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Critical Site Selection Factor #4: Occupancy OR Construction Costs

It’s easy to see why occupancy or construction costs are a factor that a lot of people are keeping an eye on...these costs are trending upward.

Q4 2016
This series examines the top-10 location factors from Area Development’s Q1/2016 Corporate Survey that determine where our readers will locate and/or expand their facilities. Availability of skilled labor is their primary concern, followed by highway accessibility. Our readers are also concerned about prospective locations’ quality of life. Find out what else companies like yours should consider when making your next location/expansion decision. How much does it cost to build or lease the facility you’re planning? According to research from Jones Lang LaSalle, construction costs are rising because of continual upward pressure from building costs, construction employment, wages, and productivity. As of earlier this year, the year-over-year costs were up for industrial, office, and retail construction alike — retail, in fact, was up by nearly 25 percent.

Meanwhile, the company reports warehouse rents are on the rise nationally, thanks to record-low vacancies. Speculative completions are on the rise, but net absorption is also quite healthy. As a result, rent per square foot this year is up by about $3 compared with last year.

Not surprisingly, there’s noteworthy variation in construction costs from market to market, typically driven by local economic conditions. A global report from Turner & Townsend, for example, calls the Houston market “lukewarm,” with year-over-year construction costs expected to escalate 3 percent this year and 2.5 percent in 2017 (that includes the full range of commercial and residential construction). The Seattle market, on the other hand, is pegged at “overheating,” with annual cost escalation estimates at 5 percent and 8 percent. New York City is “overheating” too, the report says, and San Francisco is merely “hot.”

Keeping It in Perspective
All that said, for the most part the cost of construction and occupancy is not going to be the biggest factor driving a location choice, consultants suggest. “It’s important, but it doesn’t drive the decision-making,” says Richard H. Thompson, international director, Supply Chain and Logistics Solutions for JLL. If you’re leasing a building, the real estate cost of a distribution center, for example, is 3 to 5 percent of the total operating cost Richard H. Thompson, International Director, Supply Chain and Logistics Solutions, JLL

“If you’re leasing a building, the real estate cost of a distribution center, for example, is 3 to 5 percent of the total operating cost,” he points out. Meanwhile, one might spend up to half of the budget on freight and labor. With that in mind, labor rates and proximity factors are usually going to hold quite a bit more sway. “You’re going to pay more to be in the right spot. If you have two sites that are equally viable, then you start looking at whether one might be cheaper,” Thompson notes.

A similar view comes from Christopher D. Lloyd, senior vice president, Infrastructure and Economic Development, at McGuireWoods Consulting LLC. “It’s going to vary greatly depending on the nature of the project, but if you’ve got to be somewhere, you’re going to pay what the cost is,” he says. “Just because it can be cheaper to build somewhere, it doesn’t mean everyone is going to flock there because of the low construction cost.”

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