The corporate site selection process is highly complex and customizable, yet several factors dominate every decision as examined here through examining the process as a whole and specifically though evaluating Amazon as a case study as it evaluates sites for its second North American headquarters.
According to Rodrick Miller, an expert in the area who is the current President and CEO of Ascendant Global, an economic development consulting firm and the former President and CEO of both the Detroit Economic Growth Corporation and New Orleans Business Alliance, large firms tend to have in-house teams to make real estate decisions while small to medium size firms often outsource the process to consultants, with the average length of the process hovering around 9 months.
Unlike traditional real estate investments, corporate site selections also include community relations. Professionals seeking to partner with local governments face the challenge of demonstrating their corporation’s contributions to the region. The research in this area is lacking, and as noted by University of St. Thomas finance professor Thomas Musil in his 2011 article Evaluating Economic Impacts of Corporate Real Estate Activities from the Journal of Corporate Real Estate, “Few areas of business practice have been neglected to a greater degree than techniques demonstrating the economic value that corporations contribute to the communities and regions in which they are located”. This is due in part to a lack of reliable data and research done without much attention to methodology or theory, as noted by C.M. Lizieri in the 2003 article Occupier Requirements in Commercial Real Estate.
Despite the lack of research surrounding the demonstrated contributions of corporations to the communities in which they are located, the site selection process itself is the most visible arena through which community relations are addressed. Corporations need to be able to demonstrate their benefits in order to attract bids from communities, and likewise communities tout their benefits in order to attract corporations. A primary method of attracting corporations by local and regional governments has been through incentive packages. These packages can include tax exemptions, training programs, fast-tracked permitting, and other tools.
According to Miller, “incentives are meant to be tools that can offset competitive disadvantage in the market.” Mussil writes that these packages are based on “an array of variables including the corporate impact on area labor, taxes, fees, fiscal impacts, assessments, quality of life, and community attitudes”. One way to measure these variables is through an economic impact analysis study. According to a national study of the USA municipal economic development officials, only 42% of US cities usually or always conduct economic impact studies.
Musil notes in his 2006 article Critical Issues in Corporate Real Estate: Developing a Better Understanding, some corporations are able to present their own convincing economic impact analysis and few projects have as large of an impact as the HQ2 project. The request for proposals for the project estimates more than $5 billion in capital expenditures. More than 100 cities in the United States and Canada have put forth proposals for Amazon’s new North American headquarters, or HQ2. Both Grand Rapids, MI and Detroit, MI have submitted proposals for the new site, with Detroit collaborating with the Canadian city of Windsor, Ontario to put forth an international bid.
While incentives from governments are a factor in corporate site selections, they are by no means the only factor. According to Miller, incentives play the biggest role later in the process when differentiating between the top three to five contenders. In order to narrow the search to get these top contenders, a number of different factors also come into play. The intended use of the space will differentiate the emphasis placed on different factors and Musil identified the underlying factors affect nearly every site selection decision:
- Property acquisition
- Environmental issues
- Infrastructure support
- Relationship with area businesses
- Development controls
- Expansion or contraction projects
- Public services and assessment
- Regulatory approvals
- Property taxes
- Traffic and congestion
- Safety issues
- Employee housing
Miller echoed this sentiment, noting “it seems mystical to some, but the reality is that there are a very clear set of drivers [of site selection decisions]” and wrote the “the most important factor 9 out of 10 times is the quality of the labor pool.” He also explains that quality has several different aspects encompassing not only level of education but also the creativity, productivity, and health of the workforce as well. He also brought up another aspect of evaluating a site through its people outside of the labor pool by evaluating an area’s openness based on the number of foreign born people and connection to global markets as another factor businesses might consider. Miller also noted that in order to stand out in the process, communities must create a value proposition that tell a story to highlight their unique position within the market.
Michigan’s Value Proposition
Although Amazon states that the factors listed in its request for proposal are not ranked, the first factor brought up in the project description is the amount of new jobs created, placing an emphasis on labor. In the case of Amazon’s labor needs, according to the requirements outlined in their RFP a “highly educated labor pool is critical”. Amazon anticipates as many as 50,000 new jobs with average compensation exceeding $100,000 will be created at HQ2 over multiple years. This requires a deep enough pool to fill Amazon’s needs without overwhelming the local economy.
