facilities, of those that do, about 60 percent plan to open them within two years, with 46 percent opening just one. In a dramatic change, none of the Corporate Survey respondents’ foreign facilities are planned for Canada — down from the 25 percent of the total reported by the prior year’s respondents. Plans for new facilities in Western Europe increased from 9 percent to 17 percent of the total reported by this year’s respondents, and Mexico increased from 9 percent to 13 percent of the total. Plans for Asia held relatively stable, with 22 percent of the total planned new foreign facilities slated for that region. Of those, more than 70 percent are planned for China, despite its increasing costs and troubling economic picture. More than a quarter of the

13%

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

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

17%

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

10%

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

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

Southwest (AZ, NM, OK, TX) West (CA, NV, OR, WA)

16% 11%

Offshore (AK, HI, PR, VI)

figure 12

Types of new domestic facilities (as percentage of total number to be opened): R&D

Other

24%

Manufacturing

29%

Shared Services

Warehouse/ Distribution

22%

Back Office/Call Center

3% Data Center

Headquarters

figure 13

Total number of new jobs to be created at new domestic facilities: 500-999 100-499

1,000 or more

20%

Fewer than 20

39%

50-99

13% 20-49

22% figure 14

new foreign facilities planned by our Corporate Survey respondents will be manufacturing plants, and 18 percent will be warehouse/distribution facilities. The new foreign facilities will create only slightly more jobs than the domestic ones, with two-thirds of the respondents saying fewer than 100 jobs will be created at new foreign facilities. Once again, for the majority of the respondents (62

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

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corporate survey

Analysis

Reviewing 30 years of survey responses was an interesting check against my own perceptions and experiences from advising site selection clients over those same years, beginning in 1987 with a company that had built its reputation around locating industrial facilities, but was now expanding into the white-collar world of assessing locations for high-tech operations, R&D, headquarters, and the emerging functions of customer service, data, and operations centers. Along with this came a new client emphasis on technical and managerial skills and issues related to quality of life and attractiveness for recruiting, transferring, and retaining professional and administrative talent. Feasibility analysis of trade-offs involved â&#x20AC;&#x153;stay/goâ&#x20AC;? decisions, comparing the benefits and cost-savings of a new location against the substantial business disruption costs and risks of relocation. These resulted in decisions not to move 50 percent of the time, especially for complex headquarters moves. The changing factor emphasis over these 30 years, as reflected in the surveys, reveals trends that have steadily put more emphasis on quality-of-life measures as the competition for talent has become more intense due to evolving industry sector needs, as well as demographic challenges. Not only has this affected location decisions about R&D centers, headquarters, engineering, and other operational units, but also manufacturing as all industry sectors have adapted advanced digital technologies and additive production processes. As my career evolved, I saw the impacts of globalization became major drivers in location strategy and site selection. Access became the client priority. Access to intellectual capital and talent, to markets, and to suppliers rose to be top weightings in executive decisions, with quality-of-life and other qualitative factors often identified as the most critical success factors. There is no single factor chart or survey that reflects the needs of all businesses. Not only are the requirements of manufacturing vastly different from those used in siting a research center or headquarters, but also even within a narrow industry sector, competitive strategies, corporate culture, and individual requirements demand tailored approaches. Location analysis and decision-modeling has become ever more comprehensive and complex, but as the 30-Year Comparison of Site Selection Factors chart shows â&#x20AC;&#x201D; the trend toward more focus on talent and other qualitative factors, while keeping an eye on costs, is prominent. The bottom line for most businesses competing in the global marketplace is finding the optimal tradeoffs to achieve competitive advantage through access to talent and markets, while minimizing costs and risks. All other factors become secondary.

By Gene DePrez, Managing Partner, Global Innovation Partners, Ltd.

percent) these new facilities will represent an investment of less than $10 million. EXPANSION AND RELOCATION PLANS Although expansion plans as reported by corporate re-

spondents have increased slightly on a year-over-year basis (39 percent to 43 percent of the respondents), fewer of the respondents to our 30th Annual Corporate Survey expect to expand an existing facility than open a new facility (49

percent). Of those with expansion plans, 79 percent plan to expand an existing domestic facility, with just 12 percent saying they plan to expand an existing foreign facility. About 70 percent of those respondents who plan to ex-

AREA DEVELOPMENT | Q1/2016

Total amount to be invested in new domestic facilities: $100 millionâ&#x20AC;&#x201C; $500 million

$50 millionâ&#x20AC;&#x201C;$100 million

11%

Less than $10 million

$10 millionâ&#x20AC;&#x201C; $50 million

59%

24% figure 15

Plan to open new foreign facilities within: 5 years

15% 1 year

3 years

38%

23%

2 years

23% figure 16

Number of new foreign facilities to be opened: Five or more

15% One

Three

46%

23% Two

15% figure 17

pand an existing domestic facility will do so within the next two years, with nearly 80 percent expanding one or two domestic facilities, and 85 percent of the respondents claiming the domestic expansions will create fewer than 100 jobs. All of the respondents with plans for expanding foreign facilities will do so within one to two years, with 80 percent of these respondents saying they plan to expand just one or two foreign facilities. Interestingly, though, these expansions of foreign facilities will create

AREA DEVELOPMENT

between 100 and 499 jobs, according to three quarters of the respondents to this question. Overall relocation plans, on the other hand, are not as robust. Just 29 percent of the respondents to our 30th Annual Corporate Survey say they plan to relocate an existing facility within the next five years. Of those respondents with relocation plans, 83 percent say they plan to relocate an existing domestic facility within the U.S., with more than half having one- to two-year plans to do so. The primary reasons for relocating domestically are new markets/market proximity (cited by more than 40 percent of the respondents), and labor availability and labor costs (each cited by a fifth of the respondents). Nearly all (94 percent) of the Corporate Survey respondents have no plans to relocate a domestic facility to an offshore or near-shore location. The slight percentage who do plan to relocate offshore cite tax concerns as their incentive to move. Similarly, only 10 percent of the respondents are planning to relocate a foreign facility back to the U.S. Fifty percent of these respondents cite costs (labor, energy, transportation), product quality issues, as well as intellectual property protection concerns as the reasons they are planning to reshore facilities.

Location of new foreign facilities (as percentage of total number to be opened): Canada Mexico

0% 13%

Caribbean

Central America

South America

13%

Western Europe

17%

Eastern Europe

Middle East Australia

9% 4%

Asia

22%

figure 18

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

14% India

14%

China

71%

figure 19

Types of new foreign facilities (as percentage of total number to be opened): R&D

14%

Other

18%

Manufacturing

27%

Shared Services

Warehouse/ Distribution

Back Office/Call Center

18%

5% Data Center

Headquarters

figure 20

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

Fewer than 20

17%

100-499

25%

20-49

33% 50-99

17% figure 21

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

th 30 ANNUAL

corporate survey Interestingly, the latest U.S. Reshoring Index for A.T. Kearney indicates that offshoring of U.S. manufacturing production continues to grow at a faster pace than reshoring of production to the United States (although some, including those with the Reshoring Initiative, take issue with A.T. Kearney’s finding of lackluster reshoring). A.T. Kearney could only identify 60 factory operations returning from offshore to the U.S. in 2015, with many returning to an existing facility. According to A.T. Kearney Partner Patrick Van den Bossche, “The reshoring phenomenon, once viewed by many as the leading edge of a decisive shift in global manufacturing, may actually have been just a one-off aberration.” Contributing to this lack of reshoring, he adds, is a lack of skilled workers and “service provider ecosystems that had disappeared years ago.” SITE SELECTION PRIORITIES We asked those responding to our 30th Annual Corporate Survey to rate the factors they consider when making their new facility, expansion, and relocation plans as either “very important,” “important,” “minor consideration,” or “of no importance.” We then added the “very important” and “important” ratings in order to rank the

factors in order of importance. Our Corporate Survey respondents’ number-one concern is availability of skilled labor, considered “very important” or “important” by 92.9 of the respondents, up 10.8

percentage points (the greatest increase overall) from the prior year’s survey, in which this factor had ranked fifth — a ranking that we considered somewhat of an aberration. This factor also trumps labor costs, ranked

