We explore how different brokers can lead to levels of success within the industrial real estate industry.
We examine roles that External Employees can play to help you run operations smoothly.
I spent a lot of time working in teams when I was earning my Master of Business Administration (MBA) degree, and my Master of Real Estate Development (MRED) at the University of Southern California. This was a great shift from the undergraduate days when each assignment was based on individual learning and effort. What I enjoyed most about the program was the breadth of talent in the real estate industry.
What most people know about real estate is limited to residential single-family homes and their neighborhood Realtor. During the MRED program, I learned how expansive the indus try really is: I worked with residential condo developers, private equity investors, investment management analysts, financial modeling experts, Member of the Appraisal Institute (MAI), entrepreneurial office developers, family office managers, institutional asset managers, and acquisitions officers. Every project brought a new collaborative environment where we were able to gain insights from each other and work toward a common goal. I now work with many of these people today.
When you are identifying the factors that will have the largest impact on the success of your project, look no further than your team. The quality of your experience will differ dramatically based on each person’s experience and performance. In this chapter, we take a look at the importance of building a great team, the different roles needed, and the external players you can call on to collaborate on your project.
BUILD YOUR LIST OF WHOS
Executives of companies that inhabit industrial properties are very capable and sophisticated. They understand corporate finance, operations, law, human resources, and IT. They must also have a working knowledge of logistics and supply chain, commercial real estate, commercial construction, zoning, economic incentives, public utilities, property taxes, common area maintenance (CAM), and more. It is with this knowledge that they can go out and build a first-class team to run their real estate project.
Dan Sullivan of Strategic Coach®, whom I mentioned earlier, puts it best with his insightful concept called “Who Not How.”
This concept was elaborated on through a recently released book of the same title with Dan’s coauthor, Dr. Benjamin Hardy. When it is time to take on a new project, many people procrastinate because they do not know how they are going to get it done. Strategic Coach® recommends shifting that thought to who will help get it done. This is not just old-school delegation of tasks.
Instead, the concept of “Who Not How” shifts this mindset to identifying people who love to do the things you need to have done. This enables you to bring on uniquely qualified, capable team members for each part of the project. When you find external partners who relish the opportunity to work on your project, you create a much more collaborative environment.
Your project champion is the person empowered to make decisions on the company’s behalf. For some companies, it is the owner, for others it is the CFO, VP of finance, general manager, or corporate real estate director. The title is not important—what is essential is this person’s ability to listen, lead, communicate, and empathize.
Once you have your champion, it is time to assess what capabilities your organization already has, and which ones it will need. Make a list of the people most knowledgeable of the inner workings in your current operation, being mindful that each part of your operation likely has someone with insights and knowledge that you can draw from. For example, from an internal perspective, who has helped the organization buy, sell, or lease industrial property in the past? Who was instrumental in helping move the last time you moved warehouses?
After you have determined your internal capabilities, you can assess which external partners you need. Here is a list of the most essential ones.
Most executives start with a commercial real estate broker, a person responsible for representing their interests in the marketplace. Think of your broker as your quarterback, yourself as the coach, and your team as the other players on the field on offense and defense. You call the shots, but it is your broker who deals directly with the other players in the market. He is the one who introduces you to new members. He is the one ultimately responsible for making forward progress downfield.
Brokers have a fiduciary obligation to serve you with honesty, integrity, and transparency. Their job is to save you time, save you money, and mitigate your risk. Commercial real estate brokers are next to attorneys and accountants in the Rolodex of trusted advisors for any C-level executive. Every few years, executives reach inflection points where they need to make adjustments and capital investments within their businesses. These inflection points usually have facility implications that require the expertise of a broker.
At the most preliminary level, a commercial real estate broker should have knowledge of the local market. You should also expect your broker to be a trusted community member in the market in which you do business, because relationships with other major players instantly raise your firm’s credibility within the marketplace.
The second-most-impactful type of expertise expected from a commercial real estate broker is an intimate understanding of your company’s operations and finances. This operational knowledge is where the difference in experience and education varies widely from broker to broker. It is possible for a broker to adequately represent your interests with only a cursory understanding of your business, but it is unlikely. The more alignment there is, the better.
The same goes for your company’s financials. It is one thing for your broker to know how much you can afford. It is another for your broker to know why your company budget is what it is, because this deeper understanding can help them help you in the marketplace. It is common for an executive to stick with one trusted broker throughout their business career when that broker demonstrates a continued interest and knowledge of the company’s operations, finances, and the interplay of those two factors in facility decisions.
The third-most-important criterion is execution skills. It is one thing to know the market and to know your business, and it is another to be able to wield those skills in a manner that creates new opportunities and leverage. Creativity is where having a trusted broker can dramatically multiply your capabilities. When your broker has a proven track record, they are able to repeatedly understand an executive’s vision, lead a project team, collaborate with internal and external partners, manage expectations, manage market participants, and deliver.
