Going South: Implications of Business and Population Migration
Key Takeaways
- The migration of both businesses and population to the Southern states is a strong trend that shows no sign of slowing down.
- The migratory trend began with the introduction and development of the Interstate Highway System in the 1950s and has only accelerated in recent years.
- There are several major contributors to the migratory trend: abundant land, cheap energy, lower taxes, and pro-growth policies. All these create an attractive business climate.
- The increase in population in the Southern states has many implications for regional service providers such as banks and retailers, as well as builders and materials suppliers.
- The warmer Southern climate has less obvious implications for specialty service providers, retailers, and infrastructure providers.
Part I: Southern Migration Causes and Effects
With large numbers of baby boomers retiring every year, many of those who live in the Northern and Midwestern regions continue to choose to retire in the South and Southwest (Exhibit 1).
The regional importance of the South has increased continuously since 1970. The milder temperatures and tax burdens are likely the most important factors. In terms of the increase in absolute population numbers by state, we can see the largest increases in Texas, Florida, and California (Exhibit 2).
However, it is not just retirees choosing to migrate south. Businesses have been migrating to the South for many decades. Exhibit 3 shows the net number of firms migrating to different regions. The South has by far been the greatest beneficiary of this migratory trend.
Exhibit 4 shows net firm migration in 2022 by state. California, New York, and Illinois stand out as states with the most firms leaving. Florida, Texas, and North Carolina stand out as states with the highest number of firms entering.
Fortune 500 firms moving to the South
Looking more specifically at Fortune 500 firms, there also has been significant migration to the South. Texas bank Cullen/Frost touts to investors in their 4Q2023 presentation that 55 Fortune 500 companies are now headquartered in Texas.
CBRE, one of the largest commercial real estate brokers, has also accumulated data showing the trends of Fortune 500 HQ moves.
Exhibit 5 shows that between 2018 and 2023, 28 Fortune 500 companies moved their headquarters out of state. The greatest beneficiaries were the Sunbelt states. Seven of California’s eight net losses moved to Texas.
Some specific examples include Caterpillar moving from Illinois to Texas, Oracle from California to Texas, and Tesla from California to Texas (Exhibit 6).
The reasons for migration?
In addition to nicer weather, the South also has a more friendly business climate. Exhibit 7 at the bottom shows the tax burdens over time of two of the largest states with businesses exiting (NY and CA) compared to two of the largest states to which businesses are migrating (TX and FL).
With Exhibit 8, we further compare the pair of California and Texas and the pair of New York and Florida. We simply subtract the tax burden of the lower tax state from the burden of the higher tax state in each pair. The result shows the relative attractiveness of one state versus the other. Since 1980, the tax burden gap between these two pairs has only grown wider. This widening gap only makes the choice to migrate easier for individuals and businesses.
The relative attractiveness of the South for businesses is also due to the higher number of states with right-to-work laws. These laws allow workers to choose whether to join a union and pay dues. Critically, workers cannot be compelled to financially support a union against their will as a condition of employment.
Of the 26 states with right-to-work laws, 14 are in the South. Unions thus have a much smaller presence in the South as well as in other states with these laws (Exhibit 9). Population and business migration to the Southern and Southwestern parts of the U.S. will continue to have an impact on many industries.
Population and business migration to the Southern and Southwestern parts of the U.S. will continue to have an impact on many industries.
Cost of living
The cost of living is another advantage the South has. For example, most states in the South have cheaper electricity compared to the Northeast and California (Exhibit 10). Some of the reasons for cheaper electricity include:
- Greater access to cheaper sources of power like natural gas and nuclear.
- More robust pipeline networks that reduce fuel and natural gas costs.
- Reduced transmission and distribution costs becauseof more open land and dispersed population
In Exhibit 11, we continue to use the two pairs of CA and TX and NY and FL to show the difference in costs, this time with the average cost of electricity. Electricity in California is 2.7x the average cost in Texas and 2.0x the average cost in Florida. New York is 1.9x the average cost in Texas and just 1.4x Florida.