Analysis

The cost of labor, as well as highway accessibility, has traditionally been the dominant site selection factor in choosing a new location. However, the availability of a skilled workforce has grown steadily in importance over the years and is now the leading site selection factor in this year’s Corporate Survey. Fifty-six percent of respondents cite the availability of a skilled workforce as having an effect on their new or expansion plans or current operations. The integration of advanced technology into the site selection process leads to the question, is a community’s workforce keeping up with advanced skills necessary to meet the evolving talent demands of current and future workforces? Capital investment demands of technology also necessitate a strong confidence in the area workforce’s ability to support the facility. The presence of a feeder system, including industry clusters and universities, may ensure a skilled workforce is achievable in the location. Training programs and the availability of technical colleges in a community are generally viewed as important factors in the survey, but not necessarily very important factors. Companies requiring higherskilled workforces expect to find those skills readily available in the community as opposed to developing skills via training. [Nonetheless], many state and local governments offer excellent training initiatives that address any gaps between a company’s labor needs and what’s available in the local workforce. Finally, [of those survey respondents planning new domestic facilities], 69 percent plan to open them within two years. This is good news! The survey also reveals approximately half of the new domestic facilities will be manufacturing and/or warehousedistribution, and more than half (61 percent) of new domestic facilities will create fewer than 50 new jobs.

By Gary Marx, CEcD, Managing Director, BlueCap Economic Advisors, LLC

AREA DEVELOPMENT | Q1/2016

Expect to expand existing domestic facilities within: 5 years

4 years

10%

1 year

3 years

sixth by our survey respondents with an 80.8 percent combined importance rating. With lower unemployment and a slowly growing economy, wages are starting to rise — but finding workers with the right combination of skills still takes precedence. Each day the media contains

Total amount to be invested in new foreign facilities: $50 million–$100 million

$100 million–$500 million

$10 million– $50 million

23%

8% Less than $10 million

62%

figure 22

Plan to expand any existing domestic and/or foreign facility within the next five years:

57%

Yes

43%

If yes, plan to expand existing domestic facilities: No

21%

Yes

79%

If yes, plan to expand existing foreign facilities:

Yes No

88% figure 23

S10

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12%

stories of companies stressing the importance of finding a skilled labor force for their current and future needs. For example, Archer Daniels Midland (ADM) Chief Information Officer Marty Schoenthaler recently explained, “The decision on where to locate our new technology center rested heavily on where we could find the talent.” On January 18th he told IndustryWeek the company choose Northern Kentucky for its new technology center because “when you have an established pool of large multinational companies, experienced technical talent is attracted to the area.” This explains why more than half (56 percent) of our Corporate Survey respondents say that availability of skilled labor is having an effect on their new facility and expansion plans. It’s also why 68 percent of the respondents say they consider whether there are businesses performing activities similar to those of their company in the area of search. When it comes to labor skills, nearly two-thirds of our Corporate Survey respondents say workers are lacking advanced skills such as advanced welding or machine tool programming. Half the respondents also say workers are lacking the critical STEM skills. The second-ranked factor in our 30th Annual Corporate

38%

13%

2 years

33% figure 24

Number of domestic facilities to be expanded: Five or more

11% Three

One

11%

55%

Two

24% figure 25

Total number of new jobs to be created by domestic expansion(s): 100-499

15% 50-99

Fewer than 20

15%

49%

20-49

21% figure 26

Expect to expand existing foreign facilities within: 1 year

20% 2 years

80% figure 27

Number of foreign facilities to be expanded: Five or more

20%

One

60% Two

20% figure 28

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

Total number of new jobs to be created by company’s foreign expansion(s): Fewer than 20

25%

100-499

75%

figure 29

Plan to relocate an existing facility within the next five years: Yes

29% No

71%

If yes, plan to relocate an existing domestic facility within the U.S.: No

17% Yes

83% figure 30

Expect to relocate domestically within: 5 years

24% 1 year

41%

3 years

21% 2 years

14% figure 31

Primary reasons for relocating domestically: Tax concerns Government regulations

10% 7%

Labor costs

21%

Labor availability

21%

Healthcare costs

Quality-of-life concerns

Infrastructure

24%

New markets/market proximity 41% Proximity to research centers/Industry consortium 7% Other figure 32

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34%

Survey is highway accessibility, which has historically been ranked as a top factor (last year it was ranked first). Fully 88 percent of the survey respondents rated this factor as “very important” or “important.” Infrastructure factors “will continue to grow in importance as we become even more of an economy where just-in-time manufacturing and distribution of goods are more critical,” says Larry Gigerich, managing director of location consulting firm Ginovus. Related to distribution is proximity to major markets, considered “very important” or “important” by more than three quarters of the survey respondents and ranking eighth among the factors. Remember, the main reason the survey respondents say they are relocating domestically is new markets/market proximity, cited by 41 percent of the respondents. For our 30th Annual Corporate Survey we did not ask our survey-takers to separately rate the importance of quality-oflife factors including climate, housing availability and costs, healthcare facilities, ratings of public schools, cultural and recreational opportunities, colleges and universities in area, and crime rate. In the prior year’s survey none of these factors was considered “very important” or “important” by fewer than 60 percent of the respondents. Our current survey respondents give overall quality of life an 87.6

percent combined importance rating, placing in third among all the site selection factors! It seems the importance of quality of life has steadily been creeping up. This might be a reflection of the composition of respondents. Just as the industrial

Expect to relocate a domestic facility to an offshore or near-shore location: Yes No

94%

If yes, expect to relocate to an offshore or near-shore location within:

2 years

100%

Primary reasons for relocating to an offshore or near-shore location:

Tax concerns

100% figure 33

Expect to relocate a foreign facility back to the U.S. (reshoring): Yes

10% No

90%

If yes, primary reasons for reshoring: Labor costs Energy costs

50% 50%

Product quality issues

50%

Transportation/supply chain costs

50%

Tech transfer/intellectual property protection

50%

figure 34

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

th 30 ANNUAL

corporate survey composition of the U.S. labor force has changed, Area Development’s respondent pool has changed over the survey’s 30-year history from one comprised primarily of manufacturing firms to one now representing a more diverse, service-based sector. Added to that is the cultural shift among

generations — i.e., today’s workers (mainly millennials) want more of a work-life balance than those of previous generations. Although occupancy and construction costs vary among markets, these cost factors are always top of mind for companies building or expanding facili-

