By Mark R. Smith, Contributing Writer
Given the uneasy state of the U.S. and its economy as well as the world as it continues to pull out of the COVID-19 pandemic, few observers would be surprised by Chris Lloyd’s assessment of the market for companies that are contemplating relocation.
“The headquarters market is very much in flux,” said Lloyd, senior vice president and director, infrastructure and economic development at McGuireWoods Consulting, in Richmond, Virginia. “We’re still dealing with the future of white collar work and what it will entail.”
However, he and many of the industry’s other key players “aren’t anticipating a 100 percent remote situation,” said Lloyd. “It’s moving toward hybrid on the more professional services end and [in that case] perhaps even a full-time return to the office.”
But Lloyd added that taking that approach varies market by market.
“San Francisco is still devastated by the tech market layoffs,” he said, “and Washington, D.C., is another city that’s seeing the impacts on small businesses. That’s because a large number of government workers and contractors have been working at home since the shutdown began and continue to do so.”
That problem has been cited by the city’s leadership. “[D.C. Mayor Muriel] Bowser has been critical of the federal government’s handling of that issue,” said Lloyd, “because a thriving city needs the vitality of an in-person workforce during the day.”
Still, Lloyd also pointed out that other cities are doing very well, despite such issues. They include places “like Miami or many cities in Texas which not only have seen people largely return to the office,” he said, “but also an influx of companies from other parts of the country.”
“What I’m seeing in the headquarters market now is workers telling employers or potential employers,” said Lloyd, “is that they want amenities if they are to come back from home to work in the office.”
Such amenities can include open social areas, food options and a vibrant street scene. “That plays well for urban cores as well as mixed-use areas,” he said, citing the Mosaic District in Fairfax, Virginia (just outside of Washington, D.C.) and the Star District, in Frisco, Texas, which is adjacent to the training facility of the NFL’s Dallas Cowboys.
Another part of the location puzzle concerns how companies are allowing more remote work depending on how far away from the office workers live, especially since many people moved during the pandemic to where the cost of living was less when they discovered they could work efficiently at home.
“There is a discount for the companies since they don’t have to [be concerned with the local costs of housing of] an employee and can sometimes pay an employee less,” said Oliver Schlake, clinical professor at the University of Maryland College Park’s Robert H. Smith School of Business, “since they are already saving money. An employee’s location is now part of the negotiating process.”
Within the bigger framework of corporate location, these demands are resulting in the flight to quality projects that feature various amenities – making Class C and Class D buildings, especially those in the suburban office parks, somewhat obsolete, thus ripe for new opportunities. “You’ll see those areas converted to mixed-use and residential projects that will bring them back to life,” said Lloyd.
On that note, Lloyd knows companies are looking for deals. “There are many technology companies that are downsizing,” he said. “That means lots of sublet space is available, which represents opportunity and therefore more affordable real estate transactions.”
Despite the turns of today’s market, companies seeking leases have “a pretty standard approach” when searching for space, he said.
“They always approach me with certain criteria that includes workforce, logistics and access to markets. Then we narrow down the options from there,” said Lloyd. The key elements are cost, taxes and regulatory climate, as well as another item that’s coming more to the fore, speed to market. That’s important as construction inflation remains high.
“If local and state permitting move quickly, that can save [a company] millions of dollars,” he said, “and that has real cost benefits for an end user.”
As Lloyd implied, companies looking to expand their horizons can have a plethora of needs, thus headquarters relocation strategies “can come in various typology,” said Dennis Donovan, principal for Bridgewater, N.J.-based location strategy and site selection firm Wadley Donovan Gutshaw Consulting.
The first is known as “lift and shift,” where the entire (or most of) the operation, from the C-suite down to the back office, moves out-of-market. An example is Gerber, which relocated its headquarters from New Jersey to Northern Virginia, in part to co-locate with another corporate unit (Nestle USA). This strategy can also apply to companies founded in small towns/rural areas “and need to move to better support a growing business,” said Donovan. “An illustration is KBA North America, a packaging machinery firm, which relocated from Vermont to Dallas.”
A second relocation strategy embraces moving only the C-Suite (or C-suite-plus), “the rationale for which can vary from taking advantage of global air service to better access to a customer base,” he said, citing the example of AECOM relocating from Los Angeles to Dallas.
The third type of move occurs when a company relocates headquarters, but leaves a substantial presence in the origin location. Donovan said reasons for such action range from business climate/taxation to diversifying a corporate footprint, such as Tesla moving from the Silicon Valley to Austin; the company just announced that it is redeploying its engineering division headquarters back to the Bay Area. Also, Hewlett Packard Enterprises moved its headquarters from Silicon Valley to Houston, but retained a significant proportion of office operations in the Bay Area.
Interestingly, while those differences in approach all apply, know that a company moving its headquarters is “a relatively rare occurrence in the grand scheme” of a company’s evolution, said Donovan, adding, “We probably conduct three to five such consultations per year.”
“If you talk about relocating and expanding businesses, they’re less than 10 percent of what we, or many other site selectors, do,” he said. “Not only are they relatively scarce and often relatively small, they’re often so modest in scale (some less than 25 employees) that they don’t garner that much attention within the industry.”
