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Critical Site Selection Factor #6: Labor Costs Vary by Project & Location

Labor costs are usually manufacturers biggest cost factor, but the rise of e-commerce has made these costs more important for distribution centers as well.

Q4 2015
This series examines the top-10 location factors from Area Development’s Q1/2015 Corporate Survey that determine where our readers will locate and/or expand their facilities. Highway access is their primary concern, followed by occupancy and construction costs. Our readers are also looking for available land and available buildings. Find out what else companies like yours should consider when making your next location/expansion decision.

How big a factor is the cost of labor? That depends significantly on the type of facility. For some operations, labor is by far the biggest cost, but for others, its further down the list, and thus not as major a location factor. Given that, labor costs relative position on a ranking is bound to vary with the prevalence of different kinds of projects.

On one hand, labor factors, both cost and availability, tend to be major factors for large manufacturing projects, and quite frankly, were seeing more of them, observes Dean Uminski, partner with Crowe Horwath LLP. On the other hand, he adds, for projects that are not big employers of manufacturing workers or other highly skilled employees, other factors are far more prominent.

Were finding an expectation that the anticipated shrinking of the labor market because of baby-boomers [retiring] has begun, and there is a sense that labor will slowly but surely be harder to find. That, of course, tends to drive up labor costs. Mark Sweeney, senior principal with McCallum Sweeney Consulting The cost of labor, of course, has historically been a major reason for companies to choose locations in faraway, low-labor-cost places such as China and Eastern Europe. It makes sense, then, that rising labor costs in China and Eastern Europe have contributed to the reshoring impacts on North America, observes Mark Sweeney, senior principal with McCallum Sweeney Consulting, referring to the return of some manufacturing operations to North American shores. That has certainly helped add to the momentum of reshoring.

Once on these shores, of course, there are significant labor cost differences from one place to another. Uminski recently had an international client seeking a U.S. location, and because it was a project with a large number of workers, labor cost was a big factor. Its not just wages its benefits and workers comp, he says. In this particular project, the varying labor costs of six different states had to be weighed.

Observers expect to see upward wage pressure for a number of reasons, including the decline in the jobless rate and the movement of baby-boomers toward retirement. Some of it is a natural economic cycle, and its exacerbated by demographics, Sweeney says. Were finding an expectation that the anticipated shrinking of the labor market because of baby-boomers [retiring] has begun, and there is a sense that labor will slowly but surely be harder to find. That, of course, tends to drive up labor costs.

The cost of labor is increasingly on the radar in the distribution sector, where it has not always gotten as much attention because many massive distribution centers don’t have that many human beings inside. Richard H. Thompson, who leads the Global Supply Chain & Logistics Solutions team for JLL, says that with many of today’s distribution projects, one of the biggest drivers is the e-commerce facility. Everyone knows Amazon continues to grow, Walmart continues to expand its e-commerce, and so is everyone else. Now, 35 percent of the demand for industrial real estate is e-commerce-related.

That’s noteworthy because e-commerce distribution requires a lot more labor, dramatically upping the labor cost. If you were to put up a million-square-foot distribution center that’s more traditional, fulfilling stores, it would employ 100-plus people, maybe 150, Thompson says. But the same million-square-foot building for e-commerce may employ 1,500 people, with the ability to scale up to 2,500 people during peak seasons. From a labor perspective, that’s huge.

That’s certainly a cost issue, but also an operational consideration that can really drive a location decision. There are not many markets where you can just wheel in 2,500 people at a good rate, Thompson concludes.

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