First the good news about corporate site selection: The Great Recession has neither killed it nor put it on life support. Two years after the official start of the longest and most geographically comprehensive economic downturn since the 1930s, many if not all location advisors claim to be busy. Some say their levels of activity are more intense than ever, as they log eight-hour conference calls and enough frequent flyer miles to go the moon.

But even with what appears to be a stabilized financial system and an uptick in investor confidence neither these consultants nor the economic development professionals who compete for their attention are breaking out the champagne anytime soon. Corporate expansions have been replaced by corporate contractions, with the resulting consolidations likely to produce a few winners but more losers for some time to come.

Even with that, financing is an issue, and for that reason among others even the companies that are loading the gun are taking a longer time to pull the trigger. The pressure on cash-strapped states and cities to put cash on the barrelhead to keep what they have — let alone expand — is greater than ever.  Beyond incentives, contending communities are coming under ever more careful scrutiny. A surplus of workers is no longer much of a competitive advantage, although an abundance of qualified labor remains a big plus.

Green shoots? They can be found in green energy, with many consultants saying their siting assignments for wind, solar and other renewable energy projects is taking up a large percentage of their time.

Those were the big takeaways from a canvassing of corporate location advisors and real estate executives I conducted by e-mail, phone and in person in September and October. Some two dozen of these professionals — some busier these days than others — responded to the open-ended query, “how the recession has changed the site selection process in ways that are likely to prevail for the foreseeable future?” 

Consolidation — And Even Then, Caution

“There has been hesitancy by companies to ‘green light' projects quickly, which was not always the case,” says Kathy Mussio, managing partner at New Jersey-based Atlas Insight LLC.  “There has been an overall wait-and-see attitude, not simply because companies are more cognizant of their bottom lines, but also because they want to wait and see what is going to happen with the economy.”

Dennis Donovan, of WDG Consulting reports “virtually no manufacturing location activity including much needed consolidation of some companies, the latter because of capital scarcity.” In sectors such as financial services, Donovan sees more activity, but it's in consolidation, quite a change from the years after 9/11 when dispersal and “redundancy” were the orders of the day.

Even when companies start expanding again, says Art Wegfahrt, corporate managing director of Studley, they will avoid the big-ticket moves. “Companies will remain cautious about long term commitments — shorter term projects, i.e., back office or distribution will start up again; while companies will be cautious about longer term commitments, i.e., large headquarters or major manufacturing,” he says.

John Oler, president of the New York City-based real estate consultancy JSBO Realty & Capital Inc. sees firms “maximizing use/utility of existing facilities and co-locating with other divisions.” And even there he sees “no frills/adornments to the facility.”

Companies are “looking at exit strategies for manufacturing plants they might have to close,” and “trying to design multi-purpose buildings rather than special-purpose” ones, adds veteran consultant Bob Goforth.

The consolidation trend was reinforced by other consultants ranging from Peter Brooks, executive director of TAS Transaction Real Estate for Ernst & Young and Tracey Hyatt Bosman, director of the Strategic Consulting Group for Grubb & Ellis, to Jerry Szatan of Szatan & Associates and Michelle Cammarata, vice president of Workforce and Location Planning for CresaPartners.

“Company motivation has changed,” Szatan says. “There are fewer site searches stemming from expansion and need for added capacity. More location analysis stemming from consolidation; sometimes because of overcapacity and sometimes stemming from goal of greater effectiveness and/or lower costs. I think that this will continue for the next two to three years. Consolidation analysis and issues are different than issues in a search for a new location.”

“The trend toward consolidation is likely to continue as companies continue to look for ways to do more with less,” says Cammarata. “Clients will continue to evaluate their existing portfolios to identify high performing and low performing operations and move jobs and equipment accordingly.”

More Competition = More Scrutiny And Calls For More Cash

“Risk minimization” is the mindset of most companies today, says longtime location advisor Robert Ady, leading to more of an emphasis on “shovel-ready sites, increased incentives, more detailed labor analyses and [proof of] adequacy of future infrastructure.” For communities this will entail a “more detailed evaluation of community and state financial strength, changing demographics, and image/reputation,” Ady adds.

Given the climate and their own situations, companies are demanding more money up-front versus more conventional gimmes such as deferred real estate and corporate income taxes. “Incentives that can change the credit profile of a company for financing needs have a clear advantage,” says Ed McCallum, principal of McCallum Sweeney Consulting.

“Banks and other investors have swung so far to the conservative side that even very credit worthy companies are finding it difficult to raise funds. States that cannot invest in companies are at a disadvantage.”

David Brandon, senior vice president of the Site Selection Group in Dallas, sees “greater than ever concern over minimizing initial capital expenditures,” with the “importance of cash or ‘truly monetizeable' incentives nearly a front end consideration.”

Jim Beatty, a consultant specializing in back office and call center operations, put it more succinctly. “Companies,” he says, “are looking for more deals meaning using OPM — other people's money.”