Lastly, in addition to expertise, insight, and execution, clients look to brokers as a trusted conduit through which they can find talented team members for any part of the process. Executives expect these vendors to think ahead and make the decisions that will help the organization continue to prosper and grow.
A project manager is the vendor I most often introduce to clients when they have a sizable project. A project manager is someone who runs the day-to-day operations of a project, on an hourly or flat-fee basis. The purpose of hiring a project manager is to have an experienced professional supplement the project team as needed.
On one hand, most executives have competent team members who want to take ownership and can execute. On the other hand, most team members already have a full allotment of projects. Having team members take on a large real estate project in addition to their current duties can sometimes stretch them past their capacity. A project manager has the added benefit of being new to the company, which can be an opportunity for executives to gain an unbiased opinion and create new potential.
What does a project manager do? The short answer is: whatever is needed. Project managers may create the project budget, assess the needs of the company, and manage outside vendors, such as general contractors and furniture vendors. They can work with your own IT department, coordinate orders and deliveries, manage your mover on move-in day, and direct employees in the new facility. What I like most about project managers is that they insist on exceptional performance from all their vendors and will minimize risk for the tenant.
A project manager is also a valuable resource to the broker when negotiating the lease. The project manager can provide valuable input relative to the clauses in the lease and related to construction. This includes substantial completion language, timelines and delays, use and structure of the tenant improvement allowance, and landlord delivery conditions.
For example, in a 100,000-square-foot relocation, you will competitively bid real estate economics and look at multiple different buildings, yet all of the buildings will require differ ent physical characteristics, budgets, and schedules. A project manager can help you build a basic business plan for each building scenario, so you can make an informed decision based on functionality, cost, and schedule.
For instance, Christie Fischetti, a principal at CMPG, one of the most prominent project management firms in Southern California, points out that project management requires an in-house resource with both relevant experience and time to manage the project. “It is rare that a client has an employee with both,” Fischetti said. “Compare it to changing the oil in your car. You may have the time, but not the knowledge. Or, you may know how, but you don’t have the time. In both cases, it is best to take the car to a specialist who can perform the service with expertise, and for a reasonable fee.”
Some project managers can also provide move management services, which cover more than just the move. Christie Fischetti shares that “at CMPG, what we call move management covers seven categories: IT, AV, security, signage, furniture, equipment, and the actual relocation. We can manage all of these categories for a client.” Christie continues: “This includes details most companies aren’t aware of and have never considered, such as preparing the specifications, identifying qualified vendors, managing a robust RFP process, ensuring vendors meet landlord requirements, overseeing the work, avoiding tenant delays, tracking the schedule, and managing costs.”
Is it possible to do all of this without hiring a project manager? Yes, and many companies do not hire one. But why? What I have come to figure out over the last sixteen years is that most companies do not know that such a vendor exists. Once executives become aware of external project managers for hire, they usually give it serious consideration, as project managers can offset their fees with overall cost savings and cost avoidance on most assignments.
If you do not hire an outside project manager, the project champion and the broker will serve as project managers. Just like the adage says, if you do not have an assistant, you are the assistant. Working without an external project manager can yield great results, but it is important to know that you have choices, and you can always bring in a project manager if you feel overly burdened or underprepared. It is worth interviewing at least one project manager at the inception of each project to understand their value and hear considerations you might have overlooked.
Once you begin looking at properties, you will inevitably come across opportunities that fit the majority of your needs, but not all of them. Architects can help provide creative designs to a property’s shortcomings.
Having a good relationship with an architect, or having a broker who has a good relationship with one, is always a good idea. In industries such as research and development, diagnostics, pharmaceuticals, medical devices, food production, engineering, aerospace, automotive, and defense contractors, we find they have extension office build-outs in addition to their manufacturing and distribution operations. They will most certainly need an architect.
Most of the time, it is up to the tenant to do their due diligence and decide if the property works for their company. When it comes to office build-out, due diligence is usually at the sole cost and expense of the tenant and the tenant’s vendors. It is possible to create a solution, design it, bid it out, and then ask the landlord to pay for it, but this is an outlier outcome. Payment might take the form of a rent credit, progress payments to the contractor, or full reimbursement of payment to the contractor, depending on the job and the market.
That said, some larger landlords own so much property they have an ongoing relationship with an architecture firm for most of their renovations, repositions, and tenant build-outs. These landlords occasionally allow you to use their architect during the negotiating process to “test fit” whether the subject property can work for you, and they will pay for the consultation. The thought here is that a tenant cannot lease a building if they are not confident they can build out the space in a manner that works for their operations, timeline, and budget. This is very common in office leasing, though less so in industrial.