Analysis

The 2015 Corporate Survey results illustrate very precisely the major trend that we are seeing in the marketplace. The most sought-after companies by economic developers are actively chasing very select and indemand skill sets. Irrespective of the industry, corporate decision-makers are seeking the “value add” quotient for their businesses, and they are searching for and catering to that talent factor with increasing ferocity. In a mature value-added economy like the U.S., a location would be wise to prove its particular value proposition and help match corporate needs to the requisite type of skilled labor it has to offer. If the site selection process is about anything, at its core, it should be about finding the best possible location to make a particular product or to perform a particular service better than anywhere else. Ultimately, that means finding the workforce that can do the task better than the competition and grow the business. That is why skilled labor is the number-one factor and, to a large degree, why the quality-of-life factor has grown in importance. This is a trend likely to continue. But there is one catch and it’s the premium paid for that workforce and the attendant amenities. All of the other factors in the survey really reflect costs to ultimately secure that workforce. Determining a location’s value proposition is more important than ever. How those costs are balanced and mitigated against the value-add quotient that the workforce can create is critical in moving a location from short-list to winner. Macro-economic events like globalization, shale oil, the 2008 recession, and the sustained period of zero interest rates have commoditized many of the survey factors that historically served as cost differentiators across the U.S. Survey factors like real estate, energy, highway accessibility, and low-skill labor are all declining in importance as price differences narrow across geographies. Low cost alone is no longer the driving competitive advantage in the site selection process. Successful locations would be wise to develop their skill set niches and not merely rely on the old cost differential. As more locations compete for high-skilled and value-add jobs in the U.S., the effective use of targeted and useable incentives can be a decided advantage when coupled with the right product in the location process. It’s surprising to see their [comparatively low ranking] in the Corporate Survey as senior corporate decision-makers are actively driving for these benefits on projects, and now they can often be the deciding number in the value proposition calculation and a key differentiator among the short-list contenders.

By Tom Stringer, Managing Director & Service Leader Site Selection & Incentives, BDO Consulting

AREA DEVELOPMENT | Q1/2016

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CORPORATE SURVEY 2015 * Site Selection Factors

Very Important Important Minor Of No % % Consideration % Importance %

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

58.2 8.5

34.7 39.3

6.1 36.2

1.0 16.0

22.9 41.4 45.9 45.5

45.8 39.4 20.4 22.2

22.9 15.2 17.4 17.2

8.3 4.0 16.3 15.2

55.0 16.2 23.2

33.0 16.2 35.4

10.0 30.3 32.3

2.0 37.4 9.1

28.1

36.5

16.7

18.8

4.0

20.0

32.0

44.0

14.4

39.2

26.8

19.6

32.3

35.4

21.2

11.1

36.4 41.4 38.4

42.4 33.3 37.4

9.1 18.2 19.2

12.1 7.1 5.1

35.7 38.5

48.0 35.4

13.3 12.5

3.1 13.5

45.8

39.6

10.4

4.2

38.1 18.6 39.2 22.9 45.4 23.2

36.1 34.0 36.1 46.9 30.9 41.1

21.7 20.6 18.6 18.8 18.6 23.2

4.1 26.8 6.2 11.5 5.2 12.6

17.5 17.5 38.1

30.9 37.1 49.5

33.0 23.7 10.3

18.6 21.7 2.1

Transportation/Telecommunications Highway accessibility Railroad service Accessibility to major airport Inbound/outbound shipping costs Waterway or oceanport accessibility Availability of advanced ICT services

Finance Availability of long-term financing Corporate tax rate Tax exemptions State and local incentives

Other Available buildings Available land Occupancy or construction costs Expedited or “fast-track” permitting Raw materials availability Energy availability and costs Environmental regulations Proximity to major markets Proximity to suppliers Proximity to innovation/ commercialization/R&D centers Water availability Quality-of-life factors

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

figure 35

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ties. This factor received an 85.4 combined importance rating from our Corporate Survey takers and ranked fourth among the site selection factors. With companies requiring quick turnaround times once the decision to open a new facility or expand is made, they often look for available buildings. This factor ranked fifth, considered “very important” or “important” by 83.7 percent of the respondents to our Annual Corporate Survey. If a company can find an existing facility that works for them, and they can upgrade and occupy it quickly, they will often choose the existing building instead of constructing a new one. The “tax” factors also rank highly: Corporate tax rate is ranked seventh by the respondents, with a 78.8 percent combined importance rating; state and local incentives is ranked ninth, with a 75.8 percent combined rating; and tax exemptions is ranked 11th, with a 74. 7 percent combined rating. Nearly two thirds of the respondents say tax incentives are considered most important when making a location decision, with nearly 70 percent saying incentives are very or somewhat important to a project moving forward in a particular location. Rounding out the top-10 factors is energy availability and costs, with a 75.3 percent

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combined importance rating. In fact, more than 70 percent of the Corporate Survey respondents say they are making energy-saving modifications to their facilities to keep costs down. Although only rated “very important” or “important” by slightly more than half of the respondents to our 30th Annual Corporate Survey, water

COMBINED RATINGS CORPORATE SURVEY 2015* Site Selection Factors

2015

2014

92.9*

82.1 (5)**

88.0 87.6 85.4 83.7 80.8 78.8 76.3 75.8 75.3 74.7 74.2 73.9 69.8 68.7 67.7 67.7 66.3 64.6 64.3 58.6 54.6 53.6 52.6

88.3 (1) N/A 87.9 (2) 82.2 (4) 81.6 (6) 75.6 (10) 77.1 (8) 73.2 (11) 76.8 (9) 73.2 (11T) 71.0 (13) 85.7 (3) 68.6 (16) 62.8 (18) 63.1 (17) 77.9 (7) 70.9 (14) 69.5 (15) 60.3 (21) 62.4 (19) 44.0 (25) 45.1 (24) 53.7 (22)

48.4 47.8 32.4 24.0

N/A 52.5 (23) 30.9 (26) 27.8 (27)

Ranking 1. Availability of skilled labor 2. Highway accessibility 3. Quality of life 4. Occupancy or construction costs 5. Available buildings 6. Labor costs 7. Corporate tax rate 8. Proximity to major markets 9. State and local incentives 10. Energy availability and costs 11. Tax exemptions 12. Expedited or “fast-track” permitting 13. Available land 14. Environmental regulations 15. Training programs/technical colleges 16. Availability of long-term financing 16T. Right-to-work state 18. Low union profile 19. Inbound/outbound shipping costs 20. Proximity to suppliers 21. Accessibility to major airport 22. Water availability 23. Availability of advanced ICT services 24. Raw materials availability 25. Proximity to innovation/ commercialization R&D centers 26. Availability of unskilled labor 27. Railroad service 28. Waterway or oceanport accessibility

* All figures are percentages and are the total of the “very important” and “important” ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent. ** 2014 ranking

figure 36

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availability shows the second-largest increase in combined importance, increasing 10.6 percentage points and now considered “very important” or “important” by 54.6 percent of the survey respondents. This factor keeps rising in importance as problems with water availability and quality — take for example the crisis now occurring in Flint, Michigan — keep drawing the attention of companies making location decisions. A 2014 survey of major U.S. corporations by the Pacific Institute and VOX Global found that 60 percent of companies believe water challenges will negatively affect business growth and profitability within five years, as reported by the U.S. Chamber of Commerce Foundation. More than 80 percent said it would affect their location decisions. Five years prior, fewer than 20 percent responding to the organizations’ survey expressed concern about water risks. The factor showing the largest decrease in importance rating (11.8 percentage points) and dropping from third in the rankings to 13th is available land, considered “very important” or “important” by 73.9 percent of the Corporate Survey respondents. Available land is much more important to a large manufacturing project going forward than to an office facility, for example, where an available building might be a better fit. Considering the fact that manufacturers represent just 35 percent of the survey respondents, the decrease in importance of this factor is more understandable than its high rating and ranking in the prior year’s survey. The right-to-work state factor shows the second-largest drop in the ratings (decreasing 10.2 percentage points) and rankings (from seventh to 16th). Our Corporate Survey respondents give this factor a combined importance rating of 67.7 percent. Half the states now have right-to-work laws in place, and others — like Kentucky — have local right-to-work laws at the county level. Additionally, in many states that are not right-to-work, unionization

