Commercial Real Advisor - Los Angeles

Retail Services Under Warehouse Operations Strategies for Lowering Warehouse Costs in Los Angeles

Sat, 11 Jul 2009 16:01:29 -0700

Los Angeles - Desk of John Scatoloni - 2009 is well on the way to becoming a year to reflect on right-sizing, or more precisely, a year to consolidate operations into fewer distribution centers (DC) that service more markets. The challenge is determining which markets to serve from the Los Angeles warehouse base. One segment that we are suggesting at Encon Commercial is consolidating, under one roof, the local and regional sales operations. With a warehouse site selection agenda focused on right-sizing and incorporating a direct sales operation, the DC stands to generate more revenue from the public and vendors, reduce or eliminate the need for costly retail space and provide an outlet for returned products on the racks. You do not have to search far to find that consumer spending is down and meager sales orders persist. In view of warehouse space sitting idle and stale stock occupying square footage, the CEO of Pure Linen Bedding, Derrick Zhong makes a clear observation, “A warehouse with stock in racks is no good for a distribution company”. By teaming up with Encon Commercial, Pure Linen Bedding implemented a “Do All” strategy for their DC in Los Angeles that reduced overhead expenses for the rough economy ahead.

By understanding local market trends in Los Angeles, we take into account an established trend of warehouse direct consumerism, both the propensity to hunt for a discount in the local market and also an equally fervent trend for vendors to return items for any and all concerns. With twelve million consumers within one hour of Los Angeles County the “Warehouse Direct” point-of-sales channel is thriving and proves to be a powerful tool to national distributors. As in any consumer product line, Pure Linen Bedding product lines are faced with deteriorating cash and credit conditions of vendors and increasingly complex supply chain systems supporting major wholesale clients. Any problem can be magnified by a breakdown in the wholesale supply chain, backing up product in Los Angeles with no cost effective way to deal with stock. Inevitably these products bog down at the U.S. point of entry, Los Angeles. As a reverse logistic concern these products represent a significant logistical component that can account for up to 9% of all shipping costs. How many companies can manage returns in a cost effective way? Pure Linen Bedding’s overstocked and blemished items are viewed as perfectly viable products at the appropriately discounted price. To Pure Linen Bedding, these products make more sense finding a new home through warehouse point-of-sales then moving product back up the supply chain, a logistical challenge that can run six times the cost already invested to deliver the product to the U.S. market.

At Encon Commercial, we are aware that the recent market downturn presents too many properties to choose from in any of the nine industrial markets in Greater Los Angeles. Adopting a variety of search parameters, including square footage, rate, ceiling height, office size, dock door count, sprinklers calculations, truck yard turning radius’ and landlord incentives, there is still one savings often overlooked, warehouse point-of-sales. Should the opportunity be pointed out, a few warehouse locations on your list provide a configuration ideal for a distinct warehouse point-of-sales showroom, a portion of the distribution warehouse that can substitute for traditional retail space. Often municipalities allow up to 10% of floor space for sales, enough to achieve the intended use.

Simply doing the math brings the economic numbers in perspective. Pure Linen Bedding inked a lease at a below market rate of $6.00 per square foot annually on a gross basis (all inclusive rate) in Chino, California, that fixed their rental overhead for the next six years. Encon Commercial offered a location that incorporated a seamless but separate operation for retail sales (see photo). Naturally, the rental on a proposed 2,500 square feet earmarked for direct sales came in at the same lease rate as the warehouse. Being familiar with the net charge pass-through expenses on retail space, the $6.00 per square foot inked on the warehouse space was even below the net pass-through operating expense costs for a retail location! Finally, take the going base rate for retail at $30.00 per square foot annually on a triple net basis, Pure Linen Bedding reduced overhead by a savings of $60,000 per year or $360,000 on the entire lease term, not to mention eliminating the ongoing operational costs to run a retail storefront.

What does it take to service a market and reduce overhead? At Encon Commercial, finding an attractive solution lies in absorbing retail operations into a strategically located and consumer friendly distribution center. A small strategic investment in a warehouse point-of-sales can easily off-load merchandise to the public, position a company for additional revenues and help sustain an important connection, the end user. At Encon Commercial we take the time to explain real strategic opportunities, such as “warehouse direct-sales” in commercial real estate. Our warehouse team can help you re-position during the downturn, explore opportunities to improve business performance, add market share and change your competitive position for the future.

