The great Amazon beauty pageant, in which over 200 cities competed to become the site of the corporation’s second headquarters, spotlighted the role geography plays in a company’s growth plans. Location—especially a region’s quality of life and cost of living—has become an increasingly important factor in a company’s ability to attract and retain talent in a tight labor market.
In some cases, large urban centers are alluring, in spite of their high costs. Amazon proved this with its initial selection of the Crystal City neighborhood near Washington, D.C., and Long Island City outside of New York City. (In mid-February, it announced it was canceling plans to build the New York headquarters.) But increasingly, smaller, less-expensive markets are drawing talent. Some private equity firms have taken note and are using midsize cities to their advantage.
“There is a growing subset [of job candidates] that prefer secondary or tertiary markets because the cost of living and quality of life can be better,” says Keith Giarman, managing partner of the private equity practice at global executive search firm DHR International. He recruits executives for middle-market private equity firms, family offices and pension funds in North America. Some of his most recent searches were for positions in Wichita, Kansas, Salt Lake City, Detroit and Birmingham, Alabama.
LOW COST, HIGH APPEAL
Private equity firms are finding more and more investment opportunities in smaller markets, notes Giarman, which is driving demand for qualified employees. That’s particularly true of software companies, he says, which are emerging in particular niches like logistics or just-in-time manufacturing. Often, they prefer to be closer to their markets and may not require an army of engineers on-site. “These companies don’t have to be in Silicon Valley,” he says.
The high cost of living in large coastal urban centers is starting to strain even healthy budgets. According to a 2017 survey of San Francisco-area residents by the Bay Area Council, a business-backed advocacy group, some 40 percent of all respondents and 46 percent of millennials said they were considering moving because of a lack of affordable housing, growing traffic congestion and generally high living costs. The San Francisco Chronicle reported in late 2018 that the median price of a house in the city is now $1.62 million, double what it was five years ago. Only 18 percent of Bay Area residents can afford that price, according to the article.
In Boston, more than 67 percent of human resources professionals reported that home prices and rental costs affect their ability to recruit qualified candidates, according to a 2017 survey by Northeastern University and the Massachusetts Housing Partnership.
Giarman, who is based in San Francisco, has noticed that people are leaving the Bay Area. He cites Salt Lake City as a city that “is on fire right now,” especially in tech: “It’s really remarkable what’s happened there over the last five years.” Phoenix is another area attracting San Francisco transplants, he notes.
Giarman is seeing reluctance among some job-seekers to move to high-cost areas. One candidate for the CEO spot at a private equity portfolio company in Los Angeles wanted to know early in the process whether the company could pay him a salary high enough to offset the higher living expenses compared with those in Houston, where he was currently living. That differential was estimated at 30 to 40 percent. The candidate wouldn’t proceed with discussions “unless we could assure him right up front that we would be in the ballpark,” Giarman says. The firm couldn’t offer a high enough figure and talks ended.
Like the prospective CEO, many are finding the cost of living in Texas attractive, and that’s fueling a wave of migration into the state. Some 250,000 people are moving out of California each year, and 25 percent of them are going to Texas, says Matt Regan, senior vice president of public policy at the Bay Area Council, citing U.S. census data.
Individuals aren’t the only ones moving. Companies are relocating or expanding to Texas from California and other high-cost states. Their ranks include Toyota, Liberty Mutual and JPMorgan Chase. Tech companies Google, Facebook, Amazon, Dropbox and Oracle have opened offices or facilities in Austin. Apple said in December it was expanding its presence in Austin by building a billion-dollar corporate campus and creating up to 15,000 new jobs. And in November, McKesson Corp., the nation’s largest pharmaceutical distributor, announced it would move its headquarters from San Francisco to Irving, Texas.
Not all private equity firms are seeing a decline in the appeal of urban centers. Jon Lemelman, a partner with Riverside Partners in Boston, says the firm has no trouble hiring employees there. It often recruits from investment banking training programs and business schools. Because candidates tend to be young and single, they aren’t as concerned with costs of living. They want and expect to relocate to a big city, because that’s where the best jobs are, he says. “They have generally narrowed it down to Boston or New York City.”
As for hiring for portfolio companies, which are often in smaller metropolitan areas, Riverside often finds executive talent in major cities, and it can be a challenge convincing them to uproot their family and relocate to a smaller city, he says. “The cost of living for these people is less of a concern.”
WHAT’S OLD IS NEW AGAIN
Many older industrial cities have refurbished and reinvigorated their downtowns to become more attractive to businesses and job seekers. Detroit experienced a large influx of educated young adults: The 60 percent increase from 2012 to 2016 was the biggest gain in the country, according to City Observatory, a think tank. Detroit was followed by Hartford, Connecticut, which had a 58 percent increase, and Orlando, Florida, with an increase of 56 percent.
Detroit’s revival has been led by high-net-worth individuals as well as community development groups with deep-pocketed corporate members. Dan Gilbert, founder of Quicken Loans, moved his company’s headquarters to Detroit in 2010 and has invested billions in downtown properties. (Among his many businesses is private equity firm Rockbridge Growth Equity.) Former Microsoft CEO and Detroit native Steve Ballmer is giving millions of dollars in grants to various nonprofits in the city.
But Detroit’s appeal isn’t based solely on lower costs, says Dan Ellis, a director at Townsend Search Group, which recruits executives for midmarket private equity firms and their portfolio companies, with a specialty in finance and accounting. Its culture and the new job opportunities add to the city’s attractiveness. Detroit has Midwestern character, which appeals to people who grew up in the middle of the country, Ellis says. The pace can be less hectic, the commutes more convenient, and the work-life balance more sane.
As for opportunity, Detroit lost a lot of talent during the years following the financial crisis. (The city filed for bankruptcy in 2013.) As a result, demand for qualified employees has outstripped supply. That means there are plum jobs for so-called “up and comers”—job-seekers who in the past may have been considered too young for an executive position like CFO. Ellis looks for such people, who may be in their late 30s or early 40s with solid experience and good track records. “If you’re a millennial and you stayed in Detroit and rode it out, you’re in a really good position now,” he says.
For Detroit natives who have since moved away, Ellis conducts research to find their ties to the city and then reaches out to say, “Hey, how would you like to come home?”
Family often becomes more important as millennials marry and settle down, and that can be a draw for young professionals. “Maybe they just had their first child, and the grandparents are in Detroit,” he says.
Often candidates are excited about the resurgence of the city. “To be a part of that—it’s almost a different aspect of fulfillment,” Ellis adds. “It’s about being a part of something that’s bigger than yourself.”