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30-YEAR COMPARISON OF SITE SELECTION FACTORS* Corporate Survey 2015 2015

2010

2005 2000 1995 1990 1986

92.9 47.8 68.7 80.8 66.3 67.7

85.9 45.4 56.7 91.0 75.4 67.9

87.2 50.6 59.6 87.9 77.0 69.7

87.7 65.5 57.2 91.6 79.7 72.9

87.9 64.9 58.6 94.2 82.8 77.8

87.1 73.6 49.6 92.1 78.7 71.3

84.8 54.4 50.9 96.6 79.0 N/A

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

Transportation/Telecommunications Highway accessibility Railroad service Accessibility to major airport Waterway or ocean port accessibility

88.0 32.4 58.6 24.0

97.3 36.0 50.0 21.9

91.4 28.9 50.0 20.2

95.9 29.8 53.2 21.0

93.6 29.7 59.5 20.0

92.3 32.2 55.5 16.2

91.3 25.8 61.0 15.3

Inbound/outbound shipping costs Availability of telecommunications services Availability of advanced ICT services

64.6 N/A

84.0 N/A

N/A 79.8

N/A 77.1

N/A 80.2

N/A 76.7

N/A N/A

53.6

72.9

85.7

N/A

67.7 78.8 74.7 75.8

58.5 86.3 90.9 89.3

56.5 85.0 83.6 86.0

58.4 84.7 81.6 83.6

65.5 N/A 86.4 87.8

75.4 N/A 85.8 88.7

55.2 N/A 77.9 79.6

83.7 N/A 73.9 85.4 74.2 52.6 75.3 69.8 76.3 64.3 54.6 87.6

81.0 N/A 73.4 89.8 68.2 61.5 82.1 74.8 66.4 63.6 N/A 62.1

N/A 79.1 75.0 83.7 N/A 62.3 82.8 71.1 83.2 66.7 N/A 54.7

N/A 75.8 75.5 83.0 N/A 56.1 77.7 80.9 76.8 63.8 N/A 58.8

N/A 83.2 83.7 90.2 N/A 64.9 89.6 86.5 74.5 66.5 N/A 70.4

N/A 84.0 82.3 88.5 N/A 64.1 88.1 82.9 74.9 65.1 N/A 70.6

N/A N/A N/A N/A N/A 49.1 N/A N/A 84.8 N/A N/A 60.4

Finance Availability of long-term financing Corporate tax rate Tax exemptions State and local incentives

rates are low, making this factor more of a non-issue. LOCATION DECISION PROCESS Ninety percent of our 30th Annual Corporate Survey respondents get their site selection information from magazines like Area Development. Nearly 60 percent also search online sources (e.g., AreaDevelopment.com) for this type of information, with about three quarters looking for economic data on specific locations, and half looking for listings of available sites and buildings.

Availability of skilled labor having an effect on new facility/expansion plans or current operations:

Other Available buildings Cost of land Available land Occupancy or construction costs Expedited or fast-track permitting Raw materials availability Energy availability and costs Environmental regulations Proximity to major markets Proximity to suppliers Water availability Quality of life**

Yes

44%

56%

If yes, workers are lacking: Basic skills (e.g., reading comprehension, mathematical competency, etc.)

37%

Advanced skills (e.g., advanced welding, machine tool programming, bioprocessing, etc.) 63% STEM skills (science, technology, engineering, mathematics)

50%

figure 37

(N/A) Data not available due to changes and additions to the survey * All figures are percentages and are the total of “very important” and “important” ratings of the Area Development Corporate Survey.

Healthcare coverage mandated under the Affordable Care Act is affecting location decisions: Yes

** Quality-of-life rating for prior years’ surveys is the average of rating of nine quality-of-life factors (climate, housing availability, housing costs, healthcare facilities, ratings of public schools, cultural opportunities, recreational opportunities, colleges and universities in area, and low crime rate).

figure 36A

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29%

71% figure 38

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th 30 ANNUAL

corporate survey

More than half of these respondents begin the informationgathering process one to two years before making a location decision. Three quarters make contact with the locations of interest within one to six months of beginning their initial search. About 90 percent say they put between one and five locations on their “short list.” A third only visit one or two of the location finalists, but more than half visit up to five locations before making their final decision. About 80 percent say the final site selection decision is made within three months to one year of initial contact. Fewer than half (43 percent) use outside location or business consultants when site selecting. Of those that do, about half say they are providing feasibility studies, location/comparative analyses, incentives negotiations/ management, and help with the real estate transaction, as well making the final location decision.

Analysis

The top three location selection factors for corporate users rarely tend to change from year to year: • Labor — quality and availability • Cost — employees, real estate, overall occupancy (including taxes, 1x costs, etc.) • Accessibility — logistics and supply chain networks, access to markets, and inputs/employees, etc. The continuing war for talent: Skilled labor availability, typically the numberone ranked issue annually, ranked even higher than previous years. It also ranked significantly higher than just cost of labor, which is particularly true for knowledge-based industries. In general, this harder-to-find talent may require a partnership with educational institutions — note that the training programs/technical colleges ranking is also up, reflecting what we see in our clients’ desire for partnerships with these entities in order to provide ongoing training and re-train the existing workforce to meet the needs of the corporate user; help develop the local talent pipeline; and ensure continuity among existing employees. This doesn’t necessarily apply to unskilled labor. This is easier to find and is more ubiquitous. Natural resources: Water, particularly in the West, is on everyone’s radar (availability, costs, and use restrictions). The importance of availability and sustainability of water has risen, and I’d expect this factor to continue to rise in this survey. This impacts industrial users the most (food/beverage manufacturing, agriculture, paper mills, chemical manufacturing, etc.)

Right to work and union profile are both down in importance. Why? This is generally less of an issue for companies with a higher ratio of skilled employees. Available buildings are still really important, but importance of available land seems to have gone down in priority. There are more spec buildings available in many markets — and more options for existing core/shell buildings. Thus, many companies — especially those in higher skilled industries/operations — are focusing less on peripheral locations, so they’re less concerned about land and more concerned about available buildings. Fewer companies are buying land and doing development of their own facility. With time to market being critical, it’s easier to get up and running if you can build out a spec instead of engaging in a ground-up development process. Quality of life is important, but typically not a “first tier” site selection criteria like the top three listed above. However, it is increasingly important, particularly for recruitment/retention of knowledge workers, especially millennials.

By Bradley Lindquist, Senior Managing Director, Newmark Grubb Knight Frank AREA DEVELOPMENT | Q1/2016

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YEAR-OVER-YEAR COMPARISON

Sustainable facility development more important now than in the past: No

Quality of the workforce would be negatively affected in states that are legalizing marijuana use:

Yes

44%

56%

Legalized marijuana laws would affect the decision to locate a new facility in states that have enacted such laws:

Yes

47%

53%

figure 39

The conclusion’s made in our prior year’s survey — i.e., that our 30th Annual Corporate Survey would reflect increased new facility and expansion activity — appear to hold true. Economists also are predicting U.S. GDP growth of 2.4 percent for 2016, according to The Conference Board, propelled by growth in employment and wages. And according to Deloitte’s Q4/2015 CFO SignalsTM Report, there is considerable optimism in CFOs’ expectations and plans for 2016. Growing existing businesses and getting more efficient are the CFOs’ dominant focuses, but new markets are

40%

Yes

60%

If so, measures undertaken to reduce company’s “carbon footprint”: LEED certification for new or existing facilities

25%

Energy-saving modifications to existing facilities 72% Installed on-site renewable generation

11%

Change of supply or distribution routes/methods 18% Recycling or re-use of waste products, etc. Other

76% 5%

figure 40

Type(s) of incentives considered most important when making a location decision: Cash grants Tax incentives (tax credits, exemptions, etc.)