I do a lot of work with architect Liz Hattox of Hattox Design Group, and she explains that a trusted architect can save you money by starting with a block plan, which is a quick and simple fitting of the business to the prospective building in question. As warranted, you can then progress to a preliminary space plan, which has more detail than a block plan. This is where you actually see the rooms with doors, millwork, and workstations.
Liz says, “When a tenant is looking at quite a few buildings, they should consider a block plan, especially if they have to pay for it themselves, because it costs much less money and sometimes can be done just by sitting down for an hour. I find that owners are willing to pay for space plans. It is a normal, typical, and standard practice to see if the tenant is a fit, and they can get a rough order of magnitude on pricing as well. I think a building owner is more apt to pay for a space plan if he does not think a tenant is just shopping, and he’s really serious about it.”
When you plan a space plan, you must also plan the furniture plan. Knowing the furniture you plan to use will dictate what office dimensions are needed. Knowing what furniture you will be buying will allow you to figure out how much time you need for delivery and installation. Furniture lead times are surprisingly long, so have this conversation early with your architect and project manager, both of whom will have extensive experience working with furniture vendors.
To give an example of long lead times with furniture, when my oldest daughter started first grade, the elementary school teachers were excited about newly purchased and highly reviewed German-designed furniture that was en route to the children’s classroom. Its design would divide the room into groups that could rotate through different arrangements. There would be new desks with ergonomic chairs, round tables with low-height stools that could move around and spin as needed, other round tables that would allow for sitting on the ground, and more. However, the furniture did not arrive until thirty days after the school year started. School officials, teachers, and parents had to work overtime and duplicate efforts to move supplies, break down furniture, and move into a classroom filled with projects, papers, books, supplies, and boxes everywhere. Everything worked out in the end, and students, teachers, and parents alike could see and feel the difference this new furniture had in the classroom. All the other parents said, “Fantastic.”
But my thought was, “How could this project delay have been avoided?”
When it comes to furniture, you can reuse what you already have, buy new, buy refurbished, and buy what the prior tenant used if they have excess furniture available. If you buy new furniture, you will need to resell what you already have. Most people are happy to have someone come and haul off their old furniture if they are buying new, rather than selling it for pennies on the dollar. When dealing with old furniture, you have to disassemble it, potentially buy discontinued parts, pay to move it, and then reassemble it in the new building. The value of going through this process is oftentimes offset by the ability to get a great deal on new or refurbished furniture that is delivered to you.
Material handling systems are the backbone of any warehouse. We usually start the conversation by asking how the client prefers to rack and distribute their products. In a perfect world, we then find a building to match their needs. However, we often find the best of the available buildings first, then adapt the client’s operations to match the building.
Material handling consultants are the vendors in charge of racking, storage systems, mezzanines, forklifts, conveyor belts, automation, and more. Industrial buildings come in different shapes and sizes, and various systems are designed for different dimensions and use cases. By discussing your upcoming move with material handling vendors early in the process, you can be made aware of any cutting-edge methods and systems that might be available for your new building.
More importantly, these findings may change the very nature of your building search. You may find that your products can now be racked safely in a thirty-two-foot-clearance warehouse, rather than the twenty-four-foot-clearance warehouse you are in now. This may drastically change what you are looking for, where you look, and the type of landlord you will be working with. The calculus changes when you start thinking in cubic feet, unit counts, and pallet positions, as opposed to just square feet. In addition, thirty-two-foot-clearance warehouses also have more modern fire suppression systems and may have more trailer parking for logistics-oriented operators.
You can also think of a material handling consultant like an architect of the warehouse. Instead of designing office layouts, they design warehouse layouts that include machinery, racking, aisles, speed bays, and more. They seek to understand the materials, volumes, flow, and nature of your operation within its current building. Then they educate you on the most current methods of handling similar materials and test-fit possible solutions to achieve your optimal output. These consultants can also lead you to great vendors who can help with supplying fire suppression systems, high-pile permits, racking resale, forklift supply, and dock equipment.
Catalina Material Handling’s Freeman Welch starts the process by observing how his clients store their products. “We note their pallet heights and weights, their lift equipment, and the flow of their business. We are there to connect the dots in the warehouse for our client. We assess the lift equipment being used, the aisle width required for the lift, how much storage capacity there is, how high can they go based on the sprinkler system, the commodity and weights, and the typical storage shelf life of a commodity. This is all imperative in coming up with a productive, efficient system for the client.”
Welch also uses material handling solutions with his clients’ brokers to create alternatives that clients can leverage during their lease renewal negotiations.
When considering a lease, tenants should consider asking the prospective landlord if they have a preferred material handling consultant who can lay out the building and make it a more attractive option. I have found that for certain distribution oriented facilities, landlords often already have a racking plan they created for marketing the property, and that can save you time and money.
Industrial engineers can be powerful guides for companies that are relocating their manufacturing operation, and for those looking to implement warehouse automation and robotics solutions.
