By Bridget McCrea
Selecting the right location for a new or expanding distributorship isn’t a step that should be taken lightly. Grabbing the first opportunity that rears its head in a target geographic market, shopping solely on price, and neglecting to do in-depth demographic research before signing a lease are common mistakes that can be avoided with a little upfront legwork.
“Choosing the right location can easily become overwhelming,” says Patrick Sprouse, executive vice president at Houston-based commercial real estate firm S.E. Covington & Company. “Distributors in search of space must not only find the geographic location that’s right for their logistics and workforces, but they also have to ensure that the space allows for their retail, office, and/or warehousing needs.”
Striking a balance between some or all of those elements can be daunting. At BJ Electric Supply, Inc., of Madison, Wis., President Keith Topp says the company has taken a slow, methodic approach to physical expansion. Key criteria when choosing locations over the years have included close proximity to target customers, availability of warehouse space, and affordable lease rates.
Vertical height also comes into play when BJ Electric is on the prowl for new space for branch locations. “We don’t do much in the way of small parts shelf storage. Instead, we use machines that compactly store our inventory in pans in sections as high as 24 feet,” says Topp. “We also use a lot of pallet racking, so we don’t waste much air space.”
Topp says he also looks for facilities that include ample space (20,000 square feet + office space, for example), overhead doors, and loading docks. Finally, he says close proximity to busy streets is critical and allows the 3-location distributor to serve its contractor customers in the most efficient manner possible. Intent on opening a new, full-service branch location in Milwaukee in the near future, Topp says he’ll once again turn to the criteria that have worked well for his company over the last 43 years.
“I really wouldn’t change anything about the way we handle the process,” says Topp. “We put quite a bit of research and thought into it and are generally pleased with the outcome.”
The Right Stuff
Sprouse, who works often with industrial and retail clients that need startup or expansion space, says distributors should kick off the selection process by using a narrow search filter, and then widening the search out from there. Plan your desired logistical process out before looking for space, as this will significantly reduce the amount of time spent “weeding through space that won’t work,” says Sprouse.
Key questions to ask yourself during this early phase include: How many loading docks or drive-ins will I need? Does my process require cross docks? How much office space will I need on site (to accommodate administration, sales and marketing, etc.)? “If you cannot find spaces that work to your planned logistics,” says Sprouse, “then broaden out your search.”
Once you’ve narrowed your search down to a few good options, check out the financial aspect of the deal (lease rates, terms, and so forth) as well as the facility itself. Building construction materials are a particularly important point that many companies overlook. A metal building with the right ceiling height, dock high access, or floor load, may be an attractive choice at first, says Sprouse, but it could come with an especially high power bill every month.
“Keeping environmental conditions in a range that does not damage inventory, especially during stretches of hot summer days, will become a financial drain in a metal building, even when it’s insulated,” Sprouse warns. “On the other hand, concrete and ’tilt-wall’ constructed buildings are easier to control environmentally.”
If you need a mix of office space and retail/counter space for order pickups, Sprouse says flex space options could be a good choice. Described as 30-50% office and 50-70% warehouse, flex space typically ranges in size from a few thousand square feet to 20,000 square feet. “This is a good alternative for small to midsized distributors who can also gain the added benefit of being located closer to their engineering and electrical contractor customers, both of which gravitate toward smaller, flex space options.”
When reviewing leases, knowing the difference between terms like “gross lease” and “modified gross,” is critical. With a gross lease, for example, you pay one fee to the landlord for your real estate. Modified gross, on the other hand, generally means that the gross lease will not cover some costs, such as electrical service. “If your landlord proposes a modified gross lease,” says Sprouse, “be sure to find out exactly what the modification is.”
When analyzing and comparing lease deals, Sprouse says distributors should use the information they’ve gathered to put together the best possible comparisons. Include tenant improvements that the landlord is willing to provide (which should be taken out of the gross rent in the analysis) and be sure to look at both usable square feet and rentable square feet. Two buildings – both equipped with 10,000 rentable square feet – for example, are not necessarily comparable if one of them includes 1,000 square feet of unusable, obstructed space.
Finally, Sprouse says distributors must factor in potential rent increases, how often they will occur, and whether they are tied to a measure like the Consumer Price Index (CPI). “Be sure to take these increases into account when coming up with an average or blended rental rate for a specific property,” says Sprouse. “It’s surprising how clearly the right economic choice stands out after a thorough analysis of lease proposals.”Tagged with tED