Friday, June 22, 2012

Five reasons why companies relocate

I provide location advice to owners and occupants of industrial buildings in southern California. I have discovered that a company's decision to relocate is generally for one or more of the following five reasons: rent savings, a chance to own, a better location or facility, an up size or downsize, or achieving a better efficiency. I will use real examples to illustrate each of the five reasons. Thanks to the occupants that are featured here that have allowed me to represent them over the years!



Rent Savings:
Over the past three years, companies have been able to achieve rent savings without moving. The strategy was quite simple...ask the building owner for a rent reduction in return for an extended term. Owners were willing to accommodate occupants in order to avoid a vacancy and the cost to originate new leases. I posted about the cost of originating a new lease recently and you can read the post by clicking here. As the market starts to recover, these "blend and extend" lease extensions become less prevalent and in order to achieve rent savings, a company must downsize, move to a cheaper area, or a cheaper building...one with fewer amenities or with some functional obsolescence. IAS Industries, Raymond Handling Solutions, and King-Tek EDM all three benefited from renewing leases in exchange for lower rent. KLS Doors relocated to a newer, larger building for cheaper rent as did Advantage Adhesives.

A Chance to Own:
Assuming a company possesses the characteristics of a company that should own, the environment for purchase over the past three years has been a "perfect storm" of record low interest rates and motivated pricing. Should your company consider ownership? You can read the post here which outlines the criteria. We recently represented a chiropractor, Dr. Kang, of Zen Care Wellness, who purchased a shell medical office from a lender. The Dr.'s existing landlord was the Irvine Company...who rarely sells assets. Consequently, the Dr.'s only chance to own was to relocate. Once in, Dr. Kang's debt service was about the same as he paid in rent at the previous location...a net savings once tax benefits and future appreciation are considered. My favorite example was a deal that my client Raymond Handling Solutions recently accomplished in Las Vegas. They now own, have more space (in a brand new building), and have income from an adjacent building that was a part of the purchase...truly unbelievable!

A Better Location or Facility:
A flight to quality has been a big motivator recently. Our client, Limbach Facility Services sold their obsolete building in Compton in 2005 and leased the building back from the new owner for five years. When the lease expiration was approaching, Limbach engaged us to locate a facility with a better image and a more prestigious location. Both objectives were achieved at the new home in Garden Grove, California. Limbach's landlord, Kilroy Realty is thrilled to have them as a tenant.

An Upsize or Downsize:
Companies are bought and sold, business ebbs and flows, employees are added, products lines are discontinued, etc. All of the above can necessitate a relocation. Our client, DMG, has outgrown their current facility and have "band-aided" the company's growth by leasing expansion space down the street. This has created a need for a larger building. We have been engaged to assist DMG in the sale of their existing building and the purchase of an "up leg" larger facility. Our client, Direct List Technology downsized over the years because their need for space based upon "space consuming" computers became smaller and smaller as the computers and printers became smaller and smaller. DLT discovered that they could generate similar revenue in less real estate.

Achieving a Better Efficiency:
Prior to King Tek EDM's "blend and extend" referenced above, they relocated to their present facility and signed a four year lease. I believe the short clip below illustrates King-Tek's situation prior to their move. They occupied seven different units in a multi tenant building and were experiencing tremendous operational inefficiencies...thus the relocation to a single freestanding building.