10 Current Trends Impacting Your Location Strategies
by King White, on Sep 21, 2022 9:43:00 AM
There has been so much change and disruption in the last few years that companies have completely changed their location and site selection strategies. The office sector was hit with work-from-home challenges while the industrial sector dealt with supply chain realignment. To help you make smarter location decisions, Site Selection Group has identified 10 market trends that could impact your next site selection decision.
1. Very challenging labor conditions
The extremely difficult U.S. labor market has probably become the biggest challenge for most employers in every industry. It will continue to hamper the ability of employers to recruit and retain despite their need to expand existing sites or move into new geographies. Until labor markets soften, the need for advanced labor market analysis will be critical as companies try to assess a location’s ability to support current and future labor needs.
2. Reshoring of manufacturing
The reshoring of manufacturing back to the U.S. continues to unfold as companies rethink their global supply chain as they face challenges from geopolitical hotspots like China and Russia as well as the lingering effects of the COVID-19 pandemic. The migration back to the U.S. has reshaped the industrial sector and has placed a significant strain on labor markets, infrastructure, and real estate. The automotive and semiconductor industries are a couple of great examples of industries making massive investments to expand their U.S. production as they realign their global footprint.
3. Long-term implications of work-from-home
The success of the work-from-home model is receiving mixed reviews with inconsistent consensus among major office employers. The biggest benefits have been the ability to source employees anywhere, employee work-life balance, and reduced real estate expenses; however, the long-term implications on culture, productivity, and employee accountability are unknown. Most industry experts believe the trend will stabilize with 30% of office workers likely staying at home and the remaining 70% will either be in the office full-time or in a hybrid model. The impact on the office real estate market is only beginning to unfold.
4. Nearshoring of back-office operations
The challenging U.S. labor climate in the U.S. and the COVID-19 impact on offshore hotspots like the Philippines and India have forced many U.S. companies to expand into nearshore geographies for their call centers, shared service centers, and other lower-level back-office functions. Until labor conditions soften, nearshore locations like Colombia, Costa Rica, Guatemala and Jamaica are likely to continue gaining momentum.
5. Warehouse and distribution capacity demand slowing
The demand for bulk warehouses and distribution centers grew exponentially due to the supply chain disruptions caused by COVID-19. However, there appears to be excess capacity by some large companies like Amazon and Wayfair that have retrenched on their growth plans ¬— an indicator of subsiding demand. This could be a challenge for real estate developers around the U.S. who have speculative distribution centers under construction.
6. Wage inflation
Wage inflation continues to burden employers and fuel overall inflation. Most companies saw wages increase by over 20% between 2020 and 2022 — an unprecedented level in the U.S. labor market. Pre-COVID-19, the pressure was mounting as the minimum wage increased in multiple states and labor conditions tightened. As COVID-19 waned, labor markets became tighter and government subsidies added fuel to the fire.
7. Industrial real estate market peaking
The industrial real estate market was the darling of the commercial real estate sector as the office sector got hammered by work-from-home. Industrial real estate costs generally increased by over 20%. Developers gobbled up land within an hour of most major cities for speculative bulk distribution projects. The ripple effect impacted the availability of quality, large land sites for manufacturing companies to buy and build facilities and caused economic development organizations to scramble to rebuild their inventory of construction-ready sites.
8. Flight to quality office space
Class A office space has been the winner as COVID-19 wanes. Companies ditched their older, less employee-centric spaces for newer, well-designed office spaces in well-located buildings to attract and retain employees as well as to accommodate the new hybrid workplace.
9. Interest rates and inflation
Inflation rose by 0.1% since July, but is down from its June peak of 9.1% for a year-over-year rate of 8.3% in August, according to Labor Department data. To target the 2% benchmark inflation rate, the Federal Reserve has already implemented four interest rate hikes in 2022, including two consecutive rate hikes of 0.75% in June and July. The federal funds rate is currently 2.25% to 2.5%. It is anticipated that the Fed will implement another rate hike of 0.75% in the coming months. The impact of these rate hikes could be far-reaching as it impacts the financing of large capital investment projects such as manufacturing plants, refinancing of commercial real estate loans, and commercial real estate loans for new projects.
10. The impact of technology
Technology continues to play a huge role in location strategies and the site selection trends of certain industries. For manufacturers, technology can help offset the reliance on labor which helps diminish the economic benefits of offshoring and creates demand for new facilities to house more advanced production equipment.
Similarly, distribution centers can utilize robotics and internet of things (IoT) technology to reduce their dependence on labor. In addition, these companies and others are relying more on data centers for data storage and data which drives the demand for new data centers.
Conversely, the call center industry is able to self-service technology, voice recognition, and dialect neutralization technology to offset call volume and geographic constraints. Technology is changing at such a fast rate that is difficult to determine how it will impact location strategies in the future.
The amount of change and disruption in the market is creating many opportunities for companies to optimize their location strategies. To help stay ahead of the trends, Site Selection Group invests in our technology and market intelligence to help both large and small companies. To discuss how we might be able to help you, please reach out to one of our location strategists to assist you.