The Uncertain Future of Corporate HQs

The Covid-19 pandemic has seen tens of millions of Americans engage in a gigantic experiment in working from home — one that looks to be more permanent than anyone might have imagined. Corporation after corporation has announced that they won’t be reopening their offices until mid-2021, at least.  Some commentators are even predicting the death of the office and the end of cities.

But let’s not get too far ahead of ourselves. Now, more than ever, the issue of where we work — of place and location — remains a fundamental question.

Pandemics and other crises can disrupt or change the status quo, but history shows they can also accelerate trends already underway. The question of where to locate corporate facilities has been increasing in strategic importance for a long time. Corporations were facing a rising backlash to their perceived effects on housing prices and gentrification in superstar cities and tech hubs, and from attempts to hoard taxpayer-financed incentives — a backlash that is only likely grow in the wake of the growing movement for racial and economic justice that has swept American cities since the brutal police killing of George Floyd in Minneapolis in May.

In today’s increasingly fraught economic, political, and social environment, decisions about where to locate are becoming more, not less, important. Figuring out who will work from home and who will require actual office space, which offices to prune and which to keep, how they will be configured and shared, and precisely where they should be sited — in talent-laden superstar cities, in more cost-effective second- or third-tier metros, in downtown urban centers, suburbs or rural regions — requires more strategic thought, analysis, and planning than ever.

Location today is a central component of corporate strategy. It is not just a cost that can be cut, but a key factor in attracting and retaining talent. What I call “locational strategy” is essential to the ability of corporations to gain competitive advantage. My insights on locational strategy are drawn from both my academic research in economic geography and business location, my personal involvement with numerous high-profile location decisions, and work with high-tech companies and cities over the past several decades.

The New Imperatives of Corporate Location

For the past several years, I have been undertaking research on changing locations and determinants of corporate headquarters. This research, conducted with my colleague Patrick Adler, charts the locations of the headquarters’ units of Fortune 500 companies from the heyday of the old industrial economy in the 1950s to the rise of the knowledge economy today. It identifies a huge shift in the locations of those headquarters and zeros in on the factors that underlie such changing locational imperatives.

Back in 1955, when Fortune magazine compiled its first 500 list, America was still a largely industrial economy, dominated by industrial corporations like General Motors, Mobil Oil, General Electric, and U.S. Steel. Today’s more knowledge- and technology-driven economy is dominated by technology-intensive companies like Amazon, Apple, and Alphabet. Indeed, just 60 of the companies on that original list remain today.

In the old industrial economy, location decisions were oriented to minimizing the costs of three key factors: gaining access to raw materials and transporting them to factories, transporting finished goods to their markets, and labor. Though early industries were based in and around cities like Detroit and Pittsburgh, over time this model came to be biased against these higher-cost locations. As industrial corporations grew into highly diversified, industry-straddling enterprises, they were able to shift their factories — or what came to be tellingly called “branch plants” — from more expensive cities to lower-cost greenfield locations, first in suburbs, then in the Sunbelt, and eventually overseas. To capture those factories, mayors and other local leaders and boosters of aspiring cities used tax credits and other financial incentives. The new profession of economic development emerged to position communities to better compete for and attract corporate investments and of corporate site selection to manage the process and extract maximum incentives for businesses. Over time, incentives packages grew and grew into modern day multimillion-dollar mega-deals.

But the location decisions of high-tech, knowledge-based firms turn on a different set of factors. The driving factor is access to highly educated and skilled people. This new location model is shaped by the simple fact that such talent is heavily clustered and concentrated in certain places. This is particularly true of young talent which is central to knowledge-based industries like finance, media, entertainment and high-technology and which is drawn to places which offer a combination of abundant job opportunities, deep professional networks, and lots of other young people to make friends with (and date). As such, it is skewed toward superstar cities like New York and Los Angeles, and leading tech hubs like San Francisco, Seattle, Boston, Washington D.C., and Austin, which serve as talent magnets. Under this model, the ability to attract and retain talent has become the central factor in corporate location.