In addition to a deep current labor pool, they also state the need for a strong university system. The University of Michigan, the largest public and second-largest overall research university, is undoubtedly a draw. The university touts itself as having “an enormous array of faculty doing work of relevance to the types of businesses that Amazon is in,” according to President Mark Schlissel in a Detroit News article. Additionally, Michigan State University leads the nation in supply chain management, ranking number one in the nation for seven years in a row. Amazon already recruits MSU graduates and is a corporate sponsor for the Broad Integrative Fellows program within the Eli Broad College of Business, indicating a strong favorable relationship.
They have also stated a preference for “metropolitan areas with more than one million people, a stable and business-friendly environment, urban or suburban locations with the potential to attract and retain technical talent, and communities that think big and creatively when considering locations and real estate options”. While all four leave some room for interpretation, the first is the easiest to quantify. Amazon also has the following transportation criteria:
- Population center within 30 miles
- An international airport within 45 minutes
- Major highways and arterial roads within 1-2 miles
- Direct site access to mass transit (rail, train, metro/subway, bus routes)
The Brookings Institute in their recent article reviewed the major metropolitan areas meeting the population requirement and developed a map of the top 20 contenders based on the transportation requirements listed above. Detroit was among them.
Based on these requirements, it seems unlikely that Grand Rapids would win as its airport is not a large international hub. Detroit easily meets this qualification, however there are debates on how well its transit system fares. The narrow defeat of the $4.6 billion plan the Regional Transit Authority last November indicates an unwillingness from Southeast Michigan voters to invest in transit, which could be a key factor in Amazon’s decision. Detroit does remain competitive in terms of available land. The building criteria requires an 8 million square foot site, a challenge in dense, land-scare metropolises such as New York and San Francisco.
In addition to the site, logistics, and labor other key factors being examined include: incentives, cultural community fit, and community/quality of life. Despite Governor Rick Snyder having closed the flagship MEGA tax incentive program to new participants in 2011, he has since introduced new programs to lure companies into investing in the state according to the Pew trust. Most recently he has been a proponent of the “Good Jobs” package of incentives which allows corporations to capture 100% the personal income tax withholdings of new employees for 10 years so long as they create at least 500 new jobs with 250 of those paying 125% of average regional wage as seen in the Senate plan. Amazon would undoubtedly qualify for these specific incentives. As far as how these compare with other bidding cities, Michigan’s tax breaks and incentives currently above national averages and have grown 16% between 1990-2015.
The cultural community fit requirement is described by Amazon as “the presence and support of a diverse population, excellent institutions of higher education, local government structure and elected officials eager and willing to work with the company, among other attributes.” Detroit and its surrounding communities do not lack diversity, but instead still struggle with segregation. The Detroit-Warren-Dearborn metro area today is the most segregated metro area in the country according to a study from Michael B. Sauter, Evan Comen and Samuel Stebbins. It is unclear how exactly this may influence any decision. Although the merits of UM and MSU have already been discussed, Wayne State University deserves its own recognition. Located in the heart of the city, it is one of only 12 public universities to hold “both the Carnegie Foundation's "Highest Research Activity" and "Community Engagement" classifications in a survey done by US News. and is among the top public universities in America for total research expenditures.
Amazon also solicits testimonies from other large companies doing business in the area to help determine the business climate. Mayor Duggan of Detroit has appointed Dan Gilbert, the founder and chairman of the Quicken Loans Family of Companies, to lead the team preparing Detroit’s bid. Gilbert has been a vocal proponent of investing in Detroit and is currently the largest landlord and employer in the city. His family of companies is currently seeking to further invest an additional $2.1 billion in four new projects which could lead to 9,000 new permanent jobs and 15,000 construction jobs in coming years, with $250 million slated to be funded through taxpayer backed bonds according to Mlive, indicating a willingness to work with companies looking to invest.
Finally, Amazon seeks a community with a high quality of life for its employees. Arguably the most subjective of the criteria, they invite cities to describe what makes their communities unique as they submit their bids. Additional selling to be taken into consideration include the branding aspect (participating in Detroit’s comeback), opportunity to have an urban campus, a low cost of living for employees, and a location in the Eastern Time Zone.
Mary Fredendall is an undergraduate policy fellow at the Institute for Public Policy and Social Research.