Companies are adopting strategic consolidation to increase the efficiency of industrial buildings amid rising real estate costs, according to an analysis conducted by JLL.

Occupiers' Response: Strategic Consolidation

The increase in real estate costs combined with the return to "normal" consumer demand, following the peaks experienced during the pandemic, is a key aspect of an occupier's strategy in 2024.

Companies are reassessing their warehouses and distribution centers to increase efficiency, reduce costs, and enhance productivity.

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

Cost Optimization: A Key Driver for Occupiers

The increased adoption of e-commerce during the global pandemic has led to a significant increase in demand for distribution sites closer to customers. This, in turn, has triggered a wave of construction, with 593.5 million square meters of new product added to the market in 2023, according to JLL's T4 U.S. Industrial Outlook.

With this growth came a significant increase in rental rates from 2020, which doubled to tripled compared to pre-pandemic rates. This has made costs a key factor for occupiers when reassessing their lease agreements, says Elstob.

The industrial outlook indicates that while rental growth rates are still intact, they are moderating. According to the report, the average asking rate increased by 12.3% year over year, reaching $9.90 per square meter.

Companies are now evaluating their networks, including factors such as location, supply chain efficiency, and potential real estate cost savings. The goal is to optimize distribution networks, reduce transportation and labor costs, and respond to evolving markets.

"Companies are also opting for Class A product to future-proof their operations," says Elstob. "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 consolidation process, minimizing operational disruptions is a top priority, says Elstob.

An important aspect: start early and plan strategically. Elstob suggests companies initiate the assessment process and explore options 18 to 24 months before the lease expiration.

They can gain a competitive advantage by understanding the market dynamics in-depth, including pricing, availability, and suitability.

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