Four Simple Strategies to Leasing Office Space

Fri, 22 Aug 2008 23:45:02 -0700

From the desk of John Scatoloni, June 2008, Focusing on core competency drives success in a slower economy and cutting costs is a vital tool in achieving this goal. As many international firms are experiencing slower sales and lags in account orders, CFO’s are faced with measures to reduce overhead while not to impact core professional services and the cohesiveness of an operational environment.
At Encon Commercial in Los Angeles, our real estate advisors incorporate key cost cutting strategies into our client’s commercial real estate concerns, while offering direction on the intangible value of increasing leasing options, minimizing occupancy costs and aligning space needs for growth within the overall business plan.
Case in point, Drakard Consulting is a global leader in the field of consulting management and executive staffing with offices in Southern California. Like so many retail space users in Los Angeles, Drakard was neither immune to the general market fluctuations, nor prepared to accommodate a landlord push for orbital lease rates. Our real estate advisors identified four strategies to avoid premium leasing and to drive overhead costs down; strategies that will work for your next office space.
Implement the 80/20 Rule of target leasing in appreciating market conditions. Simply stated, using our market expertise and an eye for efficient space layouts, Encon provided the market options for Drakard that met 80 percent of corporate layout needs while only requesting changes for 20 percent. At Encon, our advisors place the highest value on keeping costs down for our clients, including this strategy to avoid add-on improvements, additional rents, and enhanced security deposits to compensate for premium improvements to space. Ruling out these build-to-suit scenarios saved 5-10% of the lease commitment from day one.
Alternative Space Selection is the proverbial “Ah-Ha” of commercial real estate, the creative solution to occupying physical space. Encon advisors introduced alternatives to premium “Retail” space by identifying “Ground Floor” Class “A” office space which functionally rivals retail by offering visibility and over-standard amenities including, lobby exposure, multiple-signage opportunities, open floor layouts, floor to ceiling window lines and above all, lease rates 10-20% less than retail. Augmented by a full-service tenant friendly lease and a boost of corporate image, the take-a-way for Drakard was an upgrade in market presence and the affordability of additional space for growth.
The Stolen Play Book remains one the greatest faux pas of site selection where a tenant engages a landlord to negotiate and structure a lease commitment on their behalf. Similarly, on game day your coach hands over a well-practiced and proven playbook to the other team, and no surprise, all advantages go to your counter-part. At Encon, our advisory team brought a third-party position to the Drakard lease negotiations in order to secure business critical lease terms and trade strong credit for flexibility. Our single-point of accountability from start to finish delivered Drakard turn-key space, a shorter lease commitment, an exit clause and fixed rate options to renew. Engaging Encon was “in-sourcing” the expertise to plan beyond today, which translated into capping future overhead expenses, and removing market risk for our client. While other tenants close one eye to future obligations, Encon saved Drakard a 15-20% in scheduled overhead increases four years in advance.
Aligning strategies for leasing is founded in Identifying Propitious Conditions at hand. Tenants rarely follow the day-in, day-out market fluctuations and potential arbitrage in leasing. At Encon, our advisors illustrate both the market opportunities and the level of service provided by each landlord to our clients as two distinct but inseparable sides of the same coin. Hence, Drakard was presented several retail lobby spaces in Class “A” office buildings in target markets due to this year’s mortgage melt-down. Highlighting a series of fully engaged landlords looking for strong credit, Encon brought both elements into negotiating the space on the Tenant’s terms. Alternatively, how your company decides to spend resources on leasing will depend on aligning opportunities in both market timing and landlord’s leasing conditions. Orchestrating these incentives into a transaction is what Encon does best, a service that we provide to each of our clients. As a result, Drakard collectively saved resources at each stage of lease construction and Encon afforded the concessions that Drakard needed in this complex and landlord dominated market in Los Angeles.
Above all, our advisors suggest using all four approaches to formulate a leasing strategy. Each has proven successful in our portfolio of Tenant Representation, and in a down market saved our clients over one-fourth of their rental costs. Finally, where achieving cost savings is paramount and retaining a professional presence is essential, Encon advisors are a valuable “in-source” in deal making expertise. As for Drakard, engaging our advisors at Encon Commercial made the difference between a premium lease commitment and an overall reduction in overhead expenses.
Contact Encon Commercial today for a tailored strategy of your own, one that meets your long-term and cost conscious objectives.

Knowledge Center - Los Angeles Commercial Real Estate

Sun, 23 Sep 2007 22:55:42 -0700

A Perfect Warehouse Investment - A Los Angeles Warehouse Profile

From the desk of John Scatoloni
The United States attracts many forms of real estate investments that create sustainable wealth through both income and appreciation. Most commonly we enjoy these rewards as homeowners in our own residential properties; in essence, paying rent to ourselves, maintaining the asset and at the same time enjoying yearly appreciation in property value in the anticipation of a future sale date for a profit.
However, there is another type of real estate investment worth consideration that creates steady wealth accumulation via direct participation in the commercial business sector of the U.S. economy, the strongest and most stable economy in the world. The question is how can you derive the income benefits of owning property while concurrently growing your business? As the largest industrial market in the country, Greater Los Angeles offers a proven demand for quality industrial space with an ever limited supply. Ownership of an industrial asset begins with an immediate need for functionality and features. The key to ownership is that your needs are the same as the investment criteria to attract a tenant or buyer in the future.

