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Critical Site Selection Factor #4: Occupancy / Construction Costs on An Upward Trend

Land costs remain the biggest wild card, but construction costs have been rising as well.

Q4 2014
This series examines the top-10 site selection factors as decided by the respondents to AD's Q1 Corporate Executive Survey. Labor costs, skills, and highway access are top of mind; construction and occupancy costs are key; and availability of ICT infrastructure is getting closer scrutiny. Find out what else your company should consider when making its next location/expansion decision…

Occupancy and construction costs continued to be top of mind for site selectors, moving up one spot in the rankings in Area Development’s latest Corporate Survey. Occupancy or construction costs also indexed higher on an absolute basis in the most recent version, with a score of 87.4 in 2013 compared with 82.8 in 2012.

The higher importance reflects not only the continued proportional significance of occupancy and construction costs in companies’ overall cost equation, but also the fact that such costs are continuing to ratchet up as the U.S. and global economies proceed with recovery at varying paces, increasing demand and nudging up prices. So companies are casting a more critical and anxious eye at this massive element of the cost equation, industry experts say.

Land and Construction Costs
Such costs typically are the second-most-important cost consideration for companies after the cost of labor, says Eric Stavriotis, a senior vice president at CBRE’s Economic Incentives Group. Of course, some key options affect occupancy or construction costs, most crucially a company’s decision whether to erect a new facility or move into an existing building. If a company can wait the several months or even few years required to put up a new facility, or if a greenfield site is crucially important for some reason such as facility specialization, then this factor enters heavily into its considerations. Construction costs include site acquisition, site preparation, and installing infrastructure.

The most variable of these costs, consultants say, is land and associated infrastructure development, because their varying prices around the United States reflect foundational geographic and economic factors as well as intra-market specifics that typically dwarf any variations in the actual costs of erecting a building.

“There are pretty significant differences in land costs across the country,” notes Scott Kupperman, founder of Kupperman Location Solutions in Chicago, whose clients typically need sites for light manufacturing or distribution. Similarly, he says, pre-development, roadway, and other utility-infrastructure costs also can be highly variable depending on potential site locations. “One site may cost you $1 million and another site might cost you $7 million,” he explains. “So land is more of a blank canvas, more of a question mark, and less predictable than the actual costs of construction going vertical.” And, Stavriotis notes, land prices overall “have come back up after the recession.”

Companies also have a lot to think about when it comes to construction costs per se. Those also have been rising lately and are “extremely high right now,” Stavriotis says. “Money is still cheap, but if you look at what kind of risk a contractor has to take to build a building right now, from an insurance perspective, and what it costs to get the right [labor] trades to do it, that’s expensive.”

Meanwhile, occupancy costs also have been ticking up. A semi-annual survey by CBRE Global Research and Consulting found that global prime office occupancy costs, for example, rose by 2.3 percent year-over-year, and that the 3.3 percent increase in the Americas was the biggest boost for any region because the U.S. economy is re-emerging as one of the world’s best-performing. Office demand by high-tech and energy-related businesses in markets such as Seattle, San Francisco, and Houston surged the most, with suburban Seattle posting the largest annual increase, 19.4 percent.
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