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Is Investment in an Urban Locale Right for Your Company?

Many cities are growing faster than their suburban counterparts, as companies mine their skilled work forces, affordable property, and financial inducements.

August 2012
Urban America is standing a little taller and a little prouder these days. Corporate decision-makers and site selectors are starting to return to the urban core, once the butt of jokes. These decisions are founded on street-smart business sense, not simply social consciousness.

Urban Facility Investment
Big businesses are locating in cities historically maligned or previously ignored by investors. Head-turning facility investment, job creation, and a renewed swagger previously reserved for well-to-do communities is emerging. Between 2009 and 2012, Mitsubishi Electric constructed a $200 million facility in Memphis; Progress Rail Manufacturing, a Caterpillar subsidiary, committed $50 million in Muncie, Indiana; Goodyear Tire put down $250 million in Topeka; and Panasonic brought its more than 1,000 corporate jobs to Newark.

What's more, businesses are leaving, yes leaving, the suburbs to enter these and other big cities. Quicken Loans moved its 1,700-employee headquarters from Livonia, Michigan, to downtown Detroit in August 2010.  Therapeutic Proteins vacated Deerfield, Illinois, in favor of downtown Chicago. Panasonic in Newark is a relocation from nearby Secaucus, N.J. In today's precarious, recession-lingering environment, one might see investing in the urban core as ill advised. There's no shortage of savvy corporate leaders who disagree.

Chiquita Brands, Capgemini, Citco Fund Services, and Mitsubishi Nuclear Energy Systems now call the city of Charlotte, N.C., home. Proximus Mobility and Health Lean Logistics are new to Atlanta's city limits, as are PETCO and Becton Dickinson to San Antonio, and Lyoness Management to Miami. They list work force talent, quality and vibrancy of downtown life, access to higher education, and transportation connectivity among the motivating factors.

Corporate investment is not confined to Sunbelt cities. Genesis Casket moved to downtown Indianapolis, touting the city's abundance of local talent and business-friendly culture. Similar rationale was cited when Signature HealthCARE chose Louisville, Kentucky, and the Mark Group selected Philadelphia's Navy Yard.

Are cities' greatest urban problems behind them? Hardly. Are corporate leaders now sold on the city as the right investment location? Only some. Does this investment overcome the loss or decline of small business? No. Could this be the making of an urban site selection revival? Just possibly. Something certainly is afoot.

Championing the Inner City
Urban planners and socialists have long espoused the virtues of the city as a place for investment. For eons, this fell on deaf ears as obstacles and barriers to entry were deemed insurmountable, especially with attractive suburban options so close. Why deal with urban risk when a higher, more secure return on investment could be had elsewhere? The overwhelming urge for social justice and equitable economic opportunity did resonate with some. But inner cities are littered with the carcasses of well-meaning establishments. An investment founded on anything other than sound business rationale rarely succeeds for long.

Through compelling evidence, urban experts stopped simply marketing cities as a place to do good, but as the right investment location. The retail and service sectors were the first frontier. Collective buying power in a condensed, underserved location began to resonate. Brand loyalty in the inner city offered real merit. The proven benefits of urban industry clusters further piqued investor interest. What started as casual observations, today are legitimate motivators for investment. For perhaps the first time, a U.S. President, Barack Obama, states, "Cities are not the problem, they are the solution."

Albeit compelling, these pronouncements did not replace the very real obstacles confronting urban investment and success. The way for desirable investment still had to be paved. Tapping urban markets and their labor required viable property from which to operate, supportive financial resources, navigable permitting and regulatory processes, and constant business nurturing. By virtue of sound public-private partnerships, creative financial tools, progressive land policy and development, and other barrier-breaking tactics, certain urban markets are slowly turning the corner.

These are indisputable facts, but many see them applicable only to retailers and other establishments dependent upon the local consumer marketplace. In reality, the same tactics used to entice and sustain retail and service investment are just as valuable in the larger corporate context. Although the message may differ, corporate investors are learning that urban investment is not simply admirable, it can also make bottom-line business sense. Investment "Push and Pull"
Urban investment is rarely based on one single variable. These decisions involve myriad "push-and-pull factors," often triggered by a major business event or change in corporate strategy. Many facility investment decisions can be traced to new corporate leadership desirous of change or to a merger or acquisition. A product or service delivery shift, such as into e-commerce, may require infrastructure or skills currently unavailable. Lease expiration and sun-setting incentives may prompt location exploration elsewhere.

