In the tight Southern California industrial real estate market, fierce competition requires an even fiercer strategy.
Domestic businesses housed in the Inland Empire need room to grow. Streaming in an unrelenting current, shipments from Asia flood in through the ports of San Pedro and Long Beach. These combined demands have pushed vacancy rates down to a very low level. Right now, they sit at less than 6 percent.
“The industrial market is very tight in most of Southern California, ” says David Salazar, Managing Director with CresaPartners in Ontario, Canada. “You’re competing against both existing and new industrial companies for the best building in the best location.”
Smart Business spoke with Salazar about how to surpass the competition and complete the best deals in a challenging industrial real estate market through a proactive strategy.
What makes capturing prime industrial space so difficult?
With two major ports in the vicinity, the Inland Empire has become the distribution center for the entire western United States. Even with the slowdown in the economy, we’re continuing to see high demand in the area. In terms of imports from the Far East, shipments continue to be strong. In this type of environment, tenants have a hard time getting the best deal on real estate transactions. In order to secure the lowest cost of occupancy on the building that is the right size and in the right location, businesses must be strategic to create opportunities for themselves.
Why should businesses start the process years in advance?
One of the biggest mistakes that companies make in terms of finding the best industrial facility is waiting too late to start the process. Each day that brings you closer to a lease expiration decreases your options to create leverage with the landlord. If you want to have time on your side, you should begin to develop a strategic plan one to two years before you need to make a final decision.
Even if you want to stay in your existing location, working on the process in advance gives you the option of considering all possible alternatives and understanding the trends that are in the marketplace. This will be invaluable when you begin the negotiation process with your landlord. The objective of starting early is to give you a competitive edge.
How can a strategic plan give companies a competitive advantage?
A real estate plan should support the company’s business objectives. Costly mistakes can be avoided if there is true alignment of the real estate objectives to the company’s business plan. By taking the time to plan how real estate can support a company’s short- and long-term needs, companies move from a reactive position to a proactive position of strength. The objective is to develop a plan that meets the company’s financial, operational and logistical needs.
What should businesses do after they formulate their strategy?
Once the plan has been approved internally, the manager responsible for the initiative should begin to work with an industrial real estate adviser. You should make sure that your adviser’s objectives are in alignment with your plan and that he or she does not have any conflicts, such as representing landlords. You want your own advocate, an adviser that has your best interests in mind. Services should include market research, transaction management and project management. The team should be organized with a single point of contact. Review of the plan by all parties will help assure a timely and financially successful outcome.
Your adviser can investigate the marketplace. This includes research of local trends and conversations with large developers. Getting in on projects early can create win-win situations where you secure a property at a competitive rate and possibly have a say in some design and customization options.
What other tips can you offer for effective renewal or new lease negotiations?
One way to decrease the stress of negotiations is to try to control the property for longer periods of time. Signing a long-term lease may provide your company with greater concessions from landlords. It also provides you with greater control of the property over an extended period.
If renewing the lease is the objective, creating a competitive environment by identifying possible alternatives will increase your negotiating leverage. If you have a 10-year lease and know you want to stay, you could start the renewal process in year eight or nine. This locks in the deal prior to the property going back on the market.
Finally, using a tenant representation specialist will provide you with a personal advocate and can help to avoid possible conflicts of interest.
DAVID SALAZAR is the Managing Director for CresaPartners in Ontario, Canada. Reach him at firstname.lastname@example.org or (909) 456-8825.