By speaking with an industrial engineer about your manufacturing process, you can learn what other industries are doing to increase quality and throughput, and gain knowledge that transcends industry boundaries. The reality of manufacturing is that it is a capital-intensive business. Significant machine upgrades are infrequent. Reorienting a manufacturing process without disrupting client orders is challenging, and space is usually limited. The reality is, the chance to relocate a manufacturing operation might happen only every ten or twenty years. The manufacturing environment has changed over the last twenty years, initially with offshoring to China, then nearshoring to Mexico, and more recently, reshoring to the Midwest. It is helpful to have a guide to help you create an adaptable and efficient manufacturing process.
Bob Barry of JBA says, “One of the areas where we provide the most value for clients is driving home the concept of ‘Improve While You Move.’ A lot of clients only move a few times during the life of a business. We always encourage them to take a look at new ideas. We share new ideas from automation companies that can lead to a big opportunity to implement these improvements.
We not only help people move efficiently, but we look at a blank sheet of paper to see how we can improve the process with their current equipment and automation.
“We once moved a popcorn manufacturer. They were in nine different buildings, then moved into one. There was a huge cost to do that, but the efficiency of labor space, inventory, and process flow is now outstanding. People who move often underestimate the cost of making the move, but they also underestimate the added value and productivity they can enjoy.
“If somebody is thinking about making a move, the earlier we can get in, the better. A lot of people we help move have been in the same building for seven, ten, twenty, or in some cases, over forty years. As a result, they have very little idea of the requirements they must meet now, like ADA or high-pile storage. Whenever possible, we get something going earlier rather than later, because the time can be costly. Time is always one of the main challenges. We have a client right now who really needs to move. They have to be out of their current building in a six to seven-month window, but with their heavy manufacturing operation, an ideal time frame would have been ten to twelve months.”
SUPPLY CHAIN CONSULTANTS
Brian Reed, VP of supply chain optimization at Geodis, an internationally recognized transportation and logistics firm, explains how supply chain optimization studies take the entire supply chain into account when working with clients. He sees his approach to customers as an all-encompassing multistep process that can be either run from top to bottom or just executed at any chosen step. The top-to-bottom approach is more encompassing, but of course is a much larger thing to tackle and can be overwhelming. The following is how an engagement typically flows if you go top to bottom:
Supply chain optimization -> Supply chain network optimization -> Logistics/distribution/fulfillment network optimization -> Warehouse optimization (inside the four walls) -> Transportation network optimization (carrier-focused strategies and structure)
The main purpose in a supply chain optimization study is to take into account both supply and demand, along with decisions such as make or buy. For products, you need to decide where you should source (raw materials, components, or finished goods in a “buy” scenario), where you should make them, where you should store them (including both static inventory storage and flow points like cross-docks), and how you should distribute them. Logistics/distribution optimization focuses on facility placement. Supply chain network optimization study might focus on the high-level business components, like how much you need and generally where, but a logistics network optimization would occur afterward to get down to a specific size and format of facilities for distribution and storage.
Supply chain network optimization studies are the computer models that help you identify optimal locations for new distribution centers. These studies help enhance capacity in existing distribution centers and then help reduce overall supply chain expenses. The consultants study the inbound and outbound volumes of different products, shipping and rail transportation, different ports of entry, and lead times.
Network analysis helps you play out different scenarios to find optimal outcomes in a variety of geographies. These studies will help you understand, for instance, if you can better serve your customers out of four distribution centers in each corner of the United States, or if you should just focus on three locations between the East Coast, West Coast, and Dallas or Chicago. A word of caution with network optimization studies: as the saying goes, “garbage in, garbage out.” You will have to spend a lot of time validating and standardizing data to make the study valuable to your company.
A good glimpse into the insights of network optimization comes from Jim Tompkins, CEO of Tompkins International:
We used to say, “we have a men’s store, so the business is going to sell clothes to men.” That used to be a good definition, but today we have to ask, “what kind of men? Are they over fifty years old? Are they wealthy, or are they college graduates? Are these people hip? What percent of our market is in major cities versus rural?” All of these factors impact how the stores will work, what the fulfillment centers will look like, and the overall real estate.
Inaccurate and unsubstantiated transportation data, rents, facility costs, and incentives can dramatically change your results. Supply chain consultants like Jim bring critical thinking to the table. They can look at the data and output and tell you whether or not Las Vegas, Reno, Salt Lake City, Phoenix, and Idaho should be considered for your next warehouse in the western United States. Additionally, they can tell you why they should or should not be considered, based on same-day delivery, availability of labor versus rent rate versus productivity, incentives, and suitable warehouse availability.
