Why are Businesses Fleeing Cities? A Top U.S. Site Selection and Incentives Professional’s View

Our VP of Strategic Growth, Catriona O'Kane recently hosted a webinar with top U.S. site selection and incentives professional at BDO, Tom Stringer. BDO USA helps companies move their operations to various locations throughout the United States.

They discussed the major impact COVID-19 and remote work has had on business location decisions which have become a hot topic due to residents rapidly fleeing New York City to live in the suburbs. With Manhattan office leasing plunging by 62% in April 2020 in comparison to the average leasing volume in 2019, it is clear the impact COVID-19 has had on corporate real estate in major cities.

So, why are businesses considering relocating their office post-COVID-19? Here are some of Tom's key takeaways. 

Back to Work Social Distancing Protocols Have Changed Office Structures

Many offices in major U.S. cities such as Manhattan are traditionally open planned, small and cramped. Businesses will have to implement social distancing measures and as a result, change their office space significantly when their workers return to work or keep their occupancy to around 25%. The majority of offices in cities may not have enough space to effectively adhere to these social distancing measures and as a result, are allowing employees to work from home for health and safety reasons.

Additionally, some businesses may not be able to afford to operate with limited capacity on top of continuing to pay the extortionate cost of renting office space in the city. As a result, we might witness an upsurge in businesses looking outside of expensive cities for office locations.

Remote Work is Here to Stay, Shifting the Need for Corporate Real Estate 

The two largest costs in corporate America are employees and corporate real estate. Despite automation, employee costs can not be altered too drastically due to the creativity factor. As more companies adapt to remote working, with it becoming more permanent for certain major players such as Google, the need for large office and expensive real estate may be disappearing. 

Businesses have realized that their employees do not have to work in an office, in fact, according to McKinsey research, 41% of workers stated that their productivity levels have increased from working at home in comparison to the office. 

Therefore, businesses can essentially eliminate 100% of the traditional expensive corporate real estate costs from the corporate balance sheet if they ditch their office in favor of employees working remotely. This leaves little justification to fully return to office spaces.

For example, one of BDO's clients is building headquarter meeting spaces which potentially only 1/3rd of staff will be fully attending daily. Their plan is to send employees to work on a monthly basis of shifts. This highlights how some businesses are downsizing their current office space or changing headquarter locations due to limited staff attending. Many are considering moving to cheaper locations and thinking ahead to prepare for future economic uncertainty.

Workers are moving out of the city to increase their quality of life 

New York City experienced a mass exodus of an estimated 420,000 residents in the peak of the pandemic between March and May 2020. 

Younger worker's mindsets are shifting, they no longer want to stretch all their earnings across rent, taxes, and food. This growing trend of ‘urban expats’ are now choosing where to live based on the quality of life, knowing it won’t affect their career opportunities with some of the top employers in the world due to the prominence of remote work. 

Additionally, an increasing number of older workers including parents and retirees have decided over the last few months to pack their bags and leave cities in favor of suburban areas with lower housing costs. In particular, silver cities in Florida have become fast-growing retirement destinations for retirees. 

After spending months confined to limited space in city flats, many parents are considering moving to areas with more space for their kids to grow up in and attend nearby universities. Silver cities, many of which are in Florida, are fast-growing retirement destinations. 

States With Lower Income Tax are Becoming Attractive

As the majority of employees are operating remotely businesses are considering relocating their headquarters to areas with lower income tax as a cost-saving measure due to the economic uncertainty COVID-19 has caused.

Cities are generally home to major industries such as tech and finance, and as a result, they have a higher income tax and a younger more educated workforce. However, now that employees are not going into the office many residents are reevaluating whether the income inequality and a shortage of affordable housing which comes with city life is really worth it. 

However, as more residents are heading to different states, taxes and wage rates for employees may follow as the legal process hasn't fully caught up yet. For example, Facebook recently announced that it will adjust worker’s salaries based on where they work remotely. The legal process hasn’t fully caught up yet. So, we expect to see some significant changes in tax policy, as the population starts to shift, income tax may be treated very differently.

State Economic Incentives

Certain states have extremely aggressive economic development programs, meaning incentives not just for companies, but some are starting to attract people to relocate in order to stimulate their local economy.

Is now a Good Time for Businesses to Consider Office Relocation?

We are still in the middle of uncertain times. If you are considering relocating or occupying new office space now is a good time to buy or lease as costs have plummeted in various locations along with seizing the various business incentives being offered. 

For for more information check out our full webinar of 'Should I stay or Should I go? Relocating your office post-COVID-19 here.

Disclaimer: The information provided here does not, and is not intended to, constitute legal advice. Instead, the information and content available are for general informational purposes only.