Rethinking industrial footprints: why occupiers are shifting strategies

 Companies embrace strategic consolidation, to drive efficiencies amid rising real estate costs

February 20, 2024

Rising costs of real estate combined with a return to ‘normal’ consumer demand, following the peaks experienced during the pandemic, are a key consideration of an occupier’s strategy in 2024.

The response from industrial occupiers: strategic consolidation. 

Companies are reevaluating their warehouse and fulfillment centers to boost efficiency, cut costs, and enhance productivity.

"There is a shift towards larger, centralized regional locations, signaling a departure from previous, often reactive, real estate strategy to keep up with demand,” says Charlotte Elstob, Managing Director, Industrial Occupier Services. Large occupiers like Target have recently announced a pivot to a ‘regional’ model for their distribution network.

Cost optimization: a primary driver for occupiers

The surge of adoption of e-commerce during the global pandemic led to a significant increase in the demand for distribution sites closer to customers. This, in turn, sparked a wave of construction, with 593.5 million square feet of new product added to the market in 2023, according to JLL’s Q4 U.S. Industrial Outlook. 

With this growth came a significant increase in rental rates since 2020, which rose by a factor of two to three times from pre-pandemic rates. This has made cost a primary driver for occupiers when reassessing their leases, Elstob says.

The JLL Q4 ’23 U.S. Industrial Outlook shows that while the rental growth rate is still intact, it is moderating. According to the report, the average asking rate increased by 12.3% year-over-year, reaching $9.90 per square foot.

Companies are now evaluating their networks, including factors like location, supply chain efficiencies, and the potential real estate cost savings. The objective is to optimize distribution networks, reduce transportation and labor costs, and respond to evolving markets.

“Companies are also opting for a Class A product, to future proof their operations,” Elstob says. “This allows occupiers to invest in critical areas, such as technology integration, automation and ESG initiatives.”

Streamlining industrial footprint: best practices for smooth consolidation

During a consolidating process, minimizing disruptions to ongoing operations is a top priority, says Elstob.

One important aspect: start early and plan strategically. Elstob suggests that companies initiate the assessment process and explore options 18 months to 24 months before their lease expiration. They can gain a competitive edge by thoroughly understanding market dynamics, including pricing, availability, and suitability.

Collaboration is also crucial, so everyone involved understands the requirements and the facility, Elstob says.

“We always recommend as much time as possible for occupiers to educate themselves about the market and thoroughly understand their operational needs before proceeding,” she says.

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