The challenge for economic developers is that this all comes at a time when they themselves are in a financial vice. “There will be renewed debate about government incentives — governmental budgets are going to be tight for the next three-to-five years and opponents of incentives will utilize this to re-invigorate opposition to grants and tax credits,” Wegfahrt adds.

“Deal closing funds for major projects will be much tighter due to continued strained budgets in all levels of government throughout the world. Availability and cost of significant volumes of capital will continue to be a challenge,” says Mike Mullis, an independent consultant.

Cammarata of CresaPartners predicts that “as this trend toward consolidation continues, you may see states and local governments adjust their business incentives programs to support companies that are investing in and upgrading existing facilities but may not necessarily be adding many new jobs. For example, a client has operations in State A and State B. They plan to close the plant in State A and move the equipment to State B and make some improvements to that plant. They may not be adding many new jobs in the process. States need to be more competitive in a consolidation scenario, and when incentives are strictly focused on job creation, they may lose these opportunities. Some flexible programs include Nebraska's Advantage Program and Kentucky's recently enacted Incentives for a New Kentucky program.”

Workforce And Union “Schizophrenia”

While companies are no longer finding themselves in communities with microscopic unemployment rates, many will continue to struggle to locate those with an abundance of the advanced skills they need.

“Access to qualified workforces will be an issue in several parts of the world where states and/or countries will not have adequate budgets to provide qualified employee training programs, and related funding,” Mullis says.

And when it comes to the current mindset of unions, McCallum says: “The current recession has had a schizophrenic affect on unions. Some see a need to cooperate because management has the upper hand at present — not a bad thing if constructive events occur for both parties. Other unions are digging in their heels and jumping in the trenches. This is causing a divide among the union ranks. More importantly, not knowing what will or could happen in light of the Labor Free Choice Act and the current divide among the union ranks is making companies want a safe harbor more than ever before. Right-to-work states continue to have an advantage.”

Green Energy: A Bright Spot

The one bright spot consultants consistently point to is in the renewable energy sector. “On the plus side a surge of new facilities to produce renewable energy equipment due to both the stimulus and policies for development of clean energy,” Donovan says.

“Clean and renewable energy companies now represent a larger slice of the location selection pie, driven in part by the stimulus package and the focus it has put on this sector,” adds Tracey Hyatt Bosman of Grubb & Ellis, who is also a co-leader of the firm's Clean Energy Practice Group. “There may be winners and losers, but there will be a lot of activity in the coming years.”

“Energy, Energy, Energy — component parts and subassemblies for wind energy, solar, electric vehicles, nuclear plants, transmission, energy storage, etc., are the target markets that make sense for many states,” McCallum says. “Make the parts and ship them to the wind farms, the grid, solar fields, electric grid, is a battle going on as we speak.”

Outlook For The United States: Serious Concerns

Bright spots like green energy aside, at least some of the consultants I queried expressed serious concern about the nation's long-term outlook. One, independent consultant Daniel Malachuk, spoke of a somewhat arcane topic that he says will have significant implications.

“More companies will be looking at how governments with outsized deficits will attack business earnings. More money will need to come from somewhere, so business leaders are planning accordingly, focusing on two principal issues:

1. The United States is becoming one of the world's highest corporate tax locations, so transfer pricing and its regulation is getting increased attention. Already the subject of much demagoguery, accounting for transfer pricing has significant impact on the financial results of U.S.-based companies operating abroad as well as international companies with significant operations in the United States.

2. With federally imposed costs and taxes rising, the marginal impact of state and local taxation — on business leaders as well as businesses — is becoming increasingly significant in business location choices. 2009's economy amplified the fragile fiscal condition of many places, but it has also revealed where the financial fundamentals are stronger. In the United States, the states with the worst fiscal conditions may well get even worse.”

And Ron Pollina, Ph.D, President of Pollina Corporate Real Estate, offered the following from his forth-coming book, Selling Out a Superpower: Myths and Mismanagement Undermining the U.S. Economy:

“Many states now recognize how poorly they were prepared for a major recession. You can't start thinking about buying fire insurance after the fire. Those states that focus on job development in a diversity of manufacturing, R&D, finance and other industries will weather future storms best. This can be accomplished by development of a pro-business environment in such areas as labor relations, education, taxes, regulation and financial assistance.

“In recent decades, the majority of states have done a very poor job of creating pro-business environments (see “Pollina Corporate Top 10 Pro-Business States 2009”). Some states “get it” and were better prepared, but most do not. There isn't enough sugar to sugarcoat what is happening to the nation's long-term prospects. Before the recession started, middle-class incomes were not keeping pace with inflation and there is nothing to indicate that this will changes as we pull out of the recession. The middle class in China, India and Brazil are growing, while in the U.S., the size of our middle class is diminishing.”

“When the economy does turn around, I predict that many of the U.S. companies that cut workers will add them back offshore, where markets are stronger, taxes and labor costs are lower, and governments are more pro-business.”

Rob DeRocker is an economic development consultant based in Tarrytown, N.Y. He is also a member of the Editorial Advisory Board for Business Xpansion Journal. DeRocker can be reached by e-mailing rob.derocker@dc-intl.com.