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Occupancy and Construction Costs Taking On Increased Significance for Site Selectors

As the economy continues its downward spiral, site selectors are paying closer attention to occupancy and construction costs, and the results of Area Development's 2008 Corporate and Consultants Surveys reflect their concerns.

Dec/Jan 09
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Build-to-Suit Options
Some site selectors are still exploring build-to-suit options - if the terms are attractive. Risk management is key when few want to commit to long-term agreements. In a tenant's market, many may prefer to lock in favorable lease rates than build-to-suit, according to industry watchers. What's more, relatively few build-to-suit transactions can be completed in today's environment due to the credit crunch. "If a company is selecting a site today, existing building owners are highly motivated to do what it takes," says Brown. "If a company has the means or credit to finance new construction, construction pricing is at its lowest point in many years."

Of course, the build-to-suit option also depends on company's culture. Some companies will only entertain options that allow them to own the real estate, but many - especially public companies - prefer lease arrangements. Cranmer reports a tremendous slowdown in construction and in location decisions. Corporations, he says, are guarded about making long-term decisions in the current client. And the build-to-suit developers can't get the financing they need to complete projects. "I have seen more projects put on the shelf in the last two years that at any time I can remember," he says. "And I've been doing this 30 years."

Corporate Survey 2008
Combined Ratings* of 2008 Factors
Site Selection Factors                   2008
1. Highway accessibility 95.4
2. Labor costs 91.4
3. Occupancy and construction costs 90.4
4. Tax exemptions 88.6
5. Energy availability and costs 87.9
6. Availability of skilled labor 87.7
7. State and local incentives 87.2
8. Corporate tax rate 85.3
9. Low union profile 82.7
10. Available land 82.0
11. Availability of buildings 80.8
12. Proximity to major markets 78.7
13. Right-to-work state 76.6
14. Environmental regulations 76.1
15. Expedited or "fast-track" permitting 72.5
16. Proximity to suppliers 69.2
17. Availability of long-term financing 64.2
18. Availability of unskilled labor 62.9
19. Training programs 62.3
20. Raw materials availability 56.8
21. Availability of advanced ICT services 55.5
22. Accessibility to major airport 53.3
23. Proximity to technical university 38.4
24. Railroad service 27.2
25. Waterway or oceanport accessibility 15.7
*All figures are percentages and are the total of "very important" and "important" ratings of the Area Development Corporate Survey and are rounded to the nearest tenth of a percent.
Sale-leasebacks may be an option for some industrial site selectors that do need to expand but don't have the access to capital to build a new facility, according to Ronald Pollina, Ph.D., president of Pollina Corporate Real Estate in Park Ridge, Illinois. "Sale-leasebacks are a creative financing vehicle and it doesn't have to be for an existing building," he says. "We have structured sale-leasebacks for buildings that are going to be custom-built for clients that allows them to get the best of both worlds."

Looking Ahead
Minimizing upfront investment costs is the name of the site selection game in the near-term. Opportunities that reduce upfront cash outlays will pique the interest of site selectors, according to Lawrence Moretti, a senior team member of Deloitte's Global Location Strategies and Corporate Real Estate Practices. "Credit is a lot tighter," he says. "Reducing occupancy costs is a key consideration."

Reducing occupancy costs could mean going green for some industrial sites. Greener is better, and that trend will continue to be more pronounced going forward, according to Ragsdale. While companies are still looking for such amenities as wider truck courts, off-dock wall trailer parking, off-street access roads to accommodate truck queuing prior to entering the property, and controlled access, he says that concerns over the environmental impact of these facilities is growing rapidly: "Many companies are looking at cost-effective ways to reduce carbon footprint, such as employing the use of bio-swales to capture groundwater runoff, using fluorescent lighting with motion sensors, and increasing the R-values of insulation in cold-weather climates."

The big "X factor" is the economy. So site selectors are facing business questions more than location questions until the economy settles down. In the meantime, Cranmer is seeing more financial feasibility of projects than in the past. "Due diligence is more important and more rigorous than ever," he says. "We've gone from the expansion mode we've experienced for the past 15 to 20 years and we're retrenching as we move to contraction mode. There will still be relocations, but it's a new world out there."

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