Location decisions are rarely obvious; supply chains are complex, and comparing business, tax, and incentive climates requires specialized skills. But this dynamic is not new, as generations of leaders have parsed data, narrowing to one the costs and benefits of competing locations. What is new, however, is the risk profile of acquiring an existing food facility, where unforeseen issues or hidden defects are magnified by the immediate necessities of speed, efficiency, and throughput.
Perhaps the single most visible change in how food manufacturers expand their manufacturing footprint and acquire capacity is the role food safety now plays in site selection. Historically, industry executives relied on brokers and site consultants to provide surveys of available plants and sites; business, tax, and incentive filters narrowed the list, and the property tours began. Against the perception that vacant food facilities provided the least cost and quickest path to production, buildings were ranked and inspected, with the newest and most modern plants garnering keen attention. Pricing was secondary, if even relevant in the early stages; more rigorously analyzed were the facility’s production infrastructure — bulk ingredient systems, refrigeration, process steam, chilled water, and waste pre-treatment — and the fitness for intended use of the structure, site, and labor pool. Marshalling the parade were process and mechanical engineers, and manufacturing and operations executives charged with creating the production capacity within the building envelope.
For the most part, the site acquisition process in 2000 remained as it was in the 1950s; to be sure, the size, scale, and necessities of automation and efficiency evolved, but the process remained unchanged. That is until 9/11, when fears of bioterrorism seemed randomly to intersect with increasing product recalls and food safety issues, all of which aggregated public and regulatory anxiety, resulting in 2010’s revised and strengthened Food Safety & Modernization Act (FSM).
The ensuing shift in how and where food was manufactured, and in what size, type, and configuration of facility, was geologic in its upheaval. To call the FSMA a “disruption” fails to capture the full impact; the process of how food facility site selection, and indeed the types of facilities deemed desirable, forever changed. Even today, conditions remain uncertain as food manufacturers attempt to anticipate the regulatory standards of occupancy and production to which they will be held.
In this connection, it is noteworthy today what leads site pursuits, appearing early and with significant sway. Clear heights, expandability, column spacing, truck loading, and roof condition are still discussed, but the sharpest questions focus on present and historic food safety: Which third-parties audited the plant, and toward what certification? What ingredients and products were on-site, and under what timeframes, conditions, and temperatures? Had there ever been a product recall, and if so, what was the result and where are the documents? Who were the facility’s primary contractors (roof, structure, refrigeration, steam, sanitation, pre-treatment), and were they properly licensed and credentialed? How much deferred maintenance accumulated leading up to the closure, and what is the estimated cost of the cure? Had the facility ever failed a third-party or customer audit, or lost customers over audit results?
Simply put, in less than 20 years plant sanitation and food safety evolved from nearly an afterthought to a primary filter; rare is the existing facility that gets a close if answering “yes” or having to further explain the inquiries catalogued above. And again, the significance is not that food safety and sanitation is a concern newly minted, but rather, how today it drives the site selection process from commencement.
So, what does this mean, and how does it end? As a boutique property brokerage firm focusing exclusively on food production facilities, we have an advantaged view of the process and decision-making, and offer these informed observations:
In less than 20 years, plant sanitation and food safety evolved from nearly an afterthought to a primary filter driving the site selection process from commencement.
• Second-generation food plants are under pressure: Whether due to the costs of curing functional obsolescence (size, nonlinear configuration, low ceiling heights, lack of expandability), or having to invest toward sanitation and regulatory targets seemingly in motion, the rewards of speed-to-market are increasingly offset by the risk of inheriting exposure to food safety issues. Corporate boards, in particular, are loath to approve any property acquisition presenting uncertain investment in seeking regulatory approvals, which one client recently described as “chasing a mirage.” So not only has the market for trading food plants among end-users evolved, it has also diminished, to an extent, due to the now higher bar of occupancy.
One final question would be whether the harsh economics of supply and demand will impact this dynamic. For example, if pre-existing food facilities were to fall out favor as the default site selection, then time-on-market would increase, carry and opportunity costs would skyrocket, and prices might then fall; if prices fell far enough, perhaps occupiers would be more willing and able to invest to modern standards. Of course, these decisions must be weighed against speed-to-market mandates, never-ending margin compression at the hands of consolidated retailers, and swiftly changing trends and behavior.
• Alternative property assets are increasing in demand: What was once unheard of, to wit, a food manufacturer acquiring and renovating an existing non-food plant, has become more commonplace, particularly if the facility has valuable infrastructure: a large size, where volume provides the necessary antidote to thin margins; heavy and redundant power; a linear configuration conducive to efficient, line-of-sight production; concrete walls and double-tee concrete roof decks, sanitation friendly and conducive to heavy loads; clear ceiling heights sufficient for gravity flow mixing, interstitial spaces, or elevated machinery and equipment; and a secure site, ideally with monitored and gated access, and large enough to allow at least a doubling in size of the plant footprint.
Perhaps anecdotally, a client seeking up to 1,000,000 square feet of additional manufacturing space recently told us, after touring five existing buildings, the only property its board would approve was a former computer manufacturing facility in the Southeast, which had the credible infrastructure catalogued above, yet with no exposure to food and pathogens. This, we were told, was “the food plant of the future,” which provided the speed-to-market benefits of existing construction, yet with no exposure to food safety risk.
• Warehouse conversions can make sense: Though package shipping continues to absorb Class A space in top markets, warehouses with 26-foot clearance; room for expansion; access to elevated power, water, sewer, and gas; and room to accommodate expanded workforce parking are increasingly in demand. Even more interesting still are dual- or tri-temperature warehouses with existing power and refrigeration infrastructure, where production can be built out in previously dry or unimproved spaces. Accordingly, owners and brokers marketing warehouses, dry or refrigerated, only to other warehouse operators may be missing a sector of potential growing demand.
• Public and private speculative construction is now part of the mix: Seeking to minimize delay while capturing existing entitlements and municipal approvals, today’s site availability surveys routinely include spec buildings, whether privately for profit or publicly to entice new corporate citizens. Again, the obvious benefits include a jump on timing, an ability to customize the interiors, ideally before the floors are poured, and no pre-existing risk to food pathogens.
In sum, the property and occupancy side of the food industry reflects the same level of flux and turmoil as the category as a whole. Site selection remains relatively easy were there to be a supply of large, mass volume, high-audit facilities available for second-generation occupancy. Unfortunately, the present market skews inversely, with scant availability of modern facilities, and an oversupply of functionally obsolete and value-engineered older properties. Top-tier production plants trade quickly, often with little visibility, at pricing exceeding $100 a square foot. If marketed properly, premium properties can be made frothy, returning to the seller princely sums vis-à-vis the broader market. The dual necessities of throughput and food safety — and how those prongs define occupancy and use, and drive or diminish plant value — are not yet widely understood, which is why, in site selection and the brokerage of food facilities, expertise is paramount; bigger firms do not equal better firms, and who you choose truly matters.