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The Rise of Mid-Size U.S. Cities: The Industrial Development Boom

As company needs have evolved, many are gravitating to smaller urban areas that often provide them with a lower tax burden, affordable real estate, and development-ready sites.

Q3 2023
Amidst a time of transformation characterized by changing preferences and economic shifts, numerous major urban centers have witnessed a downturn in economic activity in recent years. During this same time period, many of their mid-size counterparts have flourished. While the rise of these mid-size cities has been under way for some time, the unprecedented changes brought about by the pandemic accelerated their growth trajectory — with notable migration of both companies and new residents.

Defined by a regional Metropolitan Statistical Area (MSA) population spanning from 500,000 to 1,000,000 residents, there are 59 mid-size cities across the United States. About half of them have grown over the past few years and are forecasted to grow more than 2 percent over the next five years. Of those expected to grow, the vast majority are located in the Southeast. In contrast, most of the northeastern cities are forecasted to have very small growth or, in many cases, are expected to contract.

New residents are drawn to the booming mid-size cities due to below average cost of living, favorable climates, and community amenities. Similar factors are at play for business decisions during the site selection process. When the growing communities are examined for corporate investment, a few key themes emerge — favorable tax climate, development-ready sites and buildings, overall cost of doing business, and competitive real estate prices. Examining these themes in more detail, and looking at examples of community successes, offers insights into the reshaping of the economic landscape.

Favorable Tax Climate
Most of the thriving mid-size cities have a common denominator: a favorable tax climate. When companies are considering establishing a new facility, corporate tax rates, incentives, exemptions, and the overall regulatory environment of potential locations are carefully evaluated during the site selection process. The tax conditions in states and communities directly impact the bottom line. A lower tax burden enables companies to allocate resources efficiently, reinvest in their operations, and achieve greater profitability.

Additionally, companies take into account stability and predictability in tax policies, as a consistent tax framework allows for effective long-term planning and mitigates risks associated with sudden changes. Ultimately, the assessment of a region’s tax climate plays a pivotal role in determining the viability of a new facility. When we look at the list of the top mid-size cities, most were able to check the box of a favorable tax climate, which in turn is one of the key reasons these regions are booming.

While the rise of these mid-size cities has been under way for some time, the unprecedented changes brought about by the pandemic accelerated their growth trajectory. For example, recent legislation overhauled the state of Iowa’s tax structure. These statewide changes, including a target corporate income tax rate of 5.5 percent, coupled with other existing tax rates and programs, have resulted in a flurry of development in Des Moines. With Iowa’s 1 percent insurance premium tax being one of the lowest in the nation, along with other favorable tax regulations, Des Moines has become an insurance hub with almost 80 insurance companies headquartered in the region and the highest concentration of employment in insurance and financial services in the United States.

Des Moines has also had success in the data center space with Apple, Meta, and Microsoft having recently announced a combined $8.9 billion in data centers in the metro area alone. For data centers with investments of at least $200 million, equipment directly connected to data center computers is exempt from property tax. There’s also a sales tax exemption on equipment, electricity, and back-up fuel. While Iowa’s favorable tax climate is not the only driver leading Des Moines’ success, it is one of the items that has put Des Moines on the map for many projects.

Development-Ready Sites and Buildings
Another common theme among the top mid-size cities is the availability of development-ready sites and buildings. Speed-to-market can be a major differentiator in a competitive landscape. Having a site or building that is well prepared can give the competitive edge needed to win a company looking to start up quickly. Many of the mid-size communities that have seen success have been working for many years to proactively prepare their sites and buildings for industrial projects. In fact, the vast majority of those mid-size cities have access to some sort of site-readiness program — either a statewide program or a program through a utility provider. This advanced prep-work has made these locations more attractive to prospective companies.

An example of a mid-size community that has experienced success as a result of site preparation is the Greensboro, North Carolina, region. For more than 10 years, a team that included economic development organizations, utility providers, and rail partners, among others, worked together to prepare the Greensboro-Randolph Megasite. The property was purchased, and steps were taken to proactively prepare the property for a mega project. Improvements undertaken included relocating power lines that bisected the property and extending water and sewer infrastructure to the site.

