Industrial site selection involves so much more than just the cost of real estate. Brandon Podolski, partner and industrial sector leader at Plante Moran Cresa, stresses the importance of taking many factors into account before considering a real estate transaction, regardless of whether it involves entering a new state or moving to a neighboring city.
“Too often, when companies are expanding or consolidating locally, they spend 90 percent of the time looking at the lease rate or real estate costs and don’t account for the impact on operations, labor, cost of goods sold, expenses, taxes and supply chain, or investigate all available incentives,” says Podolski. “These are just some of the components we analyze in a national site search, and they also make an impact on a local scale. Whether leasing, buying, or building, this is more than a real estate deal; it is a business decision that requires due diligence and thoughtful analysis. An experienced adviser can identify and evaluate all of your options and develop a real estate strategy that is closely aligned with your business plans and goals.”
Companies with multistate operations will commonly analyze the cost benefits of prospective locations in terms of labor, logistics, taxes, incentives, utilities, real estate, and other location specific factors. Each of these variables can impact the true cost of conducting business at a selected location. Being proactive can make a sizable difference.
The critical factors of national site selection
Logistics plays a key role in selecting the best location. When you think logistics, the first thing that comes to mind is transportation; however, that is just one component. Logistics is the planning and execution of efficient and effective flow and storage of all goods, services, and related information to meet customer requirements. Analyzing your existing customer and supplier base and how it ties into a location decision and impacts operations, cost, and timing can be a prominent factor in where to locate. Businesses should also examine where they procure raw materials in determining the best location for expansion or new investment.
Transportation costs remain an important consideration in location strategy. It’s important to understand freight requirements before deciding on a specific site to ensure necessary access to interstates, rail, and airports, as appropriate, as a location many miles from the main interstate is not conducive to an operation heavily reliant on truck shipping. Modeling how these costs will change based on proximity to suppliers, warehouses, and customers is an important consideration.
Taxes and incentives
State tax structures and incentives are one of the primary items in national site selection. Rates for franchise, real, and personal property taxes can differ significantly from location to location. Corporate income tax structures vary greatly as well, and some cities have an additional payroll or inventory tax. Some states are more willing than others to offer tax abatement programs, although they are sometimes specific to an industry such as advanced or high-tech manufacturing.
It’s important to conduct detailed due diligence to determine what the tax impact will be on your business and leverage any applicable state and local incentive programs. Many states have an economic development staff that can offer creative programs to help make locating in their state more affordable. Having a trusted adviser in your corner, one who is committed to your success, can be very valuable in this regard.
Labor costs and availability are significant factors in site selection, and they vary widely across the country. A great incentive package does not necessarily mean the best business decision if it leads you to an area where the pool of employees does not match the skill sets your organization needs or its projected growth. Industrial organizations need to look at their requirements for engineers, highly skilled employees, and general labor compared with salary rates and availability for each prospective location. Also, if you are a large user of energy or water, compare the cost of utilities across markets. Water rates are significantly higher in certain states and need to be factored in the analysis. Negotiating utility costs is an often-overlooked strategy.
Apply these strategies when looking to relocate or expand locally
Understanding the best practices of national site selection allows companies to look at local real estate transactions differently. The more factors about potential sites you arm yourself with, the more information you have to make a smart business decision and gain a competitive advantage. Working with an adviser when you have a new project or are in the quoting stages can give you the time necessary to conduct a thorough analysis of all options.
Comparing variables not specific to the buildings can tell you the true cost of a location beyond the price of real estate. Analyzing local property tax rates and location-specific incentives provides another perspective to a local real estate transaction. Comparing logistics costs and the proximity to customers and suppliers are also key components. While utility rates may not significantly differ in a local transaction, the energy usage and efficiency of facilities can be estimated based on roofing, windows, lighting, and HVAC equipment.
The bottom line is that choosing a location based solely on where real estate costs are the lowest can cause other factors to become unaligned. That’s when market knowledge and a disciplined approach to the selection process become critical, even when assessing locations within a small radius.