21% 64%

Other financial incentives (bonds, loans, etc.)

32%

Worker training incentives

50%

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

55%

figure 41

Analysis

The corporate responses indicate that businesses are still risk-averse. Only 6 percent of the respondents indicated that they plan to relocate a U.S. facility to an offshore or near shore location. Plus, the respondents appear to favor expanding existing facilities: [of those with expansion plans], 79 percent plan to expand existing domestic facilities. This indicates to me that executives do not want the disruption or uncertainty associated with new locations. If a company does plan a new domestic facility, the projects tend to be smaller. About 60 percent of the respondents indicate that their domestic projects will involve the creation of fewer than 50 jobs and less than $10 million of capital investment. The availability of skilled labor remains the number-one consideration in site selection. Over the past 30 years, as the importance of skilled labor has increased, the concern about labor costs has fallen. If you compare the results of 1986 to 2015, the two factors have swapped places in the rankings. Today, companies are willing to pay for a higher skilled labor force because executives believe the workers will be more productive. Quality of life has become a major concern in 2015 because companies realize that millennials are important to their future work force, and millennials are very concerned with the community and its amenities. To attract the higher skilled millennials, companies are increasingly worried about locating in places where millennials want to live. Or, as we are seeing, companies are locating where the millennials are already living — places that tend to have higher quality of life.

By Gregory Burkart, Managing Director & Practice Leader Site Selection & Business Incentive Services, Duﬀ & Phelps, LLC S20

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Importance of incentives to a project moving forward in a particular location: Of no importance

If company received and utilized incentives in the past, percentage of the incentives initially estimated value secured (or expected to secure):

Very important

31%

A minor consideration

24% Somewhat important

38% figure 42

very significant for some industries, says the report. The CFOs say they will increase their investment in North American markets, with little additional focus on Europe or China. As this is an election year, there’s been much talk about what’s needed to help businesses and the nation as a whole

75% to 100%

grow even faster and further. Commenting in The Wall Street Journal (6/21/15), Glenn Hubbard, dean of Columbia Business School, and Kevin Warsh, a former Federal Reserve governor and a distinguished visiting fellow at Stanford University’s Hoover Institution, noted the next president must be committed to policies that increase the nation’s economic potential, including long-term tax and regulatory reform, as well as trade policies that continue to open global markets and educational policies that empower schools to put students’ skills over other interests. They

21% 10 to 25%

50% to 75%

42%

13% 25% to 50%

24% figure 43

Communities are offering specific incentives for “green initiatives”: Yes No

32%

68%

figure 44

Analysis

Industrial site selection is the most complex of all site locations to undertake successfully. Site selection requires finding the necessary labor skills, but over the past two decades logistics associated with manufacturing and distribution have played an increasingly larger role as shifting customer demand interfaced with a company’s existing and expanding supply chain footprint can be either positive or negative cost and efficiency factors for a corporation. This is due to the fact that for manufacturing and warehouse distribution investments, logistics should drive location instead of location driving logistics — otherwise corporations are not minimizing costs and maximizing efficiencies. Over the past 15 years, Area Development’s Annual Corporate Surveys have typically shown that highway access has been the number-one site selection factor overall, with labor being number two. This was true for 2000, 2005, and 2010. However, the current 2015 Corporate Survey shows the availability of skilled labor as the number-one factor, with highway access slipping to the number-two spot. While I found this to be very interesting, I thought it to be a bit contrary to what I have been experiencing as a corporate site selector, at least for manufacturing and warehouse distribution investments. I took a look back and analyzed the makeup of prior respondent pools since 2000. In the year 2000, the respondent pool was comprised of 77 percent of manufacturing companies. In 2005, the makeup was 80 percent manufacturers. This figure dropped to just 66 percent for the 2010 survey. However, the current 2015 survey respondent pool is made up of only 35 percent manufacturers. This shows a respondent pool that is largely non-manufacturing in nature and hence not reflecting the highway access aspect as much as the surveys of the past. It is still my belief that for manufacturing and warehouse distribution, highway access remains the top factor.

By Bill Luttrell, Senior Locations Strategist, Werner Global Logistics S22

AREA DEVELOPMENT

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

Consider whether there are businesses performing similar activities to company's in the area of search:

18%

Very important A minor consideration

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

25%

Yes

32%

Yes

68%

18%

62%

figure 46

Somewhat important

38%

figure 47

40% figure 45

LOCATION DECISION PROCESS Sources of site selection information used during the past 24 months: Site magazines (Area Development, etc.) B2B industry-related magazines/sites (food, plastics, etc.)

90% 41%

General business magazines and financial papers papers

(IndustryWeek, The Wall Street Journal, etc.)

Contact information for consultants and/ or real estate professionals who can assist in the site search Listings of available sites and buildings

After the initial contact, location decision is generally made within:

1 month 3 months

16% 27%

6 months After 6 months

33% 24%

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

41% 40% 17% 3%

85%

Information searched for online: Economic data on specific locations Specific economic development agencies’ websites

After the initial search, contact is made with the locations of interest within:

74% 57%

45%

(e.g., FastFacility)

51%

Site selection and facility planning strategy and information (e.g.,AreaDevelopment.com)

58%

Use of outside site selection or business consultants when site selecting:

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

89% 11%

5% 19%

1–2 years

55%

More than 2 years

22%

don’t support the theory of today’s economic growth being the “new normal.” They believe that with the right policies in place, the U.S. can return to significantly higher rates of growth.

43% 57%

If yes, consultants are providing: Number of locations usually visited before finalizing the location decision: 1 or 2 Up to 5 More than 5

33% 57% 10%

Prior to the location decision, the information-gathering process is begun within: 3–6 months 6 months to 1 year

Yes No

Our next Corporate Survey will be conducted at year’s end, with a new president elected. The results will, no doubt, reflect our corporate executive readers’ confidence

Feasibility studies Global asset positioning Location studies/comparative analyses Incentives negotiations/management Location decision Real estate transaction Other

5 50% 2% 59% 48% 48% 52% 5%

in the president-elect’s ability to help their businesses prosper and grow. •• •• •• •• •• ••

AREA DEVELOPMENT | Q1/2016

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ANNUAL

consultants survey Two thirds of the consultants believe the economy is on a continuous growth track, and nearly all are busy helping clients with new facility and expansion plans.

FORTY PERCENT OF THE CONSULTANTS SAY their clients have more than 1,000 employees.

