Corporate Site Selection Whats Changed

Corporate Site Selection: What's Changed?

April 13, 2013
As the economy recovers, small to mid-size industrial companies seem to be driving expansion.

During the years leading up to the Great Recession, corporate relocation projects were dominated by very large companies.  Projects included large new office facilities such as the establishment of a new Center of Excellence, or shared service center, or perhaps consolidation of leased space onto an expanded (suburban) corporate campus.

Today the project mix tends to be dominated by small to mid-size industrial companies, often privately held. 

Moreover, many of these industrial companies are restructuring their businesses in a fundamental way. They might be positioning themselves for an eventual sale of their company (in whole or in part) -- or perhaps are considering whether to buy an existing book of business from another company.

Often these decisions hinge on the ability of the company to better leverage both the plant and equipment. Consequently, many of today’s corporate expansions are highly integrated with strategic business restructurings and initiatives that are intended to increase EBITDA (i.e., profits) in a fairly short time period. One way to improve EBITDA is through cost reduction or increased operational efficiency. 

What does not typically motivate companies nowadays is the need to increase production capacity in order to satisfy organic business growth.  And with continued weakness in the labor market, companies are certainly not opening new facilities because labor shortages are limiting their growth at their current location(s). Today, most corporate site selection is about cost reduction and not production expansion. 

This trend is actually more dramatic than it sounds and can be best illustrated by a single observation. Unlike those projects completed during the pre-recession years, virtually every project nowadays seems to involve workers at one location losing their jobs while workers at another location gain jobs.

Economic development has become much more of a zero sum game than it was pre-recession. 

Factors Influencing Decisions

Some factors that are playing key roles in determining location include an innovative developer who is able and willing to finance upfront improvements to the targeted property.

Incentives have changed as well. Whereas some states have scaled back programs  others have gone wild in these offerings. These financial incentives rarely influence the selection process except in those instances where they help offset the cost of readying a property for occupancy. Some program have  been quite effective at helping to keep lease costs competitive while at the same time allowing the developer to finance and install expensive improvements prior to occupancy (e.g., an on-site freezer or a waste-water reclamation system).

Financial credit for commercial real estate is only now  becoming available in a meaningful way. During the past five years many industrial companies that wanted to move to new facilities were unable to finance the relocation (or to sell their existing property).  As a result, many of the current crop of industrial projects are companies that are finally able (and confident enough) to move to a new facility.

Once committed to a move, it makes little difference whether the company moves next door or to the next state. These industrial companies often leave obsolete facilities but are still looking for competitively priced industrial space. Interestingly, industrial space has gotten extremely hard to find in many locations. 

What is often on the market is new “Class A” industrial space designed for clean advanced manufacturers or dilapidated industrial space that is barely fit for occupancy. Vacant old warehouse space lacking proper utility connections is also marketed as “industrial”.  As a result, those communities with existing moderately priced industrial space that meets basic standards (e.g., utilities, ceiling height) have a real competitive advantage over those that do not. 

Moreover, many industrial users require that some specialized improvement be made to what is otherwise basic industrial space.  One recent project, for example, required the installation of an on-site freezer with a back-up generator.  Another required the installation of an on-site waste water reclamation system.  In each example, the availability of an appropriate industrial space with a developer who was able to finance these improvements proved decisive in the decision making process. 

One interesting trend is that span-of-control issues have been asserting themselves more aggressively.  In most site selection processes, there is a simple tradeoff.  The further from the home base the company is willing to move, the greater the potential savings.  Today, regardless of the type of engagement (office or industrial), owners of privately-held companies seem much more determined to maintain a tight span-of-control  over the operations that are being moved- even when there is otherwise no compelling business case to be made for the closer location and despite there often being much greater savings at the more distant location.

What’s changed in corporate site selection? There are more industrial projects, especially relocations and consolidations.  Span-of-control concerns and continued risk-averseness weigh heavily on the decision-making process. Expanding output and production is much less important than reducing costs, improving operational efficiency and increasing EBITDA. In short, corporate recloation projects look a lot grittier than they did during the pre-recession.  

One cautionary note:  The observations presented in this article represent an amalgamation of projects that the author has completed over the past few years and these trends have generally been confirmed in discussions with economic development officials from across the country.  As always with a trend analysis, however, there are undoubtedly exceptions to the rule.

Dan Levine is Principal of MetroCompare LLC, a Scotch Plains, NJ, management consulting company specializing in corporate relocation engagements and economic development strategies.

Sponsored Recommendations

Voice your opinion!

To join the conversation, and become an exclusive member of IndustryWeek, create an account today!