Market Data

Industrial Tenants Can Cut Costs in a Renter's Market

What used to be a landlord's market in industrial properties -- with competition for space driving rents sky high -- now has evolved into a tenant's market. So, while the current slow economy has caused some significant changes in the real estate needs of industrial space users, it also has created some long-term money-saving opportunities. Tenants now have more breathing room to select space methodically and cautiously and evaluate their options, as opposed to the days when choices were slim and securing space was on a first-come, first-served basis.

Light industrial or warehouse space -- whether it's for offices or distribution centers -- provides some unique opportunities for companies seeking ways to maximize efficiency in operations and redefining their real estate needs to reflect new corporate strategies.

Less Flash, More Cash For some corporate departments, renting ostentatious office space in expensive high-rise buildings doesn't make sense anymore. To reduce costs, many companies are discovering the value of converting warehouse space to office space. Rather than paying an average of $20 per square foot for class A office space, companies can pay as little as $3.50 psf for convertible industrial space. For example, one major national retailer recently moved 30 employees from an office building to an industrial facility, resulting in rent savings of approximately $600,000 over the term of the lease.

In many cases, creative thinking -- from unique interior and exterior designs to additional parking -- can help transform an industrial property's image. As a result, office finish-out in warehouses now is on the rise, approaching nearly 10 percent of all industrial space on average nationally, as more value-added and back-office functions are housed in warehouse space.

In addition, the “hip” factor of working in a converted warehouse is growing in cities with traditional industrial areas such as Chicago, Baltimore, and Los Angeles. Companies often highlight the innovative layouts of such converted facilities as part of their recruitment efforts to attract new employees.

Less Is More Industrial space users also are cutting costs through more strategic building consolidation. During the retail and dot-com expansion years in the mid- to late-1990s, many companies required additional distribution centers throughout the country to properly service the growing expectations and demands of their clients and customer bases. However, as the pace of economic growth has slowed, industrial space users have begun consolidating their distribution center operations. Thus, many major corporations have started servicing their clients with fewer, large regional distribution centers (500,000 square feet to 1.5 million sf), as opposed to several smaller facilities.

Consolidation is a boon for the bottom line, since real estate often is one of the largest expenses on a company's financial statement. However, it increases the importance of improving technology and operating efficiency because there are fewer facilities to serve clients.

As companies move more value-added operations, such as customer and technical service, final assembly, packaging, labeling, returns, and repairs, into fewer but larger distribution centers, the need for additional land to accommodate employee and trailer parking spaces is growing. Prior to the economic downturn, single or multi-tenant industrial buildings typically offered one parking space for every 1,000 sf of leased space. Now, with the increase in office space and value-added operations, requirements are closer to four parking spaces for every 1,000 sf. Since consolidation requires these regional megacenters to serve a greater number of clients, companies must find industrial space with more loading docks and additional trailer storage to accommodate their high distribution levels. This increase in the ratio of employee and trailer parking psf is becoming more of a commodity to today's industrial space users.

Logistics and Location Selecting the appropriate location for distribution centers increasingly has become important to the bottom line as well. Site selection impacts customer service, operating profitability, future growth, and employment potential. Proper planning and execution can help streamline the production process and maximize the benefits when searching for a new distribution center.

When considering consolidating distribution center operations, companies must conduct an internal audit of their existing property assets to determine which properties to keep. The audit gives the industrial space user a snapshot of how it can reduce costs. This also is an opportunity to determine what their customers truly want and need. Do their customers really need products delivered to their door overnight, or can they receive them in two or three days? Finding the answers to such questions helps companies determine how many distribution centers they will need and where to locate them.

This consolidation strategy also can help control inventory by forcing companies to operate in a “pull” cycle, meaning customer demand pulls the supply. Manufacturing on demand means that companies are less likely to make products to fill a facility's capacity before selling them. Therefore, industrial space users require less extra space for inventory. Controlled inventory means fewer warehouses, reduced overhead, and lower costs.

More Choices for the Long Term
In a slow economy, industrial space users also should sign long-term leases to secure the lowest rate for the longest possible term. Companies that intend to stay in one location for many years now are signing 10-year to 15-year leases, as opposed to the three-year to five-year leases they were signing as recently as 18 months ago. Landlords also are more willing to agree to long-term leases at lower rates. Since the competition for space has fallen so drastically in many markets, industrial space users have more choices and the luxury of shopping around for a lower price. Landlords also are offering concessions such as free rent, additional tenant improvement allowances, less- stringent credit requirements, more flexible lease terms, and expansion and renewal options at below-market rental rates.

As their leases approach expiration, industrial tenants should explore the benefits made available in a down economy, while vacancies still are high and tenant demand is moderate.

Kristian D. Bjorson and Thomas T. Lynn, SIOR

Kristian D. Bjorson is director of the Logistics Practice Group for the Staubach Co. in Cleveland. Contact him at (216) 861-7171 or kris.bjorson@staubach.com. Thomas T. Lynn, SIOR, is executive vice president of southwest industrial operations for the Stauback Co. in Dallas. Contact him at (972) 361-5000 or tom.lynn@staubach.com.

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