Companies are constantly tasking senior management to find savings. In the past few years, we have seen an increasing number of relocations based largely on cost. Typically the headquarters location is among the most costly real estate in a company’s portfolio, as HQs tend to be located in higher-cost cities. There are HQ functions, however, that could be moved to other less costly locations, creating operating cost savings through reduced real estate costs, wages, and taxes. Divisional headquarters locations seem to be more the norm. These projects tend to be located closer to where the industry is clustered. For example, we recently worked with an oil and gas equipment manufacturer on an HQ location project that represented one division of a very large conglomerate. The headquarters project criteria included only those locations with large oil and gas customers.
Not surprisingly, the cities that have the greatest number of Fortune 1000 headquarters are Tier I cities: New York, San Francisco/San Jose, and Chicago, with Houston, Dallas, Philadelphia, and Minneapolis/St. Paul also having large concentrations. Texas has been the big winner in recent years with the sheer quantity of HQ projects the state has attracted.
Why Do HQs Relocate?
Corporate relocations are not entered into lightly or without a serious time-consuming analysis. There are high nonrecurring one-time costs associated with the relocation and risks that must be analyzed. Rarely is there only one reason driving the decision to undertake an HQ relocation. Companies are motivated by a variety of reasons including strategic objectives and the need to re-brand or reposition; however, we come across two or more of the following relocation drivers most often.
First, corporate HQ relocations are frequently driven by real estate needs, i.e., a company has outgrown its current footprint and needs to expand to a larger space. Many companies will simply choose to stay put and expand in their current city by leasing or buying a larger facility. However, sometimes the necessity for more space creates an opportunity to consider other cities that could either address any issues at the current location or offer new advantages at a different location.
Secondly, work force, especially lately with respect to IT functions, has been an issue for a number of companies. If it becomes a challenge to find the necessary skills within the local work force, companies will look to leave the current city behind and look for a location where the requisite labor is more readily available. However, cities can become saturated, i.e., too many companies with the same work force needs appear in the same geographical market, making it increasingly difficult to find and keep labor. Companies are often interested in “hot” markets; but when too many companies come into that market drawing on the same labor pool skill sets, the market can quickly become saturated. Once this happens, a company can find itself in the same type of difficult labor situation that it was looking to escape. A company must fully vet out not only the current work force situation in a given market, but also the longer-term work force outlooks in a number of markets.
Additionally, mergers and acquisitions can often create HQ projects as two companies look to consolidate into one combined headquarters location, with the other location kept as a regional or divisional HQ. We also have been working lately with companies that are seeking to consolidate multiple statewide facilities into a unified HQ facility in order to cut costs as well as to create greater synergy between departments and divisions.
What Are the Most Common Factors?
There are a number of factors that impact most HQ projects. The factors that are typically part of HQ projects include:
- Ability to attract and retain labor
- Operating costs
- Quality of life
- Proximity to a major airport
- Tax advantages
- Incentives
Work force: As explained, work force — the ability to attract and retain labor — is always crucial and heavily weighted in an HQ analysis. Specifically, the ability to retain a certain percentage of key executives is critical when a company is considering a corporate HQ relocation. The locations under consideration must be as or more attractive to these executives than the company’s current location in order to encourage key individuals to relocate and stay with the firm. Company goals vary from project to project, but we often see executive and key employee retention targets of 30–50 percent.
In addition, the type of new talent that is needed will often dictate the particular cities to be added to the prospective list. Companies in search of a younger, more “hip” work force may look to move to the central business district (CBD) of a vibrant city in order to attract and retain talent. In fact, there has been a migration away from suburban locations to city centers in order to attract this young work force who wants to work in the center of the action, and also closer to where they live. There has also been a trend in which companies will split operational functions and move or keep operations that need to draw from a younger work force into the CBD, while moving operations that do not need to be in the CBD to lower-cost locations elsewhere.
