Real estate isn't the core part of your business. After all, you're a manufacturer, you make stuff. And you spend most of your time figuring out how to do that efficiently and profitably.
But if you are undergoing an expansion or relocation project, why not choose a site that will contribute to your bottom line?
"I advise companies to analyze the 20-year operating costs of doing business in a specific location," said Craig A. Nielson, vice president of the Hart Corp., an international industrial real estate company based in suburban Philadelphia.
Hart firmly believes the real estate aspect of the site selection process is extremely important. He advises companies to choose real estate that is supportive of corporate goals and most productive in the long term.
Old habits are hard to break
Rather than look at real estate, and its associated issues, as part of an overall corporate initiative, many companies fall back on old habits and isolate it. They only look for the right building.
Considering the current buyer's market for existing facilities and the horror stories of unexpected, spiraling costs due to delays and unforeseen circumstances of new construction, evaluating structures and shell buildings is logical.
Buy or lease?
The decision on whether to buy or lease a building is currently influenced by industry competition, the economy, and accounting considerations. Pressured to make the bottom line appear more attractive, companies more frequently consider leasing, thereby eliminating mortgages.
Manufacturers, accustomed to owning real estate, find that the difference between leasing and owning is marginal. Leases customarily are for 10, 15, or 20 years. The company usually behaves like a property owner, in light of the capital investment made readying the building for specific processes. The length of occupancy is also a factor.
But companies wanting to expand or create distribution sites find leasing ideal.
"They have few costly improvements and their needs are basic," said Nielson. "The building needs to be a certain height and capacity, plus a forklift has to be able to operate, making shell buildings ideal.
"A lease offers great flexibility. Since other factors can change customer location and need, companies aren't tied to a property they own if they find relocation is needed. It is easier to get out of a lease if the market dictates."
While leasing might make the accountants or stockholders happy, it isn't the solution for every manufacturer. Companies that have highly sophisticated processes, such as injection molding, almost always buy manufacturing plants. The investment in improvements is so great that leasing is not beneficial.
Don't ignore the environment
Environmental issues must be considered when evaluating heavy manufacturing sites. Many states have enacted legislation lessening the financial and potential liability costs associated with the purchase of such properties. Brownfield developers stepped in, cleaned up the sites, and made them viable industrial properties that are attractive to many companies due to price, location, and other operational issues.
A manufacturer wanted to buy a property that previously housed an auto plant. The site was deemed clean, but the potential buyer found a minor environmental issue on the property. Before purchasing, the new owner required a signed agreement from the state absolving the company of any liability in the future with regard to the environmental issues caused prior to taking ownership.
Avoid the unemployment trap
In the past few years, Nielson has seen companies migrate from rural locations to sites in metropolitan areas with high unemployment.
"Companies should be very careful of such areas," said Nielson. "In their haste to get the operation up and running, companies ignore the reasons they originally chose rural locations, like less expensive operating costs and a ready supply of non-union labor."
Don't go it alone
One of the biggest real estate costs is not knowing what you don't know. While the Internet is a great tool to showcase properties, a broker is necessary to purchase a property.
Companies may not understand how to negotiate the best deal, not only for the property but for the many economic development incentives offered by state and local entities. Some commercial real estate brokers offer nationwide market research that helped companies identify in the best overall real estate solution for the specific expansion or relocation.
Even with consultation, though, impulse buying is not unusual.
"I've had clients walk into a building and reject the property because of the color of the carpet," said Nielson. "Others have selected sites based on the distance from the plant manager's home or how easy it would be for the company owner to fly in and get to the plant."
One publicly traded company intended to build and expand. After careful study and a methodical evaluation process, the choices were narrowed to two in different states.
Top managers from the company hit the road to personally evaluate the properties. The first site fit the needs of the company almost perfectly. Many incentives were offered and the estimated 20-year operating expenses were in line with projections.
As the selection team got out of the car at the second property, a doe timidly emerged from the brush and trotted across an open area. The site being considered backed up to a lake, and when the executives saw the boat dock from what would be their offices on the second floor, all that was left to do was sign the papers. These individuals were enchanted by the setting and wanted a country feel for their new facility.
But the doe, the lake, and the dock were situated in an industrial park that came with a heavily unionized work force, making the 20-year operating costs millions of dollars more than the first property.
Treat your real estate like any other part of your business. It must pass financial muster.
