Adam Mullen

The process of choosing a location for a warehouse, fulfillment center or manufacturing site has gotten significantly more complex in recent years amid the rapid rise of e-commerce and strong competition for labor. CBRE posits that many companies aren’t using many of the tools needed to meet this challenge, nor fully weighing the tradeoffs they’ll need to make.

CBRE recently unveiled its Intelligent Site Selection service for advising users of warehouses and other industrial real estate on selecting new real estate locations. The service’s many facets indicate a lot about the myriad considerations that must be taken into account by e-commerce companies, manufacturers and distributors when designing and building their supply chain. Among them: cost and availability of labor; transportation costs; government incentives; construction costs and design; financing; and close proximity to large populations of customers.

Globe Street caught up with Adam Mullen, who leads CBRE’s Industrial & Logistics business in the Americas, for an discussion of the factors influencing companies’ search for ideal industrial real estate.

Q: What choices do warehouse users face today when seeking a new location that they didn’t have to contend as much with, say, 10 years ago?

Mullen: The process is a lot more complicated now, with several new influences to account for. That’s due mainly to the rapid proliferation of e-commerce, which obviously has spurred change in a lot of industries. For example, labor availability now is a much, much bigger focus.

An e-commerce distribution center is a labor-intensive operation – much more than the traditional industry ratio of one worker per 1,000 sq. ft. of warehouse space. These DCs have a higher throughput than traditional warehouses. They require a large staff to retrieve from inventory a continual flow of items for orders. That means warehouse operators need to do a lot more homework on the demographics and economics of a market to determine labor availability, prevailing wages, education level and the need for on-site amenities.

As an example, we studied labor markets in Ohio for a client who then decided to customize the amenities in their DCs to cater to certain demographics in those markets, down to the food served in their cafeterias.

Q: What are the biggest costs associated with selecting an industrial site?

Mullen: Most people would be surprised to hear it’s not real estate, even with record high rental rate growth. In fact, CBRE’s Supply Chain Advisory practice estimates real estate’s share of a warehouse user’s logistics spend to be only 3 percent to 6 percent.

Instead, the largest cost is transportation at 45 percent to 70 percent. And most of that is the cost of shipping goods from the warehouse to customers – namely to households – rather than the drayage costs of getting goods from a port to the warehouse. This is why it’s so important in e-commerce to position your DC as close to a large population center of customers as possible.

The next-largest costs are labor at 15 percent to 25 percent, and inventory at 12 percent to 16 percent. Real estate is important – a supply chain won’t work without it – but it’s not the largest cost in the equation.

Q: If transportation accounts for the most cost in logistics, why not just make that the main consideration in where to establish a distribution center?

Mullen: In some cases, it is. But, in most cases, the warehouse user needs to make some tradeoffs based on which variables are most important to their business. In-depth analysis is required to weigh those factors.

We see warehouse users choosing their locations based on four general factors: How quickly the location allows them to get items to their customers; the costs of real estate, labor, transportation and more; the reliability of the location for business continuity; and how the location affects the complexity of their supply chain. E-commerce has significantly shifted the weighting of these tradeoffs in favor of the first variable, speed.

Q: Economic incentives surely play a role, given that we often learn about significant awards to companies establishing big distribution centers in certain markets.

Mullen: They do. Industrial employers collectively secure several billion dollars of incentives each year for establishing and operating their distribution center, manufacturing plant or other industrial use in certain markets. But it’s a more complex process than many companies initially realize.

Perhaps the main misconception we encounter is that these incentives are prescribed, ‘cookie cutter’ offerings such that an employer can qualify for package A, B or C depending on how many people they’ll hire. In truth, each incentive package is customizable and discretionary based on variables such as jobs, wages, capital expenditure, budget cycle, taxing jurisdictions and specific needs of the applying company. It helps to enlist national expertise to navigate this process.