Inshoring to MidWestern USA? CA & NYC vulnerable?

[DTEJD1997]

Hey all:

 

Here is something I've been spending a lot of my "processing power" on for this year...

 

I think that NYC & CA is vulnerable to locations in the Midwest and other "fly over" parts of the USA.

 

Why?

 

You can BUY property in the Metro Detroit area CHEAPER, sometimes MUCH cheaper than what you can RENT property in CA & NYC.  For example....I've bought/seen property just outside of Detroit for $11/square foot.  Of course, this property is in relatively good condition. 

 

When I first started buying property, I was buying for MUCH cheaper than that...but the properties were in MUCH, much worse condition.  Actually, they were rehabs.  So the end result is that it is probably better to pay MORE and get stuff in better condition than to try and get it absolutely CRAZY dirt cheap...

 

Also, you can get educated, experienced, MOTIVATED workers for a FRACTION of the price that you can get workers in NYC & CA.  Once again, the Detroit metro area has a large stock of these type of workers.  I am going to guess that Detroit is not the only place where you can get these workers.

 

You also don't have to use "dial up" interweb access in Detroit.  There is high speed access here.  We've also got water, sewage, ELECTRICITY, access to Canada, access to INTERNATIONAL shipping through water & airport, rail access, and roads.

 

Of course, housing is also somewhat cheaper here too.  You used to be able to get decent houses in the suburbs for WELL under $100k.  If you were willing to splurge, for $200k, you could get into the higher end suburbs OR you could into "B" grade locations and get 3k sq. ft. houses.  We have museums, libraries, pro sports teams, movie theatres, restaurants, bars, and CASINOS.  So there is some stuff to do on off time.

 

So put it all together, and you can produce, process, build & do stuff here for a true FRACTION of what you can in the coastal cities. 

 

The law firm that I did contract work was engaged in this exact strategy.  They have very small offices in NYC & San Francisco.  The "big wigs" are located there...but the VAST majority of work is farmed out to the Detroit office.  I'm going to guess that the coastal offices are mainly for "face" and as "sales" offices to get the work.  Once the work is secured, it gets sent out...

 

There are many other legal firms doing this.

 

HOWEVER, it does not have to be limited to legal work.  You could do all sorts of stuff here.

 

So I would posit that if you can get work on the coasts & then farm it to the hinterlands, you can do quality work for much cheaper. 

 

Why send it to India when you can send it to Detroit instead?

 

 

 

 

 

 

[mttddd]

I'm also in the legal space and maybe a year ago did the analysis to see where to setup a new center for our contract attorneys. We settled on Dallas which is more expensive than Detroit (we already had the real estate we need in Dallas) but still a lot cheaper than the major coastal cities. Iv also seen this on the IT side of things with companies off shoring to places like Georgia or Tennessee.

[DooDiligence]

Detroit as an offshoring partner (the whole state seems like a nice crossroads.)

 

--

 

Holy crap, Jack White started in Detroit...

 

...and then there's the Motor City Madman

 

Whoa, welcome to my town

High energy is all around tonight

Whoa, you best beware

Theres violence in the air tonight. Huh.

Well, Detroit city, she's the place to be

This mad dog towns gonna set you free

 

https://patch.com/michigan/detroit/u-s-sen-ted-nugent-wango-tango-your-head-around

 

--

 

(overall, it sounds like it could be a bargain basement compounder.)

 

(you'll likely end up leaving a valuable real estate portfolio to your descendants!)

 

Wang, dang

[Gamecock-YT]

You are also seeing this a lot in the finance sector with back office, middle office, and even a few front office roles being moved from the NYC area to places like Salt Lake City, Nashville, Charlotte, Raleigh, and Jacksonville. Most of it is coming about because of tax deals being cut by the state to the companies to relocate jobs (no doubt cheaper real estate/labor is the main reason, but the specific cities is usually for tax purposes) But for the employees, the ratio of income to cost of living blows NYC out of the water.

[mrholty]

As others have posted on its happening in a lot of back office jobs.  In the corporate IT World I have been on both sides and done this analysis for companies.

 

I'm based in Flyover Country right next to Michigan so our costs are relatively low but we are higher cost in the state. 

Working for a mid-sized Insurance company we were losing premium dollars to the online businesses annually.  All of our metrics are great but how does a company not kill its sales staff and create a web presence, etc.  A difficult topic so we were constantly focused on cost cutting. 

 

Here are some real world examples of what we did and why:

 

We eliminated 60% of our internal legal team in early 2000s to a domestic outfit and we felt our cycles were not efficient with inhouse staff.  We outsourced that work to a company in Minneapolis.  When the law profession has become oversaturated and costs have come down we have renegotiated our agreements (we actually switched) to a similar provider.  Any outsouring agreement we try to split the work to 2 - 60%/40% but in reality its ends up being 80%/20% and what happens is that one of the 2 generally fails in quality or they need a price increase and we give the work to the other and then find a new 2nd partner. 