One might presume that the number of headquarters relocations might have abated even more during the height of the COVID-19 shutdown, yet Donovan said that’s not so. “From anything we saw, the amount of moves has stayed level.”
Also, he said when relocations do occur, “it’s typically not for financial reasons. They have more to do with strategic moves,” such as improving proximity to a customer base; research and development opportunities; the ability to tap a deeper, richer resource base of requisites skill sets; and/or to enhance national or even global status.
“For instance, if you’re based in a modest-sized community away from a major city, that might hurt your ability to market your firm in the international arena,” Donovan said. He added that implementing a new corporate mindset can be another reason, “such as when Volkswagen moved its headquarters to Northern Virginia. The corporation equated the new environment with that new market and fresh ideas.”
However, as noted, most moves occur without a financial gain. Why?
The answer is simple. “Unless the company happens to be in a very expensive area like New York, L.A. or San Francisco,” Donovan queried, “how are they going to save any money?”
Next on the checklist is the expense of the long moving process. While there are no rules of thumb for what relocation costs due to a diverse range of business dynamics, it is not uncommon for a headquarters move to carry a one-time price tag (including human resources, real estate, transition and duplicate operations) “ranging from $80,000-$120,00 (or more for C-Suite only) an employee,” he said.
“To execute a study, a corporation has to determine the drivers and the desired outcomes,” said Donovan. “First comes the staff positions that need to be moved and why. Then a feasibility study is performed, which measures risks/rewards to arrive at a ‘go-or-no-go’ decision. If it’s a go, then comes the challenge of finding the best long-range.”
The most important part of the effort is to ascertain the relocation’s impact on the employees, most importantly the attention and attrition levels for those in the C-suite on down to the back office; second, the cost of moving the office and its people, “which is very expensive, as are separation costs; then you have to keep people who aren’t moving on the job until the move occurs,” he said, “and [add] the costs of replacing those employees.”
Next are the real estate costs for the new office, with the furnishings, fixtures, etc. “There can also be penalties, such as moving from small community to a larger metropolitan area and the inherent costs of doing so,” Donovan said. “Those are the impacts.”
Then comes the executive team convincing its board, after all of the hours and money invested, to let a move proceed – “even though most of the time the payback is not there in a reasonable amount of time,” Donovan said. “Still, executive management needs to be empowered to make these decisions.”
So while such an expensive and time-consuming team effort doesn’t happen often, it still does but with a twist from what typically occurred 15-20 years ago.
“Such moves tended to occur in financial services and other selected industries, and the cities involved were usually New York, Chicago and San Francisco,” said Donovan. Today, however, it’s across the board, especially given the changing and shifting tides of the global business environment and the need for companies to chart new strategic initiatives to compete.
“Headquarters relocation,” he said, “still can be a key component of the company’s future success strategy.”
While Donovan stated that only a scant part of WDG’s business concerns headquarters relocations, Victor Hoskins, CEO of Fairfax County Economic Development Authority, in Tysons, Virginia, said that from his office’s perspective, “Most of our corporate relocations are referenced here by site selectors.”
But as Donovan noted, just how that happens has changed on the economic development office’s side has evolved, too.
“Ten years ago, you probably would have heard from the company’s vice president of real estate” to get the process in motion, said Hoskins. “Today, however, that often has to do with the size of the company being under 500 employees. If it’s larger, they now go to site selectors, especially when they’re looking to move out of state.”
He said the FCEDA works on “about 150 deals a year and I would say corporate relocation to Fairfax is probably about 25 percent of them, with most of the initial contacts coming from site selectors.”
Just how these deals transpire varies. “Sometimes companies with a small presence here in Fairfax County have a bigger location elsewhere and want to bring everything here. That’s happens about 25 percent of the time, too,” said Hoskins. “[Their headquarters might be] on the West Coast, but they see our educated workforce, technology-rich talent pools and the solid market opportunities in and around Washington. They may have hit their peak elsewhere and want to tap into our metro area.”
Then comes the other half of this equation: when companies considering expanding out of, or even leaving, the Northern Virginia market.
“Often, they’re just testing the waters,” he said, “so we have to convince them as to why they should stay here, as we did with Hilton. They came here from California about 15 years ago, but decided to stay here due to their relationships with other local companies, the talent pool and the ability to attract additional talent to our dynamic market.”
In another high-profile local case, Volkswagen (yes, see Donovan’s comments above) was thinking of leaving Virginia for Michigan, Alabama or South Carolina. “We convinced them to stay because we have offices not only here, but in the U.K., Germany, Israel, India and South Korea, as well as California, to help them with their international distribution needs,” Hoskins said. “We worked with our office in Berlin, as well as our state economic development office and the governor, to keep them here.”
The typical mode of communication by the FCEDA with the local community, however, concerns approaching local businesses before they even consider a move.
“We monitor our leases with all of our companies, large and small, so we can start working with them three years in advance,” he said. “We try to make sure they’re happy and keep them here.”