The Great Reshuffling

How Covid changes everything about where America does business. And doesn't.

Ford Motor spent more than a century expanding operations throughout metro Detroit. Now, in the wake of Covid-19, new CEO Jim Farley and Executive Chairman Bill Ford are accelerating a planned consolidation of Ford’s facilities in the region, as the company holds off bringing its salaried people back to the office until July and reconfigures their workspaces.

But, at the same time, Ford’s leaders just recommitted the company to completing a new, $750 million technology complex in downtown Detroit that assumes digitally talented millennials and Gen Z-ers will flock to work cheek-by-jowl on a hip new campus centered around the renovated Michigan Central train station, beginning in 2022—just two years removed from the pandemic.

“We still think there will be a need to come together safely to collaborate, strategize and do innovative work,” says Carolina Pluszczynski, development director for Ford’s project. “Workers are increasingly demanding choice, so employers need to find ways to make the workplace a destination rather than a container for people. They need to give people reasons to come into the office, and we think Michigan Central will be such a destination.”

Such dilemmas have become front-and-center for CEOs these days, part of a tectonic and still-unfolding geographic reset of business across the country and around the world in the wake of the pandemic. Company leaders are grappling with a number of crucial questions that will determine where a substantial amount of American economic activity occurs for decades to come.

These challenges include: When and how will leisure activities like tourism and spectator sports snap back? What will it mean to “work in the office”? Should CEOs site more operations away from congested cities? Nearer? Are capital investments going to trickle away from the coasts and more into the middle of the country? And should they really decouple supply chains from China?

The fates of companies are being radically bifurcated by what business they’re in and where they’re located. CEOs are dealing with not just a tale of two cities but a tale of two universes, and the commercial real estate market reflects this disparity. “I’ve never seen such a separation between haves and have-nots,” says Walt Rakowich, who is on the board of Host Hotels, the world’s largest hospitality chain, and led a multi-billion-dollar turnaround of Prologis, a San Francisco-based REIT that invested in logistics facilities after the Great Recession. “The haves are data and distribution-driven real estate, such as warehouses and data centers—as well as residential houses. The have-nots include leisure-driven real estate such as hotels and offices. They’re moving in two different directions.”

Differing outcomes by geography are illustrated by Big Tech. Even as the tattered business reputation of downtown Seattle reinforces Amazon’s 2019 decision to back away from one of the biggest office-space leases in the city’s history, for instance, the ecommerce giant has been plowing ahead with construction of its new “HQ2” in Arlington, Virginia. While Amazon prepares to break ground and buys a Radisson Hotel in the vicinity for $150 million just to get it out of the way, Virginia’s colleges and universities are executing pre-Covid plans to double the number of technology engineers they graduate over the next decade.

“Amazon is moving pretty briskly,” says Victor Hoskins, CEO of the Fairfax County Economic Development Authority in Virginia. “Covid may have even accelerated their plans.”

Adding to their stress is that CEOs can decide issues about the future geography of their companies in widely disparate ways—all of which can all be considered logical at the moment, based on their assumptions about the future. Consider the radically different views from players and experts about the post-pandemic fate of America’s largest cities.

“The fact is it’s going to be harder to get people to come to work downtown,” says Wendell Cox, head of Demographia, an urban-policy consultancy in St. Louis. “The exodus to the suburbs was started by Covid, but who knows how much it’s being driven by other things. The majority of households in this country are very concerned about security.”

But Sam Zell, who keeps coming to his downtown high-rise office overlooking the Chicago River every day, calls Cox’s way of thinking poppycock. “We are social animals,” says Zell, a legend in REITs and head of Equity Group Investments in Chicago. “Urban cores are created for our proximity to one another—for mating purposes, for stimulation, for all the things that human beings are all about. I just don’t imagine in a post-Covid world that we’re going to be spread out and all unconnected.”

Here are the key tensions in the geographic rebalancing of business, their implications for companies and what some CEOs are doing about them:

Leisure vs. Work Activities

Entire industries are crumbling under pandemic lockdowns. “The pandemic is going to wipe out a lot of really good people who own campus housing properties, apartment buildings, retail and hotels—they’re going to lose their buildings,” says Mike Tingus, president of Lee & Associates, a commercial real estate brokerage in the San Fernando Valley of California. “Legislative adoption of no evictions for renters is really tough. The chances of them making up four to six months of rent in the next 12 months are virtually impossible. So, it’s only putting off the inevitable.”

Host is fine, with “the best balance sheet of any hotel owner in the business,” Rakowich attests. “But less-capitalized companies are going to have some problems. It’s about the ability to sustain a downturn from a capital perspective, how much leverage is on your balance sheet and where you’re profiting from it.”

