Prime real estate

Oct 01, 2007 9:30 PM  By

Boden, the British apparel cataloger, was nearing annual sales of $100 million in the United States. But it had to ship every order from its Leicester, England warehouse, and that didn’t exactly spell good service.

So Boden, which has been mailing into the U.S. for five years, decided to set up a stateside facility. And in January, the company will open a distribution/call center in Scranton, PA.

Why Scranton? “Most of our customers are concentrated in the Northeast so we started to concentrate on that area,” explains Ben Dreyer, Boden’s director of operations.

But there was much more to it than that. Boden considered several things in its due diligence:

The labor market. “We weren’t going for a highly automated DC/call center, so we need to be able to get good quality staff,” Dreyer says. “My horror as an operations person would be to have center and not fill it with good people.” (The company now uses a Miami contact center).

Property. Boden was able to lease a 60,000-sq. ft. distribution facility on favorable terms.

Accessibility. The Scranton facility is 2-1/2 hours from the Newark, NJ, international airport, which has direct flights to London. “If we have a problem at our facility, I want to be able to get there,” Dreyer says.

Exit strategy. Dreyer wanted to be sure that the firm could get out of the building if it had to. “We wanted something we could expand. We were asking, ‘Can you have a break in the lease — or can we expand the existing building?’”

Scranton scored high on all these points. And the clincher for Dreyer was that the town just felt right. “The Scranton/Wilkes-Barre area felt more like home and had a greater sense of community feel than anything we looked at,” he says. “And that was an important factor for us.”

Dreyer concedes that round-trip travel from the U.K. slowed things down the beginning. But it took less than three months to choose the building once the company decided on Scranton.

What can U.S. firms learn from this experience?

Plenty. For starters, it pays to take everything into account when looking for a site.

Companies often make the wrong choice when they base it on a single variable, says Stephen Harris, president of JAM Management Services, a consultancy that helps businesses with relocation.

So what if land is available? That doesn’t mean the area has adequate transportation and a labor force. And those aren’t the only things to consider.

“In a privately held company, the primary driver for where to put your building could be as simple as the distance from the owner’s driveway,” Harris says. “I’ve designed a center that landed where it did because the return address was the most appropriate sounding of three less expensive alternatives. Or it could have just as much to do with the skiing or the fishing nearby.”

“Don’t laugh,” adds Randy Strang, a vice president with UPS Supply Chain Solutions, a fulfillment services provider. “We get that scenario more times than you think.”

Some firms maintain their legacy sites, and they pay the penalty in higher phone and transportation costs. In contrast, relocation can result in a clean slate.

“It provides the company an opportunity to step back and ask, ‘Is this the best place for my business?’” Strang says.

How do you determine the ideal location? The first step is to solicit a list of factors from each stakeholder in the company. There could be hundreds.

Don’t expect everyone to agree. Operations will want to be located where in-bound shipping rates are lower. Human resources will look for a skilled and affordable labor pool. And the finance team will focus on whether to rent or buy an existing building or construct a new one.

Things get even more complex when the headquarters are being combined with the distribution center. “A whole range of considerations for the attraction and retention of quality executive officers comes into play,” Harris says.

Suppose your new site is in North Dakota. How quickly will you convince a seasoned operations executive to relocate there?

Labor and inventory comprise 18% to 25% of a distribution center’s operating costs. And they’re not easy to calculate, given the intangibles.

Do you place the facility in a remote spot and bus people in? Or do you move it closer to where they live and pay more in real estate? This is a constant worry for firms that require huge ramp-ups of seasonal labor.

Here are a few other things for your to-do list:

  1. Visit your local chamber of commerce. “That’s the best place to begin,” says Bill Kuipers, president of operations for consultancy Spaide, Kuipers & Co. “The chamber of commerce can tell you what land is available and also get you information on any state or local tax incentives being offered. And it’ll do it for free.”

    The chamber will also act as the liaison between your company and the state. And it will “give you the local flavor immediately,” Kuipers says.

    The incentive package could be the clincher if you employ hundreds of workers.

    But don’t place too much importance on incentives. One firm was lured with the promise of free land.

    “Guess what?” Strang says. “That land was anything but free.”

    And don’t base the decision solely on cost. “Sometimes too much attention is given to the cost of labor and not enough to the quality of the labor force,” Strang says.

    Service must also be taken into account. “If you’re promising delivery on all orders received by 8 p.m., you’ll need to know your latest delivery to your shipping partner,” Strang says. “Making a commitment to your customers relates a lot to where you put your distribution center.”

  2. Make sure you’ve got room to grow. You don’t want to move before you’ve completed the fifth year in your five-year plan. Acquire enough land to carry you through a longer term so you can protect your options in the future.

    LaCrosse Footwear did just that last summer when the shoes merchant moved into a new facility. The 120,000 sq.-ft. building includes 110,000 sq. ft. of warehouse space. It also houses LaCrosse’s corporate headquarters.

