The following article appeared in the Warehousing and Education Research (WERC) newsletter. For more information, visit www.WERC.com.
A decade ago land cost, along with construction cost, were the primary site selection factors when determining where to locate a warehouse or distribution center. Today, however, even in an environment where land and rental costs are increasing, these factors are no longer the primary consideration.
Real estate costs themselves rarely get on the radar screen relative to other operational costs such as labor, transportation, and customer service. The difference in a small amount of rent or land cost is insignificant to making a mistake of where you put the building and also how you lay out the facility.
Companies are being very specific about where they put their warehouses in terms of servicing their customers states. Most of our clients are focused on the longer term horizon and are primarily concerned with ‘How am I most efficiently going to deliver my products and service my customers in the most cost-effective manner?’ They also consider, ‘Where can I get a quality labor force, or at least where can I compete for labor?
There are three influential factors in play today: transportation, labor, and the availability of real estate, with a fourth, incentives, often involved in the site selection decision. What we have found is that when companies become focused on only one factor, typically they don’t make the right decision.
For example, if they solely focus on land availability, in many instances it may or may not mean that the right transportation costs, or the right labor environment, or the ability to properly service the customer can be realized. Look at all of the factors of influence and weigh them all as it relates back to your requirements.
One of the biggest issues for users of warehouse space is to clearly know what their needs are: where do they need to be, the cost implications aside from real estate, and how to achieve the most efficient layout and optimize throughput.
If you move into a new building and then two years later you don’t have enough space because you haven’t provided for it–that’s a costly mistake.
Labor is also an important consideration. Companies are struggling to make sense of the labor variables. It’s not just about having the availability, but having a very critical strategy for attracting quality employees and then keeping them.
Human resources and human resource management are among the biggest trends we see in location analysis and locating sites and positioning of the facility.
In some cases labor becomes a trade-off issue. Do you place the facility farther away and bus people in, or do you move close to labor and pay more? We see a lot of that in facilities that require huge ramp-ups of seasonal labor. But we also find that in many cases there is difficulty in busing employees into work.
A lot of people want to buy their warehouses because they are looking at them as a critical facility, much like a corporate headquarters. And they’re spending so much on the infrastructure on the inside of the building because they don’t want to be subject to the fluctuations of the real estate, or leasing market.
Meanwhile, many clients are showing increasing concern about their exit strategy. What happens if I have to get out of this building/location? What does my exit strategy look like?
Provisions addressing this eventuality are now routinely included in many lease agreements. For those with their own facilities, there is concern about the residual value of the property several years out, and whether the facility will be marketable at a “fair” value, or have to be sold at discount.
We strongly recommend warehouse management create a well-thought-out plan for present needs and future growth. Make sure you have a very solid strategy, that you’ve done your research, and that you have a team in place that can help you not only think through and decide on your strategy, but also to help you move forward and execute.
Stan Danzig is executive director of East Rutherford, NJ-based real estate services firm Cushman & Wakefield. John K. Porter, Jr., is executive vice president of the global logistics group at Atlanta-based real estate services firm CB Richard Ellis.