A Guide to Warehouse Operating Expenses

What are warehouse operating expenses, and what do they include? In working with hundreds of industrial tenants over the years, these are the two most common questions that tenants ask.

What are Warehouse Operating Expenses?

Operating expenses (commonly referred to as op/ex) are the landlord's way of recouping the costs to own and maintain their building. While rental rates can drive profit, operating expenses are simply a reimbursement of the landlord's costs associated with operating and maintaining a building.

 

Depending on your lease structure, you will either pay operating expenses as a component of gross rent or in addition to base rent. In a triple net (NNN) lease, operating expenses are paid on top of the quoted NNN rental rate.

Typically, tenants pay their pro-rata share of the building's total operating expenses based on the size of their space relative to the building. In a multi-tenant property, each tenant will pay a portion of the building's total op/ex proportionate to their size in the building. In a single-tenant building, the tenant is typically responsible for 100% of total operating expenses.

What is Included in Warehouse Operating Expenses?

Warehouse operating expenses can vary widely but generally include several key components:

• Property Taxes: These are taxes assessed on the property by local government authorities.
• Insurance: This covers the cost of insuring the warehouse and its contents against risks like fire, theft, and natural disasters.
• Common Area Maintenance (CAM) Fees: These fees cover the cost of maintaining common areas used by all tenants, such as parking lots, landscaped areas, and hallways. CAM expenses typically include lighting, water for irrigation, landscaping, parking lot maintenance, and administrative fees.
• Utilities: Costs for electricity, water, heating, cooling, and other utilities are typically borne by the tenant. In many industrial properties, these costs are submetered and billed separately based on actual usage.
• Labor Costs: This includes wages for warehouse personnel involved in operations such as loading, unloading, inventory management, and other related tasks.
• Maintenance and Repairs: Regular upkeep and repairs are necessary to keep the warehouse in good working condition. This includes costs for fixing structural issues, maintaining HVAC systems, and other routine maintenance tasks.

Common Area Maintenance (CAM) expenses are fees paid by tenants to the building landlord to help cover the building's overhead costs for common areas. Common areas are spaces used for or benefited by all tenants, like parking lots and landscaped areas. Industrial CAM expenses typically include lighting of common areas and parking lots, water for irrigation, landscaping, parking lot maintenance, and administrative fees.

What's Not Included?

Unlike most office CAM fees, industrial CAM expenses do not include electrical and janitorial (E&J) costs. In industrial properties, electrical costs are generally submetered by the tenant because industrial users can vary drastically in the amount of electricity they require depending on their operations. For instance, a manufacturer may run heavy machinery 24 hours a day, racking up exorbitant electric fees, while a neighboring tenant who uses the space as a storage warehouse may only use minimal electricity.

Janitorial services are also not included in industrial CAM. This is because, unlike office buildings, most industrial buildings do not share common interior spaces like lobbies and restrooms. Because of this, industrial tenants are typically required to contract their own janitorial services.

Your operating expenses and CAM charges should be specifically spelled out in your lease to avoid any ambiguity about what is included. A qualified tenant representation broker can help you understand operating expenses and CAM charges and help negotiate these in your next lease.

Factors Affecting Warehouse Costs

Location

The location of a warehouse greatly impacts both rental and operational costs. Warehouses in urban areas or close to transportation hubs may have higher rents but offer savings in transportation and distribution. On the other hand, warehouses in rural areas might be cheaper to rent but could increase transportation costs.

Size of Warehouse

The size of the warehouse influences costs significantly. Larger warehouses generally have higher base rents and operating expenses. However, a bigger space might be necessary for growing businesses to accommodate more inventory and operations.

Storage and Handling Requirements

Special storage requirements, such as climate control or specialized shelving, can add to warehouse costs. For example, warehouses storing perishable goods need refrigeration, which increases utility and maintenance expenses.

Technology and Automation

Implementing technology and automation in a warehouse can impact operational costs. Automated systems for inventory management, order picking, and packing can reduce labor costs but require a significant initial investment. Over time, these technologies can improve efficiency and reduce long-term costs.

Security Measures

Security is crucial for protecting warehouse inventory. Costs associated with security measures like CCTV, alarms, and secure access systems can add to overall expenses. While these measures might increase upfront costs, they help in preventing theft and damage, saving money in the long run.

Strategies to Reduce Warehouse Costs

Space Optimization

Maximize the use of vertical space and design an efficient layout to reduce costs. Implementing high-density shelving and utilizing vertical storage can help make the most of the available space, reducing the need for a larger, more expensive warehouse.

Improving Inventory Management

Reducing excess inventory and improving inventory flow can significantly cut costs. Implement a just-in-time inventory system to minimize storage time and reduce carrying costs. Regularly review inventory levels to ensure that stock is kept at optimal levels.

Embracing Automation

Implement automated systems to reduce labor costs and improve efficiency. Automation in picking, packing, and inventory management can speed up operations, reduce errors, and lower labor expenses over time. Investing in automation technology can result in long-term savings.

Adopting Lean Processes

Streamline operations to eliminate waste and improve efficiency. Lean processes focus on reducing non-value-added activities, optimizing workflow, and improving productivity. This approach can lead to significant cost savings by minimizing waste and enhancing operational efficiency.

Negotiating Better Rates

Negotiate better rates with suppliers for lower shipping and bulk order costs. Building strong relationships with suppliers and negotiating favorable terms can lead to reduced shipping costs and discounts on bulk purchases, ultimately lowering overall warehouse expenses.

Outsourcing

Consider outsourcing warehousing operations to third-party logistics providers. Outsourcing can provide access to specialized expertise, advanced technology, and scalable solutions without the need for significant capital investment. Third-party providers can offer cost-effective warehousing and distribution services, allowing businesses to focus on their core operations.

Conclusion

Understanding the various operating expenses associated with leasing a warehouse is crucial for budgeting and financial planning. By optimizing space, improving inventory management, and considering automation, you can effectively manage these costs. If you feel that you're ready to take the next step, browse available warehouse and industrial spaces for lease to find the perfect fit for your business needs.

This article was updated on 7/15/2024