Operating costs: Relocating from higher-cost locations to lower-cost locations is another key factor that drives HQ relocations. A recent relocation project involved moving a company’s tech divisional HQ from New York City to Atlanta was based on cost savings related to both real estate and labor. The move saved $5/per square foot in leasing expenses, and the wage savings were also considerable; e.g., one tech job classification in Atlanta was estimated at 100K, whereas the same job in New York City was estimated at 140K. However, costs alone rarely drive an HQ project, since the one-time relocation costs squeeze most operational cost savings that can be achieved, especially in the first four to five years after relocation. Utah, Arizona, and Texas have had recent success in enticing California companies to relocate.
Quality of life: Almost all communities tend to lead with, “We have great quality of life” — a line that can make a site selector cringe…except when working on an HQ project. A good quality of life is always an important factor to these types of projects, and companies tend to gravitate to established pro-business cities with other Fortune 1000 companies already present. Cities with HQs already established will have the infrastructure in place to easily assimilate corporate executives into the community; importantly, there will be lifestyle amenities already in place to attract and retain the executive work force. These executives are looking for a reasonable cost of housing, good quality and choices of schools as well as universities, low crime rates, cultural and recreational opportunities, and other quality of life attributes that typical HQ cities already feature. One unique example is the program set up by the Georgia Lottery. The program guarantees free pre-kindergarten education to all Georgia school children; and, more impressively, it also guarantees paid college tuition for all Georgia high school students who graduate with a 3.7 or better grade point average. While the benefit of this program may not be quantifiable, it is an impressive selling point for Georgia when recruiting companies to relocate to the state.
Proximity to a major airport: Having multiple flights to key domestic and international destinations is almost always an important factor for companies, both for employee travel as well as for key customers’ convenience when traveling to the headquarters. Management wants to be able to fly nonstop wherever and whenever needed. Connecting flights and/or long drives to and from the airport are serious handicaps. If a foreign company is looking to set up its North American HQ, international nonstop flights to the country of the parent company will obviously be important. Both Charlotte and Atlanta have had continued success in attracting the North American HQs for European companies.
Tax advantages: In the United States, where corporate tax rates vary dramatically from state to state, tax rates and related costs play a prominent role in relocation decisions. Significant tax savings can sometimes be achieved by moving an HQ from a higher-tax to a lower-tax state. There is also the case of moving the HQ outside the U.S. for tax savings. In the last year, much was written about Aon Corp.’s move of its Chicago HQ to London. While Aon indicated that the move to London was to be closer to “one of the key hubs of insurance and risk brokerage,” it is widely speculated that Aon had a large sum of cash abroad that would be subject to U.S. taxes if it had to be brought onto the company’s U.S. balance sheet. By moving its HQ outside of the U.S., $300 million could be used without tax penalty for share repurchases and other share increases.
Incentives: While incentives play a less important role in corporate relocation decisions, they are often a differentiator when it comes down to two or three finalist cities. Since HQs are highly coveted, there are a number of states that have specific HQ-targeted incentives for corporate or regional headquarters that can be very lucrative. In the U.S., with often drastically different tax and regulatory state environments, companies tend to favor relocating from high-tax, high-regulation states to low-tax, low-regulation states.
Other Recent Trends
Additionally, the trend has been — and continues to be — to favor right-to-work states over non–right-to-work states. With Indiana and Michigan joining the ranks in the past year, there are now 23 right-to-work states. Companies also place a heavy weighting on states with favorable pro-business climates in terms of regulations, permitting, etc.
A greater emphasis is also being placed on flexibility, both in terms of the size of the building as well as the interior configuration. Companies are moving away from the traditional office setups of yesteryear to more flexible interior configurations that encourage collaboration and teamwork.
Some in our industry feel that there have been fewer HQ projects since the 2008 recession and there may be pent-up demand. However, since the disruption to business activities and costs associated are so high for HQ relocations, it seems unlikely that there will be a greater demand than we have seen in the past. What remains a constant in HQ site selection, however, is that these types of projects are not undertaken often or without careful consideration of the risks involved. That said, with careful consideration and in-depth analysis of the key factors, HQ relocations can be positive game-changers.