WAREHOUSE AUTOMATION AND ROBOTICS CONSULTANTS
When it comes to warehouse automation and robotics, you will find there are several different players and terms in this field.There are consultants who design systems. There are companies that provide physical material handling equipment. There are also robotics manufacturers. Lastly, there are warehouse automation integrators. Some providers combine parts of the above-mentioned business segments into their supply chain or material handling practice. All of this can sound confusing at first, but it is well worth educating yourself, as warehouse automation and robotics are no longer seen as some distant innovation. They are becoming widely adopted and are now seen as a necessity if you are to survive and thrive.
In the introduction, we discussed the main types of warehouse automation and robotics:
- Automated storage and retrieval systems
- Automated conveyor systems
- Autonomous guided vehicles (AGVs)
- Autonomous mobile robots (AMRs)
In addition to these, there are older technology solutions, such as picking systems that include voice picking, pick-to-light, and put-to-light systems. Each system utilizes a series of headsets, scanners, and lighting systems to provide warehouse operators with systems to locate the right products and totes in an optimal manner.
Conveyor systems are largely categorized as transportation, accumulation, and sortation systems. Transportation systems utilize gravity, belts, and rollers to manually move products down the line. Accumulation systems, on the other hand, allow products to accumulate where they can, then move through a light and constant driving force. Sortation systems sort through a variety of different mechanisms to move products in specific directions from one conveyor to another.
Autonomous guided vehicles are pallet running systems. They can be semi and fully automated, depending on the application.They can also provide for the use of a cart that runs underneath pallets, moving them to the speed bay with fewer forklift aisles and automated forklifts in certain applications.
Then you have autonomous mobile robots, offered on a robotics as-a-service (RaaS) basis. This describes the way in which these robots are priced in the warehouse automation marketplace: as an all-inclusive service. By all-inclusive, I mean you pay per robot, and within the price of each robot is the robot’s system design, delivery, training, software, software integration, repair, peak add-on capacity, and software upgrades. The primary challenge for most companies is the up-front capital investment of the system. When this is offered as a service, the large up-front capital commitment is minimized, and it becomes easier to set up a test pilot and scale. The most prevalent type of robotics is found in today’s fulfillment centers.
Chris Dozier is the senior manager of warehouse automation for Ryder System, Inc., a leading logistics and transportation company. Chris works on continuous improvement projects for Ryder, whereby he helps the company set up new warehouse automation systems for its customers and improve existing warehouse operations. He places a heavy emphasis on setting a baseline, being crystal clear on the process you are looking to optimize, and working with partners who have a demonstrated track record of success.
Chris emphasizes how Ryder constantly innovates to best grow its value to customers. These innovations lead to utilizing autonomous mobile robots (AMRs) to overcome labor challenges and improve working conditions. “AMRs help team members so they no longer have to walk through the warehouse aisles with carts and scanners, and can instead have autonomous mobile robots come to them. This allows team members to quarterback which products and parts go within each AMR while reducing travel time. Another example of how Ryder utilizes autonomous guided vehicles is automated forklifts to optimize pallet movement when pallet velocity is over one hundred pallets per hour. These AGVs help with loading, unloading, and internal transfers of pallets.” Ryder’s supply chain teams have intimate knowledge of customers’ starting baselines and can then work through volumes, order profiles, and product profiles to assess potential solutions.
Since the world of warehouse automation and robotics is constantly changing, both in the types of systems available and the abundance of startups, Ryder keeps its finger on the pulse of potential combinations of systems that could work for customers. Because of the constant change and exciting evolution of the industry, Ryder works closely with customers to help them understand the importance of asking solution providers how many installations they have executed and reviewing their track record before proceeding.
Working with warehouse automation and robotics professionals at Ryder can offer companies insight and perspective as to how and when to utilize new technology and automation for optimizing warehouse operations.
THIRD-PARTY LOGISTICS PROVIDERS
When operating at scale, some of my clients start to leverage third-party logistics (3PK) providers to help with logistics and fulfillment. Inevitably, executives have to decide if it is better to expand their operations to support their business growth or to outsource and leverage other partner platforms. If you are evolving toward e-commerce, leveraging outsourced logistics firms can help you understand key metrics. Do you get a sales increase when you shift to same-day delivery? Do you get greater follow-on orders with same-day delivery? What is the benefit of same-day delivery overall? What is the cost? What does it do to your margins? What IT infrastructure do you need next?
Third-party logistics companies can be of assistance if you run into seasonal fluctuations and structural and temporary market shifts. As Jim Tompkins of Tompkins International explained in our recent interview, his client had two distribution centers: one in the East and one in the Midwest. Those two distribution centers are not adequate to get the client through the holidays, so he helped the client put a plan into action for the necessary people, processes, and technology to double the number of SKUs and provide a 50 percent increase in throughput.
Another example of 3PKs rising to meet the market for transportation and logistics needs occurred during the pandemic of 2020 with XPO Logistics. Ashfaque Chowdhury, president of supply chain, Americas and Asia Pacific, explains how XPO introduced a flex program. The program leveraged its access to more than 30 million square feet within its network of warehouses. This additional warehouse inventory was made available in response to those impacted by the abrupt supply chain shock.
