Grinding to a Halt?

HRM sits down with Worldwide ERC President Joe Benevides to find out what impact the economic slowdown is having on employee relocation.

$32 billion is the annual spend on corporate relocation in the US

“Relocations in general will probably slow down as cost management becomes more of an issue for a lot of these multi-national companies”
-Joe Benevides of Paragon Global Resources

HRM. How is the current economic crisis, in particular the collapse of the housing market, creating problems for companies seeking to relocate employees?
Joe Benevides. It's having significant impacts on many fronts. First of all and foremost is on transferees. First of all, it's taking them longer to sell their homes, and secondly, the values of the homes are declining so their equity position is much less than what they anticipated it would be or what it once was. You also have folks who are losing money on the sale of their home. If they bought the house over the past several years, they're actually receiving a value that's less than what they paid for it. Probably just as dire if not more so are those who owe more on the house than it's actually worth .

That doesn't necessarily mean that they're losing money on the sale of the house per se , but that they may have borrowed against the house over the last couple of years for improvements or funding a college education. Now the proceeds and the value are actually upside down, if you will, where the proceeds from the sale of the house are less than what's needed to extinguish the mortgage. Those are major issues. In addition to the impact on the transferee, what's also happening is that the costs to the employers are going up. If they're covering any of the loss that might be incurred, that would certainly drive up their costs. And because it's taking longer to sell the homes, there's the issue of duplicate housing where the transferee has to be in the new location, so they actually move in advance of selling their home. There's the issue where they have a mortgage at the departure location and still have an obligation to pay rent or a mortgage in the new location. In many instances, corporations are footing that bill, so that's driving up the cost of the relocation as well. As a result of all that, we see that disaffection with relocation is certainly higher than we've experienced in quite some time.

HRM. So how are companies working to get around these problems?
JB. What companies can't do is change the state of the real estate market. That's just the reality. What they can do to help their employees is to implement policies that will assist them sell their home in the shortest amount of time and receive what we hope is the greatest value for it. The best way to do that is to utilize real estate agents that are trained in the art, if you will, of relocation transactions. Not all real estate agents understand the relocation transaction and the time constraints that are a part of it. There's a Worldwide ERC form called the Broker Market Analysis that helps the employee understand what the proper listing price of the home ought to be, which looks at what the competition is in the area, what other listings are out there. We're in a situation right now where there are many more sellers than buyers, so it's really crucial to have the property listed properly. It's never been more important to make sure that that initial list price properly reflects the market and is not some ‘pie in the sky ’ number that the transferee hopes or needs to achieve.

HRM. Is that something that's happening? People have got an idea of what their home is worth and they're unwilling to look at the reality of the situation?
JB. Exactly, and that only exacerbates the problem. If a property is over-listed and the price is too high when it goes onto the market, after awhile it gets it gets old and the showings drop. Then the likelihood of selling it for any price or for a reasonable price goes down pretty dramatically. From a corporate perspective, I think that's one of the most important policy changes that a company can make, which is to make sure that the employees are using qualified brokers or agents and making sure that they are utilizing a broker market analysis to set the initial price of the home.

Some corporations are offering a condition allowance. People say the three most important things in selling a home are location, location, location. Today I think that's changed a little bit and condition is the most important. We see companies offering condition allowances up-front in the marketing phase, where they'll provide some amount of money to the transferee to dress up the home. Do those repairs that might need doing, paint over that purple wall and basically just put the home in the most marketable condition it can be. When you have more inventory than people to buy those homes, condition really matters. Buyers are becoming much more particular, and they're going choose the home that has the least amount of work to do.

The other thing that employers are doing, and something that we've found is one of the most effective strategies to sell homes is to increase the commission to the buyer's agent. Then you make the property more attractive to the real estate community by offering a higher commission. Again, there's nothing in there that can necessarily improve the price of the property, but it can certainly help to get the best possible price in the shortest possible time.

