Urban Warehouses Rise to New Heights

E-commerce is expected to almost double by 2023, according to a study from Shopify. As online shopping expands, companies are pressured to deliver more goods and get them to customers faster than before. But building new, sprawling warehouses to store the merchandise is an expensive proposition, especially in areas located near major population centers where land values have risen precipitously.

For some retailers, the solution is the multistory warehouse. Last year, multinational logistics real estate investment trust Prologis built the first multistory facility in the U.S., and in September, it leased most of the space to Amazon. Now, other developers are planning multistory facilities in urban areas on both coasts, including Innovo Property Group, which will embark on such construction in New York City's Bronx borough by the end of the year.

Constructing these complex, specialized facilities is an expensive undertaking, but developers and retailers alike believe their ability to satisfy the insatiable demand for faster deliveries will pay off, and are willing to pay more to be in urban areas—for example, rental rates in Seattle's ideally-located Georgetown Crossing, the first multistory warehouse where Amazon leases space, average more than $12 per square foot compared to recently inundated areas closer to the Port of Tacoma, which average around $8.50 a square foot, reported CoStar News.

Here's a look at the dynamics behind the multistory warehouse trend.

Making Sense for Developers and Tenants

Retail warehouses are often built in suburban or rural areas where land is cheap. Their spread-out, one-story layouts are practical for trucks, which can easily pick up merchandise and be on their way.

However, they're often located far from urban population centers, and today's consumers are demanding faster delivery times—a trend forward-thinking developers have noted.

“We charted out how delivery time frames were compressing, with Amazon leading the way. They went from seven days to five, to two, to next-day, to same-day at an accelerating rate," says Andrew Chung, CEO of Innovo.

Innovo also hired consultants and did its own research on logistics and drive times. The company concluded that speedy deliveries could be accomplished more economically if truckers picked up goods at urban warehouses rather than using existing supply lines from far-flung facilities. That makes urban warehouses a good bet for potential tenants.

To make them work for developers, the traditional single-story model needed to change. Building up is an economic necessity, says David Egan, global head of industrial and logistics research at CBRE.

“You've got a bad combination of a lack of land and very high costs. Your greatest concern is to build as many square feet as you can to get a good return. The only way to do that is to build vertically."

Innovo has two more multistories planned in New York's Long Island City, and expects to start construction there next year.

Multistory warehouses could also be economically feasible in Los Angeles, Miami, and Boston, Egan says.

Prologis: The First

Prologis has built many multistory warehouses in Europe and Asia, where dense populations and scarce land make them commonplace.

“In Tokyo, Singapore, and China, they build much higher—as high as 20 stories," Egan says. But delivery trucks in Asia are much smaller and more nimble than they are in the U.S. “The amount of square footage dedicated to truck access and parking is higher here," Egan says, making tower-like warehouses impractical.

Prologis' Seattle warehouse covers 590,000 square feet on a 13.7-acre site. The building has three levels, the first two dedicated to warehouse space and the top reserved for offices, light manufacturing, or laboratories. Wide concrete ramps allow 53-foot American semi-trucks to load goods directly from the second story instead of waiting for forklifts to convey them to a freight elevator, then down to the ground level.

The company says it has leased the entire space, most of it to Seattle-based Amazon, which this year began offering Prime customers one-day—or in some cases, same-day—delivery. Prologis is also considering multistory warehouses in New York and on the West Coast.

Innovo: The Biggest

Though Prologis may have been the country's first, Innovo's one million-square-foot, two-story warehouse will be the nation's largest when it's completed in 2021, Chung says. The 20-acre site, which Innovo acquired two years ago, was selected in part because of its strategic location, just 30 minutes away from more than nine million people in a 15-mile radius that includes Manhattan, Queens, Brooklyn, Long Island, and Connecticut.

The company, which is spending hundreds of millions of dollars on the building, has no tenants lined up yet, but Chung says that's not unusual in the industrial sector, where they typically wait until construction is underway to sign leases.

Chung doesn't view the project as a gamble, especially considering the size and growth of the e-commerce market. Online sales reached $501 billion in 2018 and are projected to surpass $740 billion in 2023, according to Statista. “We think it's a good risk-adjusted bet," Chung says.