Does Available Real Estate Drive Location Decisions? | Corporate Survey Series: Site Selection Factors

It is not uncommon for companies facing deployment decisions to initially perceive location strategy and site selection as a function of real estate. Everyone is familiar with the classic real estate adage: "There are three things that matter - location, location, location."

But can the reverse perspective also be valid - how much does the right location depend on the availability of real estate? It depends. It is not a question of the importance of real estate in a location decision - it is clearly a critical component - but more the timing for when it becomes a critical driver. More than real estate must be considered.

Many Factors
Invariably, an effective location decision requires the evaluation and prioritization of many decision factors, of which real estate is only one. The priority of real estate as a driver in the location decision is dependent on its importance compared with all other factors. Thus, choosing a location must start with an assessment of the decision criteria that are most important for the long-term success and sustainability of a project. Examples of these criteria include:

• Labor market alignment (depth, scale, sustainability, growth)
• Optimal position to targeted labor shed within a community
• Risk (political, economic, regulatory, natural disaster, security)
• Access (to other company locations or key markets)
• Access to transportation infrastructure (air, highway, rail, ports)
• Precedence for similar operations
• Alignment with other current or planned client projects or operations
• Structural operating costs (labor, taxes, utilities)
• Utility infrastructure (supply and reliability)
• Regulatory and entitlement (zoning, permitting, environmental)
• Quality of life considerations (crime, school systems, cultural and recreational amenities)
• Real estate (suitability, availability, and cost)
• Timing risks
• Governmental support for the project and incentives

When Does Real Estate Come Into Play?
In most cases, real estate selection only comes into consideration after the most critical decision criteria have been satisfied. In a typical project, real estate begins as a lower priority consideration, and becomes increasingly important as the list of potential location options narrows to just a handful, and then it may be among the deciding factors in selecting the final community. However, the importance that real estate plays at the beginning of the location decision is different for every project, and consideration must be given to the following:

• What type of operation is being considered?
• How important is having an existing building versus building to suit?
• How customized does the building need to be?
• How challenging are the client's land and utility requirements?
• What is the timing of the project, and when does the client need to take occupancy?

Depending on the industry, size, and function of the operation, existing buildings may be either readily available in most markets or scarce due to specific needs.

Project Dependent
In projects focused on light manufacturing, office, and distribution, it is understood that most markets will likely have existing building options from which to choose. Real estate is thus left to the end of the decision process, as other factors - such as labor, risk, access, and cost - take priority. The primary real estate question at the beginning of these projects focuses on the inventory of suitable and appropriate options.

On the other hand, manufacturing projects involving high tech, life sciences, or significant scale can require large, purpose-built facilities, which may not exist in a form that suits a company's specific needs. In these cases, it can be critical at the beginning of a project to understand:

• Potential existing facilities that meet the needs of the proposed operation
• Availability of "greenfield" land sites that are development-ready and meet the utility and permitting requirements of the proposed operation

Occasionally reasonably suitable buildings exist; however, it is rare that the cost of retrofitting is less than the cost of building new. Nonetheless, a project with an extremely aggressive timeline (i.e., no time to build) can compound the importance of finding an existing facility, or at least a development-ready site. Companies in this situation are more amenable to accepting higher retrofit cost to meet the project timeline. A compressed timeline can force the elimination of otherwise (potentially) more viable location options; in many cases, when the real estate doesn't meet the client's timeline, the community won't work.

What Communities Can Do
It may seem intuitive that the current global economic environment may lead to even less concern regarding the availability of real estate for most projects. More and more real estate should be coming available as businesses close or consolidate, and as new property is absorbed more slowly. These are indeed opportunities for expanding and growing companies, as long as the community and property are a good fit for the project. However, even though a building worked for one company, doesn't necessarily mean it will for another.

A community must assess what its strategic direction is, and clearly define what industry segments it is suited to attract. With this understanding, it can take steps to ensure that an inventory of appropriate real estate (land and buildings), which matches the targeted industry segments, is readily available. This can help to ensure that a community is not eliminated on a lack of real estate alone, and may give it an edge against others that meet otherwise comparable decision criteria.

Also communities must understand the expectations and perspectives of a potential prospect. Companies considering expansion typically are explicit regarding their real estate requirements. Offering a site or building that lacks the requested infrastructure is viewed by companies as an implicit agreement by the community to provide it - from a company's perspective, this is not an incentive but what is required for a community to be considered.

Available real estate can be an attribute, but its role as a location-decision driver really does depend on the project.

Matt Szuhaj is a regional leader for Deloitte Consulting's Global Expansion Optimization practice. He has 17 years of experience in domestic and international site selection and development including hundreds of projects throughout North America, South America, Europe, and Asia. Spencer Schobert is a senior practitioner in Deloitte Consulting's Global Expansion Optimization practice. He has over 11 years of domestic and global site selection experience.