Our statistical models, which track hundreds of Fortune 500 headquarters’ locations over six decades, confirm the role of talent as the key factor in the geography of corporate headquarters today. Seventy percent of Fortune 500 headquarters are located in metros that rank in the top quartile (25 percent) for talent, measured as the share of the population which holds a bachelor’s degree or more. Another key factor is the size of metro areas. This reflects the fact that larger metros have larger talent pools and more the amenities that attract top talent. Ninety percent of Fortune 500 headquarters are located in metro regions with populations of 1.3 million people or more. The third factor is the presence of international airports. Almost 90 percent of corporate headquarters are located in metros with international airports. Such airports offer global connectivity between talent hubs across the world.

Our research also charts the shift in the cities and metros where corporate headquarters are located. Not surprisingly, the biggest loser since 1955 has been the industrial Midwest, while the biggest gainer by far is the San Francisco Bay Area, the veritable center of America’s high-tech knowledge economy. New York, of course, remained the center for corporate headquarters over the entire period, home to 16% of corporate headquarters from the mid-’50s to today. Back in 1955, Chicago was the nation’s second-leading headquarters city, and Cleveland, Detroit, Pittsburgh, Minneapolis, and Milwaukee all ranked high up the list.

Today, the Bay Area, which spans the San Francisco and San Jose metro areas, ranks second with 52 headquarters, quadruple its number back in the 1950s and adding up to more than 10% of today’s total. This tremendous growth vaulted  the Bay Area ahead of Los Angeles and Chicago, America’s second and third largest metro areas. LA’s corporate headquarters declined by nearly 20% over this period. And Chicago, a huge center of corporate HQs in the industrial age, saw an even larger decline of almost 30%. Other Rustbelt cities like Cleveland, Pittsburgh, Detroit, and Milwaukee saw even steeper declines.

San Francisco was not the only metro to add headquarters. The tech hubs of Seattle and Denver also quadrupled their numbers. And, greater Washington, D.C. added 13 new headquarters for a growth rate of more than 300%.  A number of Sunbelt cities also saw significant growth. Dallas and Houston, with roughly 60% headquarters growth each, are now the nation’s third and fourth biggest headquarters centers respectively. Atlanta and Nashville both experienced 50% headquarters growth. And Miami, which has solidified its position as the economic and financial center of Latin America, saw 200% growth in its headquarters. All in all, the top 10 metros account for more than half of all corporate headquarters, the top five for nearly 40%, and just two metro regions, New York and the San Francisco Bay Area, account for more than 25%.

Urban Corporate Headquarters Aren’t Going Away

The new geographic pattern of corporate headquarters reflects the rise of a spiky, winner-take-all geography that is dominated by giant superstar cities and metro areas. While Covid-19 may result in some additional dispersal, it unlikely to dramatically overturn this now well-established corporate locational pattern.

Hubs and Spokes

What is more likely is that Covid-19 crisis will alter the distribution of business functions and locations within leading corporate clusters.  With the rise of remote work, many families and older and more vulnerable people may opt to move to less-crowded suburbs, exurbs, and even smaller cities. A likely outcome is a more distributed hub-and spoke system of corporate location, with major headquarters facilities in urban centers, surrounded by satellite complexes to service remote workers. The changes will ultimately register less in the macro-geography of the country than the micro-geography of its metro and mega-regions.  The depth and extent of this shift will ultimately turn on how long the current crisis lasts. If a vaccine becomes available in early 2021 and things revert back to something approaching the old normal, the changes will be relatively small. But if a vaccine proves elusive and the virus remains an active threat, the changes will be longer-lasting and in some cases permanent.

In either case, the shift to remote work is no temporary blip. Before the crisis hit, about 10 or 12% of the American workforce worked remotely part of the time, with just 2% working from home on a full-time basis. That figure shot up to between 50 and as much as 75% of the workforce as the virus took hold last spring. Roughly 20% of the workforce is likely to continue working remotely on a full-time basis after the crisis, with another third doing so part-time, according to a recent survey.  The ability to work remotely gives people much more flexibility in their choices of where to live. The need for social distancing has made families more inclined to place a premium on space — both outdoors and indoors, so as to accommodate a home office and a space for online learning for their kids. So some people will be pulled out of cities.

