Earlier this year, we partnered with a 100,000 sq. ft. lawn and garden distributor to evaluate the merits of extending the lease in their current facility versus relocating to another.
The requirements for this distributor were basic, and with some capital investment they could relocate without too much disruption.
For LIDD, this assignment was straight-forward:
• Analyze the current distribution center to determine the optimal size
• Evaluate relocation options vs. status quo
• Determine the CapEx to relocate
• Complete lease negations with a landlord to understand long-term rental rates
• Make a decision to stay or go
Following our analysis, we all agreed that the existing building was too large. In fact, through a warehouse reset, the tenant could eliminate up-to 16% of its existing square footage. At $10.00 per sq. ft. that would be a meaningful savings.
By looking at the CapEx required to relocate and set-up at a new facility, we determined a rental rate threshold that could justify renewing the lease in the poorly sized building.
Supported by facts and data, we began lease extension discussions with the existing landlord for a 7-year lease term. The landlord quickly demanded a take-it or leave-it increase of $1.00 per sq. ft. This was particularly concerning as our data model required rental relief, not a rate escalation.
Unfortunately negotiations broke off. We were thrust into the marketplace and began to look seriously at new options. Since the tenant had taken a proactive approach to securing a lease, an appropriate building was easily sourced and the relocation was completed smoothly.
While there is nothing unique about this series of events, it is a simple reminder of the benefits of beginning your leasing decisions early.
A good rule of thumb is to imagine that you had to relocate your entire operation to another building within another city. Think of all the planning, construction, administrative and execution that would be required to seamlessly pull this off. Once you’ve road mapped this, allow yourself that much time plus an additional 6 months to successfully execute a reasonable lease agreement.
Like the tenant above, you may begin your real estate assignment with a conceptual idea of how it will play out, but outside influences can always complicate the process.
As consultants in Supply Chain Infrastructure, LIDD’s mandate is to help organizations make better decisions in their real estate, material handling & IT systems. As a licensed real estate brokerage, LIDD works exclusively with users of space to protect precious capital from going to waste.