Looking for a cheap distribution center? Consider Sioux Falls, S.D.

Interested in opening a distribution center in Sioux Falls, S.D.? The market has a deal for you. Looking to establish a DC footprint in the Sunnyvale/San Jose, Calif.? Bring a big wallet.

Sioux Falls provides the cheapest place to build and operate a 175,000- square-foot warehouse employing 75 hourly workers. According to a survey of 50 North American markets by consulting firm The Boyd Company Inc., it would cost $7.4 million in 2011. By contrast, the annual cost to operating the same warehouse with an identical labor force in Sunnyvale/San Jose during 2011 would be $12.6 million, the survey said.

The highest-cost markets behind Sunnyvale/San Jose were Orange County, Calif.; Toronto; Los Angeles/Long Beach; and the New Jersey Meadowlands area. At the opposite end of the price spectrum, Louisville, Ky., was the second cheapest operating market behind Sioux Falls. It was followed by Omaha, Neb.; Greenville/Spartanburg, S.C., and Shreveport, La.

Louisville is the prototype of an attractive U.S. industrial property market, said John Boyd, the firm's principal. The area has relatively low operating expenses supported by close proximity to the nation's interstate highway system, a temperate climate, and reasonable labor costs. Louisville is also the home of the WorldPort global hub operated by transport giant UPS Inc.

The report also shows that the real estate bust is still having an effect on some regions of the country. Construction and land rates in markets in Nevada, Arizona and Florida, states hard hit by the sharp downturn in real estate values, are down 40 percent to 60 percent from levels seen two or three years ago, according to Boyd. Recently, however, these cost declines have been partially offset by higher freight rates and fuel costs, he says.

The Boyd Company specializes in site selection for businesses looking to expand or relocate their distribution networks. Its real estate reports include each market's applicable rates for labor, land, and warehouse construction as well as transportation and energy expenses and property taxes. The company updates its data every 18 months.

Canadian invasion?
One meaningful trend not visible in the survey is the increasing influence of Canadian investors in U.S. warehouse and distribution center transactions, says Boyd. Attracted by falling U.S. property values and a weaker U.S. dollar, Canadian companies are increasingly eyeing U.S.-based distribution centers—especially in the U.S. Midwest—as a way to establish a geographic pivot point for their North American distribution, Boyd says.

Canadian firms are choosing locations in the U.S. over Mexico because of its greater transparency and common language, says Boyd. By contrast, Canadian firms have found Mexico an increasingly difficult and frustrating operating environment, he says.