At the same time, Rakowich says, “in the short run there are likely to be opportunities to buy certain real estate, perhaps at reduced values, from the have-nots. And longer term, there will still be the need for quality hotels, office buildings and retail centers. People still like interacting with each other and getting out. We’ll still travel. We’ll get back to some semblance of what we had, and when we do, we’ll see resurgence in those areas.”

Offices vs. Remote Work

Siemens USA spent several years building a strong “virtual culture” that came in handy during the pandemic, says President Barbara Humpton. These technology-based capabilities—ranging from digital simulation of entire factories to IoT systems that help clients customize space usage—provide a real leg up for the global industrial giant.

But Humpton also says, “One thing missing is networking and meeting new people and new customers. You have to work really hard through digital interfaces to build new relationships. There’s a magic to person-to-person that we can’t replace. And you need that to build your culture.”

Other CEOs also are reckoning with the future of offices—places where many of them invested heavily over the past several years to attract and retain millennial workers who deemed workplace culture as crucial. Remote work forced by the pandemic succeeded for many companies “because the technology tools were better than expected, and productivity didn’t take a significant hit,” says Larry Gigerich, head of the Ginovus economic-development consultancy in Fishers, Indiana.

But now, notes Jay Garner, head of the Site Selectors Guild of consultants, “we’re hearing CEOs say that creativity and innovation wane as a result of not working in groups, especially for millennials and GenZ-ers, who like socialization and miss the ‘creative collision.’” So, handicappers predict that post-pandemic re-occupation of offices eventually could reach 80 to 90 percent of pre-Covid levels, but no one is sure.

Hunt Military Communities CEO John Ehle believes “the novelty of working remotely wore out around July.” The head of the largest U.S. military-housing owner, based in El Paso, Texas, adds, “People are starting to miss their routines, and the separation between work and home, and work with colleagues. They’ve spent way too much time on video conferences and phone calls.”

Pat Wilson, commissioner of the Georgia Department of Economic Development, sees many CEOs agreeing. “So many ideas are shared in interactions in the office, having that day-to-day personal contact makes a difference,” he says. “The original thought of massive empty buildings isn’t going to come to pass. You’ll see a blend.” In fact, says Jon Cesaretti, a principal at Crowe Horwath consultants in Chicago, CEOs “are not walking away from offices but repositioning them. They may be taking a big office and chopping it up into three or four smaller offices.”

Thus, various “hybrid” solutions are emerging to the problem of the office and will become the new normal. Waste Management CEO Jim Fish, for example, was concerned about having to shoehorn the company’s 1,100 employees into the company’s new headquarters building in downtown Houston, which was scheduled to open by early 2021, leaving little room for growth even though it’s a spanking-new structure. Now his goal is up to 900 people.

“Now, that concern has gone away with Covid,” Fish says. “We segregated our office employees into three categories even before Covid, and now we have put a lot more in a ‘hybrid’ category, especially tech folks. But the people who will be there will still need a workspace, so it may be similar to what you see at a consulting firm where people are traveling a lot and have more shared versus personalized space.”

Cities vs. Suburbs

An anti-urban narrative for some CEOs has firmed up thanks to the pandemic, summer riots in some large U.S. cities and school closings. It stipulates that millennials with young children are fleeing city cores, facilitated by remote work. “Suburbs and exurbs have become very attractive to them for quality schools and quality of life that they’re not finding in the urban core,” Gigerich says. “Also, they can be in places where they don’t have to take public transportation if they don’t want to.”

Adds demographer Joel Kotkin, “Middle-class people will live in cities and even have kids there and then raise them until about the age of five. But once they need more space and want to send them to school, they’ll move out to the suburbs. Most of the cities where there has been trouble are controlled by regimes that are against charter schools. Education reform simply won’t take place in those areas. Most growth now will be in smaller cities and suburbs.”

Meanwhile, city cores such as Manhattan and the Loop area of Chicago will “keep young people who are less concerned about the pandemic and think that the homeless are local color,” Kotkin says. “They aren’t worried about screaming crazy people on the streets, and they’re going to see this as an opportunity. Artists and certain upper classes without kids will stay. But cities simply can’t be centers of corporate activity the way they were in the 1950s or 1960s or the way that things were being imagined until now.”

Yet, others argue for a scenario far more favorable to the restoration of cities. “We’re at the extreme of the exodus,” says Peter Jackson, CEO of Bluescape, a visual-collaboration software provider based in San Carlos, California. “Places in the mountains or on the beach are going up in value by 30 percent to 100 percent. But these were knee-jerk reactions. And with vaccines, I wouldn’t be surprised to see those markets deteriorate by half of that percentage increase or more by late next year. ‘I really wanted to put my kid in this high school to play this sport,’ and so on.”