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ith 57 percent of those responding to our 30th Annual Corporate Survey saying they do not use outside consultants when site selecting, it stands to reason that the responses to our 12th Annual Consultants Survey will differ from those of our Corporate Survey. Let’s take a look at the profile of the responding consultants and their clients’ location and expansion plans and site selection priorities. RESPONDING CONSULTANTS’ PROFILE Three quarters of the responding consultants work with durable goods manufacturers, and nearly 60 percent with nondurable goods manufacturers. Two thirds are helping to site distribution/warehouse facilities, and nearly 40 percent are working on projects in the data processing/ computer-related services and healthcare/life sciences sectors. Additionally, the majority of their clients are very large in terms of employment numbers (1,000+), say 40 percent of the responding consultants. This stands in contrast to the respondents to our Corporate Survey wherein 79 percent of the respondents are with firms employing fewer than 1,000 people. Nearly 90 percent of the respondents to our 12th Annual Consultants Survey are providing their clients with location studies/comparative analyses as well as incentives negotiation and management, although two thirds do say their clients have gathered preliminary data and already narrowed down the geographic area in which they wish to locate before engaging their services. Nearly all (93 percent) are working with executive management at their client companies, with more than 70 percent also working with the tax/finance and real estate departments at client firms. Finally, nearly two thirds of the responding consultants believe the economic recovery has achieved a continuous growth track. These consultants are more optimistic than the Corporate Survey respondents — only 48 percent of them hold that opinion. Needless to say, that is

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Percentage of respondents working on projects in the following industries:

probably because the consultants are primarily working with companies that are in a growth mode. CLIENTS’ NEW FACILITIES PLANS This reasoning is borne out by the fact that 95 percent of the responding consultants say their clients plan to open new domestic facilities within five years (only half of the Corporate Survey respondents have new facilities plans), with three quarters of the consultants saying those clients plan to do so within two years. Two thirds of the respondents say their clients will open just one new domestic facility, while a quarter say they will open two. The primary recipient of these new facilities will be the South — 17 percent of the total and the same percentage as reported by the Corporate Survey respondents. This region is followed by the South Atlantic, accounting for 14 percent of the projects the

responding consultants are working on, followed by the Southwest and Midwest, each responsible for 12 percent of the total projects. A quarter of these new facilities will be manufacturing plants, say the respondents, with about a fifth housing warehouse/distribution operations, 16 percent being new headquarters operations, and 12 percent back office/call centers. These last two facilities uses are not as heavily represented in the Corporate Survey responses. More than half of the respondents to our 12th Annual Consultants Survey also say their clients expect to open new foreign facilities within the next five years — only 25 percent of the Corporate Survey respondents say they have such plans. Three quarters of the consultants’ clients plan to open these foreign facilities within two years, with more than 90 percent having plans for one or two foreign facilities.

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

76% 59% 29% 66% 46% 39% 31% 24% 10% 39% 14% 6% 8%

chart A

Percentage of respondents providing the following services to their clients: Feasibility Studies Global Asset Positioning Location Studies/Comparative Analyses Incentives Negotiations/Management Location Decision Real Estate Transaction Other

46% 20% 88% 88% 77% 48% 8%

chart B

In terms of their employment numbers, client companies utilizing their services are generally: Small (20-99 employees) Mid-size (100-499 employees) Large (500-999 employees) Very large (1,000 or more employees)

2% 32% 26% 40%

chart C

Nearly a quarter of these foreign facilities projects are slated for Mexico, 18 percent for Asia, 14 percent for Western Europe, and 11 percent for Canada. Notably, none of the respondents to our Corporate Survey report plans for new fa-

AREA DEVELOPMENT | Q1/2016

S25

Number of new domestic facilities average client plans to open: One Two Three Four Five or more

67% 25% 6% 0% 1%

chart H

Departments of clients’ organizations significantly involved in the site selection process/project: Executive management Tax and finance Real estate Information technology Supply chain or logistics Operations or business unit management Human resources

93% 72% 78% 18% 51% 67% 54%

chart D

Most of the clients who ask consultants to perform a location search have: Not actively initiated the site selection process Already gathered preliminary data Already narrowed down the geographic area in which they wish to locate Already chosen several “finalist” communities Expect the consultant to narrow or make the location decision for them

34% 64% 64% 28% 31%

chart E

Believe the economic recovery has achieved a continuous growth track: Yes No

64% 36%

chart F

CLIENTS’ RELOCATION AND EXPANSION PLANS

Clients plan to open new domestic facilities within five years: Yes No

95% 5%

Clients who expect to open new domestic facilities plan to do so within: 1 year 2 years 3 years 4 years 5 years chart G

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cilities in Canada. China will receive 28 percent of the consultants’ clients’ projects in Asia, but a fifth are also going to Malaysia, and 15 percent each to India and Vietnam. In contrast, the respondents to our 30th Annual Corporate Survey who have plans for Asian facilities say 71 percent of them will be in China. The types of foreign facilities the responding consultants’ clients are opening range from manufacturing facilities (35 percent) to warehouse/distribution and back office/call centers (each 14 percent) to shared services operations (10 percent). Only 5 percent of the Corporate Survey respondents’ new foreign facilities will house back office/ call center as well as shared services operations.

23% 54% 17% 4% 3%

When it comes to their clients’ relocation plans, 65 percent of those responding to our Consultants Survey say their clients plan to relocate an existing domestic facility within the U.S. within the next five years. Of those consultants’ clients who plan to relocate domestically, three quarters of the respondents claim they will do

Clients’ domestic location projects are slated for the following regions (as a percentage of total new domestic projects):

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

3% 10% 14% 11% 17% 12% 6% 7% 12% 7% 2%

chart I

Types of new domestic facilities clients are opening (as a percentage of total new domestic projects): Manufacturing Warehouse/Distribution Headquarters Data Center Back Office/Call Center Shared Services R&D Other

26% 22% 16% 8% 12% 8% 7% 2%

chart J

so within a year or two. Three quarters of the respondents also say the primary reasons their clients are moving are market proximity/new markets and labor availability. Two thirds also cite labor costs, and half cite tax concerns among the reasons for these domestic relocations. Nonetheless, the majority of responding consultants (86 percent) say their clients

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Clients planning new facilities slated for Asia will locate them in the following countries (as a percentage of total new Asian projects): China India Vietnam Singapore Malaysia Other Asian nation (including Indonesia, Taiwan, Thailand, Korea, Myanmar)

28% 15% 15% 10% 20% 12%

chart N

Clients plan to open new foreign facilities within five years: Yes No

52% 48%

Clients who expect to open new foreign facilities plan to do so within: 1 year 2 years 3 years 4 years 5 years

17% 60% 21% 0% 2%

chart K

Number of new foreign facilities average client plans to open: One Two Three Four Five or more

64% 29% 5% 0% 2%

chart L

Clientsâ&#x20AC;&#x2122; foreign location projects are slated for the following regions (as a percentage of total new foreign projects): Canada Mexico Caribbean Central America South America Western Europe Eastern Europe Middle East Africa Australia Asia chart M

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11% 23% 2% 8% 9% 14% 10% 2% 1% 2% 18%

are not planning to relocate a domestic facility to a foreign location. In fact, nearly two thirds of the Consultants Survey respondents say they have seen a decrease in the number of companies establishing foreign facilities or conducting site searches in foreign locations as opposed to domestic ones in the last year. Of those clients that are planning to move a domestic facility offshore, half the responding consultants claim the moves are planned two years out. Nearly 90 percent cite labor availability as the reason for their clients going offshore; more than three quarters again cite market proximity/new markets; and two thirds say government regulations along with labor costs are prompting their clients to consider foreign locations. Similarly, two thirds of the respondents say their clients have not relocated a foreign facility back to the U.S. (reshored) in the past year, nor are they planning to do so. (Notably, 90 percent of our Corporate Survey respondents say they do not expect to reshore a facility.) Of those consultantsâ&#x20AC;&#x2122; clients that have reshored, three quarters of the