But there are also factors that will push other groups back to cities. Younger workers at the earlier stages of their careers will continue to be drawn to cities because they offer higher pay, extensive professional networks, and deeper and thicker pools of potential friends and mates.  Young, educated people between the ages of 25 and 34 have accounted for roughly half of the population growth in close-in urban neighborhoods (within three miles of the city center) since 2010, and their share is likely to grow. Because they are crammed into small apartments with multiple roommates, they want and need to develop more personal and professional ties, and they feel less threatened by the virus, office space — whether in a corporate center or a company-underwritten co-working space — will remain a key amenity or perk to recruit them.

This trend is not lost on major tech companies, a number of which have doubled down on urban locations. Facebook shocked many this August when it signed on to lease a whopping 730,000 square feet of office space in the landmark post office building across from New York’s Penn Station. Amazon continues to plan to locate thousands of workers in New York’s iconic Lord and Taylor building which it purchased before the pandemic.

These push-and-pull trends are not so much major disruptions as they are accelerations of changes that were already underway. Net them out while adding in the need to reconfigure for social and physical distancing and it is hard to say just how much the need for office space in central locations will decline. Companies will need to allocate more square footage to their non-remote workers, at least in the short run, and it’s likely that at least half and more likely three-quarters of today’s remote workers will ultimately return to offices full time.

A recent CBRE report predicts that urban hub facilities will be needed to house top corporate functions, as a mechanism to recruit and retain young talent, and to function as “brand statements,” much as a Fifth Avenue flagship store does for a retail chain. The spokes will house full-time office workers or part-time remote workers who live in the suburbs or second and third-tier cities. The study thoroughly debunks the idea that major companies will abandon or substantially reduce their footprints in superstar cities like New York or San Francisco. As the report puts it, such dense markets “house deep, diverse and sought-after skills which continually attract employers.” A strategy that accommodates both younger and older workers, whether they are density friendly or density averse, “would pair well with increased work-from-home formats, and offer optimal flexibility and safety to workers that still want in-office workplace options. By creating thoughtful and engaging satellite offices proximate to concentrations of workers, these offices serve as magnets, attracting employees and promoting culture, collaboration and innovation.”

While such a shift may negatively affect the economies and fiscal capacities of some expensive cities, it will have the side benefit of bolstering suburban and regional economies, reducing commutes and the emissions that flow from them, and creating the possibility for establishing integrated 15 minute neighborhoods in which people can work, live, and raise their families in cities and suburbs alike — a goal that urbanists have only dreamed about until now.

Location as Corporate Strategy

Deciding where to locate a major corporate facility — especially a headquarters or a significant branch office in a knowledge or innovation hub — is among the most consequential and expensive decisions a company can make. Such decisions involve far more than calculations about the costs of real estate and the levels of local wages. They have powerful and lasting effects on a company’s ability to attract, recruit, and retain talent and gain access to vital business networks and markets. When location decisions are taken lightly or done badly, they can be extremely costly and very hard to undo. The potential negative impact to the reputation or “brand” of a company like Amazon that can come from demanding and accepting excessive incentives can far outweigh its dollar value. Those risks, which have always been substantial, have increased significantly as the nation’s political mood has become more fractious.

Amazon’s much ballyhooed search for a second headquarters, or HQ2, provides a textbook case of the “do’s and don’ts” of the new corporate location. Announced in September 2017, Amazon’s original Request for Proposal (RFP) neatly encapsulated the key factors that drive business location today: a large metro with more than a million people, with large pool of skilled tech and management talent, served by interstate highways and transit, and in close proximity to a major international airport. Amazon took the process very seriously, undertaking what is perhaps the most detailed, comprehensive and data-driven site selection process anyone had ever seen, driven by a top-level team of real estate, economic development, and site selection professionals.

Yet, to urban economic development experts like me, it seemed like something of a circus, if not an outright ruse. Corporations almost always know more or less where they want to locate key facilities in advance. More to the point, only a handful of cities fit it Amazon’s own stated criteria. From the git-go, I predicted they would choose Washington, D.C., where Jeff Bezos had recently purchased a $20 million-plus mansion. Not only is D.C. a major metro on the East Coast power corridor, CEOs’ living choices have long been recognized as key factors in where corporations site their headquarters. (I was a member of the board of the organization that submitted Toronto’s proposal — a position I later resigned when it became clear to me that the process had devolved into a fishing expedition for financial incentives).

