Build New or Use Existing? Industrial Site Selection Tradeoffs

Many industrial companies commencing the site selection process need help evaluating the merits of selecting an existing building versus constructing a purpose-built facility for their production and assembly project. In 20 years of working on a very diverse set of industrial projects, Site Selection Group, a leading location advisory, real estate, and economic incentive services firm, has evaluated the trade-offs of each strategy countless times. The following provides a quick overview of each strategy, including a general market outlook, impact on the site selection process, and advantages and disadvantages. 

The Case for Existing Buildings 

Market Outlook

Those industrial site selection projects taking advantage of existing assets typically have one of two characteristics, and often both: Their production process is vanilla enough that it can fit in your standard concrete box, and/or they have a significant speed-to-market constraint. In today’s climate, this actually represents the majority of manufacturing and assembly projects nationally (despite the large mega projects that make the headlines).

There are projects that are able to find quality second-generation assets aligned with their specific use, but those are few and far between in this economic cycle. 

Impact on the Site Selection Process

There are typically two factors that impact the site selection process for existing building searches:

1. Site selection searches are limited based on market availability. It just so happens that the current inventory of existing assets across the United States is quite strong due to speculative development and a slowing trend of distribution center activity. However, that availability is heavily concentrated in tier 1 and tier 2 markets that have enough population density to attract institutional development money. 
   
   
2. Building availability drives micro site selection strategies, which are further constrained by the availability of adequate utility capacities. Searches are obviously limited to where existing buildings are located, but utility constraints narrow the field of options quickly. Most vacant industrial product is intended for warehousing and distribution. That makes accommodating above-standard electric, water, wastewater, and natural gas requirements more difficult but not impossible. 

Advantages

Other advantages exist, but these three are the most prevalent for projects searching for an existing facility:

1. Existing buildings often expedite the timeline to production by six to 12 months as compared to purpose-built facilities. 
   
   
2. For a variety of reasons, the acquisition cost of an existing asset in many markets is more cost-effective than constructing a new facility. Additionally, existing buildings offer a clearer and quicker path to leasing an asset should a company wish to defray upfront capital costs. 
   
   
3. Because they’re designed to be versatile, conforming operations to a standard building typically affords one a better exit plan to dispose of the asset to a subsequent user. 

Disadvantages

The more prominent disadvantages of the existing asset strategy are:

1. Due to their business model, instructional owners typically strongly prefer to lease assets. Therefore, the pressure to lease a facility is more prevalent for existing assets. 
   
   
2. Because developers typically max out site coverage, finding facilities that can accommodate an expansion strategy in later years can be difficult, although not impossible. 
   
   
3. Most buildings are constructed in areas of light industrial zoning. While that use allows for the majority of your typical production and assembly projects, it can constrain those that have heavy production processes. 

The Case for Purpose-Built Facilities

Market Outlook

Those industrial site selection projects committing to purpose-built facilities typically have one of two characteristics, and often both: Their production process requires a unique asset, and/or they have some exorbitant utility requirement or transportation requirement (e.g., rail, barge). In today’s market, that usually represents mega projects, whose activity has declined since 2024, or projects with a very specialized production process, both of which collectively make up the minority of industrial projects.  

Impact on the Site Selection Process

There are typically two factors that impact the site selection process for purpose-built facilities:

1. The search for greenfield sites provides more geographic flexibility. Project searches can still be constrained a bit, but due to heavy investments in sites and infrastructure from states, communities, and utilities, sites are generally available in a diversity of geographies. 
   
   
2. Utility availability and capacities, as well as compatible zoning uses, drive micro site selection strategies. With the burden to find an existing asset relieved, the search for adequate sites usually comes down to utilities, modes of transportation, and developability. 

Advantages

Other advantages exist, but these three are the most prevalent for projects constructing a purpose-built facility:

1. Purpose-built facilities obviously allow for maximum design customization to incorporate elements such as irregular shapes and heights, laydown yards, outside storage, tall ancillary structures, etc.  
   
   
2. Typically, land is relatively inexpensive compared to other capital costs. Therefore, it is less of a challenge to plan for future expansions to accommodate growth over time. 
   
   
3. Securing a site first provides the user with the most flexibility in ownership structure. It affords them the ability to simply construct and own an asset or competitively bid developers before or after construction. 

Disadvantages

The more prominent disadvantages of constructing a purpose-built facility are:

1. The time it takes to conduct adequate transaction due diligence on a greenfield site, plus the delta in the construction timeline, can easily add 12 months to the overall process. 
   
   
2. Because of a good inventory of existing assets and escalated construction costs, it can be $20-$50 per square foot more expensive to construct a facility versus purchasing an existing asset. 
   
   
3. Purpose-built facilities in this climate are de facto specialized in nature, making them inherently less compatible for subsequent users. 

The Most Common Mistake

Prematurely Making the Decision about Real Estate Strategy

The strategy for many projects commencing the site selection process is typically obvious from the start. However, there are many projects that warrant an objective search for both strategies. Site Selection Group recommends that these companies remove any preconceived notions when entering the site selection process and encourages them to carry both strategies through in parallel. Once tangible options are identified and evaluated, it is much easier to accurately assess the tradeoffs. Those tradeoffs can not only be time and costs, but also workforce- or risk-related.