“It was common to hear of containers full of retail goods, apparel, and consumer products received within various ports in the United States that could not be delivered to shuttered retailer locations,” says Ashfaque. “We were able to provide space and a platform for customers during a critical time.”
Third-party logistics companies come in various sizes and levels of sophistication. They range from small to midsize operators that rely on manual processes and a localized presence, all the way to large global companies like XPO, which has one of the most advanced warehouse operations and IT infrastructures in the modern marketplace.
Much of what you can gain by working with 3PKs like XPO Logistics is their cost structure, speed of execution, flexibility, and expertise. Ashfaque explains, “XPO has an extensive footprint, operating thousands of warehouses globally. We are the fifth-largest industrial tenant globally and have existing relationships with major industrial landlords. These relationships provide greater access to real estate and help us speed up lease negotiations for our customers. In many cases, we can also provide space at a reduced cost.”
When it comes to speed of execution, you must realize that XPO Logistics executes roughly sixty building searches per month. This is more than most companies do in their entire existence. This repetition of execution in setting up new warehouses means it has a robust process, seasoned vendors, and pre-negotiated master service agreements, leading to a seamless setup of new facilities for customers.
Ashfaque finds that “XPO’s scale also leads to flexibility. We are able to provide multi client solutions by sharing warehouses through XPO’s Direct platform. XPO can also shift obligations with landlords, where it leases a significant volume of warehouses. As a result, it can make space available in every major market.” This means a CEO who would ordinarily have to decide which market to locate their 200,000-square-foot distribution center in can split it up into multiple smaller locations closer to the customer and make adjustments in greater frequencies.
Lastly, 3PKs can provide expertise. Much like a broker can provide expertise in having the entire playbook of a transaction at your fingertips, companies like XPO Logistics have entire teams of industrial engineers, facility engineers, real estate specialists, human resources and recruiting, technology experts, procurement teams, safety, and much more. The same goes for IT expertise whereby they optimize labor and inventory. The exponential effects of these complementary skill sets result in superior results for their customers.
SITE SELECTION CONSULTANTS
Didi Caldwell of Global Location Strategies is one of the country’s most experienced site selectors in that she has worked globally on large infrastructure, industrial, manufacturing, and distribution assignments for large companies. Site selection consultants are flat-fee-based consultants who work with organizations in a similar vein as brokers and supply chain consultants but have more of a focus on assessing greenfield development and the politics and economics of operating in new geographies.
In an interview with Didi, she explained the benefits of flat-fee based pricing in that once the scope of work has been agreed to by all parties, it really limits the client’s expense exposure while bringing a valued member on to the project team.
There are three main scenarios present when manufacturing and distribution companies reach out to site selection consultants:
- Underwriting and analyzing expansion into new geographic regions due to capacity constraints
- Adapting to changing business conditions causing companies to migrate to certain areas over time as labor availability infrastructure and geopolitical risk shift
- Evaluating redundancy, consolidation, plant closures, and necessary reinvestment during mergers and acquisitions
Site selection is most often focused on greenfield development opportunities in conjunction with labor analytics and economic incentive packages. Site selectors like Didi take client requirements and filter them by geographic regions, taking into account state and municipal-specific characteristics, through county demographics, and down to the city level. In doing so, they uncover different land opportunities owned by public entities, and in many cases, can contribute that land for the development of a new manufacturing plant or distribution center.
Labor analytics is the study of the labor pool as it relates to your company’s operation and the geographic area where you are looking to do business. These studies will help you understand which markets have union or nonunion labor and skilled or unskilled labor, and then analyze the locales’ wage rates, hiring packages, access to talent, demographics, and population trends.
When evaluating labor, start at a high level to get an understanding of each market’s attributes. You should assess the following:
- Labor quality: The concentration of workers in a particular industry or occupation, the number of degrees or certifications awarded on an annual basis, turnover rates, productivity, and so on.
- Availability: The size of workforce, number of workers with the requisite skills, unemployment rates, and so on.
- Costs: Wages, benefits, unemployment, insurance, and workers’ compensation
Economic incentives are tax breaks companies gain when they move to specific municipalities. Tax breaks are more complicated than they seem. There are several different kinds of incentives. Your site selector will help you understand the different lenses through which you can approach incentives:
- Cash incentives: These are cash, or cash-equivalent, incentives, such as free land.
- Infrastructure incentives: These include infrastructure, site improvements, and site prep.
- Performance-based incentives: These are incentives that are realized as the project develops. As you create jobs and as you invest money, you are able to realize the value of these incentives. A good example is property tax abatements.
- Nonmonetary incentives: These can be incentives that speed up your project and reduce red tape, like expedited permitting.