 

We outsourced a good chunk of IT to India but brought back 40% to the Midwest after repeated issues.  Time is important and the time zone issues , local customs are just too hard for small and mid-size companies to overcome without having lots of boots on the ground in India for compliance.  We started without any local staff in India but after repeated quality issues and switching to a different India company we then realized the issue was us.  We then hired an Indian local to be our rep but without any real relationship to us the agreement didn't help.  It only got better when we hired some local US guys to own the agreement in India and we pay to have them over there regularly.  Lots of companies fail and lots of companies go to India to spend 1/3 and spend the same as they double staff and then ignore their time to market.  Our biggest savings was outsourcing the hardware side of IT to a local shop that put it on the cloud.  I assume they just put it on AWS or something but Amazon is hard to deal with.  They are easy.  I could save more by going direct but hassle factor is worth something.

 

We outsourced part of our call centers to the Dallas area specifically for the tax savings.  Like others the agreements usually go to what city and state is offering the best deal.  This is a real inefficient marketplace where I've thought someone could be a broker.  Everyone woos the large business but there is savings in mid-size cities.  The broker could get paid by the city/state (similar to a buyer's agent for a realtor) and could manage an exchange of what cities states have the best deals. 

 

Lastly-the coolest oursourcing gig was a guy we had found when we were negotiating our wire and wireless phone agreements with US Cellular & their landline business, Sprint, Verizon and AT&T.  Our sourcing guys had gotten 10-20% off what we were spending our on wireless business and we were set to lock in to no rate increase for our wires (we were moving to VOIP) from a standard phone service.  We somehow got a consultant who was a former AT&T VP (I assume they are like banks and hand out titles like candy) who had a database that he shared with something like 30 other guys like him around the country of the rates they were getting on deals.  (They all agreed to share all the terms).  With this we were able to knock 40% off our wire bills, a considerable savings and the negotiation could not have been easier - he came in and pulled up 3 recent agreements for companies our size/spend and went to work.  He took 50% of the year 1 savings which we estimated at $600k so he got $300k for a months amount of work spread over 3 months.  We got the savings for 3 years.  His entire business was built on information asymetry in which the average consumer has no idea to find out what similar deals are going off at.  I've often wanted to buy that guys business.

 

 

[Jurgis]

I don't think "inshoring" is something that will magically happen now. There's a certain amount of it going all the time. And then there's a large amount of Hollywood, Silly Valley, NYC, Boston that will never be inshored. Yeah, RE prices suck in CA and NYC. Yeah, taxes may suck too. But try to whatever-shore the Silly Valley companies. Not happening. Try to tell people who want to live in NYC to go to Boston or Cleveland or Detroit and see what happens.  ;) So, yeah, there's some amount, but there's also a huge unmovable amount.

 

I don't know if there is much investable from this. Apart possibly buying cheap RE in Midwest and hoping for better trends that've been around in the past. But then you have to talk about the migration to sunnier places, the land availability, etc.

 

(Yeah, Chicago is cheap. Some good jobs too. I tried to tell a cheap friend of mine to move there and buy a nice house. He looked at me as if I'm crazy. So there...)

[Guest]

What happened to NYC over the 20-40 years? From my understanding, wasn't NYC kinda dumpy back in the 70s/80s?

 

Here's my (very simplistic) view on things. I'd argue that the overall the economy was stronger in the 70s/80s than today (it could handle a hard shock to the system easier). What would the economy look like now if the government brought interest rates to 1980 levels or an oil embargo?

 

Back in the day, most people had pensions and higher savings rates. Due to pensions (among other factors), stock prices were lower since companies profitability was lower. However, middle class folks had those juicy pensions and, as a result, the economy was stronger in certain ways (no crazy momentary policy, lower government debt, etc).

 

The cut in taxes allowed wealth inequality to blossom (and stock prices). NYC (since it had so much of its economy tied to market) also blossomed. A lot of money in a few hands then stalled the economy (see 2000, 2008) and now needs a ton of government assistance (debt) to stop from plunging. NYC and Silicon Valley prospers (thanks bailouts and super low interest rates!) while most of the country suffers. 

 

The Midwest definitely has a less risky mindset compared to other parts of the country. That pays big dividends in times of stress (I'd imagine if the Fed didn't try to manage the economy with interest rates, things would look a lot different). Due to bailouts/interest rates though, that mindset has become a net negative. Why be prudent when the government will step in and absorb the losses?

[mrholty]

The Midwest definitely has a less risky mindset compared to other parts of the country. That pays big dividends in times of stress (I'd imagine if the Fed didn't try to manage the economy with interest rates, things would look a lot different). Due to bailouts/interest rates though, that mindset has become a net negative. Why be prudent when the government will step in and absorb the losses?

 

This is exactly correct.  I was a kid during the farming crisis in the mid 80s.  My Dad was not a farmer but selling to farmers was his primary business and he had done well.  1 down year was fine and he doubled down and bought competitors, year 2 bad - scraping by, year 3 Dad did illegal things to keep the business afloat.  Got caught.  House seized by IRS.  Taught me the value of saving for rainy day.