Nonetheless, the “Amazon Idol” competition followed its script to the end: 236 cities sent in proposals, providing detailed data on their economies, talent bases, and available building sites. Amazon whittled it down to 20 finalists, taking an even deeper dive into these cities, sending teams to undertake multiple site visits at each location.  The resulting dataset is a treasure trove that Amazon can draw on as sites for operations, research, warehousing, and distribution facilities in the future.

Despite all that careful planning and data analysis, Amazon’s ultimately called a do-over on its final selection. It pulled out of its Long Island City site in the wake of a firestorm of outrage from local politicians and community activists over incentives and the prospect of further gentrification and displacement. A few months later, Amazon proved my own and other critics’ point when it quietly leased a large amount of space in Manhattan’s Hudson Yards without receiving a nickel of subsidies in return.

Amazon is far from the only high-tech company to engender such community backlash. Protests erupted over the buses that shuttle techies between their urban apartments in San Francisco and Oakland and their workplaces in Silicon Valley. In March of this year, San Francisco considered a measure that would limit the construction of new office space if the city failed to deliver affordable housing. In April, Alphabet’s smart-city subsidiary Sidewalk Labs, a company I have worked closely with, pulled out of Toronto, in part because of the pandemic, but also because of the controversy over privacy and what was perceived as its privileged access to public land on Toronto’s lakefront. This occurred even though Sidewalk Labs did not seek or accept any taxpayer sponsored incentives, committed to affordable housing and environmental development, and engaged in extensive community engagement. In July, Seattle passed a payroll or “head tax,” to increase revenues from the city’s biggest businesses and highest earners which are widely perceived as not paying their fair share — an ongoing issue that was partly responsible for Amazon’s search for a second headquarters to begin with.

How Companies Should Rethink Their Approach

It is time for corporations to rethink and revise their approach to corporate location. They must approach site selection and community engagement in a far less transactional way. They must think of places not as abstract points on a map made of bundles of measurable characteristics that meet certain corporate criteria, but as actual communities where people live, raise their families, and form deep emotional attachments. And they must put their money where their proverbial mouth is, investing in those communities and in the full complement of capacities they need to build and sustain more fruitful relations with the places in which they choose to locate. The backlash will only grow given the deepening anti-corporate, anti-Big Tech sentiment on both the left and the populist right; community concerns over gentrification, inequality, and unaffordable housing; and the burgeoning Black Lives Matter movement for racial and economic justice.

In today’s environment, locational strategy is an ever more important of competitive advantage. Based on my research and conversations with leading corporations, consultants, mayors, city leaders, and urban development experts, as well as a decade-plus of teaching about these issues in a leading business school, here are the five key dimensions that underpin a more effective approach to locational strategy.

Say No to Taxpayer-Financed Incentives

Tax-payer-funded incentives amount to a whopping $50 billion or so every year. And individual mega-deals have risen to multiple billions. That’s a lot of taxpayer money that could be spent on education, infrastructure, affordable housing, and other public goods.

Corporate incentives are wasteful and useless. Detailed research shows that they have little to no effect on siting decisions. Companies (or their site-selection consultants) create a fictitious competition to extract maximum incentives and locate where they would have anyway. America is an extreme outlier on this matter. The European Union, for example, strictly limits the tax incentives that jurisdictions can offer. But efforts to develop similar federal, state, and local policies in the U.S. have gone nowhere. In the absence of public regulation, corporations should recognize that it is in their own interest to regulate themselves.

Embrace the Rise of the Rest

Companies need to think more expansively about where they locate. It makes sense for them to develop spokes, not just in the suburbs of superstar cities, but in second- and third-tier cities as well. For all their massive concentrations of talent, superstar cities are increasingly expensive and come with the host of problems borne of inequality — exorbitant rents, rampant gentrification, extreme inequality, traffic congestion, homelessness, and more — that I have dubbed the “new urban crisis.” When it comes to location, too many companies have a herd mentality, following each other into the same locations. It’s time for bold leaders to break ranks and establish new beachheads, spreading their investments wider and helping to build new innovation ecosystems, accelerating what Steve Case dubbed “the rise of the rest.”

