Electronic processor Advanced Technology Recycling has generally chosen to rent space in the United States rather than buy it. Renting has given the company the flexibility to more easily align with market trends and add space as needed.
“We think [that] going to be very difficult to do now,” said Ken Ehresman, president of Advanced Technology Recycling (ATR).
The difficulty comes from the rapid rise in rental rates for commercial properties in North America.
Interviews with various electronics reuse and recycling companies have clearly shown that virtually all companies in the warehouse rental industry incur higher real estate costs. This reality, driven by pandemic-influenced changes in retail and supply chains, is forcing some to rethink how they expand and utilize their existing square footage.
“You can find yourself in a pretty tough spot in today’s market,” said Bob Houghton, CEO of Sage Sustainable Electronics, which leases facilities in two regions of the country.
The factors involved
Underlying the market-wide rental cost increases are huge – and likely lasting – shifts in the world of warehouses.
North Americans started buying more goods online early in the pandemic, and they haven’t stopped, prompting e-commerce companies to seek warehouse space for fulfillment centers.
In December, The Wall Street Journal covered a report by real estate research firm CBRE, which found that leases for industrial properties are on average 25% higher than five-year leases that expired last year.
Additionally, supply chain management is moving from “just in time” to “just in case”, which means additional warehouse space is needed to store goods before they are sold. online or in store. Add to this strong competition for building space for data centers. And in some jurisdictions, the legalization of marijuana for years has spurred demand for warehouses for plant grow operations.
“You can find yourself in a pretty tough corner in today’s market.” – Bob Houghton, Sage Sustainable Electronics
Despite the challenges, electronic processors are finding ways to advance in the real estate business.
Based in Pontiac, Illinois, ATR has a significant footprint across the United States, with facilities in Allentown, Pennsylvania; Birmingham, Alabama; Buffalo, New York; Grand Rapids, Michigan; Vegas; Pontiac; Salt Lake City; and San Antonio.
With the exception of the company’s 140,000 square feet of processing space in Illinois, all facilities are leased.
ATR’s Ehresman said the company had seen higher rental rates for some time. The increases have manifested themselves in both base rates (the cost per square foot) as well as “triple net charges”, also referred to as “common area maintenance fees” and include a portion of site taxes, maintenance costs and insurance.
ATR first started seeing landlords pass on higher triple charges because landlord labor costs were rising, he said. In some cases, ATR has seen these costs double. Historically, increases of 3-5% were normal.
“Some owners tried to hold the line for a while, but it was just too difficult,” he said.
In recent months, owners have also indicated that they want to renew at higher base rates.
“We’ve seen 15-25% increases in their demands, and then you have to negotiate them,” he said.
The scarcity of storage space is something Houghton of Sage has also witnessed. His company leases facilities in Columbus, Ohio and Reno, Nevada.
Sage recently renewed its contract for the 145,000 square foot Reno facility, which it began leasing after former occupant Arrow Electronics exited the ITAD market in 2019. During this lease renewal , which raised Sage’s base rate “substantially”, Sage’s real estate agent informed Houghton that the Reno area has a 2% vacancy rate for commercial properties.
This does not leave tenants much bargaining power.
“You’re really not negotiating a lower rate,” Houghton said. “I think the reality of this situation is what you’re really doing is making sure you don’t lose your place in the queue and are able to rent a space.”
“We’ve seen 15-25% increases in their demands, and then you have to negotiate them.” –Ken Ehresman, ATR
Meanwhile, Miles Harter, CEO of Dynamic Lifecycle Innovations, said his ITAD and e-waste recycling company had seen rental rates at its Nashville, Tennessee, facility increase over the past seven or eight years. years as Nashville grew.
“On average, I think our rental costs have probably gone up 8-10% a year since we moved in,” he said.
But Dynamic has been safer in Onalaska, Wis., where the company is headquartered, because it owns its land and buildings.
“I know the land values around us have gone up tremendously since we bought ours, which has worked in our favor,” Harter said.
“Cannot absorb these costs”
In Canada, eCycle Solutions has seen market rental rates increase across the country, but costs are rising particularly rapidly in the Greater Toronto and Vancouver, B.C., metropolitan areas, said Scott Loughran, director of business operation.