 

FIL was a farmer.  Very conservative.  His old man (wifes Grandfather and Great Grandfather) were the banker in the area where he lived during the depression and the main local bank went bust.  Families were still paying back debt into the late 70s.  All cash and payments weekly.  The original farm was 36 acres in 1912 when purchased.  In 1945 they family owned about 425 acres in the area mostly in 40 acre lots.  Families know these stories and are generally more conservative.

 

In the upper midwest prices are down for almost all crops and the young farmers have not been through a down cycle and are levered up.  At the local bars its not fights between John Deere vs CaseIH but how much debt as the old guys are telling the young ones to be cautious.  Look at the last few years of of John Deere comps.  The old farmers who have cash have been waiting for 30 years and are getting anxious for the banks to start foreclosing.

 

 

[HJ]

What happened to NYC over the 20-40 years? From my understanding, wasn't NYC kinda dumpy back in the 70s/80s?

 

That's a great question to ask, another question to ask is what happened in the 60's and 70's to turn NYC into a dump from the Great Gatsby days?  It's also not just NYC, all the major cities in the US experienced some degree of "urban decay" until the 80's.  Here's Wikipedia on the phenomena:

 

https://en.wikipedia.org/wiki/Urban_decay

 

What happened the past 20-40 years to caused the change in NYC?  The booming financial service industry is one, but it's easy to argue globalization is the greater force, perhaps even the force causing the boom in financial services, which disproportionately benefits the coasts vs. mid-west. 

 

 

 

 

 

[Spekulatius]

There is no reason to go to Detroit. Sure, real estate is cheap there, but that is true in a lot of other places as well, that aren't as dumpy. Michigan is no tax haven either.

I work in the NYC area in engineering and the company Of work for inshore to upstate NY. we can hop in a car and be there in 3 hours. The wasteland begins ~ 1.5 hours north of the city already. Same applies to Nevada if you are in CA.

 

The problem is that human capital does not want to move. If you try to do so, many will just take the packet and find a job elsewhere. So you will lose the employees with the best skills or those that are the most underpaid.

 

Aalso, from my somewhat limited experience, these jobs at the new o shored locations are not very safe either, as companies shut down these new locations rather quickly, if they don't work out, or the business goes bad, despite being in a low cost regain. Then you can be stranded in a location with not that many other jobs, and need to move again. So for employees, the prospect of moving is not too enticing.

 

I think the sunbelt state are more likely benefit from onshoring than Michigan. The states are more business friendly and probably better run, demographics are better and there not really much difference between cheap and dirt cheap.

[mrholty]

 

The problem is that human capital does not want to move. If you try to do so, many will just take the packet and find a job elsewhere. So you will lose the employees with the best skills or those that are the most underpaid.

 

Aalso, from my somewhat limited experience, these jobs at the new o shored locations are not very safe either, as companies shut down these new locations rather quickly, if they don't work out, or the business goes bad, despite being in a low cost regain. Then you can be stranded in a location with not that many other jobs, and need to move again. So for employees, the prospect of moving is not too enticing.

 

I think the sunbelt state are more likely benefit from onshoring than Michigan. The states are more business friendly and probably better run, demographics are better and there not really much difference between cheap and dirt cheap.

 

This is exactly it.  Except my quibble about states being more business friendly and better run than Michigan.  I think the South has a longer runway due to the shift being newer, Michigan is just early.  The entire economic model of how cities and states are funded primarily via Property Taxes is bad.  We built these sprawling cities that were funded by growing (selling new houses) build more suburbs etc.  Then when the growth stops how do you maintain the infrastructure that needs to be replaced in 30 years.  The reason that I don't think the South is better run and just early is that Dallas and Kentucky having huge pension issues. 

[CONeal]

Inshoring has been happening for awhile now.  The 1st time I had heard of it was back in 2009, when a few companies moved their technology and call centers from overseas to Arkansas.  The service was more reliable and also wages were cheaper then average, not to mention the real-estate .  The tax benefit from the state was an added bonus.

 

Basically just move your company to a town that is heavy manufacturing and semi close to a college and you will get more then enough qualified and well motivated employees.  If they want to quit, sure have fun in a factory bc they have a list of people waiting for a job.

 

With telecommuting/work from home becoming more popular over the last several years a few call centers have moved to this model.  A person just logs into a special computer and the company saves on real-estate. 

[atbed]

Reshoring also seems like a potential positive for many of these places, or at least not a negative any longer. It was positive for the first time in the last 20-30 years. If taxes get cut, maybe this picks up steam. Continued wage inflation in places like China will certainly help

 

Some of my peer group has moved out of NYC. Not everyone is against it. I think migration trends reflect this. If it weren't for births and foreign migration, I believe the population in the tri-state area would be down due to adults leaving it.