Consumer Behaviour,Corporate Governance

Decoding property booms following corporate relocations

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A recent study uncovered the spillover effect of business migration on skyrocketing housing prices and cascading impacts on neighbouring districts, while revealing the formula for growth

By Putro Harnowo, Senior Content Manager, China Business Knowledge @ CUHK

“Location, location, location,” one of the most chanted slogans among real estate players, holds the key to unlocking the value of any property. A prime site can make all the difference, driving up asset values and drawing in a crowd of eager buyers. But what happens when the location itself undergoes a significant transformation? This is the scenario that unfolds when company headquarters relocate.

A major corporate entity’s move brings with it many potential benefits and challenges. When Amazon announced its plan in 2018 to establish a second headquarters in the heart of Arlington County, Virginia, just south of the bustling US capital, it didn’t take long for the Amazon effect to drive property values. Within a year after the announcement, local housing prices had risen by 33 per cent.

The e-commerce behemoth is not the only one. Apple’s headquarters relocation in 2017 has also caused a property boom surrounding Apple Park in California. As companies continue to seek new opportunities and expand their operations, the ripple effects of their headquarters’ relocations are inevitable. In Asia, global firms like Phillips, FedEx, and Dyson have also moved their head offices, which may impact local economies and increase in demand for property markets.

property-booms
Headquarters relocation significantly impacts housing prices by moving employees, creating multiplier effects in nearby areas.

“Firms could be choosing nice locations with good attributes, such as amenities, transport, government subsidy, to relocate their headquarters, which are coincidental with housing price increases,” says Desmond Tsang, Associate Professor of Real Estate at the School of Hotel and Tourism Management at the Chinese University of Hong Kong (CUHK) Business School.

Nevertheless, property booms that follow company relocations are a fascinating phenomenon in the business world. In a new study titled Corporate relocation and housing market spillover, Professor Tsang, alongside his colleague Maggie Hu, an Assistant Professor of Real Estate in the same department, in collaboration with Wayne Xinwei Wan of Monash University, investigated further the complexities behind such occurrences.

“Our study shows that headquarters relocation has brought a real impact on housing prices through relocation of employees, a multiplier effect of nearby business and retail establishments, and agglomeration and synergy of similar firms being located close to each other, even after controlling for various factors,” says Professor Tsang.

Specifically, the study found that headquarters relocation resulted in a 10 per cent increase in local housing prices, with the effect starting one year before the relocation and continuing to increase for up to two years afterwards. The strongest effect is observed within a 15-mile radius of the new head offices.

Headquarter moves and housing grooves

Headquarters relocation is unique compared to other offices or plants relocation due to its role as a central hub for top-level executives and highly skilled employees. As a result, this event involves bringing in a significant number of skilled workers to the new location and prestige to new locations, which attracts other businesses to the area.

“We see headquarters relocation is more influential because it brings in skilled labour,” says Professor Tsang. “For instance, in one of our analyses, we show the impact of corporate relocation is greater for high-priced homes compared to low-priced homes.”

Relocation announcements are often made well in advance. After analysing 16,191 corporate headquarters relocations in the US from 1994 to 2017 and their impacts on the local housing market, the researchers found that, in a more refined sample of relocation announcements, housing prices in the district where the relocation took place increased significantly soon after the announcements were made.

“We see headquarters relocation is more influential because it brings in skilled labour. For instance, in one of our analyses, we show the impact of corporate relocation is greater for high-priced homes compared to low-priced homes.”

Professor Desmond Tsang

The overall analysis revealed that housing prices increased by 0.35 per cent in the year of headquarters relocation. This translates to a substantial impact, resulting in approximately 10 per cent higher housing price growth compared to districts without a corporate headquarters relocation, based on an average annual house price growth of 3.5 per cent.

The study also found around 0.29 per cent increase in local housing prices in the year before the relocations, indicating the expected impact of the impending move. The prices then rose by 0.34 per cent in the year following the relocations and an additional 0.23 per cent increase after two years of relocations. This cumulative effect translates to 40 per cent higher growth in housing prices in districts with corporate relocations compared to those without.

The impact on the local housing market is observed to be the strongest when the headquarters move from far locations. This effect appears less significant for relocations within the same state or city, suggesting that the effect is limited if the company only moves to a nearby area without requiring its employees to move or change vendors.

property-booms
Real estate professionals should consider corporate spatial decisions when forecasting housing market fluctuations.

The benefits of the relocation also extend beyond the immediate district, leading to increased housing demand and higher prices in neighbouring areas. The researchers discovered that the positive spillover effect reaches districts within a five-mile radius of the new headquarters, which experienced a significant growth rate that is 19.6 per cent higher than districts without corporate relocation nearby. This impact remains significant up to 15 miles away and diminishes with distance.

Although the study did not look into specific types of neighbourhoods that are more susceptible to these effects, Professor Tsang sees that the extent of influence of the spillover effect would be geographically greater for rural areas, due to the ease of transportation to larger areas.

“We do find neighbourhoods with similar firms already there would see bigger effects of corporate relocation, due to the agglomeration and synergy effect of similar firms,” says Professor Tsang.

Rising costs, dwindling options

The agglomeration effect was found to spread beyond the industry to the local economy, as firms located close to each other benefit from the available talent and knowledge that helps the local economy grow. Additionally, some businesses not only bring more spending but also help other businesses come together and grow in the same area.

For real estate industry practitioners, the study implies that the local housing market could have large fluctuations due to the intertwined relationship between corporate entry and residential real estate prices. Therefore, housing market forecasts should take corporate spatial decisions into consideration for real estate valuation.

While the housing boom resulting from corporate relocations could positively impact existing homeowners, Professor Tsang and the team note that it may also reduce housing affordability and pose greater challenges for renters and first-time buyers. City and state policymakers must carefully weigh the potential benefits against the distributional effects associated with corporate relocations.

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Furthermore, Professor Tsang elaborates on finding a balance between the benefits of corporate relocation, such as increased economic activity, with the negative effects on housing affordability and economic welfare. “I think this is an open question that is subject to future research work,” he says.

“Attracting headquarters would be more essential for up-and-coming neighbourhoods where housing is still affordable,” Professor Tsang adds. “Once cities have flourished and fully developed, the concern about housing affordability could outweigh its economic benefits.”