We seem to be reaching an inflection point in the geography of talent where smaller, less expensive cities have a new allure, something that is reflected in the inclusion of cities like Philadelphia, Pittsburgh, Columbus, Indianapolis, Newark, Miami, and Nashville on the list of Amazon’s HQ2 finalists. Those cities and many others are much more welcoming than coastal superstar cities, both because they need jobs and because they are more affordable. As a business leader in one of those cities put it to me, “Tell those tech companies to come to the ‘grateful cities,’ where they will be more welcome.”

Be a Serious and Invested Community Partner

Companies should resist the temptation to play communities against one another, or to treat them as mere points on a map. Locational strategy is not just about choosing places, it is about managing them and investing in them in ways that are a win-win for communities and their residents. They can learn from anchor institutions, like universities and medical centers, which typically work hand-in-glove with local leaders to create housing and amenities and jobs.

A growing number of companies are already using this approach of partnering and investing in their communities, some which I have observed and been involved with:

• Prudential Insurance has stuck with its hometown of Newark, New Jersey through thick and thin. Instead of following other businesses to Manhattan or residents to the suburbs, the company stayed in Newark after the devastating riots of the late 1960s, upping its investments in the city.
• Right around the time that Amazon launched its HQ2 search, Walmart announced its decision to build a new campus in its original hometown of Bentonville, Arkansas. Walmart could have easily moved to Dallas, Atlanta, New York, or another superstar location. But instead, it doubled down on its hometown. With support from Walmart, local leaders, and some of the Walton family heirs, Bentonville invested in a host of leading edge projects and amenities aimed at turning the region into an attractive location for world-class talent — among them the art museum Crystal Bridges and its sister institution The Momentary, a new contemporary art space; an art hotel; a culinary school; a new private school with scholarships for less advantaged students; numerous restaurants and coffee shops; a network of new bike trails; and various projects, centers and schools at the University of Arkansas.
• In Tulsa, the George Kaiser Family Foundation have worked to make the city a center of remote work, invested in its award-winning arts district, the Guthrie Museum, and more.
• Quicken Loans’ Dan Gilbert has made massive investments in downtown Detroit.

Create a Chief Location Officer

Location decisions can no longer be offloaded to real estate units or outsourced to site selection consultants. Large, rapidly growing firms must proactively manage portfolios of locations that serve different purposes. To ensure they are making their decisions both sensitively and strategically, corporations should appoint a Chief Location Officer at the C-suite level, providing them with a staff that is well-versed in the new economic geography, its data analytic underpinnings, and in the actual management of communities — not just MBAs with real estate or operations backgrounds, but professionals who have worked in cities and local economic development. Such staff capacity should be, supplemented with advisory groups of former mayors, economic developers, and others who can help companies better understand and manage communities and partner with them on addressing pressing issues.

The building of such capacity should extend to the boardroom. Large companies would do well to recruit former mayors, city leaders, and community developers as directors and to create special committees to oversee location and community management functions.

Locational Strategy as a Centerpiece of Business Education

Business schools have to step up too, establishing courses and curricula which teach MBA candidates the disciplines of location and community management. Locational strategy needs to be taught as a core element of corporate strategy. Here business schools can draw from existing faculty experts in strategic management and real estate, who have developed new insights into geographic clusters and ecosystems.

My course at the University of Toronto’s Rotman School of Management now asks students to consider three key sets of issues. I begin by making location personal, inviting students to consider their own location decisions strategically and in a data-driven way. I then have them work through each of the factors involved in locating and selecting a new site for a startup or major corporation. After that, I engage them in simulated negotiations with a city government or economic development organization, helping them understand the dimensions of conflict and contestation on all sides. In this way, I help them better understanding of multiple sides of location decisions and community development.

It may well be time for an MBA concentration in location and urban development, melding knowledge firm management, corporate strategy, and real estate concentrations. More extensive executive education is also needed, particularly value-added practitioner-oriented programs for senior managers and members of corporate boards of directors.

Given the unprecedented stress, change, and uncertainty of our current moment, location and community engagement must become a central focus of business education and business practice alike.

America’s economic geography has shifted dramatically over the past several decades, shifts that are both accelerating and changing as a result of the Covid-19 pandemic. It’s too early to tell how the landscape will settle. But these changes are and will continue to shape a new corporate landscape. Forward-looking corporations take location more seriously than ever, making site selection and community engagement a centerpiece of their overall corporate strategy. Location, after all, is everything.