With the vacancy rate for industrial space at an all-time low of less than 4 percent and rents up 17.6 percent (per a February 2022 Prologis report), warehouse tenants don't have a whole lot of leverage when it comes to negotiating leases. The surge in storage costs will continue to rise in the coming weeks, and probably months. This leaves companies like mine, which store products for retailers and brands, balancing these rising costs against our customers' expectations and resources.
If you have a fulfillment or warehouse partner, now is the time to discuss how to take your next steps together in the interest of moving in a direction that supports your goals. Here are a few important things to consider as you head into that conversation.
Take stock of the big picture.
The commercial real estate landscape is tough for everyone right now, and while the details may vary, we're all in the same boat, paddling against the current. Be aware of and sensitive to the fact that everyone's costs are increasing. It's not a solution, but mentally grouping yourself with your partner rather than standing in opposition to them is an exercise that will help put you in the right frame of mind.
Remember, too, that warehouse workers are often the last touchpoint before your customers receive their orders, which makes them as valuable as any other link in the supply chain. Especially in a tight labor market, making sure your warehouse partner is able to provide those people with fair, competitive wages will only benefit your business.
Make timing a priority.
Keep the lines of communication wide open with your warehouse partner and make it clear that you want as much foresight and visibility as possible into the timing and nature of any events that will impact storage costs. Having advanced awareness of the timing of rent increases will allow you to not only adjust product pricing accordingly, but to communicate impending adjustments to your customers in a timely fashion.
Rising product and service costs are obviously not attractive to consumers, but with the current awareness about inflationary pressures on the economy, rising costs are not coming as a surprise.
Revisit your current agreement.
During times of adversity, it may be in the best interest of all parties to temporarily redefine short-term goals. Consider revising the parameters of how you operate. If you have a service level agreement (SLA)--a standard agreement between a service provider and customer that defines services required and expected level of service--review it to identify any areas that can be moderated for awhile. Or if you've been working on a retainer model, consider moving to an hourly rate or project arrangement until you're on more stable ground.
Extend your contract.
If you are content with your warehouse partner and have no plans to bring your business elsewhere, extending your contract could be a viable option. Committing to a long-term agreement may allow you to lock in rates, affording you the opportunity to benefit from gradual rate increases over a few years rather than a big spike all at once a year or two down the road. Not everyone is going to be willing to do it, but if you're a good partner and you're working with a good partner, you may be able to work something out.
The goal of any good contract negotiation is to come to terms that are fair and balanced. What will help you get there is foresight, good communication, and mutual transparency. Remember that the part on the other side of the table is a strategic partner whose goal is to help you succeed so they can, too.