The effects of COVID-19 on the site selection decisions of technology companies will be significant – both during the pandemic and after it recedes. The technology industry’s ease of transitioning to a remote workforce will lead other industries into a reappraisal of their own technology workforce footprints. Technology manufacturing’s reliance on global supply chains will be challenged and reconfigured for risks.
In this article, we will discuss how the COVID-19 pandemic has and will impact the location decisions of technology companies and their workforces, focusing on the information technology industry, including software firms, data centers, and the electronics manufacturers that support them. In addition, we will discuss pandemic impacts of location decisions of technology-driven back-office operations that power non-technology industries from financial services to government.
Topline trends bode well for technology, whether observing the rapid adoption of new virtualizing software (video, e-commerce, etc.) or the upward valuations of publicly traded technology companies (technology stock indices have performed three times better than an index of the total market). The penetration of technology into our economy will continue and even speed up.
Virtual services will remain in demand and will require additional investments. Consumer services that have been virtualized, from grocery delivery to payment systems, will further spread and embed throughout the economy. The integration of both physical and virtual business models will reframe investments in both infrastructure and workforces for many years to come. Our cloud infrastructure will expand in size and capability.
Below, we provide a current view of site selection for technology companies and our observations on how site selection factors have changed in light of the pandemic.
Site Selection Process for Technology Companies
The pandemic has upended the site selection process, both from a logistics standpoint (e.g., doing physical versus virtual site tours) and strategy development. In keeping with recent years’ trends, more site selection research will be done prior to contacting communities for information. Now, pandemic planning requires a new set of questions to frame the goals of a location decision:
• How will this location decision help my business be more resilient in the face of current and future disruptions?
• What will my employees think of this decision and how should we balance the need for in-person and virtual employee experiences?
• What are the regulatory and tax environments across potential locations, and how might they change in response to the pandemic?
• What are our long-term real estate needs and how do they contribute to our competitiveness?
With so many companies reconfiguring for remote work, the purpose of real estate has moved from operational goals to strategic goals. Going forward, offices may be viewed more as places for teams to bond and learn versus produce and innovate.
Although the goals and questions have changed, the process for selecting new locations will remain largely intact:
1) Define success. The site selection process should always begin with the company’s ultimate goals, as these will drive all subsequent efforts. What are the company’s strategic needs? When does the client need to make a final decision? Are there specific considerations that must be addressed by the new location? Define not only the “what” (requirements), but also the “why” (aspirations).
2) Identify financial needs and potential incentives. Many technology companies are increasingly aware of the site selection process, having watched major site selection stories in the national media. Now, companies must ask if they need incentives to choose their new location and which incentives are most appropriate. Capital-invensive industries, such as semiconductor manufacturing or data centers, will be significantly affected by taxes and incentives; service and R&D firms such as software developers will find that statutory incentives are limited. Discretionary, often cash-based, incentives will bring heightened scrutiny as the U.S. recovers from the pandemic-induced recession.
3) Evaluate potential communities. Much of site selection research can be conducted remotely and prior to contacting communities for information. Site selection firms maintain significant data on labor availability, cost, tax structures, transportation infrastructure and university assets. Often, a company can short-list communities based on this data. Input from executives also drives the selection of communities for consideration.
4) Risk assessment. As companies face new risk factors in the site selection process, a risk assessment should be performed for each site to evaluate potential political, natural disaster, crime/security and pandemic exposure.
5) Issue requests for proposals. Requests for proposals (RFPs) should be issued to a limited number of communities. The short list of potential locations should consist of five to 10 communities that meet certain criteria, such as broad geographic considerations and labor requirements. These RFPs usually request information on specific sites and buildings, current tax rates affecting those locations, and available incentives. To ensure confidentiality, communities will not be provided with any identifying information about the client.
6) Proposal evaluation and benchmarking. Once the consultant has received all completed proposals, communities will be evaluated against the goals identified during the first phase of the project. Due to the different types of available incentives, the consultant will likely need to complete a financial analysis of the company’s operations to make direct comparisons between communities. Any data received from communities will need to be evaluated, either from secondary sources or through local interviews (even with local employers). The site consultant will then visit those communities with the most compelling proposals.
7) Site visits. No more than five communities are typically selected for site visits, though technology projects may shortlist as many as 20 communities. During these trips (or virtual visits), the consultant will meet with public officials and private sector leaders to obtain a more nuanced portrait of each community’s strengths and weaknesses. These qualitative findings will then be integrated with hard data from each community’s proposal to determine the most attractive locality.
8) Negotiating terms. Once a preferred location has been determined, any outstanding issues surrounding incentive packages and/or real estate acquisition should be finalized. Incentive clawbacks must be scrutinized closely to determine if future business decisions (e.g., hiring timelines, remote work decisions, etc.) will risk the repayment of any financial incentives.
9) Select site. The last step in the site selection process involves the careful consideration of each community’s proposal. The consultant should then collaborate with company management to select the most compelling community and site. The decision regarding the selection should remain private until the client secures a formal agreement with the community. Once accomplished, the site selection consultant should coordinate with local officials on a public unveiling of the community’s new corporate partner.
While much of the process for selecting new locations remains largely intact, there are pandemic impacts on technology sector site selection which should be considered.
Pandemic Impacts on Talent Availability and Cost
Cost considerations will continue to be a driving force of technology manufacturing, but low-cost labor is becoming a less significant factor due to rapid advances in automation and artificial intelligence (AI). Workforce will continue to be the primary factor in location decisions for software companies that seek the best talent, but remote-work trends accelerated by the pandemic will reframe site selection priorities for IT-heavy projects.