Zell, who several years ago famously predicted the end of the American suburb, allows as how, “as a result of Covid, all of the empty houses in Lake Forest” in suburban Chicago “have been repopulated. But I don’t think we’re seeing an exit of population or an exit of activity from central cores. The magnet of urban areas isn’t being permanently changed. What’s going on is that the people who represent the core of that don’t have the same kind of connection to the city that previous generations had.”

In any event, some effects of the pandemic pounding of big cities are clear. Downtown real estate will see devastating effects “as leases come up for expiration and then companies want less space,” Gigerich says. Shared-office space is also in serious oversupply.

On the flip side, Zell says, “the hottest form of real estate in cities is probably industrial distribution” as ecommerce delivery proliferates. “Simple rectangular buildings are easy to create, so in the next few years we’re likely to see a significant oversupply.” And in the food business, the pandemic is leading to the establishment of more third-party, cold-storage space within striking distance of urban areas, as well as “ghost kitchens” that are putting together meals for pickup and delivery, bystepping traditional restaurant kitchens, says Scott Kupperman, head of Kupperman Location Solutions in Lake Forest, Illinois.

Coasts vs. the Interior

The middle of the country clearly has been gaining on the coasts in the midst of the pandemic, aided by the technological dispersion of white-collar work and heartland attractions, including lower costs of doing business, less expensive housing, reasonable taxes, strong schools and underrated quality of life.

“Large heartland metropolitan areas like Nashville, Austin, Detroit, San Antonio, Grand Rapids and Dallas-Fort Worth are all gaining educated millennials far more rapidly than coastal ‘magnets’ like New York, Los Angeles or even the Bay Area,” Kotkin says.

What’s more, a post-Covid “rubber-bander” phenomenon is snapping more young workers back to their birthplaces. “People will say, ‘I can go live in the Rockies or near my mother in Mankato, Minnesota—or just about anywhere if you’re valuable enough to your company,” says Cox. “It’s a much broader reset than ever.”

By January, in fact, three major companies—Tesla, HP Enterprise and Oracle—said they would spurn California to move their headquarters to Texas, where Chief Executive consistently has found America’s best business climate. First Databank, for example, “accelerated” its move of jobs from its headquarters in South San Francisco to satellite offices in Indiana and North Carolina. “They’ll see a little more growth over time, though I wouldn’t say it’s being driven by the pandemic in a major way,” says Bob Katter, president of the publisher of drug-information software. California is a “more expensive place to do business, ” but there’s “tremendous talent there. So we’re trying to strike a balance.”

Meanwhile, as Antoine van Agtmael and Fred Bakker argue in the book, The Smartest Places on Earth: Why Rustbelts Are the Emerging Hotspots of Global Innovation, the Midwest already has become an epicenter of a growing interface between manufacturing and technology, where a legacy of industrial expertise is fertilizing growth in technologies ranging from self-driving cars to digital agriculture.

Flyover-country business legacies also are benefiting companies like Clearcover. The Chicago-based startup provides online car insurance and employs about 150 tech workers in downtown Chicago. Why not design Clearcover’s ecommerce capabilities in Boston, New York, San Francisco or Seattle? One key is that much of the traditional insurance industry grew up and still resides in Chicagoland. “We went through an analysis and tried to find the best overlap between a market where we could find world-class tech talent, great insurance talent and where we could raise a lot of capital,” says CEO Kyle Nakatsuji. “It boiled down to Chicago and the coasts, and Chicago won on better access to all the insurance talent from Allstate, State Farm, Kemper, Aon and other insurance companies here.”

Still, many doubt that economic shifts from dominant coastal nodes will be extensive. “Whether it’s Hollywood for entertainment, Hartford for Insurance, Silicon Valley for tech or New York for financial services, you will find that for another city to develop the capabilities to support these industries from nothing is a lengthy and difficult process,” says Antonio Argibay, founder and managing principal of Meridian Design Associates, an architecture and design firm with offices in Miami and New York City.

The fate of New York is perhaps the biggest issue in this arena. “It’s too early to tell” whether there might be a permanent aversion to the Big Apple by CEOs and their employees, Cesaretti says. But he believes apocalyptic scenarios will be proven wrong. “New York has seen much worse. In the ‘70s and ‘80s, New York was a disaster, and it came back. I have a hard time believing it will be abandoned now.”

William Sankey lodges a firm vote of confidence in his hometown. “We continue to see professionals—even people we hire in other markets—still have a desire not only to come back to the office but to move to New York,” says the CEO of Northspyre, which produces software for running real-estate projects from its headquarters in Brooklyn and elsewhere. “That speaks volumes about how modern workers feel about wanting to work together in a creative environment in cities.”

