As the economy exits the recession and continues on its recovery, corporate headquarters (HQ) projects are still attractive as ever to economic developers. But has the financial crisis forever changed the corporate site selection process? Our answer: perhaps it's changed, but it certainly hasn't gone away. There are a series of factors - some traditional, some new - impacting how many companies are establishing or relocating their headquarters. Let's explore the outlook for HQ projects and the factors driving the decision to relocate or renovate what some refer to as a metaphorical corporate "mother ship."
HQ Demand Drivers
What are the main factors driving the location of a corporate headquarters in today's market? Many traditional criteria remain in place, including:
- Availability of labor/talent
- Access to markets
- Image and brand
- Business climate
- Operating costs
- Quality of life
Closer examination of today's business climate reveals several additional economic and cultural trends that are becoming increasingly relevant when choosing a corporate headquarters location.
Negative Demand Drivers for New HQ Projects
The following emerging trends reduce demand for new corporate headquarters space, despite their positive economic contribution to economic trends as a whole:
- Increase in mobility. With iPads, laptops, and WiFi everywhere, professionals are spending less time in the office. Younger generations of workers demand new freedoms such as open floor plans, new collaborative spaces, and mobile technology. Work force mobility is transforming the demand curve for office space. For example, Jones Lang LaSalle's Peter Miscovich predicted that average square footage required per employee would fall to 50 rentable square feet by the year 2015 for companies deploying mobile workplace strategies.
- Smaller but smarter = increased productivity, increased density. A recent CoreNet Global survey found that 40 percent of corporate occupiers believe the average allocation of office space per person in North America will fall to 100 square feet or less by 2017. Also, 55 percent of respondents stated that the amount of space per worker has decreased between 5 to 25 percent over the last five years.
According to Richard Kadzis, CoreNet Global's vice president of Strategic Communications, "The main reason for the declines is the huge increase in collaborative and team-oriented space inside a growing number of companies that are stressing `smaller but smarter' workplaces."
- Prioritization of corporate capital flow. Global corporations are sitting on near record levels of cash, watching volatile markets from the sideline. For the capital that is deployed, corporations are prioritizing (a) revenue enhancement (new markets, new business, and acquisitions); (b) improved margin (automation, lower cost markets, supply-chain efficiency, reduction of headcount); and (c) innovation (R&D, access to talent).
Area Development's 2011 Corporate Survey supports this assessment, and demonstrates that corporate real estate projects continue to mirror these priorities, especially during tight economic conditions, with resources being directed at manufacturing and R&D projects in lieu of new headquarters facilities. Not surprisingly manufacturing is leading the way with 32 percent of new domestic facilities and 33 percent of new foreign facilities, according to the survey. In these competitive economic times, the main priority for companies is to increase revenue by getting more products to more markets. HQs are not a strong lever for revenue growth, representing just 4 percent of the survey respondents' planned domestic activity and zero percent of planned foreign activity.
- Making do with legacy space and locations. Many existing HQs were designed for workplace standards of the 1980s and 1990s. Studies by IBM, HP, and Sun Microsystems have found space utilization to be less than 40 percent in many offices today versus 20 or 30 years ago. Given capital constraints, companies have done everything they can to make do with existing space through adaptations, HR strategies, collaborative technology, and reworking existing spaces for increased collaboration.
Jones Lang LaSalle's Workplace Strategy group found that space for collaboration is essential, noting in a recent report, "70 percent of the work produced today is through collaborative efforts and is expected to grow in 2012." In the past, individual space accounted for three quarters of space in corporate offices. Now it`s common to see 50/50 splits between individual and shared space. These are meaningful trends that cannot be ignored.
Positive Demand Drivers for New HQ Projects
The following emerging trends increase demand for new corporate headquarters space, and have driven significant deal-making in urban areas and use of economic incentives:
Urban migration. Corporations are giving serious consideration to exiting large, suburban, centralized corporate campuses. Macro-level hiring is still tepid across the United States, but factors surrounding work force productivity and the war for technology and creative talent have driven new requirements for productive office space. Thus, the shift towards relocating a headquarters operation from the suburbs back into the central business district has begun. Urban planning initiatives by major cities have resulted in affordable housing and better transit, thus reducing employee commutes, and access to restaurants and retail - features that contribute to the appeal of "working downtown."
Even areas like Detroit are seeing an uptick: Quicken Loans bought a 500,000-square-foot office building in downtown Detroit and will move 1,500 employees there. Quicken's CEO Bill Emerson explained in Fortune magazine that top recruits wanted to be in a place where they could live, work, and play. Emerson added, "An asphalt parking lot is not necessarily the best [place] to do that."
Analysis: Overall Outlook for HQ Activity
- Smaller, often more urban HQs and Centers of Excellence. Because Class A space in Tier One markets is expensive, some companies are rethinking the composition of their corporate headquarters and the employees typically located there. This assessment is playing out in two primary ways. First, some companies have decided to move their HQ operations to a new location along with a smaller number of employees, with the balance of the HQ work force being located in a lower-cost location.
A second approach involves strategically choosing which divisions will most benefit from an urban location; sometimes that means moving the official HQ, but more often, it means creating a "Center of Excellence" in an urban location, typically a function populated with a younger employee demographic. For example, a large technology company is moving 100 systems integration employees from its suburban campus to a nearby urban center. The new location will be located near transit and will allow access to new talent, while the company's top senior executives and its official headquarters remain on the suburban campus.
- Operational cost reduction. Sound counterintuitive? Wouldn't corporations interested in keeping costs under control stay in their current facilities? That depends on how you look at cost reduction. In terms of real estate one-time costs, new facilities might sound expensive. But operationally, smaller urban campuses are many times less expensive.
This desire to control costs often means bifurcating operations, a trend we have seen grow. Previously in large campus environments, all business units were co-located, but now companies are often moving secondary functions to lower-cost locations. Such strategies also offer companies the ability to "plug in" in different cities or sub-markets, diversifying their ability to attract and retain talent.
In the 2011 Area Development Corporate Survey, 25 percent of respondents stated that the sluggish economy had forced them to put expansion on hold. However, when the U.S. economy improves, the high-performing companies that are acting today will gain advantages over their peers, especially in the race to attract and retain talent.
According to PwC's 14th Annual Global CEO Survey, innovation "has gained prominence among global chief executives' strategic priorities as a means of boosting revenues and reducing costs." Additionally, CEOs said they are "just as likely to focus on innovation to achieve growth as on exploiting existing markets," signaling innovation in the workplace driving productivity and attracting talent.
We expect to see more HQ projects in the next decade due to pent-up demand. But these modern, right-sized workspaces will be significantly different in size and design, when compared to their 1980s predecessors.
noun:the location where central business decisions are made; the top tier of the corporate structure that takes responsibility for the success of organizational strategy and governance. - Business School Definition
noun: the most sought after of all project types, capturing headlines, anchoring trophy real estate projects, and often garnering hefty incentive awards. Compared to manufacturing, R&D, or data centers, headquarters are major mile markers for the economic development efforts of states, cities, and towns. - The "Real World" of Corporate Site Selection