Should You Build to Suit or Lease Your Next Distribution Center?

As shippers redesign their distribution center strategies to embrace e-commerce, automation, and other trends, the typical short-term response is to lease available space as soon as possible, often at a premium.

A strategic assessment of business needs over the long term could take network planning in a different direction.

Q: What factors should I consider in the build vs. lease decision?

A: Market forces may lead you to secure space in existing facilities in high-demand markets with high rates and even higher escalators. You may end up paying premium rates per square foot for a building that may not suit your needs over the long term.

That option may make sense in some cases if you’re entering a new market or launching new products. But these days, it’s a costly option if you’re bidding against other companies who want access to the same market.

The alternative is a build-to-suit project, often in a lower cost but adjacent market that will ensure the facilities meet your ongoing business needs. The result is a predictable cost structure over a 15-to-20-year lease period. This strategy avoids competitive pricing for high-demand locations.

Q: With inflation and real estate rates rising, is it wise to be locked into a long-term commitment?

A: You can lock in rates now for the long term for a predictable expense base. Although leasing rates may mitigate as supply chains normalize, the rate environment likely won’t return to the level of even a few years ago.

Imagine if you had started a two-year build-to-suit program that is now coming online. Your lease would be much more attractive than current rates. If you start a building project opening two years from now, your rates will be better than spot rates in the open market.

That’s especially true if your business requires a location in an expensive market like Los Angeles. You could lock in rates in LA at the current level and have a building that will suit your needs.

You will avoid paying a premium for existing space that many other companies are bidding on right now. Depending on the lease arrangements, there could be capital and tax advantages for your business as well.

Q: What are the operational advantages of building to suit?

A: Your organization can design the space for your current and future business requirements. If your products are heavy or bulky, you may not need a 30-foot clear space or extensive racking.

If you need rail access or chemical storage capacity, or other specialty requirements, options for move-in-ready buildings are limited. Jumping into a lease for an existing building could mean you’re paying for space you can’t utilize fully, or that won’t optimize your inbound and outbound strategies.