Inventory
New Construction
Percent Speculative Construction
New Construction
Percent Speculative Construction
New Construction
Percent Speculative Construction
30-Jun-00
1999 (SF)
1999
1st Half 2000 (SF)
1st Half 2000
2nd Half 2000 (SF)
2nd Half 2000
Atlanta, GA
354,000,000
15,518,730
58.5
6,800,000
64.7
7,900,000
64.6
Bakersfield, CA
21,600,000
300,000
66.7
80,000
37.5
300,000
33.3
Baltimore, MD
70,141,994
2,528,497
95.1
777,451
N/A
2,882,000
45.1
Boise, ID
21,808,199
331,526
47.2
824,029
39.9
211,928
92.9
Boston, MA
49,251,516
1,530,301
28.2
670,000
N/A
804,206
29.4
Calgary, Alberta
76,310,174
2,999,075
50
2,999,075
12.2
300,925
12.2
Charlotte, NC
30,659,166
768,300
N/A
882,750
N/A
1,097,000
N/A
Chicago, IL
822,701,532
21,479,817
52.6
9,045,787
54.3
6,773,350
22.4
Cincinnati, OH
205,000,000
9,000,000
N/A
3,600,000
N/A
2,700,000
N/A
Cleveland, OH
320,845,696
5,500,000
36.4
750,000
33.3
2,000,000
37.5
Columbia, SC
25,561,000
1,048,000
N/A
1,235,000
7.3
650,000
38.5
Dallas, TX
326,270,000
2,631,000
70.5
2,295,022
80.6
2,878,345
54.1
Denver, CO
191,800,000
3,750,000
46.7
1,500,000
86.7
900,000
77.8
Detroit, MI
225,021,164
4,764,604
N/A
2,576,135
N/A
5,944,401
N/A
Edmonton, Alberta
56,099,100
1,402,200
29.8
1,125,000
32
500,000
40
Fort Lauderdale, FL
67,703,330
2,614,497
N/A
1,300,000
N/A
0
N/A
Fresno, CA
42,600,000
600,000
83.3
300,000
100
300,000
100
Hartford, CT
61,225,268
170,000
11.8
50,000
50
100,000
50
Honolulu, HI
35,775,000
0
N/A
60,000
N/A
75,000
N/A
Houston, TX
314,330,871
4,555,211
89.2
889,480
75.1
1,244,314
65.4
Indianapolis, IN
204,483,784
4,600,000
54.5
6,336,366
78.9
3,500,000
71.4
Kansas City, MO
152,000,000
3,540,000
32.2
2,015,000
73.7
2,350,000
68.1
Las Vegas, NV
62,257,000
4,275,000
86.6
2,042,000
84.5
1,991,165
77.4
Lehigh Valley, PA
34,866,357
2,600,000
N/A
1,407,544
81.3
567,400
89.4
Los Angeles, CA
1,163,731,100
28,870,900
82.3
22,169,100
86
19,120,000
78.4
Memphis, TN
131,000,000
2,750,000
90.9
2,450,000
87.8
4,710,000
74.9
Milwaukee, WI
233,000,000
1,350,000
44.4
575,000
39.1
575,000
43.5
Minneapolis, MN
76,891,930
3,600,000
N/A
1,500,000
N/A
1,900,000
N/A
Montreal, Quebec
309,779,000
3,400,000
11.8
2,879,000
17.7
2,056,000
9.5
Nashville, TN
163,322,696
2,100,000
76.2
1,100,000
54.5
2,000,000
85
New Jersey (Central)
251,328,000
3,725,000
77.2
1,398,000
54.4
2,689,300
62.8
New Jersey (Northern)
401,000,000
946,000
63.2
327,770
0
1,772,000
24.6
New Jersey (Southern)
87,142,720
850,000
58.8
1,000,000
50
1,258,000
N/A
Oakland-East Bay, CA
142,981,757
1,835,006
89.1
629,611
N/A
1,411,518
74.8
Ottawa, Ontario
22,334,582
0
N/A
0
N/A
0
N/A
Philadelphia, PA
244,472,511
666,000
16.2
160,000
N/A
698,000
31.2
Phoenix, AZ
204,112,630
5,735,309
N/A
2,613,807
N/A
2,000,000
N/A
Portland, OR
42,202,545
2,087,281
N/A
639,654
N/A
550,825
N/A
Raleigh, NC
24,100,000
528,156
N/A
238,200
N/A
1,226,283
N/A
Sacramento, CA
124,314,130
3,049,961
38
1,553,199
72.4
950,000
52.6
Salt Lake City, UT
93,635,010
4,226,379
30.5
252,361
20.6
800,000
81.3
San Diego, CA
164,052,372
9,266,643
65
4,660,202
18.5
1,497,813
N/A
San Jose (Silicon Valley), CA
233,187,999
2,554,775
N/A
2,685,109
N/A
0
N/A
Savannah, GA
24,081,000
1,295,000
38.2
50,000
N/A
1,768,000
61.8
Seattle, WA
121,799,980
3,631,189
30.5
2,253,975
90.6
2,767,003
79.1
St. Louis, MO
205,624,000
4,805,000
55.3
1,457,000
44.7
2,264,000
55.1
Tampa, FL
108,536,680
1,467,000
68
240,000
62.5
1,000,000
50
Toronto, Ontario
617,474,084
13,109,312
48.3
3,745,219
36.6
7,055,057
45
Vancouver, British Columbia
138,169,450
3,193,800
36
1,194,000
51.7
1,793,366
25.3
Rank
Market
1
El Paso, TX
2
Tulsa, OK
3
Greensboro/Winston-Salem, NC
4
Greenville-Spartanburg, SC
5
Birmingham, AL
6
Oklahoma City, OK
7
Louisville, KY
8
New Orleans, LA
9
Memphis, TN
10
Salt Lake City, UT
11
San Antonio, TX
12
Norfolk, VA
13
Wichita, KS
14
Jacksonville, FL
15
Columbus, OH
16
Nashville, TN
17
Indianapolis, IN
18
Albuquerque, NM
19
Tampa-St. Petersburg, FL
20
Richmond, VA
21
Charlotte, N.C.
22
Raleigh-Durham-Chapel Hill, NC
23
Des Moines, IA
24
Omaha, NE
25
Kansas City, MO
26
Pittsburgh, PA
27
Cincinnati, OH
28
Cleveland, OH
29
Milwaukee, WI
30
Hartford, CT
31
Houston, TX
32
Dallas-Ft. Worth, TX
33
Reno, NV
34
Orlando, FL
35
Atlanta, GA
36
Phoenix, AZ
37
Riverside-San Bernardino, CA
38
Detroit, MI
39
St. Louis, MO
40
Baltimore, MD
2001. Real estate data from Grubb & Ellis, Industrial Market Trends, Spring 2001, Office Market Trends, Summer 2001; National Real Estate Index, Market Monitor, First Quarter 2001. Cities rank higher that have lower costs and higher vacancy.
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