“The recycling industry cannot absorb these costs without support,” he said.
The e-waste processor operates leased facilities in Chilliwack, British Columbia (near Vancouver); Airdrie, Alberta (near Calgary); Mississauga, Ontario (near Toronto); Markham, Ontario (also near Toronto) and Salaberry-de-Valleyfield, Quebec (near Montreal).
“One thing we’re finding is that landlords who have generally liked to push for lease terms of 10 years or more are looking for terms of three to five years, which is a bit of a change, just because of the rapid rate at which rates are increasing,” Loughran said.
Todd Zegers, global vice president of ITAD and reverse logistics at Ingram Micro Commerce and Lifecycle Services, said he’s seen rental rates increase in the range of 5-15%.
In some ways, however, Zegers has scale on its side.
Commerce and Lifecycle Services is part of Ingram Micro, a massive distributor of computer products that generates tens of billions of dollars in revenue annually. ITAD sites may be housed in leased facilities occupied by other corporate branches, including forward logistics operations.
“One thing we’re finding is that landlords who have generally liked to push for lease terms of 10 years or more are looking for terms of three to five years, which is a bit of a change, just because of the rapid rate at which rates increase. – Scott Loughran, eCycle Solutions
Ingram Micro also has such a large portfolio of leased real estate, including signed contracts with the same large commercial real estate companies, that the company has enough bargaining power to help control rate increases. Small processors don’t have that leverage, Zegers noted.
But the markets are challenging Ingram Micro in other ways.
For example, Zegers said outfitting facilities with shelving and other internal upgrades takes a long time because contractors are understaffed.
He also acknowledged that with rising costs for labor, warehousing space and supplies, if square footage becomes constrained in a facility, Ingram Micro is forced to consider ‘raise prices or reduce customers.
pull all the levers
As part of a strategy to avoid the continued increase in rental rates, ATR has offered to purchase some of its leased buildings. But so far, no offers have been accepted, Ehresman said, which is a common situation in today’s tight real estate market.
“It’s a seller’s market,” Ehresman said.
He recommends companies keep their balance sheets in order and keep cash in the bank, which better positions them to buy quickly. He also suggests being proactive in researching potential spaces before they hit the market, perhaps as companies go out of business.
He also highlighted engagement in economic development programs, which can provide incentives to companies that build a facility and hire a certain number of employees in economically disadvantaged areas. This may mean settling on public land.
“There’s a bunch of different levers that we pull on, like everyone else there.” – Todd Zegers, Ingram Micro Commerce and Lifecycle Services
“Working with the incentives is key if you want to build,” he said. But that approach requires a longer lead time, Ehresman said, noting that contractor labor shortages and supply chain challenges are pushing the timeline even further.
Another strategy is to innovate how you use existing space.
At Ingram Micro’s plant in Chandler, Arizona, the company is looking to have office staff continue to work from home, allowing the company to convert approximately 15,000 square feet of office space in processing space, Zegers said.
“Obviously we’re trying to optimize the footprint that we have,” Zegers said.
The strategy could also extend to new installations. Ingram Micro is “actively buying” a larger facility in the Chandler area, and it could move into a building that has more processing space and less office space than the company might have wished for in the past. , did he declare.
“There’s a bunch of different levers we’re pulling on, like everyone else out there,” Zegers said.
Sage, meanwhile, is considering taking space away from processing and giving it to storage, Houghton said. (The company is stocking assets for customers who may want to redeploy equipment in the future.) To compensate for the reduced processing area, operations crews are working double or triple shifts.
“There’s a sweet spot, because if you get things too cluttered, it reduces your operational efficiency and adds a lot of cost to that end of the spectrum,” he noted.
A reality that is here to stay
Going forward, Houghton thinks having a good relationship with the owner will be crucial. “Your reputation as a tenant is going to have something to do with your ability to rent space as you move forward,” he said.
And Houghton sees the current housing market as a new normal for businesses to adapt to.
“Honestly,” he said, “I don’t think what we’re going through right now is going to change in the next five years.”
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