Overview Of Choosing The Best Industrial Property

Many industrial tenants assume that finding suitable spaces is the hardest part of their search. However, the discovery and accumulation of options is often the easiest part of the process. It is the decision which option will best support the company's future growth that requires the most thought and effort. This is where the business stakeholders, often in coordination with tenant representatives, need to adopt a strategic approach to ensure that they achieve both short-term and long-term goals.

This process requires a change of perspective. Although it is natural to compare properties, this is not the best way to do so. Instead, each property should be evaluated in relation to set criteria specific to your business and its needs. This approach will change your thinking and help you communicate with potential landlords.

While every business has different priorities, the following are the main elements to consider when choosing a property to rent:

• Timing.

• Net effective rate.

• Tenant improvements.

• Your business's financial impact.

• Operational considerations

Timing

Is the property available for delivery? Is the property leased, vacant, or in dire need of a renovation? A property that has been occupied for more than 30 days and needs renovations can lead to a six-month delay in your company taking possession. On the other hand, a vacant property that has been fully renovated can be occupied almost immediately after contract execution, negotiation, and delivery of all monies due. You should also consider the holdover costs of your current premises if you are considering purchasing a property that will not be ready in time for your lease to expire. These can easily exceed your regular rental rate.

Net Effective Rate

It is not enough to compare the costs per square foot of potential properties. Each lease may have a different start date, size, monthly rental rates, escalations, and tenant improvement allowance. Brokers use a net effective rate measure to help you make an informed comparison of all your options. The net effective rate is the rent that the landlord charges, including free rent, the rental rates for the entire lease term, and tenant improvements allowances. This net effective rate allows you to quickly compare properties that are almost identical in all other aspects. This data may even suffice to help you make a decision if you are looking for office space in Class B. For industrial users, every property has its own unique operational and qualitative characteristics, which should be carefully considered before you make a decision. The net effective rate will give you a clear idea of each property's monthly and annual expenses.

Tenant Improvements

Tenant improvements are often understood to be the cost of renovating space. However, that is only one aspect of this crucial component of a property and lease. First, it is important to clearly define the difference between tenant improvements that are necessary for your business and those that you consider desirable but not essential. The next factor that needs to be evaluated is how much money the landlord is contributing to your tenant improvements (i.e., the tenant improvements allowance), as well as how much of that contribution will be amortized into your lease payment. You should also consider who will be responsible for the work. This is an essential issue as managing a tenant improvements process can take up to hundreds of hours from your core business and team. You may also need to hire a competent project manager to oversee the process and provide input and oversight to your team.

Financial Impact on Your Company

Once you have a better understanding of each alternative's costs, you can then evaluate how each option fits into your company's profit and loss statements, as well as a balance sheet. This is crucial since real estate is often the second-largest expense for industrial users after labor. The key questions to ask are: What percentage of total revenue does your company's property overhead contribute? Although rising real estate prices have had an impact on this rule, there are some differences between industries. However, it is a good guideline to assume that rental expenses will account for approximately 5% to 8 percent of your company's total revenue. How much cash is required to purchase new furniture, IT equipment, and machines, as well as for the removal from and decommissioning of the building you have previously used? It is important to evaluate the length of the lease, how it aligns with other financing or debt agreements, and your long-term business vision.

Operational Considerations

Industrial users need to consider potential properties not only from an economic perspective but also the other criteria mentioned above. Manufacturers, distributors, and life sciences companies all have metrics that are relevant to their business. These metrics can be used to monitor and improve their business performance. These metrics could include inventory levels and turnaround times, delivery time, product volume, quality control, safety, productivity, and so on. These factors are affected by the industrial buildings in which your company operates. The shape and dimensions of the building, as well as its fire suppression system, column spacing, fire suppression system, and loading areas, can have a significant impact on your business.

It is, therefore, crucial to identify and correlate the most important operational metrics to your business. For example, if you want maximum pallet positions, then you might consider higher clearance industrial buildings. This will allow you to compare the number of pallets you can store for each dollar of rent and use that data to drive negotiations. Suppose you're looking for a manufacturing plant. In that case, you may prioritize how many semi-/fully automated manufacturing lines can be installed within a property, depending on the size of the building, the electrical infrastructure, and parking. This will allow you to determine how many units can be produced per dollar of rent and use that information to influence negotiations.