Real estate costs can represent a sizable percentage of a company’s total supply chain expenditure, but committing to a long-term lease could decrease those real estate costs. Many companies hesitate to commit to a long-term lease because they desire flexibility – they want the ability to adapt to changing supply chain demands. However, this flexibility may be far more expensive in the long run with the rising real estate value environment.
For example, California, Northern New Jersey, Pennsylvania, Dallas and many other regions are experiencing tighter supply and rising rents. Landlords in these areas may welcome short-term leases to accommodate non-committed tenants because they are aware that at the end of the term a 10% – 20% rent increase could be easily achieved.
The costs of warehouse relocation often discourage companies from moving at the end of their term, and thus they are forced to accept strong rent increases because an increase in rent is likely cheaper than relocating. In the past, renewal options at fixed rates have solved this issue, but today most landlords will only consider renewal rents at current market rates if renewal options are being discussed.
The ability of a shipper to enter into a meaningful, long-term lease can translate into considerable savings beyond the annual planning horizon.