Robert Hess, executive managing director, consulting for Newmark Knight Frank Global Corporate Services in Rosemont, is well known in the corporate real estate world. He is considered a preeminent expert in the field of supply chain strategies, global location strategies and corporate site selection. Mr. Hess has successfully completed over 200 significant projects for Fortune 1000 and Middle Market companies across all asset types, including several large capital investment deployment assignments in Asia, the Americas and EMEA.
Recently, Mark Thomton, editor of Chicago Industrial Properties, sat down with Hess to discuss the corporate real estate market, the state of manufacturing, and how the U.S. can address a lack of confidence in the economy. Here is a portion of their conversation.
CIP: What are some of the major concerns of your corporate clients today?
HESS: The word risk comes to mind right away. There is a lot of pent up demand out there. Organizations want to do something to differentiate, take strategic plans to the next step, and develop new product. There is still a lot of good R&D going on. In terms of commercializing it, that is a challenge right now. There is a lot of cash in corporate entities, but they are holding back. They don’t feel confident that the demand is there. How does that impact real estate? People are holding back. If they do something, it is a small incremental project. It doesn’t create a lot of construction jobs. It’s like molasses.
Companies can move operations. They might decide to move from New York to Texas, but do they have enough management talent? Can they handle the disruption? What if they lose key talent? In this economy, how do you move when your house is at half its value? These are realities that are impacting decisions in corporate America today.
CIP: If the business plan is working now, meaning it is very profitable, what will be the catalyst to change the current status quo?
HESS: It will be the aligning of certain stars like regulatory policy and the political mish-mash in Washington. However, it’s not all about Washington. Everybody has to get off of that. It’s about companies feeling confident that they can make investments and see a good return. I think that at some point, if certain companies start losing market share or new market segments open up, they are going to have to invest, build, or relocate. Keep in mind that may not have to happen in the U.S. These companies could be making investments overseas. That unfortunately might delay some of the activity in the U.S. we would like to see.
CIP: If companies are holding back on major real estate decisions, what are some services that you are providing right now?
HESS: This is not a good time to be a one-trick pony. It’s a good time to have a broad service mix and leverage a lot of different things by working on the cost cutting side and the revenue enhancing side. In the brokerage environment its being able to do carve-outs, blend-and-extends, and help people get out of leases. There are some opportunities for creative consulting.
CIP: How much do corporations take taxes into consideration when making real estate decisions?
HESS: It depends on the industry and the situation of the client. It’s hard to carve out just one reason, but it is real. I can’t say that it’s not an issue. I was just with a $30-$40 million enterprise in Chicago that has grown 30-40 percent each year in the health care industry. The CEO told me that he wants to stay here because of the talent base, but his 
profitability is eroding by 3-4 percent (due to recent tax increases in Illinois). People are looking around. This is a company that doesn’t want to move and they probably won’t, but it doesn’t mean that they won’t take future expansions and put them somewhere else. I’m not going to say I know the public sector side and the justification for it (tax increases). Obviously, we have to have services and infrastructure, but Illinois is in for a rough ride over the next 12-18 months in my opinion in terms of business retention and attraction. It’s never been seen as a top 10 business state and it is very competitive out there. I was just with an economic developer form southern Wisconsin who has attracted two small manufacturing companies from Illinois. It’s hard for the big companies like Motorola or Sears to pick up and move. There are so many advantages here in terms of talent and infrastructure. I am concerned for Illinois because I believe there are so many incredible assets here. This was a shock to a lot of companies at this time. If it was in 2004 or 2005 that would have been a better time to do it. It’s bad timing now.
CIP: Talk about some of the advantages in Illinois. When you are working with corporation what are the strengths of Illinois and Chicago?
HESS: There are some tremendous portfolio companies here. There are great firms like Walgreens, Boeing, I can go on and on. There is excellent talent, a good quality of life, and the logistics. I think all of my supply chain clients would agree that Chicago has great roads and intermodal capabilities in Joliet. Chicago is on the world stage. We also have companies like ADM in Decatur and Caterpillar in Peoria. It’s hard to change geography. States on the fringe of the U.S. would love to have the geography of Illinois. That will allow this state to continue to enjoy national and international success for certain industry types, but it doesn’t mean that there won’t be rough waters for certain industries because of decisions made in the public sector in this state.
CIP: What about the national infrastructure? What are corporate concerns with overall infrastructure in this country?
HESS: If you look at some reports, like from the IMF, infrastructure has been downgraded. It’s not an A in the U.S. anymore. Certainly we have fantastic interstates, but it has been stressed. It is something that is off the radar because of jobs and other things we need to focus on. But you are competing against China, parts of Europe and Brazil, where these countries are investing in roads and airports. If you go to China, every city with a million people has a new airport. I understand that a central government like that can plan it that way, but if you talk to executives from U.S. companies they are always impressed with China’s growth. They look at that as a competitive advantage to get speed-to-value from suppliers to customers. In the U.S. we have always prided ourselves on being tops at that. That means our infrastructure has to be upgraded. That includes the water, sewers and the power grid. There should be more investment in electric power infrastructure. I have a personal experience with that being involved in a very large steel mill operation that ended up in Mobile, Alabama. This was a company that was going to use 13.2 GVA, enough power for a city of 200,000 people. We went all over the county for that project and noticed that hardly any place in the U.S. could handle it. They needed a unique blend of roads, rail, waterways and power. I would love to go in front of congress and talk about all of these projects that I have had a chance to work on where we have heard clients say that infrastructure is not that good.