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

35% 14% 5% 11% 14% 10% 9% 3%

chart O

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

65% 35%

Clients who expect to relocate domestically plan to do so within: 1 year 2 years 3 years 4 years 5 years

39% 35% 20% 2% 4%

chart P

consultants say their clients have done so because of product quality issues, and nearly 70 percent say transportation/supply chain costs are to blame for their clientsâ&#x20AC;&#x2122; reshoring moves. Nearly all of the respondents (90 percent) to our 12th Annual Consultants Survey say their clients are planning

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12th

ANNUAL

Primary reasons for clients’ domestic relocations: Tax concerns Government regulations Healthcare costs Market proximity/new markets Infrastructure concerns Labor availability Labor costs Energy costs Access to capital Proximity to research centers/ industry consortium Quality of life concerns Other

24% 20% 22%

chart Q

Clients plan to relocate an existing domestic facility to a foreign location within the next five years: Yes No

14% 86%

Clients who expect to relocate a domestic facility to a foreign location plan to do so within: 1 year 2 years 3 years 4 years 5 years

consultants survey

54% 36% 4% 74% 18% 76% 66% 20% 8%

0% 56% 22% 11% 11%

chart R

to expand an existing domestic facility within the next five years, with more than 80 percent expecting to do so within two years. CLIENTS’ SITE SELECTION PRIORITIES We’ve also asked the consultants to rate the site selection factors on which their clients base their location and expansion decisions as “very important,” “somewhat important,” “minor consideration,” or “of no importance.”

Although the site selection priorities of our Corporate Survey respondents (only 43 percent of whom use outside consultants when site selecting) and the Consultants Survey respondents diverge at many points, both groups highlight availability of skilled labor as the number-one factor. In fact, 100 percent of the responding consultants rated this factor as “very important” or “important.” Ninety percent of these consultants say availability of skilled labor is having an effect on their clients’ facility plans or current operations, with 85 percent saying workers are lacking advanced skills like machine tool programming or bioprocessing; 60 percent note that workers lack the increasingly important STEM skills as well. Interestingly, the responding consultants are not as concerned about the effect on the workforce of legalizing marijuana: two thirds say it will have no effect on workforce quality, nor do they feel legalized marijuana laws would affect their clients’ decisions to locate facilities in states that have enacted such laws. In contrast, more than half of the Corporate Survey respondents

Primary reasons for moving these facilities offshore: Tax concerns Government regulations Labor costs Labor availability Healthcare costs Energy costs New markets /market proximity Proximity to research centers / industry consortium Quality of life concerns

56% 67% 67% 89% 11% 44% 78% 22% 11%

chart S

Increase or decrease in the number of companies establishing foreign facilities or beginning site searches in foreign locations as opposed to domestic ones in the last year? Increase Decrease

36% 64%

chart T

Clients have relocated a facility back to the U.S. from a foreign location (reshored) in the recent past or are planning to do so: Yes No

35% 65%

If so, reasons for reshoring: Labor costs Skilled labor Energy costs Product quality issues Transportation/supply-chain costs Geopolitical/government policy concerns Tech transfer/intellectual property protection Other

43% 7% 32% 75% 68% 32% 36% 18%

chart U

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Clients are planning to expand an existing domestic facility within the next five years Yes No

90% 10%

Clients who expect to expand domestic facilities plan to do so within: 1 year 2 years 3 years 4 years 5 years

28% 53% 18% 1% 0%

chart V

say marijuana legalization would affect workforce quality, with nearly 50 percent saying it would also have a bearing on their location decisions — obviously there’s a disconnect here! It should be noted that the consultants’ overall ratings of the factors as “important” or “very important” is higher than the ratings given to the factors by the Corporate Survey respondents. In fact, the top eight site selection factors have combined “very important” and “important” ratings of more than 90 percent. For example, although highway accessibility is ranked sixth by the consultants, this factor has a 93.5 percent combined importance rating. And a related factor, proximity to major markets, is tied in the rankings for the number-two spot with labor costs, with both of these site selection factors considered “very important” or “important” by 96.1 percent of the responding consultants. Another cost factor — inbound/ outbound shipping costs — is

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CONSULTANTS SURVEY 2015* Site Selection Factors

Very Important Important Minor Of No % % Consideration % Importance %

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

88.3 23.4

11.7 41.6

0.0 29.9

0.0 5.2

35.6 62.3 50.6 31.2

51.3 33.8 32.5 45.5

13.2 1.3 13.0 16.9

0.0 2.6 4.0 6.5

58.4 13.0 44.2

35.1 39.0 44.2

6.5 39.0 11.7

0.0 9.1 0.0

7.8

35.1

45.5

11.7

37.7

50.7

9.1

2.6

14.3

42.9

33.8

9.1

14.3

24.7

44.2

16.9

37.7 49.4 65.0

36.4 41.6 29.9

23.4 7.8 5.2

2.6 1.3 0.0

59.7 52.0 33.3

35.1 39.0 50.7

5.2 9.1 16.0

0.0 0.0 0.0

42.9 13.5 16.9 41.6 23.7 48.7 36.8

45.5 51.4 58.4 44.2 59.2 47.4 47.4

11.7 24.3 16.9 14.3 15.8 2.6 13.2

0.0 10.8 7.8 0.0 1.3 1.3 2.6

7.9 15.8

54.0 48.7

30.3 34.2

7.9 1.3

Transportation/Telecommunications Highway accessibility Railroad service Accessibility to major airport Waterway or oceanport accessibility Inbound/outbound shipping costs Availability of advanced ICT services

Finance Availability of long-term financing Corporate tax rate Tax exemptions State and local incentives

Other Available buildings Available land Occupancy or construction costs Expedited or “fast-track” permitting Raw materials availability Water availability Energy availability and costs Environmental regulations Proximity to major markets Proximity to suppliers Proximity to innovation commercialization/R&D centers Quality-of-life

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

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

COMBINED RATINGS CONSULTANTS SURVEY 2015* Site Selection Factors

2015

2014

Ranking 1. Availability of skilled labor 2. Labor costs 2T. Proximity to major markets 4. State and local incentives 5. Available buildings 6. Highway accessibility 7. Available land 7T. Tax exemptions 9. Expedited or “fast-track” permitting 9T. Inbound/outbound shipping costs 9T. Accessibility to major airport 12. Energy availability and costs 13. Training programs/technical schools 14. Proximity to suppliers 15. Occupancy or construction costs 16. Low union profile 17. Environmental regulations 18. Right-to-work state 19. Water availability 20. Corporate tax rate 21. Availability of unskilled labor 22. Raw materials availability 23. Quality-of-life factors 24. Proximity to innovation/ commercialization/R&D centers 25. Availability of advanced ICT services 26. Railroad service 27. Waterway or oceanport accessibility 28. Availability of long-term financing

100.0 96.1 96.1 94.9 94.8 93.5 91.0 91.0 88.4 88.4 88.4 85.8 86.9 84.2 84.0 83.1 82.9 76.7 75.3 74.1 65.0 64.9 64.5

97.3 (2)** 97.3 (2T) 91.5 (8) 95.8 (5) 88.8 (11) 98.6 (1) 95.8 (5T) 90.2 (9) 97.2 (4) 77.4 (18) 86.1 (12) 91.6 (7) 83.3 (15) 85.9 (14) 90.2 (9T) 82.2 (16) 78.9 (17) 74.0 (19) 68.0 (21) 86.1 (12T) 65.3 (23) 62.0 (24) N/A

