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Corporate Site Location in the COVID 19 Hurricane

Although expansion will take a back seat to dealing with COVID 19 for several months, companies that focus on key business and corporate site location matters will not just survive but also thrive.

Q1 2020
COVID 19 is similar but not the same as a hurricane. The differences between COVID 19 and a hurricane are in scale, scope, and length. Both events have dramatic personal impacts on human safety and economic security, but a hurricane hits one area while COVID 19’s target is everywhere. A hurricane lasts for hours, but COVID 19 lasts for months. From a corporate site location perspective, COVID 19’s impact has transformed the global economy and corporate site location into New Orleans during Katrina.

Economic Disruption
COVID 19 is a massive economic disruption. Manufacturers like Honda, Ford, Fiat Chrysler, and others have temporarily shut down U.S. facilities. Economists predict a double-digit drop in the U.S. GDP in Q2 of 2020 and growth in Q3 is not optimistic as the end date of the public health crisis is unknown. The International Chamber of Shipping said the pandemic is costing the worldwide industry around $350 million per week, and in January 2020, North American transport volume was down 9.4 percent, impacting the over 225,000 Americans working in the freight transportation industry according to recent USA Today reports.

Unemployment claims by Americans are over three million and the number will just go higher. Even if state governors do not order residents to stay home to slow the spread of COVID 19, much of the goods-producing industry dependent upon customers traveling to their retail centers to buy their products will slow or stop production.

Prime Issues to Focus On
The COVID 19 economic disruption will slow or stop corporate site location projects by many companies as they work to address employee safety, cash flow, and other more critical issues related to their business’ survival over the next couple of months. Corporate real estate and corporate site location leaders should be focused on three prime issues during COVID 19:
  • Make sure your people are safe and the company survives;
  • Recognize growth opportunities;
  • Renegotiate economic development incentive agreements; and
  • Continue to focus on longer-term needs such as site development.
Companies first need to focus on the protection of their workers, customers, partners, and communities. Accenture advises key efforts tied to COVID 19 company survival to include providing responsive customer service by transforming contact centers rapidly and supporting their employees as they do so; ensuring supply chain resiliency through short-term steps and by leveraging platforms that offer applied analytics, artificial intelligence, and machine learning; building human resiliency to get their people through the disruption, while maintaining high levels of engagement and trust; and creating elastic digital workplaces to help employees serve customers better while ensuring business continuity. As with any economic disruption, there are winners and losers, and companies should keep their eye out for growth opportunities.

Expansion will take a back seat for a couple months for most of these companies. In fact, the federal government’s $2.2 trillion stimulus package, including $500 million in large company loans from the Federal Reserve Bank, is likely to be a greater focus than planning an expansion project. Much like the 2009 financial services lead recession, companies may be more focused on gaining government assistance than on where to expand for their next project.

Growth Opportunities
As with any economic disruption there are winners and losers, and companies should keep their eye out for growth opportunities. Traditional retail’s struggles to compete with growing on-line competitors will move into hyperdrive due to COVID 19. When the crisis subsides, many consumers will not go back to shopping in brick and mortar retail stores as they will be attracted to the convenience of shopping from home. Industry reports indicate that half of the large-scale industrial corporate site location projections in 2019 were logistics. That percentage will balloon in 2020 as online-based retailers such as Amazon, Chewy, and others sprint to capture an even larger share of consumer purchases, and other industries — from grocery stores to other consumer goods — follow suit.

From a corporate real estate standpoint, while the consensus is short-term leasing activity will decline as occupiers take a wait-and-see approach, and there are challenges with site inspections for capital markets activity, strong long-term demand rents are likely to remain stable as demand for more secure supply chains, growing e-commerce, and last mile cold-storage grows.

In addition, companies and their corporate site location consultants need to focus on their tax incentive agreements to ensure there is adequate flexibility to deal with the impact of COVID 19. Well-drafted tax incentive agreements recognize that events outside of the company’s and community’s control or large-scale market conditions can validly disrupt a company’s growth plans. Most tax incentive agreements contain force majeure (“superior force”) clauses that typically allow one party to limit its liability because of unforeseen events, such as “acts of God,” war, or terrorism, and would likely apply to forced closures in the face of a pandemic. COVID 19 clearly fits into those conditions, and companies should be renegotiating their incentive agreements for their own protection. Companies and their corporate site location consultants need to focus on their tax incentive agreements to ensure there is adequate flexibility to deal with the impact of COVID 19.

With or without a force majeure clause, companies struggling to meet job and capital investment requirements in tax incentive agreements should be proactive with local and state economic development officials to negotiate a new incentive agreement. Nearly all tax incentive agreements require annual reporting, and many contain “clawback” provisions. Waiting until the end of the year and surprising local and state economic development officials with a negative annual incentive report does not produce good results for companies. In fact, most of the time, local and state economic development officials are sympathetic to major market disruptions, and companies should come out better for the upfront discussion.

Longer-Term Issues
Companies should still focus on longer-term issues like site development. Site development is a time-intensive process. COVID 19 presents an opportunity to prepare sites for development through land-use entitlements, tax incentives, infrastructure, and construction finance. Preparing sites for development during this economic disruption requires economic development leaders to “walk and chew gum at the same time.” Daily press briefings about the health crisis are real and scary. Local, state, and federal government agencies have added serious responsibilities that few are prepared or have a team in place to deal with. Calls to save retail and hospitality industries impacted by COVID 19 are valid and should be addressed. However, regions and states that lose a focus on traditional economic development do so at their own peril. With the growth coming in logistics regions, is it the time to prepare sites for industrial development?

COVID 19 is a temporary condition. Unlike a sustained time of economic disruption, COVID 19 will last for months — not years. CBRE indicates early reports from China signal it took about six weeks for hotel room demand to stop falling and begin to rise; 80 percent of the shopping centers are re-opened, including 85 percent of Starbucks as of the first week of March 2020; 81 percent of manufacturing companies that export goods from China have resumed doing business; and e-commerce (shipping), which was four weeks from almost a complete shutdown, is back to almost total 100 percent recovery today.

Hurricane COVID 19 is the most serious event of my lifetime. The safety of yourself, family, friends, and workers is paramount. However, just as New Orleans has risen from the rubble created by Katrina, the global economy and corporate site location will do the same. A focus on key business and corporate site location matters can help a company not just survive COVID 19 but also thrive.

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