Warehouse Leasing – Transparency is Key
Demand for new distribution centres in Australia is booming. The boom is being driven by the shift to online retail, amplified by the pandemic and lockdowns, plus growth in consumer demand, and a move away from ‘just-in-time’ strategies. This all requires more space to receive, store and distribute an ever-increasing selection of consumer goods.
Interestingly, many organisations only need to source a new distribution centre once every 5 – 10 years. So, it is unlikely the necessary skills and experience exist in-house to ensure the optimal development decision is going to be made on the most favourable commercial terms.
Property is an old industry and is slow to change. Traditionally there have been multiple players, including developers, trusts, and agents. All have had a part to play. And, with existing strong relationships and fee arrangements in place, it can be something of a minefield for those with little experience.
In the past, once an organisation has reviewed its network and developed a functional design (automation/racking etc.) and gained board sign off it would approach a property agent to source possible sites.
That agent would receive a fee from the successful developer, typically up to 20% of the gross average annual rental, which for a 20,000 sqm facility in Western Sydney would amount to almost $1,000,000.
Around 20 years ago the tenant representative model emerged, where the design brief for warehouses of sufficient scale was taken directly to the developers freeing up the 17% to 20% fee that would have otherwise been paid to the agent. Often this fee would be split between the client and the tenant representative.
Often the tenant representative also provides consulting services that cover the network design, warehouse design and/or project managing delivery of the new facility.
This model has been very successful to the extent that most major industrial property agents have now developed their own supply chain consulting capabilities using the agent commission to fund the consulting services.
So, the bigger the facility, or more expensive the lease, the more the agent or tenant representative will earn. The potential for a conflict of interest to arise is obvious.
As procurement leaders – in conjunction with our specialist property partner ResolveXO – our approach is 100% transparent, we charge a fee for service that is not linked to the rent of a new facility.
We also fully support the total cost of ownership concept, and, in the case of industrial property, this translates into the lowest cost of tenancy for the period of the lease. This does not preclude negotiation of up-front incentives if that is of value to the tenant. In effect, much of what would have been paid to agents or tenant representatives can now be put into lower rent or increased incentives.
Here are a few questions you should consider if you’re in the market to lease an industrial property.
There are no free services
When it is about property someone always pays. So be sure you know who is paying whom. The tenant representative works for whoever is paying the fee. Is it you?
You are likely to pay hidden fees
If fee arrangements are not transparent it is highly likely that a landlord will unfavourably adjust the incentives you are offered or the final rent you pay to cover any fees being paid to other parties.
Free advice can’t be trusted
Free advice is too good to be true and, at any rate, should not be relied upon.
Independent advice is trusted advice
Make sure your key advisers are independent and will be completely aligned with your objectives.
You should know the total amount of the fee
Insist on full disclosure. You should expect and accept nothing less.
Transparency is critical
You should receive a formal guarantee from your advisers that they, or any related entity, will not accept incentives or payments from any other parties connected with your property solution.
I trust this article is helpful. I would welcome more detailed discussion with you about our approach and capabilities if required.