Mali R. Schantz-Feld (November 2012)
In Area Development’s 26th Annual Corporate Survey, proximity to major markets was considered “very important” or “important” by 83 percent of the survey respondents. The category jumped 8 places in the rankings — the survey’s greatest jump in importance - from the previous year’s Corporate Survey results.
Mike Mullis, president and CEO of project location specialist firm J.M. Mullis Inc., recognizes proximity to major markets as central to site selection decisions. Proximity to distribution networks can affect business success, especially for firms involved in aerospace, automotive, manufacturing, or distribution. Because of the higher costs that are sometimes associated with bigger cities, Mullis notes that tier-two and tier-three suppliers have to think creatively to locate as close as possible to major markets for supply needs.
“Many times, to be closer to major markets, the company can choose geographic areas that might not be as conducive to operating costs or labor quality, but very [advantageous in terms of] logistics costs,” he says. He offers an example: “One dollar extra an hour in labor would be offset very quickly by $5 million a year in transportation costs.”
In recent years, the troubled economy has resulted in a lack of appropriate infrastructure on available properties in the right locations, forcing location specialist firms to be more creative in finding sites that have access to customers and their supply base. They may have to explore sites that are not “not bad, just more challenging,” adds Mullis, who now spends more time checking out second- and third-level locations within a market by population base. “Because of logistics, we are forced to look at properties that we would not have looked at before, for instance, those that would have been used for a commercial shopping center development or a housing development,” he says. This can result in extra time and costs for rezoning, permitting, construction, and finding a labor force, but proximity to the major markets is the ultimate goal.
Some firms — like distribution companies involved in direct-to-customer delivery or Internet-centric companies — may choose to locate a reasonable number of miles from the interstate instead of right on the highway. For others, proximity to a hub of overnight carriers such as FedEx, UPS, or Express Mail becomes critically important.
Figuring Taxes Into the Equation
Business tax regulations also figure into creative location strategies for some companies. For warehouse distribution firms, planners compile logistical studies on how to achieve the most return for their investment. Jason Hickey, president of Hickey and Associates, consultant for site selection and public incentives, points out that development professionals are finding ways to be close to the major market while avoiding a higher tax burden.
Hickey explains that while inventory tax is imposed immediately in some states, in other states it only kicks in after 30, 60, or 90 days. In such cases, companies can plan facilities over the border, in a neighboring state with more lenient inventory tax rules. He notes that Oklahoma has attracted some Texas businesses for this reason. Oklahoma’s inventory tax is applicable for inventory that has been kept over 90 days, whereas in most cases, in Texas, inventory tax begins immediately, except if a special Freeport exemption is applied for and awarded. “With the distribution center in Oklahoma, the company can still serve the Dallas market but, in some cases, it is worth it in the long run to put the distribution site right over the border,” says Hickey.
A Marketable Attribute
F. Michael Tucker, president and CEO of the Center for Economic Growth (CEG), an 11-county regional economic development corporation in New York’s Capital Region, notes that proximity to major markets is the centerpiece of the region’s marketing campaign that invites businesses to: “Be right in the middle of everywhere with instant access to everything.”
New York’s Tech Valley — which already houses GE and IBM, their suppliers, and small startup companies — attracts others in this niche. Tucker points out that GLOBALFOUNDRIES’ Fab 8 in Saratoga County, which employs 1,300 people, is a good fit for this major market. Fab 8 is expected to ramp to volume production late this year and, upon full build out, will have a production capacity of approximately 60,000 wafers per month. The firm’s website notes, “Because the nature of semiconductor manufacturing is extremely complex and requires a high degree of industry collaboration, even among competitors, operating advanced manufacturing physically close to leading-edge industry in R&D Tech Valley’s burgeoning semiconductor ‘ecosystem’ gives GLOBALFOUNDRIES a unique competitive advantage in the global marketplace.”
Appealing to Young Work Force
Major centers are evolving along with the economy. “In the 1960s, ‘70s, and ‘80s, there was a departure from investing in major urban centers, with more investments seen in the suburbs and greenfields,” says Hickey. “Now, because costs have gotten a little lower, more people have a chance to reap the benefits of living and working in a large market.”
Although big-city employees are faced with certain inconveniences such as traffic problems, they also have the option for more reliable and available public transportation, or evolving new transportation businesses such as Bikeshare, a company with more than 175 bike rental stations across Washington, D.C.; and Arlington and Alexandria, Virginia. Similar programs are starting up in other major markets, including New York City. Hickey says, “For companies who want to attract that young professional work force, the major market presents a very appealing prospect.”