Estimates vary, but some 40 to 50 percent of U.S. workers are currently working from home. This radical change in the footprint of production will likely remain, in large part, as workers recognize their ability to stay productive and find more hours in the day from skipped commutes. One recent survey suggested that one-third of companies will keep 50 percent of their workers operating remotely after the pandemic is over. Technology companies will likely remain more remote-oriented, as several have announced their workforces will work remotely indefinitely. Still, technology workers recognize the value in teamwork in the physical realm, and signs point to a continued desire of technology workers for onsite amenities, campus environments, and proximity to culture.
Technology workers inside traditional, non-tech industries may behave differently. These workers often choose job stability and financial guarantees over the options-driven ambitions of their venture peers. These workers are innovative and instrumental to the success of their employers, but they often are asked to reduce costs through their location decisions, whether it is moving financial services datacenters from the Northeast to Jacksonville, Florida, or outsourcing technology functions to India or Latin America. Back-office technology operations will continue to find new configurations that work in the current economic environment, just as manufacturers seek new suppliers wherever they can be found.
With the dispersal of technology workers out of high-cost centers in California and the Northeast due to the pandemic, technology companies may be selective with whom they bring back to the office. Non-critical workers may be left as “remote-optional,” allowing workers to fill positions from anywhere in the U.S. (and potentially anywhere in the world) and allowing companies to offer competitive salaries (although potentially reduced) to match housing costs where these workers choose to live.
We’ve already seen a sizeable expansion of California-based technology companies in lower-cost locations in Texas, Arizona and Tennessee. We should expect to see continued expansion across other states where millennials flock. The pursuit of recent college graduates might also change for companies as students experiencing a fully virtual or hybrid education may already have decided where they plan to move upon graduation.
Pandemic Impacts on Supply Chains
Decades of distributing supply chains across the globe to lower-cost locations have enabled the creation of low-cost technology products. Distributed supply chains have compressed both cost and time, but they come with significant risk to resiliency during global crises. A report published in July 2020 found that 73 percent of 350 surveyed manufacturers and retailers suffered a supply disruption due to the pandemic. As a result, one-third said they would move production out of Asia and two-thirds said they would locate production closer to home.
In addition to the reassessment of supplier locations, manufacturers will eye stockpiling of supplies as a buffer to future disruptions, thus increasing the demand for warehouse space. One leading broker estimated that a five percent increase in stockpiling will require an additional 400 to 500 million square feet in warehouse space across the U.S. Some of this new warehouse space may come from vacant retail space as retailers reorient to e-commerce and foot traffic permanently falls in traditional retail spaces. Some urban malls are already being converted to distribution centers; the same could occur for manufacturers.
Pandemic Impacts on Air Service Requirements
One site selection factor that has changed significantly is air service. Transporting workers to their clients, as well as to their teams, has been a top concern of the past, but it is unclear how this practice will evolve post-pandemic. Localities with hub airports, numerous flight options, and reasonable rates had been quite important, but air travel’s future remains unclear, from availability of flights to the potential rise in ticket prices. Fewer business trips are one anticipated response to the difficulty of air travel, and a greater spread of workers across the country could enable driving-distance travel to customers. Should we expect to see technology firms set up regional hubs of redundant workers who can serve customers on-site by car? Much remains to be seen regarding air service.
Pandemic Impacts on Site Selection Incentives
Manufacturers are a top target for recruitment by state and local governments, often receiving significant financial incentives when investing in new plants, equipment and jobs. Due to the pandemic, state and local government tax revenues are declining and future tax incentives will face increasing scrutiny, both from elected leaders and the public. Tax incentives may be reduced, and technology companies might view their benefits as not worth the risk of public backlash.
As a result, statutory incentives (that are already “on the books”) will receive renewed focus by companies in their site selection evaluations (discretionary incentives need official approval and garner media attention). Significant variation in tax systems and statutory incentives will keep corporate real estate and tax officials busy. Examples of statutory incentives include whether data center equipment is subject to state sales tax, accelerated depreciation schedules by county tax offices for manufacturing equipment and state income tax apportionment formulas. These discretionary incentives can sometimes amount to far higher value than cash-based incentives, particularly for manufacturers and data centers.
Federal incentives may become the area most “in play” for technology companies in coming years. A variety of legislation has been proposed (and not passed as of this writing) that would create incentives for the reshoring of supplier industries deemed critical to health care and technology competitiveness. Presidential candidate Biden has proposed $700 billion in incentives in his plan to target manufacturers’ goods procurement in the U.S., as well as R&D in priority areas such as electric vehicles, lightweight materials, and AI. Biden’s “Manufacturing Communities Tax Credit” would aim to empower communities to revitalize their manufacturing base. President Trump has been a strong supporter of manufacturing in the U.S. and recently announced a plan to re-shore U.S. drug manufacturing.
COVID-19 will have an impact on how tech companies conduct site selection, not only in the short term but also into the future. Companies must now analyze additional risk factors when making investment decisions that did not exist prior to the pandemic. While these risk factors will play a larger role in technology firm location decisions, all aspects of a location should be analyzed and evaluated based on a company’s strategic and long-term goals. The pandemic has generated a significant amount of disruption and uncertainty for many companies, but through a structured site selection process and a detailed location analysis that is properly aligned with long-term objectives, companies can achieve lasting success in their location decisions. T&ID