An economic-incentive consultant can help you understand where these incentives exist and help you determine whether or not they are worth the savings.
Whole books are written about how to interview vendors and structure contracts, so I will not rewrite them here. Rather, I aim to give you a short primer. If you would like to delve deeper, I recommend you pick up The Vested Outsourcing Manual by Kate Vitasek.
Most executives and project champions triangulate information from their internal team members and external vendors. This triangulation is natural and allows executives to level up their knowledge with each conversation they have. An all-hands meeting to kick off the project is helpful, as it can be beneficial for every vendor to meet the other project team managers and hear their feedback.
One of my national logistics clients is a great example of this approach in action. This client was in the process of doubling their capacity within Orange County, California. Our initial challenge started with a lack of suitable inventory. In this submarket, the base of the industrial stock was developed in the 1970s and 1980s, when manufacturing was more prevalent. Manufacturing buildings during this time had lower warehouse clearances between sixteen feet and twenty-four feet, large amounts of power, modest parking, and minimal trucking areas meant for smaller trucks. Some manufacturing buildings only came with grade-level loading doors instead of dock-high loading.
In this assignment for my client, we located an older manufacturing building that was being utilized by an aerospace company.The aerospace company was also in the process of being sold to another corporate parent. This logistics client assignment occurred at a point in time when market pricing had been compounding for several years. The cost-prohibitive pricing of new Class A industrial buildings meant we had to focus on Class B buildings. We rationalized that we could operate profitably if we could find a creative solution to utilize this old aerospace manufacturing plant.
During our initial property inspection, we made a note of the building systems, ceiling height, and fire suppression system. Once back at my office, I contacted my material handler, fire sprinkler contractor, and high-pile storage consultant network. Each member came out to inspect the property, report their findings, and suggest solutions. We were able to design a fire sprinkler system upgrade that allowed us to store our products at the very top of the warehouse within a newly designed racking system. The fire authority and city inspectors needed to inspect and approve of this racking and fire suppression system—the fire sprinkler upgrade alone totaled $275,000 for this 100,000-square-foot industrial building.
Because we were able to identify the problem early, we designed a solution. Our next challenge was figuring out how to fit this solution into the context of the negotiation. We would need to figure out a way to structure the lease in a manner where the aerospace company paid for the sprinkler upgrade without paying for it as a cash outlay. My client, on the other hand, was a conservative private company that made capital investments in its businesses regularly. We decided to fund the sprinkler upgrade so we were in control of the vendors and quality, but only if the aerospace company would give us free rent to cover the cost of the upgrade.
The leasing concession meant the aerospace company could get out of their excess real estate without a huge expense. My client would be able to make the building functional and code compliant for the expansion of their operation, and we did not have to pay rent on the building until we had finished the upgrade. Creating a solution out of this older manufacturing facility turned into a competitive advantage for my client.
What started as an initial problem for us turned into an interview with each of the vendors, helping us transform our challenge into an opportunity to make use of an antiquated property. It was in discussing challenges with a few vendors that we were able to really understand the nuance of the problem and create a win-win solution.
CREATE YOUR PRELIMINARY TIMELINE
Now that we have thought through who is going to be on your team, we need to account for how time will impact everybody’s ability to complete the project. It is in the layering of everyone’s considerations that a project takes shape and you can make informed decisions.
My family has traveled extensively over the years. We try to travel as a whole family whenever we can. This includes my parents, my wife, my sisters, our kids, our in-laws, and so on. We have traveled as a group of ten, up to a group of twenty, to Ireland, Scotland, Italy, Israel, Turkey, China, Japan, and more. There is nothing like planning a trip to a non-English-speaking country with a big group to make you appreciate a good itinerary. You want to know where you need to be each day, when you need to be there, how you are going to get there, who will be included, and the cost. You want to know this well in advance. The more you rely on a guide and a travel agent, the more you can enjoy the vacation.
Once, we were in a Turkish airport, about to fly from the fairy chimneys and hot-air balloons of Cappadocia to the timeless ruins of Ephesus. My brother-in-law’s first name was spelled as “Tony” on his passport, but the plane ticket spelled his name “Toni,” with an “i” not a “y.” At the very last minute, when half the kids were already on the plane and the engines were whirring, the airline staff said they would not let him on the plane because of the spelling discrepancy. I was halfway through the metal detector and had to run back to help him.
We were sweating profusely in the small, non-air-conditioned municipal airport, haggling back and forth, and finally figured out the problem. They agreed to let us pass and make our flight. Looking back at the chaotic environment during the airport experience, I figured out what saved us. The travel itinerary! It had all of our names, locations, schedules, and arrangements all on one document.
That document was just for seventeen people. Now imagine putting a timeline together for hundreds of employees, thousands of pallet positions, hundreds of trucks, and dozens of vendors. This is even more necessary because it helps glue the project together and keep everyone on track.
