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Home > Economics > The new tech economy is all about location, location, location

The new tech economy is all about location, location, location

Feb. 24, 2020 by Kurt Shenk, Victor Kao, Davis Nordell, Adam Lohr and Troy Merkel

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Economic output in the United States is increasingly revealing a geographic divide, with a greater share of gross domestic product being concentrated in the nation’s largest metropolitan areas. In 2018, 31 counties generated 32% of U.S. gross domestic output, according to a report in Bloomberg based on data from the Bureau of Economic Analysis.

In 2018, 31 counties generated 32% of U.S. gross domestic output, according to the B.E.A.

The shift is a reflection of the continuing flight of workers away from rural or less-populated areas toward regions that offer more jobs and opportunities. There are benefits that come to employees and employers when working in these counties, including building strong networks, gaining career capital within top industries, being around educated populations, and having better job portability.

The middle market

As middle market technology companies look to expand operations and grow into new markets, they will need to consider this growing concentration of labor and output. According to the Bloomberg study, these same counties harness 22% of the U.S. population and 26% of the overall U.S. employment. In an economy where the competition for skilled workers is more intense than ever, companies increasingly have to go where the talent is.

The biggest metro areas produce 32% of U.S. economic output

The network effect

The benefits of this concentration of talent are particularly evident in the technology industry, in which 60% of output is derived from these 31 counties – a figure that has been on the rise over the past decade. Compared to other industries, the output from the technology industry is the most concentrated from a geographic perspective. Some of this concentration is also seen when tech companies are raising venture capital funding.

Many technology companies are burning cash and require funding to sustain their operations while they scale their offerings. Over the last several years, 75% of venture capital has been invested in four primary markets: San Francisco, Los Angeles, New York and Boston. For this reason, we expect that companies will experience the most success in these key tech hubs across the United States.

Companies benefit as well

The benefits of locating in a top economic county or metropolitan area extend beyond those for employees. Companies also benefit. The output per employee increases when a company is situated in a top metropolitan area. The Brookings Institution looked at the top 20 metro areas and identified significantly more output per tech employee when a company operates in that area.

Source: Brookings Institution

Opportunity zones

Opportunity zones provide some great benefits to companies within the technology, media and telecom industry. They were created under the 2017 Tax Cuts and Jobs Act to spur economic growth in lagging geographic areas.

The combination of tax deferral and potential tax avoidance on certain capital gains can be attractive, especially to real estate investors. But the investment does not have to be an outright purchase; leases, leasehold improvements and actual lease payments all qualify, making the new regulations particularly attractive to the technology, media and telecom industry.

For example, Queens and Kings counties in New York show a large disparity between GDP output and opportunity zones within the county, but these two New York boroughs do still have significant GDP output and access to talent in the New York metropolitan region. We also noted significant opportunities within Los Angeles, which has large GDP output with a great amount of opportunities for technology, media and telecom companies to establish corporations within opportunity zones.

Source: Bureau of Economic Analysis, Bloomberg

Looking ahead

These top counties will source job growth in the coming decade. There is little to suggest that this shift of human capital will change anytime soon, as the majority of job growth is anticipated within these cities. Small-town America may face limited or no job growth, which will cause the divide between the haves and have-nots to widen. Zip code and industry will be more important than ever.

The takeaway: Small and midsize technology companies need to consider the seismic shift when considering expansion plans. Companies may be able to attract outside investment by situating their business expansion in one of the many opportunity zones aligned to the 31 counties identified in the Bloomberg report.

More than ever, continued growth in the technology industry could be reliant on the old real estate adage: Location, location, location.

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Filed Under: Economics, Tech, Media and Telecom Tagged With: gross domestic product, middle market, opportunity zones

About Kurt Shenk

@kurt_shenk

In January 2018, Kurt was selected as a senior analyst in RSM’s cutting-edge Industry Eminence Program, which positions participants to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. Senior analysts advise clients on conditions impacting middle market leaders. Kurt’s focus is the technology industry.

Kurt has over nine years of audit and accounting experience, serving innovative venture- and private equity-backed technology clients. His responsibilities include working to assure effective and efficient planning, execution and wrap up of engagements. His proactive approach toward client service is the foundation of the strong client relationships that he maintains.

About Victor Kao

@victorkao4

Victor provides a unique blend of accounting, operations, and IT subject matter expertise, and leads a wide spectrum of projects including internal audit, Sarbanes-Oxley compliance, systems organization controls readiness and attestation, business process improvement, and information technology assessment services. Prior to joining RSM, Victor served in senior management roles in a variety of industries, including consumer products, food and beverage, technology, banking, and financial services. Currently, Victor’s core industry and subject matter expertise lies within technology.

Victor has substantial IT risk advisory experience leading and coordinating ERP software selections and implementations, IT general controls review, segregation of duties analysis, cybersecurity, and system and organization controls readiness and attestation. In 2018, Victor was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions participants to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders.

About Davis Nordell

@davisnordell

Davis has more than 11 years of experience in providing tax compliance and tax consulting services to a wide array of middle market clients in a variety of sectors. His focus is primarily on large privately held businesses in the technology and consumer products industries with multi-state compliance footprints.

In May 2019, Davis was selected as a senior analyst in RSM’s cutting-edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions influencing middle market leaders. Davis’ focus is on the technology industry.

About Adam Lohr

Adam is an audit partner and life sciences senior analyst in RSM's cutting-edge industry eminence program. In addition to providing assurance services to his clients, he sits on RSM’s national life science team and leads the San Diego office life science practice.

His senior analyst responsibilities include advising the firm’s life sciences care clients and client servers as they work to navigate the rapidly changing industry environment. Adam regularly writes, presents and advises on capital markets, digital transformation, policy and other issues transforming life sciences. He is an instructor at the regional and national level, and is experienced in the application of ASC 606 revenue recognition for the technology and consumer products industries.

Adam has over 12 years of accounting and finance experience, serving private equity-backed and private closely held companies in the middle market. He specializes in providing financial audit services and helping clients respond to technical, regulatory and economic changes that impact their business.

About Troy Merkel

@troymerkel

Troy Merkel is a Partner and Real Estate Senior Analyst at RSM. He has 15 years of experience in audit and consulting, with a particular emphasis in real estate and financial services reporting, in accordance with US GAAP, IFRS, NCREIF PREA Reporting Standards and income tax basis. He is also an expert in accounting for asset acquisitions and complex leases and specializes in various tax-advantageous, in particular Opportunity Zones and government subsidized deal structures.

In 2018, Troy was selected as a senior analyst in RSM’s cutting edge Industry Eminence Program, which positions its senior analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. These senior analysts advise clients on conditions impacting middle market leaders. Troy’s focus is on the real estate industry.

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