Let’s demonstrate this approach in detail. . .
In choosing your industrial investment, think like a tenant, more precisely: “your future tenant or buyer”. It is this industrial space that you will know thoroughly while the business and at the same time gain a complete understanding of the features that make up a quality, functional, and economically sound investment for the long-term. Site selection began first with the right location; second - adhering to a customer service viewpoint and finally a design that promotes business development. Achieving each will ensures success creating wealth through investing in industrial space.

Logistics and Safety:  The Los Angeles basin and adjacent counties fall into nine distinct geographic and functionally make up nine individual markets. Abundance makes the decision of “location” a difficult one; however, using four benchmarks will narrow your location to a few specific industrial clusters. Ease of freeway access and a minimum 3.0 turn ratio per day for container drayage from the ports eliminates the vast majority of inferior locations. If truckers can not find the warehouse or the route is prone to congestion, the logistic viability is jeopardized. Furthermore, as fuel costs and traffic increase, so does the lease rates and sale prices for industrial space with good access to the ports. Evidently the rates are consistently higher and the vacancy rates are lower than logistically unfriendly markets. An investor should focus on properties within one-hour arrival time from the ports. Adding in a reasonable level security in the facility and yard area, including the ability to store containers, product and trucks, flushes out cites with medium to high theft rates. Albeit, some cities share proximity with the ports, only a hand full can claim security for owners and client products. Ask yourself, “Would I work in the warehouse after hours and on weekends”. If you can honestly answer, “Yes” then your future tenant or buyer will say the same and view the location as worth considering.

Customer Service and Design Layout:
In addition to logistic concerns, a perfect warehouse should include a focus on customer service. When choosing an industrial investment pay attention to how efficiently the warehouse fits into a customer service network, which means the warehouse is in a location central to your past, present and future clients. Keep in mind that industrial space serves customers based on proximity, ease of deliveries including operational flow of the distribution warehouse and yard efficiency. Each aspect plays an important function in obtaining and servicing clients. Indirectly the customer service approach to choosing a warehouse also impacts the operational budgeting, inbound and outbound transportation, inventory levels, facility costs, labor and security.
For example, a dock high loading capability is a minimum threshold between a functional distribution space and an obsolete warehouse for storage. Choosing dock high loading buildings with a minimum of twenty-four foot high clearance ensures distribution companies will view the property positively. Finally, adaptability for future requirements is a must as demands on a typical warehouse strain capacity. Some common future expansion points include a parcel large enough for current use plus expansion in container storage yard and truck staging. Future adaptability should address increased product flows, cross dock capability, single point entry for staging and security. And, in the warehouse, additional areas for ventilated pick n’ pack, a dedicated return area for long-term storage, and the possibility for more office space should sales volume increase. The most important aspect is in viewing an industrial investment as a asset providing comprehensive benefits for future tenants and buyers.

Key Benchmarks for Design:
1. Concrete Tilt-up
2. Built after 1995
3. True Dock High Loading
4. Minimum of 24 Feet High Clearance
5. Sprinkler System
6. Secured Yard with 110 Foot Turning Radius
7. Street Frontage Visibility
8. Office Standard Finishes
9. Minimum of Three Restrooms
10. Excess Land or Yard for Expansion

Long-term Perspective:
Ultimately, companies look to purchase an industrial investment for four key reasons: to increase productivity, reduce operating expenses, increase customer service levels and create sustainable wealth. One key factor is common to all: a well-designed, well-operated warehouse will be a competitive asset serving today and tomorrow's distribution needs for future tenants and buyers; determining which property to acquire sets the stage for investment returns. Remember to maintain a long-term perspective on the building features and a strategic plan for logistics, safety and of course customer service. The essence of a sound industrial investment, therefore, is the quality of the relationship between design and the customer operating in the space. You, the owner, buy more than space, you’re really providing solutions for future tenants and buyers logistics and customer service needs. Finally, future tenants and buyers may change but the logistics and design features remain the core decision in choosing an industrial space. You’ll find that if the site selection process for an industrial investment is done well, there will be an emotional connection to your future tenant and buyer’s success and a real satisfaction in knowing that your investment has long-term value.
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