That is why the intermodal centers in Joliet and Rochelle are like magnets. Companies can have certainty that there products will be on-loaded and off-loaded with the best equipment. Those are expensive investments. Maybe that is why Illinois felt the need to raise taxes. I think that would be very palatable if they said that our revenue was going to go to public infrastructure. Companies might have a different perspective on that, but I’m not sure that has been communicated.
CIP: When you look at the intermodal activity, are you optimistic about the future of the logistics industry in Illinois?
HESS: Absolutely. That is a great vision for Will County and all the stake holders involved in that. Make no small plans. I think it is good to go back to that. Strategic planning has been hit hard, but I think it is back. Companies weren’t planning in the deep recession. Now they are planning again. They are talking about where to invest if things get better. Companies are becoming more collaborative across different divisions and functions. I hope they continue to collaborate because then we will have good initiatives and good planning. On top of that, what would really make those initiatives come alive is having a very strong public-private sector partnership. That is what is broken right now. If we can’t rely on the federal government to create jobs and move forward, it will be important for the cities, the counties and the states. Those entities will have to step up. If there is an environmental issue in Lake County because a firm wants to add a $50 million facility there instead of Ireland, get out of the way. Don’t destroy the environment, but make it happen. Come up with solutions. That is what corporations are saying in board rooms. I think if we get catalysts in place, there is some really good planning going on, especially in the $100 million-$3 billion size company range.
CIP: Productivity is better than it has ever been, but the workforce is stagnant. Do you see manufacturing having a chance to grow in the future?
HESS: We would like to make more stuff. There are a lot of discussions within companies that we all can’t be service oriented here. We value the ability to do the R&D, commercialize a product, and then actually produce it. But we all know that the world is flat and that it is very competitive. There will continue to be the outsourcing of manufacturing, especially the lower-skilled positions. That is not as prevalent as it used to be. There is back-shoring going on. If you look at productivity, length of the supply chain, and rising fuel costs, you add that up, and companies are looking more closely at whether they can do it here. The statistics show that for some industries it is almost a break even. Then it is intangibles like confidence and certainty. That is what is hurting us. I’m working on four manufacturing projects right now. One is a Tunisian firm coming to the U.S. The U.S. is a higher cost, but it is more stable than the Middle East. A Brazilian firm is looking to make a $3 billion investment in alternative energy. Another interesting project, a California firm is looking at California and Kentucky. There are three examples and two of them will benefit the U.S. with direct foreign investment.
CIP: You said that Washington is not the only problem, but a strong public-private partnership would be beneficial. If Washington could do one thing right now, what would you recommend to spark confidence?
HESS: I will mention three things, because I hear them from clients. One is the regulatory environment. Companies want certainty around our energy policy. A lot of these industries are energy intensive. There is uncertainty in that area in terms of permitting. Two, our whole educational infrastructure–this is more of a systemic cultural thing. What does industry need? They need people who can make great product. If you work with software or technology firms, you see young, creative people. We have to continue to have talented people come out of our college system to remain the R&D technology leader in the world. What about the manufacturing side? We have a shortage of skilled labor, even though we have 9 percent unemployment. Why? Because we are not pushing people through community colleges. There is still this perception that everybody has to go to college, but we need people with vocational and technical training. I’m hearing that all over the country. With the manufacturing that we do have here, you can work in a plant and make $70,000 or $80,000 for some of the higher end skilled jobs, but they can’t find those people. Third, I think we need to improve physical infrastructure in terms of our ports, electricity and roads. Those all tie together. They are basic things that companies need: people, process, technology, and the energy to get it done.
CIP: How do foreign companies view U.S.?
HESS: The U.S. continues to have the largest, best-funded consumer base in the world. The markets are here. You have to have North America in your portfolio. We certainly are making it difficult for them though. The additional advantage is our strong R&D and our universities. International firms love being able to come here and partner with universities. We have to work on the fundamental things like infrastructure, energy and labor, and make sure that we are strong. Then, U.S. manufacturing will remain strong. It will competitive and remain strong. We’ve let our basic advantages erode in some respects and I hope that turns around for the U.S.
I’m a DePaul grad. There was a professor there who traveled around the Great Lakes and looked at the infrastructure, but in his book, he noticed that these states don’t work together. Imagine if you could work closer together on water issues.
CIP: We’re built on competition, but it’s a global world. Illinois competition against Indiana takes place, but the fact of the matter is we are all competing against countries like China.
A: You’re exactly right. It’s just not Illinois versus Indiana anymore. It is Illinois and Indiana versus China, versus Costa Rica, versus Central Europe. You have to stick together. If something locates five miles on this side of Illinois and Indiana says “I’m not helping” shame on us. That’s jobs for the U.S. You have to recognize state’s rights, but it is really about clusters, coalitions, and regions these days. Collaboration has been under siege. In my business, that is what I look for. I look for people who are working together to bring the resources to the table. Do they have a can-do attitude? When a client sees that, they are going to pick that next $12 billion project and stick it in Illinois and not in Indonesia. That’s 12,000 jobs we should have here. It is so hard to get an alignment of resources right now. That is what my clients are looking for.
