Why Corporate Headquarters Relocate
Why Corporate Headquarters Relocate
by Leslie Wagner, Senior Principal
What do Sears, General Electric, ConAgra Foods, Marriott and Motorola all have in common? Yes, they are all publicly traded companies, and…?
They all have either relocated their corporate headquarters or are in the process of location modeling and detailed analysis to do so. Reflecting back to the late 1980s when Sears, Roebuck & Co. (prior to Sears Holdings Corporation) made the decision to sell its downtown Chicago building and move to the suburbs, this decision was an impactful event for the city of Chicago. It was also indicative of the trend of companies exiting higher cost downtown locations for more cost-effective suburban options.
It used to be that major headquarters relocation projects were somewhat rare, but fast forward 20 plus years and companies like Motorola are relocating. In Motorola’s case, it’s back to downtown from the suburbs. There are many factors driving such decisions.
Factors Driving Corporate Headquarters Relocation Decisions
Corporate relocations are not taken lightly and are tremendously impactful and laden with immense challenges to carry through with implementation. Making the decision to relocate can be extremely challenging for a variety of reasons, such as:
- A company’s location is an important element in displaying its personality or image
- Moving the company away from its original roots in a particular community can be emotional
- The location is an important part of a company’s identity and can play a role in the perception of its customers and investors
- The company may have been an integral part in helping grow an emerging cluster and relocating could impact continued cluster success.
Conversely, if a company is in need of repositioning or rebranding, a headquarters move could be just the answer in helping to change the future.
Strategic issues generally are the drivers of analysis leading to relocation. Singular issues, or a combination of many, may be at play. Perhaps it’s the need to reduce short- and long-term operating costs or selling real estate assets to raise needed capital to deploy in higher priority ways or it’s a need for expansion capacity and/or the ability to enhance hiring opportunities of a changing workforce.
Human capital factors, more so than ever, are impacting decisions to relocate. People are what make up companies and these same people, employees, can be profoundly impacted by a decision to relocate. Employees will be impacted far in advance of a potential headquarters move in several ways:
- Discussing a move can have an impact on morale and productivity both positively and negatively
- Utilization of internal resources in terms of developing the right team to plan and orchestrate a move; all of whom already have full-time job responsibilities
- Being a part of the relocation team can be a daunting challenge to ensure the right information is assembled to make the best-possible decisions.
- Those responsible for planning must understand and commit to confidentiality both internally and externally
- Everyone will have an opinion and the ability to please all of the people all of the time simply won’t exist.
- The process will be disruptive and will at some point involve everyone in the organization, including top-level executives and managers.
Cost is one of the toughest issues to overcome and often one of the primary drivers of relocation consideration. An opportunity to reduce overhead can be a primary driver, however, cost savings associated with relocation may be less than the costs to actually relocate. Relocations, generally speaking, are cost neutral and may include:
- Lease costs such as a differential in square footage and opportunity for efficiency gains
- Acquisition/disposition sale of existing real estate and/or the tenant versus owner-occupant relationship
- Key employee relocations, employee retention, severance commitments and new hiring expenses
- Technology transfers and upgrades to ensure forward momentum for years to come
- Physical relocation costs, such as the reprinting of all materials containing corporate address information.
It may be important when justifying relocation costs to be well-positioned to quantify the value of the strategic reasons driving the relocation. It is feasible that the relocation will result in a net cost increase. If this is the case, leadership must be convinced themselves in addition to being able to effectively articulate to others that the benefits and long-term interests of the company are best served in a new location and that the move is an important investment in the future.
Understanding each of the relocation drivers may be compelling enough, but this understanding is only a piece of the equation. Once the decision is made, a number of other factors are critically important to the overall project success.
Other corporate headquarters relocation decision factors will be reviewed to achieve the goal of selecting a location that aligns best with the ultimate corporate objectives:
- Reviewing the opportunities for greater operational efficiencies
- Understanding the changing needs for proximity to end users and target markets
- Evaluation of the future labor pool to fill vacancies and allow for corporate growth
- Understanding impactful business-related costs, such as unemployment insurance and Workers’ Compensation
- Consideration of Right to Work laws
- In-depth review of the local and state-level business environment in terms of taxes and regulatory matters and the administrative process for reviews and approvals
- Identification of meaningful economic development incentives that can offset short- and long-terms costs
- Analysis of available real estate and market lease and buy rates
- Review of utility service availability and costs to ensure adequate capacity to support loads and demands and that the service is reliable to mitigate business interruption risk
- Understanding infrastructure assets is critically important; not just roads and highway systems, but also rail, ports, fiber and air. The number of direct flights to destinations can drive a business location decision.
- A factor increasingly on corporate radar screens is the interest in understanding the financial stability of the state and local communities under consideration. Few companies have interest in locating to an area where roads are in disrepair and there are inadequate levels of public services.
There are also the qualitative factors of corporate headquarters relocations. The ability to attract and retain a qualified workforce remains at the top of site selection criteria lists.
- Is the proposed location in the north with cold temperatures or in the south with warmer weather?
- Will it be a downtown urban or outlying suburban environment, with an easy commute? Or will it be a longer, more challenging, traffic pattern?
- How do the quality-of-life factors stack up?
- What are the crime rates of the locations of interest?
- Are the school systems highly ranked?
