Why is it so hard to find warehouse space?
Once your order volume picks up and you’ve decided that you’re going to be fulfilling your own orders, it’s time to find warehouse space.
Searching for a warehouse can be extremely time consuming and difficult. Almost always, it’s a landlord’s market. Even when the economy is doing poorly, industrial spaces are hard to find.
Big reason is because lease terms are generally 3-5 years plus and spaces aren’t being built as fast as the demand is growing. Even in times like COVID, where retail businesses are hurting, online businesses are still booming. Most online businesses use industrial space. Besides this, industrial spaces are taken up by B2B operations that supply other businesses.
How to find the ideal warehouse space?
Just because it’s hard doesn’t mean it’s impossible. There’s still a lot of options available on the market. I’ll keep it real with you. It’s very likely that you won’t find space that ticks all your boxes but if you make some adjustments, you will eventually land on something that fits. Keep this in mind as you go through the process so you don’t dismiss good options. There’s a lot of things to look for when finding the right space so let’s get started.
Before You Get Started: Credit Consideration
One of the benefits of running an eCommerce business is that your operation is neat and quiet compared to the other businesses out there (e.g. woodwork, auto shops etc). Landlords like this a lot. They also like the fact that there’s minimal foot traffic coming to the business (most eCommerce businesses usually just have their staff or business partners coming to the building). This makes satisfying the landlord easier and puts you ahead of other potential tenants.
Besides being satisfied with the type of business, the landlord also wants to make sure you’re able to afford the space. They want to be protected because they spend a lot of money finding a tenant and finalizing the deal.
If your rent is $5,000 per month and your lease is for 5 years, you’re expected to pay the landlord ~$300,000 over the course of 60 months. It’s tough to convince the landlord that you can afford this, especially when you’re a new business but it’s not impossible.
It’s extremely important you ensure you’re in a position to be able to afford this kind of commitment and also to prove your creditworthiness.
If your business is an existing business, you probably have leasing history, financial statements and bank statements to show you’re in good financial standing. If there is no business history, they will look at your credit score.
If they’re not happy with your credit either, don’t worry. There’s still ways to combat this:
- Tell them you’ll provide a personal guarantee and are willing to be a co-signer on the lease.
- If your situation allows, offer a higher security deposit.
- Get a 2nd person to be a cosigner.
- Provide dated checks/cheques upfront.
- Show that you have capital ready.
Worst case scenario, you’ll be able to find a landlord that’s charging more than others.
I put this in the beginning because this is where you’ll start. Based on how big your items are, how many unique SKUs you carry, and the quantity you keep in stock of each, you must figure out how much space you need. Once you’ve figured out how much square footage you need, you can begin your search.
I recommend keeping your range close to what you want. Once you’ve exhausted all availability, only then extend your range.
The 3 rules of real estate. Location. Location. Location. You need to really consider location for so many reasons but I’ll share my top ones:
You want to make sure the location is close to where you live. If your warehouse is an hour away (which is normal) vs 15 minutes away (which is ideal), you save 1.5 hours in commute time per day. This adds up. If you’re like me who goes to the warehouse every single day, that’s an easy 500+ hours saved per year. What’s 500 hours worth to you? You decide.
Besides yourself, you also want to make sure the workplace is close to your staff. They are probably commuting from different areas and taking different modes of transportation to get to you. I think places that are close to major highways and close to the transit system are the best. This way people who drive can get there fast and it’s also accessible for those that take the bus/train.
Safety is also a big consideration. It’s important to ensure you’re looking for space in an area with low crime rates. Sometimes you’ll find cheaper prices in areas with high crime rates but is that worth giving up your peace of mind? You decide, but I think it’s worth spending the extra change. This is important for both your safety, your people’s safety and the safety of your products.
Layout / Partition / Building Features
Even though you’re on the hunt for warehouse space, you will need a certain amount of office space as well. Most warehouses come with office space(5-20% is standard). Inside the building, there might be other partitions done based on the needs of the previous tenant.
This part is where business owners dismiss their options which is a big problem. Try not to look at the warehouse in its current state. If the current layout/partition doesn’t fill your needs, you can always get changes done. With any changes, you’ll have to make sure it’s okay with the landlord first whether it’s inside or outside. I agree that it’s not free to make changes but I’m just advising to keep an open mind.
Your shipping, receiving, packing, storage processes all will require assignment of space. The best starting place for this is based on the outer perimeter of the space. Based on where the shipping and receiving doors are located, the placement of the rest of your operations will fit accordingly. The most common shapes are U-shaped, L-shaped or even I-Shaped. If you have the luxury of picking between these, consider which would allow for the most efficient and streamlined operation.
Overall, I think the shape isn’t a make or break for most businesses.
Rent rate is obviously important but I’ve noticed that prices are pretty similar across the board. Even when comparing really small spaces and really big places, the difference in price per square foot is insignificant. Generally, you’ll be paying within market rate This is a good thing because it means that even when you’re paying a higher rate, you’re not too far off the median rate.
Most landlords don’t like to lower their rate. Instead of negotiating the rate, you should try and get a couple of free months from them.
