Corporate Exodus: New York a Victim of Own Success
When Mobil Corp. last orchestrated an exodus of its employees from New York, the city was teetering on the brink of bankruptcy, and companies were fleeing in droves.
Today, New York boasts one of the strongest local economies in the country. Unemployment is at its lowest level in 13 years. State and local taxes are falling. And office vacancy rates have rebounded from 18% a decade ago to 9.4%, one of the nation’s lowest, despite the most expensive office rents in the country.
Nevertheless, Mobil recently announced that it is defecting again--this time, forsaking its hometown for good. Within three years, the company’s entire corporate staff will be based in Fairfax, Va. (A decade ago, Mobil had moved about 1,000 people in its refining operations to Fairfax.)
The oil giant joins the largest flight of major corporations from New York since the city escaped its fiscal crisis in the late 1970s.
During the past year alone, nine of the nation’s top 500 industrial corporations have moved their headquarters from New York, and dozens of smaller companies have been enticed to go elsewhere. In addition, International Foods will complete its move out by the end of this month. J. C. Penney will relocate to a Dallas suburb next year. Both National Broadcasting Co. and American Telephone & Telegraph are considering moves to New Jersey.
But Mobil may be the biggest blow, at least symbolically. After all, the company has called New York home since 1866, and ironically, its name was once Standard Oil of New York.
Has corporate America once again lost faith in New York? Just the reverse, say economists, city officials and officials of the departing companies themselves.
This time, observes Rep. Bill Green, a Manhattan Republican, New York “is a victim of its own success.”
Manhattan real estate values, which were severely depressed when worried corporate executives began fleeing in the early 1970s, have risen tenfold since bottoming out in 1977. Only now is the growth pace starting to slow--providing a powerful incentive for corporations to sell their multimillion-dollar headquarters buildings for a quick and easy profit. This is particularly alluring to companies at a time when oil, autos and a host of other industries are under severe financial pressure and are trying to cut costs.
Even those who choose to lease their buildings after departing are finding that office space in Manhattan’s midsection is in such high demand that they can collect a premium over Manhattan’s already high office rents--at an average $38 per square foot per year, ranking among the highest in the world--and cover the bulk of their relocation costs.
In this fashion, J. C. Penney expects to save between $60 million and $70 million a year when it moves its corporate headquarters and about 3,800 employees from Manhattan to a Dallas suburb next spring. At that rate, it will pay off the estimated $140 million in relocation costs in just two years.
New York also is a victim of its own success in reversing the sharp decline in its tax base, which was a major contributor to the city’s brush with bankruptcy. Virtually every corporation fleeing Manhattan for the suburbs or for cities where property values are as depressed as Manhattan’s were a decade ago has cited rising taxes as one motive.
At 19%, New York State’s top corporate income tax rate is one of the highest in the nation, the average being 6%. And combining income, sales and property taxes, the average individual residing in New York pays far more taxes every year than residents of any other state.
Hence, paying no personal or corporate income tax was a major incentive for Penney to move to Texas.
Many of those companies participating in the latest exodus actually began cutting their New York work force in the last wave--during the late 1960s and early 1970s--and are just now reuniting their executives and headquarters staffs with their operating divisions. Mobil, for example, said it has realized after an eight-year presence in Virginia that it can operate more efficiently and far more cheaply there than it can in Manhattan.
New York also suffers from a malaise faced by many large cities: Employees simply aren’t as willing as they once were to move to big, expensive cities in order to take a more prestigious job.
A just-released survey by Merrill Lynch Relocation Management, the nation’s largest relocation consultant, found that 39% of the 606 major U.S. corporations polled had a difficult time last year persuading employees to accept transfers to high-cost cities such as New York. This reverses a five-year trend.
“Attracting recruits or existing employees is becoming very, very difficult in New York,” said Joseph Sassano, a vice president of Merrill Lynch’s relocation arm. “It’s similar to what Los Angeles went through in the late 1970s.”
While some employees still cite crime and cramped living spaces as reasons for avoiding New York, those reasons are overshadowed by high living costs and long commutes between their office in the city and their home in the suburbs.
According to Runzheimer International, a consulting group, a typical four-person family living in New York must earn at least 35% more than the $50,000 received by the average American family in a year--higher than any other U.S. city--to maintain the same standard of living.
One reason is expensive housing. According to the National Assn. of Realtors, New York had the second-highest median housing prices in the nation in the fourth quarter of 1986--$167,600, second only to Boston at $167,800.
Executives and lower-level employees alike also are tiring of what AT&T; Vice President William P. Mullane Jr. calls “windshield time.”
Mobil’s laundry list of reasons for leaving New York includes long commutes, as did American Brands when it abandoned its headquarters on Park Avenue last year in favor of Old Greenwich, Conn.
The renewed corporate pullout after a 10-year reprieve comes as New York is enjoying record low unemployment and record high employment. The city has also just announced its first cut in personal income taxes.
Despite the jobs already lost because of business relocations and the 5,700 jobs that will be lost when Penney and Mobil pull out, New York has gained 300,000 jobs since 1977. (However, the city lost more than 600,000 jobs between 1969 and 1977.)
Hence, while Mayor Edward I. Koch and other city officials admit to being concerned about the corporate exodus--the mayor last week announced a plan to reduce business taxes, for example--they aren’t willing to give away some of the world’s most valuable real estate just to keep a company in New York.
In fact, Koch hastens to note that for every company that chooses to leave New York, there are several clamoring to take over the abandoned office space. And to company statements that employees will be happier working closer to their homes, he retorts: “Are their workers really happy elsewhere? I doubt it.”
Nonetheless, most of the companies moving in have been relatively smaller firms with fewer employees. And the city spent months in intense negotiations with Penney. But in the end, city officials were more willing to lose 3,800 jobs than to give a tax break on one of the most valuable properties in midtown Manhattan, the Penney Building on Avenue of the Americas.
In fact, the city stands to gain in the short run from Penney’s move, since it will collect about $3.5 million a year in occupancy taxes, assuming Penney follows through on its plan to lease the building to others. (Since Penney owns the building and pays property tax on it, it does not pay an occupancy tax, which is assessed only on renters.)
The city is particularly gun-shy about offering corporate tax incentives in light of the recent flap over AT&T;’s plan to move more employees from Manhattan to New Jersey. Koch recently threatened to “sue the hell out of them” to recover the tax breaks that AT&T; received as an incentive to build in New York rather than move to the suburbs. The two sides are back in negotiations.
City officials are much more likely to offer major concessions to corporations that want to stay in New York but are willing to move outside midtown Manhattan, where prime office properties fetch as much as $250 a square foot.
For companies willing to move to upper Manhattan or to any other New York borough, the city provides reduced utility bills for eight years and often will expedite zoning changes.
This year-old policy has attracted 220 companies. Among them are financial powerhouse Morgan Stanley, which has moved some operations to Brooklyn, and British Airways, which is moving 800 employees from a prime Park Avenue site to Queens.