Foreign Sourcing vs. Reshoring

Many CEOs are rethinking their manufacturing supply chains in the wake of pandemic disruptions and considering rising American political sentiment against China. “We’re moving forward three to four years in just a few months,” Cesaretti says. “Manufacturers in the Midwest are getting very large contracts to do various things that used to be done outside the country.”

Michigan is poised to take advantage, promoting the state as “a software hotbed, where software development can converge with our business-friendly climate and high concentration of engineers to create many industries of the future,” says Josh Hundt, chief business development officer for the Michigan Economic Development Corporation. Mark Burton, the group’s CEO, adds that the state also sees a great opportunity “in re-shoring or on-shoring, given our strengths in manufacturing and advanced manufacturing.”

Consider Arizona, too. Taiwan Semiconductor Manufacturing, the world’s largest contract maker of silicon chips for iPhones and other devices, announced last summer it intends to build a major plant near Phoenix that could involve total spending of $12 billion and create more than 1,600 jobs. “It’s a very big deal if someone really is taking the plunge to go to a place where there is no other manufacturer of microchips,” Cesaretti says. “Other players in the industry are going to think that’s a big deal too. And suppliers are all going to locate nearby.”

A bipartisan movement also has begun in Washington, D.C., for the federal government to consider subsidizing U.S. construction of microchip factories as Asian and European governments have done. “But with all the Democrats in Washington, it will be a challenge to make sure those dollars don’t all get allocated to coastal locations,” Gigerich says. “If you’re going to get into that game as the federal government, you’ve got to do it correctly.”

Arizona: Adjusting to Game Changers

Sun Corridor has been keeping its powder dry for a major economic-development opportunity, and that opportunity is now for the public-private agency that serves as a chamber of commerce for the Tucson area.

In the wake of the pandemic, the agency is “doubling down on our efforts. We decided now wasn’t the time to sit back,” says Sun Corridor President and CEO Joe Snell. “We increased our spending and dipped into reserves we had set aside, increasing our outreach to companies and site selectors with our marketing message.”

Sun Corridor also performed a “gap analysis of what happens post-pandemic and what we need to shore up to win” new jobs, Snell says. Now the group is considering ways to grant financial credits to businesses that meet thresholds for numbers of remote workers in the Tucson area. “We’re also looking at whether we can provide day-care centers in different parts of our area.”

Snell also is looking at Sun Corridor’s attributes from different angles now, such as in logistics. In a new season of drastically reduced air travel, “being a mid-sized city and not having a top-10 airport isn’t as important as it was before,” he says. At the same time, Tucson is seeking to take advantage of the shakeup in American manufacturers’ sourcing in China, offering its close proximity and strong rail links to Mexico as an advantage.

“To companies that were doing business in China before, we’re saying, ‘Let’s get closer,’” Snell says. “Do your IP in Tucson and your manufacturing in Mexico.”

Sun Corridor’s efforts already are panning out: As 2020 closed, its pipeline of qualified companies that are looking to relocate surged over the previous year, Snell says.

Webasto: Welcoming a Hybrid Future

Several years ago, Webasto Roof Systems made a concerted effort to overhaul a corporate culture that had become a lifeless, stale drag on productivity and overall results. Chiefs of the U.S. arm of a big German auto supplier hired consultants, launched a website about culture and conducted a three-day, all-hands conference at a casino in downtown Detroit to jump-start the transformation and create kumbayah moments.

“What has been done previously is clear and in front of us and a great achievement and starting point,” says Giuseppe Barile, the operation’s new CEO. “We are one team. The challenge we face is to keep it and improve it.”

Indeed now, Barile is trying to ensure Webasto’s model new workplace culture survives the Covid-19 remote-work paradigm. What’s more, he’s got to do so while honchoing the company’s move from its current headquarters building in Rochester Hills, Michigan—the site of the white-collar part of the cultural transformation—to a $40 million facility that is being refurbished to serve as Webasto’s new headquarters for a growing workforce in another suburb, Auburn Hills, several miles away.

“The ‘one team’ concept depends on socialization of our people,” Barile says. “So now, we have to envision a new way of working together in the new building. Do we somehow go back to the office or not?”

Barile decided to reconfigure the new headquarters to support a hybrid operations model with some Webasto employees staying home and others of the 400-strong workforce being assigned to the building, with flexibility for all. This will include a “hotelization” in which workers will digitally book desk spaces in a facility that will include fewer desks than employees.

“Somehow the office will be populated,” Barile says. “People can decide if they work from home or the office, but the office is a melting pot for our values and an important place for socialization and recognition that you are with Webasto and our values.”