Many businesses eventually reach the point where operating challenges at their current location are no longer tenable. Steadily climbing taxes, excessive business regulations, traffic congestion, the emergence of nonconforming land uses, and other conditions hamper operations. Labor skill deficiencies, productivity constraints, or heightened turnover do as well. When coupled with older, inefficient or underutilized facilities, the urge to move on is hard to squelch. These are the "push factors."

"Pull factors," the allure of more enticing location attributes elsewhere, can also be too powerful to ignore. Work force subsidies, loan forgiveness, low-cost or heavily subsidized development have lured many a firm. Highly trained work force, attractive and affordable property, and especially financial inducements have even more appeal.

United Airlines, Willis Group Holdings, and Sara Lee all recently committed to returning, relocating, or consolidating operations from Chicago's suburbs into the city itself. Each of these decisions came on the heels of a major corporate event or unresolved issue. The reasons for selecting downtown Chicago were many, but certainly included improvement upon current facilities, location prestige, and access to highly trained, tech-savvy individuals. Chicago's vast transportation network, connecting city to suburbs, greatly lessened the risk of employee defection. In the case of United Airlines, more than two-thirds of their headquarters employees already lived within five miles of a commuter rail station.

Labor is often a top rationale stated for investing in the city. This too can be motivated by an event or corporate strategy. For example, Walgreens' expansion into downtown Chicago was, in part, driven by the growth of its e-commerce business and the accompanying need for programmers, software developers, and others in great demand. Sara Lee cited access to skilled tech talent among the reasons for returning to downtown from the Chicago suburbs.

Young, talented professionals value proximity to other young, talented professionals. The migration of these folks back to the city is testament to this fact. Case in point: in the last decade, the number of college-educated people under 35 living in downtown or midtown Detroit grew by almost 60 percent, even as the city's overall population declined. According to newly released U.S. Census data, for the first time in a century, growth in cities outpaced suburban growth in the same metropolitan areas. Of the nation's 51 largest metro areas, 33 registered city growth equal to or greater than their suburbs. Last decade that number was just five. A big contributor is young, well-educated people returning to the city. While many Sunbelt cities are growing faster than their suburbs, so too are Boston; Columbus, Ohio; Memphis; Milwaukee; Minneapolis; Oklahoma City; Philadelphia; Pittsburgh; and Rochester, N.Y.

For many businesses, the recession has provided the answer to an urban setting previously unaffordable or absent appropriate real estate. Opportunities now exist to sublease affordable space in a prime setting or trade up, say from Class C to B or from Class B to A. Leaner operations can more easily shoehorn into smaller office space, a characteristic of many cities versus their suburban counterparts.

Pinpoint Urban Strategies
Work force, real estate, higher education, and urban lifestyle certainly contribute to businesses investing in the city. But these assets did not grow organically. The link between cities, innovation, and talent is manmade and quite intentional. It is no surprise that Boston's Innovation District includes mixed-use physical and business attributes, research space linked with university expertise, transit accessibility, and advanced IT infrastructure. These are the very same characteristics sought by fast-growing firms. Collaborative development and business attraction between the public and private sectors has paid off many fold in the city of Memphis with the $190 million Electrolux investment followed recently by Mitsubishi Electric Power Products' $200 million investment decision.

The coup de grâce for urban attraction remains the financial incentive. Tax increment financing in Chicago is responsible for countless investment decisions in the Loop and in more economically challenged parts of the city. No single, recent incentive has had more of an impact and been more on-the-mark than New Jersey's Urban Transit Hub Tax Credit, a massive enticement to keep jobs in New Jersey while spurring investment in the state's nine transit hub cities. Without this incentive, Panasonic does not relocate to Newark and keep its more than 1,000 corporate employees in New Jersey. And New Jersey's Goya Foods likely moves its headquarters out of state and builds its new warehouse and distribution facility elsewhere, not in Jersey City.

Whether a trend, tendency, or inclination, sizable business investment is happening in cities around the country. Municipalities, once written off by investors, are generating corporate interest. Cities, even if for just this moment in time, are growing faster than their suburban counterparts. This much is indisputable.

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