High Unemployment Areas Offer Aggressive Incentives to Expanding and Re-locating Businesses

Global economies are on the road to recovery from what will go down in history as the worst recession in the post-World War II era. But cities across America may continue to see unemployment figures rise even as recovery is trumpeted from coast to coast.

With lingering problems in the credit and housing markets, re-employment is still a distant promise for hundreds of thousands of Americans, and some cities have been hit particularly hard. Indeed, IHS Global Insight forecasts unemployment rates will remain high for another year in many cities where the housing crisis was deepest and where manufacturing was at the center of the local economy.

IHS predicts up to 16 cities in California, Michigan, Arizona, Florida, Illinois, and Indiana may have unemployment rates higher than 15 percent even into the fourth quarter of 2010. In cities like El Centro, Calif., for example, the problem is magnified, with the possibility of unemployment hitting 26 percent in 2010. Rockford, Ill., may see 17 percent unemployment by the fourth quarter of 2010; and Detroit and Flint, Mich., may see high unemployment rates for even longer terms.

Do the Stats Tell the Whole Picture?

High unemployment states may seem attractive from an available-labor standpoint. But do the stats tell the whole picture? Les Cranmer, senior managing director at Studley in Philadelphia, doesn't think so. As he sees it, site selectors and location advisors need to dig deeper than the surface statistics.

"We all rely on the same sources, but right now those sources are outdated after about 30 days instead of after a year," Cranmer says. "There could have been a plant closing or downsizing that hasn't hit the reporting sources and won't for a while. So in this market, stats and data only get you so far."

Cranmer's advice: Get on the phone and visit communities. Talk to current employers, and find out what's really happening on the ground. The exercise will yield more accurate statistics and the bonus of insights into local cultures and trends. For example, some communities with high unemployment rates may be highly unionized, while others are not.

"If you go into a city and talk to people, you may find out the problems with organized labor aren't as big as they appear from the outside," Cranmer says. "So, again, the statistics may tell you one thing, but you really have to go out and have some live conversations and find out what happened yesterday, not last year.".

Site selectors are eyeing high unemployment states for opportunities to locate and expand where there are existing buildings and plentiful labor. With some states getting more aggressive and creative with incentives and training programs, site selectors are diving deep into due diligence and preparing to negotiate economic development deals that help hurting cities and position companies for long-term growth. But with every opportunity comes challenges. Plentiful labor doesn't always mean qualified labor, and available real estate doesn't always translate into suitable sites. Still, high unemployment states may be the answer for some companies in some industries.

Opportunities for Growth
In the face of a global recession, most companies aren't in high-growth mode - but many are still growing. For example, the energy, healthcare, and consumer staples sectors of the United States are cited as best-positioned for recovery from the recession, according to IHS. Leading companies in these sectors have strong balance sheets and are not directly vulnerable to the lingering effects of the credit crunch.

"Companies that have access to capital and have the wherewithal to expand may find cities with high unemployment rates extremely attractive. In this environment, qualified workers are rampant," says Katie Culp, a senior vice president in the Location Advisory & Incentives Practice at Colliers Turley Martin Tucker in Indianapolis, Ind. "There is an upside for companies willing to expand into high unemployment rate cities."

That said, companies exploring cities with high unemployment rates should examine the employment and unemployment trends before the recession began, according to Mark Sweeney, senior principal of McCallum Sweeney Consulting, a site selection consulting and incentive negotiation firm in Greenville, S.C.

"If the city had long-term 8 percent unemployment before the recession, then unemployment may not be a recession issue. This may be some sort of a structural issue or a labor-quality issue," Sweeney says. "So, the first thing you want to do is get a multi-quarter, if not multi-year, perspective on labor. You also want to look at the recessionary spike to find out what jobs have been lost, and, more importantly, what skill sets have entered the labor marketplace."

The Allure of Training Programs
Although high unemployment cities are bound to have some attractive skill sets, the $1 million question for site selectors is this: Are those skill sets transferable? Just because a community is home to thousands of people looking for jobs doesn't mean they are trained to meet the unique demands of your company.

Many states are launching new training programs, especially in cities where a major industry and its supporting service businesses have failed. But retraining individuals so they can add value in new industries remains a public-policy challenge to state and local governments. Location consultants agree that internal corporate training programs are vital to retraining efforts. The good news is there are dollars available in almost every state to assist companies in offsetting retraining expenses.