HRM. Are these cost crashes in the housing market going to have an effect on organizations ’ ability to hire the best people? Do you think that’s going to be a problem in such a competitive business environment?
JB. Well, yes, but it's not so much the cost pressure. What we're seeing is many more moves that are canceled or rejected because the employee can't afford to sell their home to take the new job. That's probably one of the biggest impacts apart from cost, is that employers might not be getting their first-choice candidate. In many instances, the preferred employee simply can't afford to sell their home. It's not so much that they can't make the mortgage payment; it's just that they can't afford to sell and then pay off the mortgage. That's probably the biggest impact from a talent perspective.

HRM. So have you seen a drop off in successful relocations over the past year or so, or is the situation not really biting yet?
JB. We haven't really seen much of a decrease in relocations yet. It has softened throughout the decade and volumes are down from where they were in the late '90s and the early part of this decade , but we really haven't seen anything dramatic over the last year or so. It continues to be relatively soft, but we haven't seen any dramatic worsening. It will be interesting I think to watch that phenomenon over the next several months, where clearly the financial markets continue to soften, especially here in the States and in Europe, for that matter. So it will be very interesting to watch over the next several months as to what volume has done. I think it'll be more of an overall economic slowdown, which typically leads to fewer relocations as companies try to manage their costs.

HRM. Have you seen sort of a rise in international relocation over recent years? Is that something that's on an up swing?
JB. Most definitely. The economy has become more global. It's unusual to see any of our clients that don't have international moves or have an international footprint. Companies are globalizing to take advantage of cost differences in other parts of the world. People are moving IT jobs to India and manufacturing jobs to China, so there's that component where companies are taking advantage of the cost arbitrage. Secondarily, they're looking at markets outside of the United States as growth opportunities, as a new market for them to enter to sell their goods or services. Cross-border moves have been the fastest growing part of the industry.

HRM. Do these global moves present a different set of challenges for companies and individuals?
JB. Absolutely. There are cultural issues; there are language issues; there are housing issues. Someone moving from the US to somewhere like the UK. If they were living in a 3000 sq. ft., four-bedroom, two-bath Colonial home in the United States will not find that kind of housing in the UK. At least not for an equivalent price. Even with a move to somewhere like the UK where there is no language barrier, people often underestimate the challenges. The costs are different, the culture and lifestyle is different. A lot of that revolves around housing, but probably the biggest challenges are the family issues. We pay a lot of attention to the employee, getting them to the new location, getting them settled in, getting them into their new job, but it's crucial to make sure that the family is well cared for, to make sure that they're assimilating into the culture properly. The spouse may be giving up a career or putting a career on hold; children are changing into a whole different schooling environment. I would say that the largest reason for a ‘failed assignment’ would be family issues.

HRM. Do you predict that we will see less of these cross-border relocations as the economic situation worsens?
JB. I think relocations in general, both domestically and international, will probably slow down as cost management becomes more of an issue for a lot of these multi-national companies. I've always said the easiest way to control relocation costs is to move fewer people. And you know it's not the most strategic of approaches, but it is an effective approach, so I think people will look at doing that. I don't think we've necessarily seen anyone putting a moratorium on relocations, but they'll be just more strategic in the folks that they choose to move. There will be much more pressure to be absolutely sure the position can’t be hired locally. Companies will need to know what the reason for that particular move is and make sure that it's absolutely necessary for that assignment to happen.

In addition to his role at Worldwide ERC, the global association for relocation professionals Joe Benevides is SVP of Global Relocation Services for Paragon Global Resources. He is a frequent speaker at industry conferences and is a recipient of the ERC Meritorious Service Award in 2001 and the ERC Distinguished Service Award in 2003. In addition, he is an SCRP, serves on ERC's Board of Directors. Benevides holds a Bachelor's degree in finance from the University of Massachusetts, Dartmouth and an MBA from Suffolk University Graduate School of Administration.

Some numbers

• $32 billion annual spend on corporate relocation in the US
• 794,000 annual average number of employee transfers within the US
• $10,000 average cost of shipping an employee’s personal goods
• 31 days average time to move once transfer opportunity is accepted
• Source: Worldwide ERC