61.9 57.2 52.0 42.9 39.0

N/A 62.0 (24T) 69.0 (20) 47.1 (26) 38.9 (27)

chart X

ranked ninth (tie) with an 88.4 percent combined importance rating, representing the largest increase in the combined importance ratings with a jump of 11 percentage points over the prior year’s Consultants Survey. Since incentives negotiation/management is one of the primary services the consultants are providing to their clients, it stands to reason that state and local incentives is ranked fourth among the factors, receiving a 94.9 percent

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combined importance rating from the respondents to our 12th Annual Consultants Survey. Eighty percent of the respondents say incentives have always been of great importance to their clients when making location decisions. Nearly 90 percent say their clients actually consider cash grants most important, with more than three quarters saying tax incentives are most important. Two thirds note the importance of training incentives as well. The related factor of tax exemptions is ranked seventh with a 91 percent combined rating. Surprisingly, corporate tax rate only ranks 20th, slipping 12 percentage points from the prior year’s Consultants Survey (the second-largest decrease in the combined importance ratings) and now considered “very important” or “important” by only 74.1 percent of the respondents. The explanation for this might be contained in a recent article in Area Development (Directory 2016) from Hartley Powell and David Padykula at KPMG: “Why Location Matters to Manufacturers in Lessening the Tax Bite.” The authors say, “Statutory tax rates only tell part of the story. While topline rates are important, and high rates may provide “sticker shock” for companies considering locating within a given state, they are just one component of an enterprise’s effective tax burden. Tax incentives, apportionment, throwback rules, and other factors often have a dramatic effect on effective tax burdens. In some cases, states with low statutory tax rates often impose high effective tax burdens, and vice versa.” Available buildings and available land also land among the top-10 site selection factors in the Consultants Survey, ranking fifth and seventh (tie), respectively, with combined importance ratings of more than 90 percent. Available buildings are the clients’ choice for getting projects up and running quickly, and available land is needed for many of the larger, build-to-suit projects consultants are working on. Remember, two thirds of

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com

12th

ANNUAL

Availability of skilled labor is having an effect on clients’ facility plans or current operations: Yes No

90% 10%

If yes, workers are lacking: Basic skills (e.g., reading comprehension, mathematical competency, etc.)

39%

Advanced skills (e.g., advanced welding, machine tool programming, bioprocessing, etc.) 85% STEM skills (science, technology, engineering, mathematics)

60%

chart Y

Quality of the workforce would be negatively affected in states that are legalizing marijuana use: Yes No

33% 67%

Legalized marijuana laws would affect clients’ decisions to locate facilities in states that have enacted such laws: Yes No

35% 65%

chart Z

Sustainable development is more important to clients now than in the past: Yes No

71% 29%

Measures clients have undertaken to reduce their companies’ “carbon footprint”: LEED certification for new or existing facilities Energy-saving modifications to existing facilities Installed on-site renewable generation Change of supply or distribution routes/ methods Recycling or re-use of waste products, etc.

consultants survey

57% 86% 21% 36% 54%

chart AA

the responding consultants are working on projects for facilities with more than 500 employees. More than three quarters of the responding consultants also say the existence of a shovel-ready or pre-certified site is very or

somewhat important in their clients’ site searches. Closely related to this is expedited or “fast-track” permitting in a tie for the ninth spot with an 88.4 percent combined importance rating. The factor showing the largest drop in its combined importance rating (17 percentage points) is railroad service, now rated “very important” or “important” by slightly more than half of the responding consultants. This seems to be an anomaly because although trucks are the primary conveyance for domestic freight, all signs point to the increased importance of rail as part of the logistics picture. Just last year, the Federal Railroad Administration projected the tonnage of freight shipped by the U.S. rail system would increase 22 percent by 2035. Products being shipped into and out of the U.S. at the nation’s ports are arriving and leaving by rail — a key link in the nation’s intermodal system. Are falling fuel prices having an effect on the preference to ship by rail? Analysts say that if rail loses some of its cost advantages over trucking, companies may switch back to take advantage of trucking’s faster speed and greater convenience over rail. This new conundrum might be reflected in the drop in the consultants’ rating of railroad service.

Relative importance of incentives to clients when making location decisions: Have always been of great importance Are more important now than in the past Are less important now than in the past

80% 14% 5%

chart BB

Types of incentives clients consider most important when making a location decision: Cash grants Tax incentives (tax credits, exemptions, etc.) Other financial incentives (bonds, loans, etc.) Worker training incentives Other incentives (land, utility-rate subsidies,

infrastructure support, etc.)

87% 77% 26% 65% 71%

chart CC

Communities are offering specific incentives for “green” initiatives: Yes No

45% 55%

chart DD

Importance of the existence of a shovel-ready/pre-certified site in clients’ site searches: Very important Somewhat important A minor consideration Of no importance

33% 44% 19% 4%

chart EE

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94% 6%

tant” or “important” by more than three quarters of the consultants. Again, as problems with water availability as well as quality take center stage across the nation, we can only expect this factor to keep rising in importance.

86% 14%

CONSULTANTS’ INFORMATION SOURCES

Clients consider whether there are businesses performing similar activities to their’s in the area of search (clustering): Yes No chart FF

Clients consider weather-related factors in their location decisions: Yes No chart GG

Just as water availability showed the second-largest increase in importance among our Corporate Survey respondents, it also showed the second-largest increase among our Consultants Survey respondents — this time increasing 7.3 percentage points, and now considered “very impor-

Nearly all (93 percent) of the respondents to our 12th Annual Consultants Survey say they use site and facility planning magazines like Area Development for site selection information, while three quarters also use general business publications. When searching for information online, 90 percent of the respondents look at specific economic development organizations’

websites and they’re looking for economic data on specific locations. Interestingly, more than 70 percent say they don’t use social media for site and facility planning. Additionally, more than half of the responding consultants say their firms maintain their own site selection databases. More than 85 percent of the respondents to our Consultants Survey say their clients generally put between one and five economic development organizations on their “short list,” with three quarters saying their clients make up to five site visits. Once their services are engaged, 46 percent of the consultants say their clients generally reach a location decision within six months to a year. •• •• •• •• •• ••

CONSULTANTS’ SOURCES OF INFORMATION Sources of site selection information used during the past 24 months: Site and facility planning magazines

(e.g., Area Development, etc.)

B2B industry-related magazines

(e.g., food, plastics, etc.)

General business magazines (e.g., IndustryWeek, etc.)

93%

Contact information for other consultants and/or real estate professionals who can assist in the site search Listings of available sites and buildings (e.g., FastFacility)

Site selection and facility planning strategy and information

(e.g., AreaDevelopment.com)

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Number of locations clients usually visit before finalizing the location decision:

Use Don’t use

1 or 2 Up to 5 More than 5

29% 71%

53% 76%

Information searched for online: Economic data on specific locations Specific economic development organizations’ websites

Use of social media (e.g., Twitter, LinkedIn, etc.) for site and facility planning:

88%

Consulting firm maintains its own site selection database: Yes No

56% 44%

90%

38% 53%

44%

Number of locations/economic development organizations that usually make a client’s “short list”: 1-5 5–10 More than 10

13% 74% 13%

Length of time after engagement of consultants’ services that clients generally reach a location decision: 3–6 months 6 months to 1 year 1–2 years

39% 46% 14%

86% 13% 1%

for free site information, call 800-735-2732, ext. 225, or visit us online at www.areadevelopment.com