October 15, 2019
By Rich Hamilton & Doug Ceva
In the age of eCommerce, third-party logistics providers, or 3PLs, are growing faster than ever. In fact, in 2017, 3PLs leased an estimated 40% of the vacant warehouse space in the U.S., making them a prime target for landlords and developers. And their rapid growth has only continued since—showing no signs of a slowdown anytime soon.
So, what should landlords consider as they look to reap the benefits of the 3PL boom? First, it’s important to understand the customer when pursuing a lease agreement with them. Each 3PL tenant has unique business needs, and no two 3PLs are exactly alike. From transportation and freight forwarding to warehousing, eFulfillment, and distribution, 3PLs offer a wide range of contracted services, and for landlords, this variation makes working with a 3PL much different than working with a more traditional occupier, like a manufacturer.
However, 3PLs often make excellent, profitable tenants, and by understanding their industry, landlords can take advantage of their booming business.
The 3PL business has historically been a competitive industry with thin margins – sometimes as narrow as the single digits. In the past, when landlords looked at a 3PL’s financials, they were understandably concerned. However, the financial concerns of the past don’t seem to be as much of an issue anymore. Today, many 3PLs are major corporations (some publicly traded), earning strong net operating incomes.
The Best Approach: Know what to expect – 3PLs typically have thin profit margins because of the competitive nature of the industry.
The way 3PLs operate also makes it difficult for them to quickly make commitments to leases or development negotiations because there may be extenuating circumstances that delay decision-making. Those circumstances often involve an ongoing RFP process or the negotiation of services and operating agreements. Therefore, it’s reasonable to expect the lease negotiation phase to take a bit longer than it might with a different type of tenant.
The Best Approach: Be patient. Recognize what is driving the customer and what stage they are at in the RFP process with a customer.
3PLs have more specific lease terms than typical occupiers because their lease agreements are determined by operating agreements made with their customers. Therefore, it is typical for a 3PL to want a lease to be coterminous with an operating agreement, as it’s too risky to sign a longer-term lease or take more space than contracted.
However, there are exceptions, as some larger, well-established 3PLs look to create an anchor network in key cities in the U.S. and around the globe. These anchor locations, or “hubs,” are determined by geographies that will likely have a high demand for 3PL services.
The Best Approach: Understand the real estate requirements the 3PL is trying to achieve, as outlined in the 3PL service agreement, and drill down to the key drivers that will help the 3PL succeed with its business objectives.
Just like any other industry vertical, 3PLs come in all shapes and sizes. Some are professional warehouse operators with terrific balance sheets and the willingness to sign long-term leases. Others are transportation companies that need truck yards and shorter lease terms. Regardless, many 3PLs bear a key similarity: they make great tenants and working with them can be advantageous to a landlord’s profit margin.
As the 3PL industry continues to mature significantly in the coming years, landlords should take note. By understanding a 3PL’s business model, its reputation in the industry, its financials, and the clients the 3PL is serving, landlords can maintain successful tenant relationships and reap the benefits of the 3PL boom.
Rich Hamilton serves as Managing Director and Lead for Cushman & Wakefield’s 3PL Specialty Advisory Group. Doug Ceva is the VP of Global Customer Solutions for Prologis.
Pictured, top: Vista Logistics Park, Gresham, OR. Above left: Rich Hamilton. Below right: Doug Ceva.
For comments, questions or concerns, please contact Paul Bubny