How To Budget for Your Industrial Lease

Budgeting is one of the least understood aspects of securing the right industrial property — but it’s also one of the most crucial to your company’s success. Whether you are renting your first industrial space or your 20th, developing a detailed and nuanced budget will position your company to achieve its short- and long-term objectives; both for its physical location, as well as the overall business.

The process of developing a budget for industrial space can be divided into four primary phases:

• Engage a team of advisors.
• Survey the market.
• Understand build-out costs.
• Establish your moving costs (if applicable).

Of course, budgets are rarely fixed. But if you begin your search for an industrial facility to lease with a clear forecast in mind, it will help guide the process and hopefully prevent your reach from exceeding your grasp.

When you develop a team of advisors to help create a budget for your industrial lease, you’re going to want to consider a broad range of disciplines. Firstly, and perhaps most obviously, you’ll need someone who is focused on the numbers, such as your chief financial officer or accountant. Next, you’ll want someone who understands how budget decisions impact operational efficiencies, so your head of operations will be an essential collaborator. Further, any in-house human resources and IT directors will be invaluable, as well as in-house or third-party legal counsel.

Your CFO will understand how your lease obligation aligns with your company’s financial statements, overhead expectations, financing and debt instruments and potential merger and acquisition activities. Your head of operations can help you figure out the operation growth trends you need to be mindful of, as well as the capital investments that will be necessary for your new facility. HR will make you aware of how different locational choices will impact your workforce, and how your facility can better serve your team members. The IT team will be able to help you understand the new technology that your operations team will be deploying, and what IT-related equipment and timelines are required. Lastly, your legal representative can confirm the stipulations of your existing lease (if you have one) and help you understand the outstanding risks that you’ll need to budget for or protect against.

In addition to these team members, you will probably want to hire a commercial real estate broker to assist with your search. Your broker will be instrumental in helping with the next phase of the process.

You can collaborate with all of your other external and internal resources to develop a plan and budget for your ideal industrial facility, but all of that strategizing will be for naught if you discover that there’s no inventory in the market that can accommodate your needs, or that the price of your desired space is far outside of your budget.

In today’s industrial leasing market, with the increasing maturation of the e-commerce industry, the price of available space has appreciated and accelerated, while availability has plummeted. Because of these factors, companies’ budgets and the time required to execute an industrial lease are both expanding. Accordingly, you will want to work with a commercial real estate broker that is focused on the industrial market and can provide you with an accurate assessment of both how much the space you’re seeking will cost and how long it will take to secure such space. This will affect other potential costs, such as holdover rent at your existing facility, if you’re relocating.
An informed broker will also be able to provide you with data on tenant improvement allowances that can, at least partially, offset your build-out costs, as well as information pertaining to security deposits and any other expenses that might be associated with leasing industrial space. Of course, the broker’s services are one item you can generally leave out of your budget. As a tenant, the owner of the property where you lease space will typically be responsible for paying the broker’s fee.

In addition to understanding your monthly rental costs, it’s alco critical to establish a budget for building out your space. Even though you will be budgeting for a space you haven’t found or signed a lease for yet, many of the expenses are relatively predictable and universal for most industrial properties. For example, office furniture, IT setup, audio and video setup, racking, material handling equipment, warehouse automation and robotics capital expenditures, tractor trailer investments, platform scales, etc. are all expenses that will be relatively consistent across different facilities. Work with your operational team, IT professionals and human resources personnel to develop a prospective budget for these costs.

If you’re relocating from an existing facility, you will also need to estimate the cost of the move itself with a moving and transfer company. A moving and transfer company will be able to help you budget, time and execute your move based on the amount of work you choose to do yourself and the amount of work you need them to perform. These activities will usually include the breakdown, relocation and setup of all furniture, workstations, computers and personal effects, along with all branding, artwork and common area items. You’ll also want to figure out how you are going to cycle your inventory so that you minimize the amount of stock that you relocate. If you deplete your current inventory from your existing building, and then send all new inventory to your new building, you can save dramatically in labor time and costs.

In addition to estimating the cost of your move, you’ll also want to be prepared for any expenses associated with decommissioning your existing facility. The most common decommissioning items involve the removal of telecom systems, ethernet cabling, furniture and equipment. You should also arrange for the sale of any existing racking if you purchased new racking for your next facility, as well as the clipping, grinding and filling in of bolts that secured the racking systems.

Finally, you’ll need to remove your sign from the property and ensure that all facility operating systems are in the same condition that they were when you arrived, though some wear and tear is generally accepted. The moving company and your operations team can help you develop a budget for this process and also provide you with an estimate for any funds that you might recoup through the sale of old materials.