Flexibility the key in warehousing package

By Bob Dey

Industrial space repackager David Jans is negotiating to buy the Wanderers Club at Mangere Bridge for the second stage of a new-style industrial warehousing development.

The Wanderers, on Coronation Rd, run by former All Black Pat Walsh, was previously known as the Blackbridge Tavern for its association with the long-uncompleted bridge now forming part of Highway 20 from Hillsborough to Auckland International Airport.

Jans was instrumental in building up Property For Industry's portfolio and in beginning the tenancy restructuring which enabled that company to create greater efficiencies for tenants and more profit for PFI.

He resigned from PFI in March last year after talks on his place in the company's future structure broke down, then resurfaced at Kiwi Income Property Trust, in charge of a programme to establish a $100 million industrial portfolio.

A new warehouse for Spicers Paper on Carbine Rd, at the back of its existing Mt Wellington premises, was completed a fortnight ago but a large industrial portfolio was plainly not about to mushroom.

"We had to measure our opportunities, not just against industrial property benchmarks but against opportunities in the whole Kiwi portfolio. It didn't justify being there full-time," says Jans.

In his new venture, Industrial Space Solutions, Jans says he is trying to match two conflicting desires - one for landlords to have more security and the other for tenants to have more flexibility.

"We've recognised the market has shifted. The institutional investors are looking for long-term passive investments to bottom-drawer and bank, the tenants are not looking for long-term leases. The typical industrial tenant is deciding warehousing is not part of his business, so you have this third-party warehousing contract being created.

"Multinationals coming into New Zealand are not sure if the market's big enough and don't want to commit for more than three years. Across the board, leases are getting shorter. It has become a difficult market to source the right product in."

The $11 million first stage, excluding the tavern site, will have an 11,365 sq m main building designed for leasing as a whole, in halves or in thirds, two smaller buildings and a 5000 sq m one for a total of just under 19,000 sq m of warehousing.

A 1000 sq m serviced office facility will have a separate entrance and parking from the large-vehicle access at the front of the warehouses. Jans says if the tavern site was secured, the whole project would cover 5.6ha and contain 30,000 sq m of storage space.

The property has a 10m-high wall that runs for 130m beside the motorway, which will be floodlit and used for marketing of tenants. "We expect to start construction in November or December," he says.

The buildings will match modern industrial needs which have seen stud heights raised in the 90s from 7m to a 9m standard and, in the biggest of these buildings, 10m.

But, says Jans, "the biggest issue in Auckland is the ability of your floors to take the weight of the loading. There's a lot of peat in Auckland and that's where the cost starts to climb, all unseen. This is a very good rock site, which keeps our budget under control."

But those are the comparatively easy issues. Where Jans comes in with costings, and storage methods which can make all the difference to an industrial business, is in the racking potential.

The conventional forklift requires a 3.7m-wide corridor to work in, but with a reach truck and its retractable forks, the aisle can be reduced to 2.7m.

"Storing 3000 pallets under a 6m stud, you will need 3600 sq m. At $65 a sq m that will cost $234,000 a year. Under a 9m stud, racking six-high and with a reduced aisle width, you can come down to 2100 sq m of floorspace. Although the price a sq m is higher, $78.20, it costs a lot less a year, $164,220.

"We sell volume rather than floor area. We increase their efficiency and profitability. We're trying to do more than just put up buildings and put them out for lease, but we're stopping short of becoming contract warehousers."

That racking improvement is one thing, but the conflict in lease terms is a separate argument which Jans also wants to overcome.

A difficulty for tenants is that standard warehousing contracts are likely to be for three to five years, but a normal lease on a new design-build property is either nine or 12 years, with a few down to six years.

At that rate, tenants might have four to six years of lease time to take on contingency, in the hope that they will win a new contract to justify the space taken. Alternatively, and this has become a frequent occurrence, tenants have not been prepared to commit to the lease so have not pursued the business opportunity.

That is a double loss to the economy, one of them the rent and the other the lost business which might not be taken up by anyone else.

Although there are some new international players in the distribution world, such as New Wave which has had a huge facility built at Mt Wellington, Jans says most distributors will turn to existing buildings available short-term.

As commercial office tenants are learning to count the total cost of office space, including outgoings and working the figures back to the cost for each staff member or for net return, so industrial tenants need to look at costs for each pallet position rather than just measure the price of a square metre of floor.

In one instance, Jans he discussed better opportunities with a document storage company which he said could introduce inside racks, giving two lines of racks on each side of an aisle.

"You can say this is no big deal, this is mostly about short leases, but there are ramifications for property. Tenants who have been forced into signing long-term leases because there were no other options now have an option."

Jans says the flexible warehousing concept is common the United States, Britain and Germany. Two huge British industrial parks, Milton Park in Oxfordshire and Magna Park at Leicester, grew from this concept into fullscale business districts.

Industrial Space Solutions' billing system is based on floorspace and time, from $98.50 a sq m for 1000 sq m a year down to $69.90 if 5000 sq m is taken for nine years. Jans says the other difference is the price per pallet depending on stud height - $54.60 under a 9m stud compared to $63.70 under a 7m stud. With the narrower aisles, he says the costs for palleting under a 9m stud falls to $46.30.

Jans says his approach differs in its rationale from that of the syndicates, which have focused on finding a classy tenant and promoting investment on that basis. His focus has been on location and flexibility within the building.

Barfoot & Thompson industrial agent Radley Clarke put the idea in his head when Jans was restructuring a Wiri project for PFI, but Jans could not see the sense then in creating something so management-intensive.

Clarke sold him the site and is marketing the warehousing concept vigorously. In an easy market the landlord would not worry about it, but Jans says in a climate where negotiations favour tenants this sort of new concept has an important place.