"Retraining individuals is a huge initiative and needs to be. Worker skills you find at an automotive manufacturer could easily transfer to pharmaceutical production. We've seen a number of pharmaceutical fill operations," Culp says. "But a company needs to be willing to retrain and know that it's going to take some additional time to retrain these workers before operations can begin."

High unemployment states like Michigan have enhanced their job-training programs, and many other states are reassessing the possibilities for future industry. As Sweeney sees it, states are willing to find a way to fund retraining programs if companies are willing to relocate or expand there. Distribution facilities may be in the best position to leverage opportunities in high unemployment cities.

"Our manufacturing clients don't tend to hire from unemployment rolls, but there may be particularly interesting skill sets in unemployment now that are worth looking at," Sweeney says. "Our large distribution facility project clients do make a habit of hiring off the unemployment rolls, so high unemployment cities may be more attractive. That may be a silver lining for some cities from a macro sense."

Incentives for Growth
Most cities are not offering new economic development incentives in a down economy because new incentive programs are created through statues and take time to implement, but many are working to make existing incentives more lucrative. Culp points to states that are offering more tax incentives per job. Instead of $4,000 to $5,000 per job, for example, some states are offering closer to $8,000 to $10,000.

"Most states are offering incentive programs that offset future tax liabilities. So there is definitely a cost to the state to offering a greater value per new job created. But many of these programs offset future tax liabilities on growth they wouldn't otherwise see," Culp says. "Some states may be willing to knock off the company's corporate income tax at the state level for a period of 10 years. That's not a direct line item from today's cash flow reserves."

Incentives can also be controversial or unavailable. Cash-strapped cities may not be able to give expanding companies what they need most: start-up money, explains Art Wegfahrt, a corporate managing director at Studley in Philadelphia. Tax credits and training assistance don't help companies in their first year, he says, and federal stimulus funds don't appear to be helping the cause.

"The bigger question is 'incenting' a company for the higher-paying jobs. Frankly, as much time as I've spent looking at various stimulus grants and loans, I haven't found anything that's impacting people who have been laid off or who are underemployed," Wegfahrt says. "The amount of money in the Stimulus Bill that went into the economy didn't create as many jobs as they expected."

Tapping Available Facilities
With manufacturing facilities shuttered and corporations downsizing office space, there are also opportunities to pick up real estate at pennies on the dollar. Companies that held cash reserves close to the vest during the economic boom may be positioned to grab facilities that require little retrofitting.
But times have changed, according to Les Cranmer, senior managing director at Studley in Philadelphia. A few years ago, it wasn't unusual to find a company looking to start up, expand, or relocate their operation - and time was of the essence. Those companies looked for the right labor, the right skill sets, and affordable operating costs - and an available building. Those times have gone away.

"Usually companies have a longer fuse, if you will, before start-up would happen," Cranmer says. "On the other hand, you are beginning to see ads from real estate companies hired to market or sell buildings. And one of the features could be ceiling height and age and number of truck docks. Still, real estate is not the driving issue for site selection. Labor with transferable skills would be key in high unemployment cities."

More Competitive than Ever
The bottom line of site selection in the current market climate - especially in cities with high unemployment rates - is negotiation. States and cities are competing aggressively where they can. Although some states are facing budgetary crises that have negatively impacted incentive programs, others are making positive changes to tax structures and incentive programs in a quest to return to growth.

"With fewer new projects, it's more competitive out there, and states are wrestling with more limited resources," Sweeney says. "There is more caution or concern by public officials about what they can do or what they want to do. Things are taking longer to negotiate than in the past."

At the end of the day, unemployment is only one brush stroke in the big painting. Site selectors need to look at all the positives and negatives of each city and state, according to Ron Pollina, president and geo-economist at Pollina Corporate Real Estate, Inc., in Park Ridge, Ill. And for some of the states in the IHS report, he says, the negatives far outweigh the positives.

"If it's an R&D operation, any of these states could work. A right-to-work issue is not an issue for research and development operations. Michigan, Illinois, Indiana, California, Florida, and Arizona, all have good educational systems," Pollina says. "Despite unemployment rates, companies have to do an assessment of what each of these states has to offer and compare it - or they could be leaving millions of dollars on the table."