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We’ve zeroed in on four issues that frustrate a broad spectrum of San Diego businesses, and have dubbed them The Four Horsemen.
Here’s the second one.
Some of the most crippling costs for San Diego businesses are ones they don’t actually pay themselves.
They’re the steep price tags for homes or rentals, for gas and public transit, for entertainment and everything else that goes into living in San Diego.
Recruiters, relocation experts and business owners say many San Diego companies pay their workers significantly more than they might elsewhere so their employees can afford housing and other expenses that are disproportionately high here. That can cut into profits and influence decisions on where to expand, particularly when a business can find lots of workers to do the same job for far less in another city.
Some companies hold the line, potentially losing out on candidates. Others quietly bite the bullet.
Take Pinnacle Industrial Supply, a pipe and metals supplier in Otay Mesa.
Sales manager Daniel Halecky said he’d prefer to own his business space, but the high cost of his workers’ salaries and his steep rent put ownership out of reach.
He recently hired a new salesperson who used to work in California’s Central Valley. Halecky estimated that salesman would make about $50,000 a year in other parts of the country, but Halecky ticked the worker’s salary up by more than $15,000 to make it feasible for him to move his family here.
“In San Diego, it has to be upwards of $65,000 or $70,000 where that’s a livable wage,” he said.
Much of that is due to San Diego’s steep housing costs. Here’s how San Diego compares with other large metros when it comes to the median housing price.
Halecky’s willing to shoulder the cost-of-living burden, plus the higher rental cost per square foot for his space in Otay Mesa, because his manufacturing customers – which include shipbuilders – are here.
Some of those customers, however, talk about moving somewhere where they can pay less for employees and commercial space.
Real-estate information firm CoStar Group recently ranked San Diego as one of the five priciest markets in the nation for both industrial and so-called flex space – which can also be used by research and development companies – in the fourth quarter of last year.
Companies that employ lots of people and have the option to go elsewhere often at least flirt with a move.
Rick Urban of Quality Controlled Manufacturing in Santee, a company that’s been courted by officials in Texas, estimated that state’s reduced labor costs alone would boost his profits 15 percent.
The machining manufacturer doesn’t have immediate plans to move but Urban said forecasts like that can persuade businesses looking at multiple cities for expansions.
“That’s make-or-break for a lot of companies,” Urban said.
Indeed, at least one CEO whose company expanded out of state last year said publicly that the cost-of-living differential played a role in the decision.
“Only 20 to 25 percent of San Diegans can afford to buy a house,” American Specialty Health CEO George DeVries told U-T San Diego. “Out here in Indiana, virtually all of our employees can afford to buy a home or a condo, and that is meaningful to us.”
Living costs are increasingly persuading lower and middle-income workers to look elsewhere too.
An August report from Los Angeles forecasting firm Beacon Economics declared California’s high housing costs one of the state’s biggest economic challenges.
“This worrisome trend deprives businesses of a strong mid-skilled workforce and makes it difficult to recruit talent because businesses can’t afford to pay wages that would offer a desired quality of life (such as the ability to buy a home),” Beacon economist Jordan Levine wrote.
Relocation Coordinates International CEO Katherine Kennedy, whose San Diego company manages employee relocations, sees that trend firsthand.
She regularly sees out-of-town job candidates opt against a move to San Diego because of the high costs.
Some make spreadsheets breaking down everything from the taxes they’ll pay in California to the likely sticker price for housing, and quickly realize their salary won’t allow them to live comfortably in San Diego.
“That’s what we are up against on a daily basis,” Kennedy said.
That means some companies scramble to deal with languishing vacancies, or compromise on candidates in order to hire someone they can afford.
Then there’s San Diego leaders’ nightmare scenario: the times when the high cost of living pushes a company to move or expand somewhere else.
Kennedy’s company once worked closely with Science Applications International Corporation, a government contractor that was once headquartered in San Diego but moved to Virginia in 2009.
She believes cost-of-living issues contributed to the move.
Government contracts can limit a company’s ability to pay and compete for workers, a particular challenge in areas where the cost of living is high.
“They don’t have the funding to just make an offer and have it cover the whole thing,” Kennedy said.
The company’s ultimate decision to move to Virginia put it closer to those handing out the contracts and allowed it to compete for workers in a lower-cost environment.
This is part of our quest digging into the difficulties – real or perceived – of doing business in San Diego. Check out the previous story in our series, Safety First — Then Come Tough Decisions for SD Businesses, and the next, The Eternal Question for SD Businesses: Should I Pay or Should I Go?.