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Sunday, Jun 26, 2022

Valley Exodus Heads to Texas

The list of companies leaving the Valley is long. In the few years, home-selling company Rex, staffing company ASGN Inc., chocolatier Nestle USA and aerospace manufacturer Incora have exited to either Texas or Virginia.

But the fact that corporate giants outside the Valley – including L.A.-based CBRE Group, Tesla and Oracle Corp.

– have also left California for Texas points to a statewide relocation trend.Additionally, securities brokerage Charles Schwab Corp. left San Francisco for Texas and medical supplier McKesson Corp.

headed to Dallas last year.“A lower cost of living is driving businesses out of state,” said Associate Professor of Economics Kirk Lesh at Thousand Oaks-based California Lutheran University. “California is not the most business-friendly state. It’s cheaper and easier to do business in Texas.”Even though digital real estate brokerage Rex still maintains its Woodland Hills offices at 21550 Oxnard St., its corporate heart now beats in Austin, Texas as of 2019. Last September, Incora, the aerospace parts company formerly known as Wesco Aircraft Holdings, announced the relocation of its corporate headquarters from Valencia to Fort Worth.Meanwhile, ASGN recently relocated to Virginia, where Nestle USA also moved in 2018 after a high-profile vacating of its 15 stories — a collective 518,000 square feet — at 800 N. Brand in Glendale. Only recently have ServiceTitan and Children’s Hospital Los Angeles assumed some of those floors.Last September, conservative media outlet The Daily Wire announced that it would relocate from Sherman Oaks to Nashville. For a story in Deadline, co-founder Jeremy Boreing credited a “declining quality of life in the city,” particularly high taxes and housing costs in addition to left-skewing political leadership, as reasons for the move. He said management considered Texas before settling on Nashville,and said about 80 percent of its employees would join the exodus.Business climate changeLesh at Cal Lutheran suggested that companies want to mess with Texas when it comes to setting up a corporate headquarters because the Lone Star State offers less regulation and less red tape. “Texas is more favorable to businesses than California,” Lesh said. “This is a trend that has been happening for quite some time. It certainly picked up in the last couple of months.”Once a paradise for startups and established corporations alike, California has seen a number of factors drive companies to reconsider where to plant their flagships.The main factors driving companies out of California to states such as Texas can be boiled down to a trifecta of cost prohibitive conditions: high tax rates, strict regulations and housing costs and limitations. States such as Texas or Virginia offer lower costs of living and more favorable tax laws.When CBRE, which has a major presence in Glendale, announced last October that it was relocating its main offices from downtown Los Angeles to Dallas, it signaled a major move for the brokerage giant, which has a history in California that reaches back more than a century.

Lew Horne, regional president of CBRE Pacific Southwest, said in a statement, “Designating Dallas as CBRE’s global corporate headquarters formalizes how our company has been operating for the past eight years. We have more than 5,000 employees in California and only an extremely small number of operations-related roles are expected to migrate over time to Dallas.”Hostile to manufacturingWhile the coronavirus pandemic may have pushed companies to make a relocation decision, the factors behind those decisions have been decades in the making.“Personal income taxes and business taxes have been a big motivating factor for California businesses to move to Texas for 20 years,” said USC Price School of Public Policy Associate Professor of Real Estate John Loper.However, when Hewlett-Packard announced last December that it was going to relocate its headquarters from San Jose to Houston, that was a chilling symbolic gesture, according to Lesh.“In my mind, Hewlett-Packard founded Silicon Valley. And they’re leaving?” he asked. “That’s not good. They shouldn’t move from California, it’s their home.”While the details may differ for each company, California’s heavy-handed regulations are the common denominator in many moves.When Tesla Chief Executive Elon Musk moved his operations from the Golden State to Texas, he said the reason was because California local governments denied his intention to reopen his factory in Fremont during the pandemic.“California has been winning for too long,” Musk said at a Wall Street Journal viral event in December. “If a team is winning for too long, they tend to get complacent.”“I was surprised a few years ago that Musk chose Fremont for his car manufacturing plant,” Lesh said. “We’re hostile (in California) to manufacturing basically for environmental reasons.”  In a research study, consulting firm Spectrum Location Solutions found 660 California companies moved 765 facilities out of state in 2018 and 2019. Tech giants such as Dell and Advanced Micro Devices already have a presence in Austin, which has earned the nickname Silicon Hills.  In 2017, biotech giant Amgen Inc. relocated divisions of its workforce from its headquarters in Thousands Oaks to Tampa, Fla.According to California Lutheran University economist Matthew Fienup, the company cited the “affordable cost of living” in Florida as one reason for the move.Venture capital entity 8VC leader Joe Lonsdale explained to the Austin American Statesman last November why his firm moved there from Silicon Valley.“It’s just become really obvious that there are a lot of places to build around the country, not just Silicon Valley, due to cost of living, talent and all sorts of other things,” Lonsdale said.

Observed Loper: “It’s a tax thing but it’s also an ability to pay less wages. For a new employee, they can hire them for a lower wage; for an existing employee they get 50 percent more house.”Lesh observed that the California’s response to its homegrown gig economy has been less than business-friendly.“San Francisco outlawed (local company) AirBNB in the pandemic,” Lesh said. “It’s a bad idea to shut down a company in your own city. Second, you’re letting hotels stay open.”Also, the state tried to unionize Uber and Lyft with the 2019 passage of AB5, which required that their drivers be classified as employees, not independent contractors.“These moves are alienating,” Lesh said.

Lesh and Loper said that the pandemic year has only emboldened the trend.“COVID is accelerating the move out of California,” Loper said. “(Living in San Francisco and Los Angeles) is less desirable now. All the restaurants are closed, the nightclubs are closed.”As USC’s Loper pointed out, homeowners in markets outside of California can get more bang for their buck.“In North Texas, I can buy a home that has a fourth and fifth bedroom,” he said. “I know a lot of executives who have a lot of homes in multiple cities and they are not in Southern California.”Besides Texas, Arizona, Utah, Nevada, the Raleigh-Durham-Chapel Hill triangle in North Carolina and Florida have siphoned off companies from California, Loper said.Cal Lutheran’s Lesh believes that more companies will bolt from California in 2021, and moving beyond the pandemic, he foresees a new world that may be a hybrid of what preceded the outbreak and where society is now.“Change is here,” he said. “More people are working from home. The world is not going to look the same after COVID. … There are lots of unanswered questions.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.

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