    “One of the smartest things LaCrosse did in the new facility was to build the corporate office area two levels high, placing part of it on a mezzanine over the warehouse area,” Kuipers says. “It sounds easy, but most people don’t do it because of the higher build-out cost.”

    What’s more, building multiple-level offices uses space that would be otherwise lost. Planning and constructing the LaCrosse Footwear site took about 11 months.

  3. Consider a used facility. Do you really need new construction? Don’t shy away from converting used buildings into a DC, Harris says. As manufacturers head offshore, they’re leaving plenty of infrastructure available, he says. And conversion takes no more than a few months, rather than a year.

    Indeed, says Jack Rosenfeld, chairman/CEO of multititle mailer Potpourri Group, it’s much faster to buy an existing facility, than to build a new DC. But you typically have to compromise on some of your requirements with a preowned structure, he says. These may range from ceiling height to the building’s overall layout.

    Still, the strategy worked well for the $200 million-plus Potpourri Group. The company, whose 10 catalogs include Back in the Saddle, In the Company of Dogs, The Stitchery, and The Pyramid Collection, had outgrown its two distribution centers a few years ago. Plus, the leases on both facilities were expiring, and the company wanted to consolidate operations under one roof.

    It was important to find a location that was close to the old facilities, which were in Chelmsford, and Medfield, MA, Rosenfeld says. Why? “We wanted a new one close enough to keep as much of our warehouse employees as possible,” he notes.

    Potpourri found an existing industrial facility in Whitinsville, MA — about an hour away. “It was in the right area, and the landlord was willing to help with some build out we needed,” Rosenfeld says.

    Improvements to the building included reinforcing the flooring and removing some overhead steel beams so that the cataloger could put in additional shelving.

    “The renovation was nothing major, it took us about five or six months to move in after we decided on the facility,” Rosenfeld says. What’s more, the company was able to retain about 85%-90% of the top managers when it moved to the DC in 2004.

  4. Do the legwork. Technology is a wonderful thing, but don’t expect to find a DC site over the phone or online. “You can’t do it all from your desk — you have to get out on the ground and talk to people,” says Boden’s Dreyer.

Eight rules of commercial real estate

Think you know what you’re doing when it comes to commercial real estate? Think again. Here are some tips from operations consultant Stephen Harris that you may not have considered.

#1. Don’t buy a bargain. Real estate and buildings have predictable value. If something is available cheap, there is likely something wrong with it.

#2. Consider using a buyer’s agent, complete with preset agreement. These commercial realtors frequently understand the local market well enough to be worth far more than the cost of their fee.

#3. Don’t shy away from converting used buildings. The manufacturing flight to offshore locations has left some fine infrastructure on the books of companies anxious to get rid of it. Prices are good, and conversion takes no more than two months, not 12.

#4. Don’t rush. The appropriate process should take from three months to nine months. Plan ahead, and track your process once it begins.

#5. To build new will cost about $55/sq. ft. for dry storage warehouse (no refrigeration), exclusive of site development costs.

#6. To develop a site is a difficult cost to predict, but it should range from $10 to$15 per sq. ft. of building area.

#7. Real estate starts at $25,000 per acre, and can go to triple that for “spade-ready” land in a desirable area.

#8. From the day you close on property, the fastest you can design and construct a DC is about one calendar year.

Site selection SCORECARD

With so many factors to consider in commercial real estate, you’ll need a scorecard to keep it straight.

First, ask each department to state its preferences. Then list these criteria in order of importance, says Stephen Harris, president of JAM Management Services.

Next, incorporate these factors into a simple score sheet that allows various sites to be rated numerically on a scale of 1 to 100.

This can take three to six months, and it will require the involvement of top management. But it can reduce the overall time needed for the search and evaluation (years, in some cases).

Here are the things to consider:

  1. Size of building. This includes the facility’s footprint, cube and parking.

  2. Inbound and outbound shipping costs. UPS, FedEx, and the USPS will help you do the calculations.

  3. Access to (and cost of) power, gas, water, sewers and connectivity.

    Incentives offered by regional governments (in the form of training, property tax relief and permits).

  4. Labor market (education levels of workers, availability)

  5. Building condition

  6. Purchase and operations costs

  7. Encumbrances/rights of way

Other criteria are:

  1. Zoning
  2. Neighbors
  3. Permit process/regulatory restrictions
  4. Size and cost
  5. Site development costs
  6. Construction cost index

Limit yourself to a proscribed time period to search out and evaluate alternatives. Appoint a key employee or a consultant to conduct the search and complete the scorecard for each site. Make your decision from the two or three best scoring alternatives, and keep two of the options “in-play” up to the signing of a “letter of intent” or a “purchase and sale” agreement.

Remember that due diligence is a process of objective analysis that ultimately allows you to make an informed decision. If you conduct the search correctly, you will see two or three alternatives float to the top, frequently with very similar scores. Choosing from among these like options will then be a no-lose decision.