“Real estate is the key cost of physical retailers. That's why there’s the old saw: location, location, location”
- Jeff Bezos, Founder, Chairman and Chief Executive Officer, Amazon
Local governments go to great lengths to attract growing businesses to locate in their area for the large-scale economic impact, both direct and indirect that they bring.
This is because they create large numbers of high-paying jobs leading to spill-over economic growth, the cluster effect that attracts further investment and increased tax payments.
Listed real estate companies that align part of their portfolio to the needs of high-growth businesses have the opportunity to deliver superior earnings growth.
In the current economic cycle many of these companies have been in the technology business. The high-growth trajectories of global technology firms are leading to the creation of a limited number of hubs on a vast-scale to serve as global and regional corporate headquarters. Securing the base of such a company would be a highly attractive prize for a community due to the consequent economic benefits and tax revenues that tend to follow.
Thus, there is extensive local government interest and media attention in these selection processes. The technology giants concentrate on the potential of a prospective location to support their long-term global growth plans when considering these major location decisions. Hence, the focus is on those factors that best drive innovation and operational efficiencies.
The most recent and highest profile example of this was the process of finding a new home for the second corporate headquarters of Seattle-based technology giant Amazon, known as HQ2. In September 2017 the company invited proposals from cities and received responses from more than 200 across the US, Canada and Mexico for the US$5 billion project which is committed to creating 50,000 jobs.
A shortlist of 20 was confirmed in January 2018 and in November it was announced that HQ2 would be split between two locations. National Landing, a future neighborhood including Crystal City in Arlington, Virginia, (near Washington DC) and Long Island City, in Queens, New York City were selected. Each will eventually employ 25,000 workers.
Getting the geeks through the door
Large technology businesses require a deep pool of highly educated and tech-savvy workers with the necessary skills and experiences to grow the company.
This was highlighted in the recent HQ2 selection process. Jim Carney, Senior Vice-President at Amazon told the New York Times: “During the process it became clear to us that the overriding criteria was going to be the ability to find and attract talent.” Proximity to the talent found in some of the world’s best universities is therefore imperative for the success of companies such as Amazon.
Major technology company office openings require large-scale hiring of a wide range of job functions. However, it is generally the search for software engineers and programmers that represents the greatest recruitment challenge.
The full roll-out of a new large-scale technology headquarters will generally take place over a period of time and hence significant ongoing recruitment will be required. A reliable supply of suitably qualified entry-grade staff is thus crucial to the success of such projects. This will therefore influence location selection decisions.
The presence of universities and technology colleges with established expertise in delivering suitable courses to a high standard will be a key driver.
Foxconn Technology Group attracted controversy when it was reported that it was considering importing engineers from overseas when it struggled to recruit sufficient local staff for its large expansion in Wisconsin. This was perhaps due to the state not being widely recognised as a centre of commerce for millennials.
Work, rest and play
Closely linked to the availability of labour, technology companies seeking to identify a location able to support skilled labour recruitment over the long term, place high priority on the liveability of an area.
They often look closely at bustling cosmopolitan districts of urban areas, that are well equipped with restaurants, bars, gyms, cultural life and open spaces to attract young professionals. It is no coincidence that the world’s three largest technology hubs of San Francisco, New York City and London are widely viewed as being among the most liveable cities for these workers.
Crystal City, now re-branded as National Landing, in Northern Virginia near Washington DC was able to offer Amazon an established eclectic mix of shops and restaurants as it searched for a site for its HQ2 site.
Moreover, it was in a position to support the development of a private sector initiative to create a 130,000 gross square feet entertainment and shopping venue. Central District Retail, as it will be known, will provide an Alamo Drafthouse Cinema complex, a specialty grocer, restaurants, bars and other leisure retail outlets.
The area was also able to boast 400,000 rental apartments, condominiums, townhouses and houses within a five-mile radius, with a further 40,000 under development. This is supportive of Amazon’s focus on hiring youngish professionals, however a hub of this scale will require large numbers of more senior executives who often have other lifestyle priorities. Their focus will often be on efficient links to more family-friendly suburbs.
Technology companies concerned about hiring senior executives, who often have growing families, will be mindful of convenient transport links to areas boasting more spacious housing and good schools. In practice this is likely to mean proximity to mass transit rail stations that offer direct access to more distant residential areas.
The National Landing proposal was able to boast three Metro stations and also a station on the Virginia Railway Express commuter line. London has built its technology cluster at Shoreditch, sometimes known as ‘Silicon Roundabout,’ around an underground rail station - Old Street.
Road and rail connections to a city’s commercial and political centres that enable easy access to meetings with clients, suppliers, financiers and policy makers are also important.
Access to an airport that provides relevant direct flights will increase a location’s attractiveness to a technology group with global operations. The National Landing proposition was keen to highlight the site’s proximity to the adjacent Reagan National Airport that operates direct flights to approximately 100 cities.
At the other end of the transport spectrum, access to bike lanes and a comprehensive cycle share scheme can align with the lifestyle offering to the environmentally-conscious employer.
Large global technology companies prioritise identifying a venue that is accessible to or can attract a skilled labour force and provides suitable connections able to support its business operations. However, the willingness of local government to support a proposal is also likely to play a material role in the selection process.
The bid to attract Amazon to National Landing was supported by a significant package of measures from the Virginia State Government and local government bodies. This included job subsidies of US$22,000 per job that pays in excess of US$150,000, up to a total of US$550 million for the planned 25,000 jobs.
Local government will also invest up to US$195 million on improvements to the Crystal City and Potomac Yard metro stations, improvements to Route 1 and a connector bridge to the airport. Local universities will receive US$375 million of support for bachelor and masters degree programs and there will be a US$50 million grant to promote technology internships.
The use of public money to support innovation locations is widespread. In 2012, UK Prime Minister David Cameron committed £50 million to regenerate the area around London’s Old Street roundabout and create a large indoor civic space for technology firms.
The sums involved have been so significant that some commentators have questioned such use of tax-payers’ money. Nonetheless, this support is very often made available when technology location decisions are made.
It appears that local policy makers find the high-paying jobs, wider economic benefits and property taxes that they bring irresistible. An example of the positive impact of attracting these businesses can be clearly seen from the effect that Amazon has had on the Seattle skyline over the last decade.
The small matter of office space
Important though these broader factors may be, technology companies have a requirement for suitable office space to house the employees and contractors whose innovation will grow their businesses.
This requires a sufficient supply of suitable land for building new offices that will facilitate their longer-term expansion. Such projects require local construction capacity and flexibility in planning regulation to enable development to be completed within reasonable time frames.
The more immediate needs of the business would also normally require a significant supply of existing office space that meets or can soon be adapted to the company’s needs.
The National Landing development was able to offer Amazon the opportunity to secure 6.2 million square feet of existing office space and 7.4 million square feet of additional development space controlled by the company’s real estate development partner.
The growth trajectory of global technology groups continues to see the development of a limited number of large-scale headquarters projects. The consequent economic benefits make the selection of such locations keenly fought over.
Real estate companies able to engage with the ecosystem of stakeholders and align their offering so that they deliver a compelling market proposition are well placed to deliver strong earnings growth.
Listed real estate investors have the opportunity to capture value when they take a global view and bring a superior understanding of the location selection process of major technology groups.
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