PROJECT TIMELINE MINDSET
Go into an initial project timeline knowing a portion of it will be an academic exercise. For example, a part of the plan is dependent upon securing the right building. You can prepare for the fact that you will have an executive office that requires furniture, data connections, and artwork. All useful planners love prolific boxer Mike Tyson’s quote, “Everyone has a plan until they get punched in the mouth.” But I think this quote from General George S. Patton is more relevant: “It is in the act of creating the plan that the real thinking goes into the project, not the adherence to the plan.”
Who you have on your team will also dictate your initial timeline. Some team members have never assembled a detailed project timeline before, whereas others are project wizards who obsess over inconsequential details. I find that most executives want to know that their team has thought through, written down, and discussed the details long before taking action.
LEASE EXPIRATION AND HOLDOVER
Your timeline should start with your current lease expiration date. This is the date when your warehouse is no longer yours, and it is now the landlord’s. Knowing your lease expiration is the easy part. Thinking through all of the steps that need to take place in order for you to be fully operational in your new building in advance of your lease expiration, but not too far in advance, is the real challenge. It is both an art and a science.
When looking at your lease expiration, you must look at the section labeled Holdover. This is the section that states you are not allowed to stay month-to-month in the building after your lease has expired, and if you do, you will be penalized by paying 125 to 200 percent of your usual rent. The landlord is looking for stability and consistency of cash flow. So is the landlord’s lender, if there is debt on the property, and the landlord’s investors. The reason for this is that a month-to-month tenant leaves the landlord without ample time to lease up the property again.
You will also want to think through when you will do restoration work, do your final walk-through, sign your final releases, and facilitate the return of your security deposit.
We have discussed where you are moving from. Now let us shift to where you are moving to. When you are shopping for a new building, you must think about when it is appropriate to negotiate. For example, if you are one year out from your current lease expiration, are there any buildings available today that you can sign a lease on now that will start in twelve months? The larger the building, the higher the probability that the answer is yes. For example, renewals on 5,000-square-foot warehouses happen three to six months out. Renewals on 75,000 square feet may happen six to twelve months out, and renewals on 300,000 square feet may happen twelve to eighteen months out. Leases on spaces up to 1 million square feet can happen twelve to twenty-four months out, especially when negotiated on ground-up construction.
You benefit by starting the preliminary project timeline process early. The primary reason is that once your broker starts to engage the brokerage and landlord communities, new opportunities will start to percolate. It is in the uncovering of new opportunities that you are able to evaluate these and incorporate them into your timeline.
In my experience of hundreds of real estate transactions, there are only a few that have had enough time to truly benefit from advance forward planning. In conversations with architects, project managers, supply chain consultants, and warehouse automation, literally every single one had a moment when they discussed the timeline and how starting early had a great benefit.
BASIC COMPONENTS OF A TIMELINE
The basic components of an industrial transaction differ based upon the nature of the transaction. If you extend the lease on your existing facility, you will have one timeline. If you relocate to a leased facility, you will have a second one. If you buy your next facility, you will have a third timeline. If you buy land and build and relocate your next facility, you will have a fourth timeline. Lastly, if you have to sell your current building and then buy a new building to move into, you will have a fifth timeline. Rather than detail all five scenarios, I will give you an example of the most common timeline for a move.
- Initial assessments—one month
- Lease review
- Physical-condition review
- Operational review
- Existing landlord review
- New building programming
- Build your team—one month
- Assess internal capabilities
- Assess external capabilities
- Select project champion
- Interview vendors
- Select vendors
- All-hands meeting
- Build your timeline
- Market engagement—two to three months
- Assembling opportunities
- Property tours
- Initial inspections
- Secondary inspections and bidding
- Lease proposal negotiations
- Lease contract negotiations
- Tenant improvements—two to four months
- Space planning
- Work letters
- Furniture, fixtures, and equipment—two to six months
- Move day—zero to three months
- Decommissioning—one month
Most executives want to plan as far in advance as they can, but the business cycle does not always allow them to do so. They do not always have clarity on their future revenue, operational bottlenecks, or financial obligations all at the same time.
I can empathize. Remember, though, your lease will expire whether you have clarity or not. While you may not have clarity before you devise your preliminary timeline, you will have clarity afterward.
I have seen a wide variety of project timelines, ranging from nonexistent gut checks to fully formed construction-project planning Gantt chart line items. The more complex the project, the more complex the timeline should be. No project benefits from less foresight. The idea here is to get comfortable with planning.
Now it is time to take your timeline into the marketplace and alter it based on real-life conditions. It is helpful to know what buildings are available, as properties are available at specific points in time. You might find the perfect building available now, but you need six months before you can lease it. You might find that a less-than-ideal building is available, but it is available at your ideal time. Can you modify the building to make it a win-win scenario? Only by engaging in the market will you be able to make these kinds of judgment calls.