- Are the housing costs affordable?
Each of these factors will have a direct correlation in a company’s ability to relocate and hire workers, particularly those with in-demand skill sets. The U.S. national voluntary turnover rate is 23.4 percent according to the Bureau of Labor Statistics. When factoring in costs associated with rehiring, training and ramp-up of productivity, each employee turnover will cost a company between one-half to five times more than retaining an employee. Smart companies are factoring these costs into their relocation decision modeling so as to minimize the turnover cost effect.
Current trends indicate the workforce is younger. Urban-focused companies have tapped into and understand that workers want walkability and to live and play close to work and are responding to the trend accordingly. Urbanism has created some unique opportunities for creative redevelopment.
Recent Examples of Corporate Headquarters Relocations
General Electric recently announced its decision to leave Fairfield, Connecticut, and move its headquarters to Boston, Massachusetts. GE officials pointed to Greater Boston’s concentration of elite universities, well-educated workforce and nimble tech firms as the main draws. As stated by the company’s chief executive, Jeffrey Immelt, “We want to be at the center of an ecosystem that shares our aspirations.” Company leadership is in the midst of an all-out effort to transform the 124-year-old company and a corporate relocation can be an important cog in the wheels of progress.
Motorola Solutions headquarters is leaving Schaumburg, Illinois, after 50 years, returning to its urban roots. In this case, the company is not leaving the state; it is relocating from its sprawling suburban campus to downtown Chicago. Motorola Solutions Chairman and CEO Greg Brown said the move would allow the company to “gain the access to talent they need for the future we are all building here in Chicago.”
Arctic Cat (maker of all-terrain vehicles and snow mobiles) is relocating its headquarters from the suburbs to a larger, 107-year-old building in Minneapolis. This is a great example of an urban redevelopment project that will “allow the company’s new management to implement their vision of creating a different environment and feel for their employees” said CEO Chris Metz. Metz went on to say the “relocation was necessary because the company is determined to grow significantly over the next few years.” Additionally, the Minneapolis location “should make it easier for the company to recruit engineers and product development pros as well as other executives and administrators.”
Marriot International CEO Arne Sorenson has publicly spoken about the company’s plans to relocate its headquarters, which have been in Montgomery County, Maryland, since 1955. With its lease expiring in 2022, Sorenson said, “It’s time to start thinking about it.” At almost a million square feet, the timeline for decision making will be long and, as outlined here, there are many deciding factors to be considered. Sorenson has indicated that “in order to attract the best talent, a location that will appeal to young workers will be needed.”
ConAgra Foods, in Omaha since 1922, has made the decision to move to Chicago, Illinois. CEO Sean Connolly believes he’s “got the best shot to attract the kind of talent his company needs to rebuild its brands and come up with new ideas.”
What part, if any, do economic development incentives play in these corporate decisions? For most companies, they are and will be extraordinarily meaningful. (Note: Motorola Solutions did not receive any city or state incentives to move its headquarters, but the company was approved for $100 million of incentives in 2011).
States understand the impact of having corporate headquarters locate within their state. While the job creation is of utmost interest, there is an understanding of the “ripple effect,” as headquarters firms will likely draw other businesses to the area to do business with or support operations. Additionally, corporate philanthropy will be added to local civil affairs, on which many communities place a high value. States astute in this understanding have developed incentive programs that specifically address their interest in corporate and regional headquarters recruitment.
A few such programs include the following.
- Indiana offers a credit against corporate income tax liability. The credit can be up to 50 percent of a corporation’s approved costs in relocating to Indiana. Fifty million dollars in new investment and 75 new employees are required.
- Mississippi offers national and regional relocating headquarters between $500 and $2,000 per new job for a period up to five years.
- South Carolina has a 20 percent credit against corporate income liability, based on the cost of the portion of the facility dedicated to headquarters operation or direct lease costs for the first five years of operation.
- Tennessee provides a refundable tax credit for relocation expenses resulting from a move. The credit can be used to offset franchise or excise tax liability in the year earned. If liability is less than the credit, the difference is refunded in cash.
- Florida’s discretionary grant funding may be available so long as 50 jobs are created in a three-year period and an investment of at least $50 million is made.
- West Virginia offers a credit of up to 10 percent of the company’s qualified investment to offset corporate income and business franchise tax liability for up to 13 years.
- Wisconsin provides a refundable business tax credit based upon a percentage of wages paid to eligible headquarter employees. In addition to reimbursement of up to 50 percent of training costs, the company can earn credits for up to three percent of capital investment in personal property and up to five percent investment in real property. A new investment of $1 million is required.
- Kentucky provides income tax credits to both regional and national headquarter firms that can offset up to 100 percent of corporate tax liability.
- Louisiana provides a rebate of up to 25 percent of facilities and relocation costs over five years.
Though economic development incentives are tools in the corporate headquarters relocation decision-making process, they are not always the driving factor. Ultimately, corporations will make their location decision to support the ongoing success of the company and/or intensify the need for change.
The examples here indicate that long-term access to workforce talent is a critical component driving relocation decisions today. Having a clear understanding of the factors attracting employees through a thoughtful, qualitative and quantitative approach to location modeling and analysis will help to ensure excellent location decisions are made. Expert knowledge and evaluation will help companies make informed relocation decisions that help secure a company’s success for many years to come.
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