Tip: It’s pretty common to get 3 months free with 5 years and 7 months free with 10 years.
What’s included and what’s extra?
In your gross rate, there’s also going to be a component called “CAM” fees. This stands for Common Area Maintenance. It covers the overhead costs associated with the maintenance of the common area of the building.
In certain deals, it also includes some utilities as well. For most industrial leases, only water is included. Each deal is different and it could be that nothing is included and it’s also possible that other utilities such as Heating, Electricity etc are included as well.
It’s very possible that something like garbage isn’t included.
Major: You want to make sure that heating or AC is available in the space you’re getting. Heating is pretty standard but AC is a rare luxury.
What’s important here is you want to make sure you’re in the know of what’s included and what’s not. This will help determine what additional costs you’ll be incurring each month and help calculate your true cost.
Most lease terms will be 5 years or longer. It’s not uncommon to see 3 year terms but it’s extremely rare to see 1 year. Shorter terms are more common in cases where the space is being subleased (there’s a section for this later).
Generally, I think a shorter lease term is better (when it’s not a sublease). It’s in your best interest. Who knows what stage your business is going to be in a few years or even a year from now on. With shorter terms, you have the flexibility to upgrade, downgrade or relocate for any other reason.
With longer lerms, you give up the flexibility. The commitment is also bigger. The landlord will always try to get you locked in for longer terms. If you’re sure you’re going to need the space for a couple of years, agreeing to longer terms than other offers also give you the ability to use that as a negotiating tool.
Lease vs Sublease
Some places are for lease and others are for sublease. In subleasing, there is somebody who is already tenating from the landlord. They either no longer have use for the space or have a section which they don’t use.
The issue here is that you’re not the primary lease holder and you don’t have the same level of control with things. You might also have to share certain spaces inside the building which might not be an option for your business either.
There are situations where subleases make sense but I recommend staying away if possible.
How soon is it available?
Most properties on the market are available immediately or on short notice. This is ideal because once you find something you like, you can make an offer and move forward.
Some landlords start searching for new tenants before their current tenant’s lease expires. They do this so they don’t miss out on rent while the property sits idle. This can be really good if your need isn’t immediate. Asides from the ability to evaluate all options properly, it also gives you additional planning time.
Some landlords will assign parking spaces and others will just have unreserved space where anyone can park. The area the warehouse is in will ultimately determine how many spots you get. It’s not uncommon that there might be situations where there aren’t enough parking spots and staff will have to park nearby. In really heavily populated areas, it’s also possible that parking is paid.
In all cases, make sure sure you’re fully aware of the parking situation and are in agreement before signing for the warehouse.
Proximity to Post Office/Shipping Carriers
We talked about location already but here’s a bonus one.
There’s going to be times where you schedule pickups but the carrier doesn’t show up. There’s also going to be times where you create orders after the carrier has already picked up. When this happens, you’re going to need to drop off the orders to the carrier or the post office.
If the closest carrier is more than 15 minutes from your location, I think it’s a problem. Ideally, you want your warehouse to be located close to the post office or the carriers you use the most.
I think this doesn’t apply to most businesses that are looking for an industrial spot but if it’s important to you, make sure you discuss it upfront. Signage placement is not just up to the landlord but also the condo board of your municipality as well.
You can expect to have to pay additional for signage abilities.
This is a tricky one. It could be that there’s no loud noise when you visit the place but it doesn’t mean it’s like that for the whole day. The best way to gauge this is by figuring out who your neighbors are. If they have operations that include automobile repair, wood work, welding or anything else that requires operating machinery, there will be noise. This can be extremely annoying and it’s something you can’t do much about.
If you’re an eCommerce business, I recommend finding a business plaza where other businesses have operations similar to yours.
When I first moved to America, I went through hell to find warehouse space. In 30 days, I looked at over 120 spaces all over LA County and Orange County in California. I made reasonable offers for ~40 different spaces.
Imagine this scenario:
- No Credit History (I had just got a Social Security Number)
- Newly Registered Business
- I knew 0 people in the entire state of California (nobody could be a cosigner)
Considering this, landlords weren’t willing to entertain my offers. Why should they when they have so many other businesses trying to lease from them with established businesses and credit history?
Ultimately, I had to settle for a spot in Wilmington, California, which wasn’t the best:
- High crime area
- Loud Noise (neighbors doing wood work on 1 side and welding on the other)
- High rates
- Double the security deposit
The odds were against me, but I made it work. I literally got the worst deal possible but I was happy I had space to work from. It wasn’t my first time looking for space so it wasn’t that I lacked experience, I just wasn’t in the best position to get everything I wanted.
If you’ve found a space that checks all your boxes, consider it a blessing. The truth is that it’s rare to find everything you need in 1 warehouse. Focus on what’s important and make adjustments as required. There’s just not that many options available and the competition is high. Based on your situation and budget, this can become harder or easier. Ultimately, you’ll have to make some sacrifices to make it work. You’re a business owner and you’re already challenging yourself on a daily basis. Consider finding a warehouse a mini challenge. Don’t stress it too much and enjoy the ride. Cheers!