Location is always said to be the most important factor when it comes to real estate. But location isn’t the only consideration for warehousing for last-mile delivery. Rent, access to the local labor market, labor costs and availability also play a factor.
Ten years ago, during the Great Recession, there was an abundance of availability of industrial real estate, which enabled companies to negotiate better rates. Last year, however, there was 276 million square feet of net absorption in industrial real estate, the second-highest amount recorded, Kelly Picard, CEO of Hackbarth Delivery Service in Mobile, Alabama, said during a session at the Customized Logistics and Delivery Association’s Final Mile Forum & Expo last week in Phoenix. Nationally, there was a “low” 5-percent vacancy rate despite new development amounting to 263 million square feet, she said.
“When you look at those numbers, everything that’s getting built is being consumed, which has led to low vacancy rates,” she noted.
The situation has led to two other challenges: (1) increased rents and (2) more development. Base rents averaged US$5.89 per square foot for first quarter 2019, the highest on record and up from $5.75 last year, said panelist Ward Richmond, a Dallas-based executive vice president at Colliers International global commercial real estate services organization. This year, 294 million square feet of distribution space is under development — also the most on record, he said.
Why? Factors include the increase in e-commerce and the need to locate product closer to end consumers “to get it there faster to meet their increasing expectations for speed,” Picard said.
When looking for warehouse and distribution space that meets their needs, Picard said, the questions last-mile delivery companies must ask regarding site-selection strategies include:
●How valuable is the real estate space?
●How much money per square foot will be generated at the location?
●Should the company look for different customers that would generate a higher rate of return?
“Our priorities around site selection have changed as the business has grown and some of the market factors have evolved,” said another panelist, Troy Cahill, general counsel at LaserShip Inc., a last-mile-delivery company headquartered in Vienna, Virginia.
In the past, location and accessibility to roads and interstate highways were foremost, he said. While that is still important, the company has another focus: labor. “For us right now, the most important factor is finding a location that is going to give us ready and easy access into the local labor market,” he said. Before deciding on a location, the company investigates the availability of labor, labor rates and “how that will ultimately influence our ability to succeed in that location,” Cahill said.
Other important factors: For LaserShip, accessibility to roads and interstate highways has become the No. 2 priority, followed by market availability and growth potential, and lastly, rent and labor rates. “The building we move into today may not be the building we need in two, three or four years,” Cahill says. “So we have to be looking down the road to determine whether the landlord we’re partnering with will be able to give us more space in that location or analogous space in a proximate location.”
Among other site-selection strategies cited by the panelists: (1) working with a tenant broker to find properties and negotiate a lease and (2) ensuring that lease contract terms are as favorable as possible to the last-mile delivery company. Such terms can pertain to lease concessions like termination rights, sublease ability and longer terms, among others.