After losing out on some notable projects, the big win finally came in December of 2021 when Toyota Motor North America announced that they would build a new $1.29 billion automotive battery manufacturing plant on the site. Since the original announcement, Toyota has announced two additional investments at the site — $2.5 billion in August 2022 and another $2.1 billion in May 2023, bringing the total investment to nearly $6 billion. Ultimately, the assessment of a region's tax climate plays a pivotal role in determining the viability of a new facility.

But this wasn’t the only big win for the region recently. The Piedmont Triad International Airport (PTI) had been purchasing land around the airport and proactively preparing this land for potential aviation projects. In 2022, Boom Supersonic selected PTI for a $500 million operation to manufacture a new supersonic passenger aircraft. While both of these projects were major wins for the region, they would not have happened if the community had not proactively been preparing sites for development.

Overall Cost of Doing Business
The overall cost of doing business plays a significant role in a company’s decision of where to operate. While the tax climate is a part of the overall cost of doing business, other factors including utilities, regulatory environment, and labor costs also play a big part in investment and ongoing operating costs. The cost of doing business typically tracks similarly to the cost-of-living index in a community. If you exclude the western cities and southern Florida, the other thriving mid-size cities all have a cost-of-living index below the national average.

One differentiator is wages. Compared to the average annual wage of $64,687 in the bigger metro areas, the thriving mid-size cities is 12.68 percent lower at $56,968. Another differentiator is the ease of permitting, both the initial operations and expansions, as the regulatory process can add years to a project which equates to dollars and cents. For the thriving communities, the regulatory environment is business-friendly and even may be expedited as an incentive.

The Augusta, Georgia, metro area, which spans both Georgia and South Carolina, has excelled in this area. With a cost of living that is 16 percent lower than the national average and an annual average wage of $53,100, the region has recently seen a flurry of activity. One notable win was a 2.7 million-square-foot Amazon distribution center in which the local jurisdiction, Columbia County, was able to offer expedited permitting. With the company and community working through many of the issues during pre-development meetings, the county guaranteed permitting feedback within 10 days to keep the project moving smoothly.

Competitive Real Estate Prices
While future real estate prices are expected to slow, the most recent quarterly statistics show a 16.1 percent year-over-year increase in industrial rates. The drastic rate increases over the last few years have driven many projects to lower-cost locations. Many companies are leaving the Northeast and West Coast for more cost-competitive and business-friendly locations — especially those that have more competitive real estate prices. The affordability factor, marked by lower operational costs, has acted as a magnetic force, drawing businesses toward these cities as smart investment choices.

One metro area that has benefited from the West Coast exodus is Boise, Idaho. The area is experiencing an influx of tech companies and professionals, drawn by the quality of life, lower cost of living, and the allure of a budding tech scene. According to recent data, Boise’s annual population growth has surged by an impressive 2.2 percent, ranking among the top three in the nation. The overwhelming majority of new residents have relocated from California.

With this influx of people has also come an increase in commercial real estate demand. The second quarter of 2023 witnessed an unprecedented milestone for Boise’s real estate market, with a staggering 1.2 million square feet of space delivered — most of which was not pre-leased. This influx of supply caused the market’s vacancy rate to experience a significant increase of 260 basis points, marking a historic quarter-over-quarter uptick. Industrial rental rates in the region stand at a competitive average of $10.36 per square foot (psf) per year NNN (compared to $16.04 in Oakland, CA). This attractive rate has not only enticed new players to set up shop but has also fueled expansion among existing businesses. For example, Micron recently made waves by announcing a monumental $15 billion investment to expand its existing footprint in Boise, creating more than 17,000 new jobs over the next decade.

Solidifying Their Appeal
Economic development is a long game. As consumer needs continue to evolve, so too do the priorities of companies. Smaller, business-friendly areas with policies in place to support growth are rising to the top. The affordability factor, marked by lower operational costs, has acted as a magnetic force, drawing businesses toward these cities as smart investment choices. The strategic marketing of available sites and buildings has not only attracted businesses but also amplified the cities’ profiles as viable business destinations. These factors, when viewed against the backdrop of robust economies and favorable business climates, have solidified the appeal of mid-size cities. Moreover, the transformative effect of the pandemic, driving individuals to seek refuge in smaller, more resilient urban centers, has catalyzed the growth trajectory of these cities. As mid-size cities continue to evolve, their success stories underscore the potential of strategic urban planning, economic resilience, and adaptive innovation, portraying a future where growth and prosperity transcend conventional urban norms.

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