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"Tier Two" Locations Offer Potential Solution During Tight Labor Markets

In this article written for Site Selection Magazine, BLS & Co. Managing Director Tracey Hyatt Bosman provides insight into the competitiveness of second-tier markets and how tier-two locations offer solutions in tight labor markets. Read more below.

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In the past few years, we've experienced some of the most competitive labor markets in recent history. While wages seem to have finally plateaued, and unemployment rates are edging up, no one is predicting abundant labor in the near future.

According to the U.S. Bureau of Labor Statistics, as of October 2023, the U.S. unemployment rate was 3.9%, compared with an average rate of 5.71% from 1990 through 2022. The St. Louis Fed projects the rate to climb to 4.1% in 2024 and then fall back to 4% by 2026. Neither demographic trends nor immigration numbers are easing the situation. Forbes in November 2023 even warned, "hiring and retaining workers will be a dog-eat-dog, employer-eat-employer effort."

There are a lot of actions companies can take to recruit and retain labor more effectively, including fostering a positive and energetic work environment, enhanced benefits packages, on-site medical care, and daycare support. Companies exploring location options for new or expanding operations can take the additional step of seeking areas where there may be less competition for labor, frequently synonymous with “Tier Two cities."

Some consider Tier Two cities as defined by a certain level of air connectivity, population or overall cost structure; others would point to the largest cities without an NFL team. Whatever the definition, it's the concept that choosing a Tier Two city means going a little off the beaten path in search of less competitive - and potentially less costly-labor market conditions.

Corporate location decisions are not so frequent that one can add everything up and definitively conclude that more or fewer companies are choosing Tier Two locations, particularly after controlling for industry mix and size of project. It's safe to say, however, that tight labor markets, the emergence of a remote workforce, and a staggering number of "megaproject" announcements that will be gobbling up thousands of workers in single locations demand that companies at least consider Tier Two options when planning for a new operation.

Stepping Outside the "Tier One' Norm

This is a frequent conversation with our life sciences clients. 'The life sciences industry is dominated by locations like Boston, San Francisco and Raleigh, North Carolina (Research Triangle). With such fierce competition for talent in these markets, life sciences companies must weigh the benefits of being in the center of the activity against the benefits of tapping into a potentially deeper, broader or even just more stable workforce environment.

The life sciences industry gives us an opportunity to also illustrate how the definition of "Tier Two" will vary by industry. If viewed through the lens of air connectivity or population size, Raleigh would be a Tier Two city. It is, however, undeniably a Tier One location in the life sciences industry.

Eli Lilly recently made the strategic decision to expand operations to Concord, North Carolina, in the suburbs of Charlotte, a city that is among the 25 largest MSAs in the country but not historically known as a life sciences hub. Still within North Carolina's world-class life science training infrastructure, it sits just outside the frenetic competitive pace of the Research Triangle.

Examples of other Tier Two life sciences locations our clients have been considering include Denver/ Boulder, Colorado; Indianapolis, Indiana; Houston, Texas; and Atlanta, Georgia.

Intel's recent selection of Columbus for a mega-sized chip manufacturing location is an example of a tech company choosing a location outside the more traditional tech manufacturing markets of California, Austin Phoenix. 'The company surely anticipates being able to absolutely own the market for chip manufacturing workers in Columbus.

The counterpoint is that there aren't any chip manufacturing workers in Columbus, at least not yet. The area will need to cultivate this workforce. Both Eli Lilly and Intel have the luxury of being "employers of choice," with strong brands that will create a gravitational pull and spur regional growth in the skillsets they require. Furthermore, given the magnitude of their projects and the time required to construct the facilities, there is time to establish and grow a talent pipeline.

Other examples of projects going a bit off the beaten path include aerospace in smaller metros like Huntsville, Alabama; Palm Bay, Florida; Dayton, Ohio; and Colorado Springs, Colorado; and electric vehicle/battery investments in Stanton, Tennessee; Syracuse/Rochester, New York; and Big Rapids (Grand Rapids), Michigan.

Finding the Right Fit

Looking beyond the 25 most populous U. S. metropolitan areas, we find metros like Kansas City, Missouri.; Austin and San Antonio, Texas; Jacksonville, Florida; Charleston, Greenville and Columbia, South Carolina; Winston-Salem and Greensboro, North Carolina; Las Vegas, Nevada; Oklahoma City, Oklahoma; Des Moines, Iowa; Nashville, Knoxville, and Chattanooga, Tennessee; and Omaha, Nebraska, all of which are seeing investment activity. University towns are especially interesting given the continuous stream of new talent into the marketplace. In short, there are a variety of dynamic smaller cities that warrant consideration.

Beyond availability, Tier Two markets potentially also represent material payroll savings, as much as 10-15% (or even more) versus Tier One markets, depending on the type of position and the markets compared. (Other costs are frequently lower, too, including real estate, utilities, and taxes.)

We're not saying that smaller markets are inherently better, less expensive or have unlimited workforces. A smaller labor pool can be just as competitive, even more so, if there aren't enough workers to satisfy the demand of local businesses. Further, sometimes the potential upside isn't worth the risk that comes with being a pioneer, especially if the operation is leading-edge and benefited by being close to R&D hubs. At the same time, the most obvious markets are not necessarily the best markets for a given project.

Today's takeaway is not that companies are abandoning Tier One markets. There are still plenty of investments going into Phoenix, Dallas, Houston, Atlanta, Seattle and the other "NFL. cities." But "Tier Two" doesn't mean second rate. Companies may find the perfect fit for a new operation outside the traditional alternatives.

Tracey Hyatt Bosman, CEcD

Managing Director

Tracey Hyatt Bosman develops and executes incentives and location selection strategies for BLS & Co.'s corporate and institutional clients. She is a certified economic developer with twenty years of professional experience across a wide range of sectors, including data centers, manufacturing, headquarters, back office and contact center operations, and logistics.

Source:
Site Selection Magazine
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