While not a core part of the industrial real estate playbook, research from Los Angeles-based industrial real estate firm CBRE indicates that a new trend appears to be emerging in the form of multistory warehouses in United States-based metropolitan areas.
That was the main takeaway from a report issued this week by CBRE this week, entitled “Going Up: Vertical Solutions in Industrial & Logistics.”
CBRE explained in the report that with U.S. industrial real estate demand having outpaced supply for 33 consecutive quarters, due, in large part, to e-commerce growth, coupled with consumers expecting quicker delivery times, it has led to a shortage of urban infill sites for new last-mile delivery and am emerging trend of multistory warehouse development.
What’s more, it noted that the main drivers for multistory warehouse development are high population density, strong e-commerce penetration, and tight market conditions for suitable last-mile fulfillment buildings and development sites.
“Multistory warehouses are an emerging phenomenon in the U.S., but they might pencil out only in the densest neighborhoods and cities,” said David Egan, CBRE’s Global Head of Industrial & Logistics Research, in a statement. “We might need to see some additional adaptations that are common in Asia and Europe, such as smaller delivery trucks, which allow for tighter ramps and, in turn, smaller building footprints.”
In the U.S., CBRE said there are at least five multistory warehouses underway or in the planning stages in New York City, Seattle, and San Francisco, which, if successful, could serve as a pacesetter for future developments in other cities with similar conditions.
Other U.S. markets identified by CBRE that it indicated have potential for multistory development include Los Angeles Chicago, Dallas/Ft. Worth, Houston, Atlanta, and Miami.
The concept of multistory warehouses is one, which is “quite new,” according to Matt Walaszek, Senior Research Analyst at CBRE specializing in Industrial & Logistics.
“It really has not taken off quite yet,” he said. “There is decent traction and evidence of it happening in some key pockets of the U.S. that are most dense. The way we approached this [research] was what are the cities that have the conditions for this type of development to take off and actually work. Some markets we have identified may not have any at all. I am not sure if it can work in the Texas markets, as there are different fundamentals there. But we are seeing it in the coastal hubs, and a lot of it has to do with where the land values are at, and the cost of land, and the cost to build. With the limited supply, it is quite difficult to find available [sites] for warehouses closer to dense population centers. This may be a viable option.”
Walaszek said it will likely take some time before development of multistory warehouses truly takes off and really impacts supply chain operations.
A key reason for that, he explained, is that it remains to be seen is tenants will take on rents that are priced at upwards of $30 per square-foot, which are similar to office rents.
“Whether or not they agree to that price remains to be seen, but some may argue that they don’t have a choice in this current market,” he said. “Tenants need to look at the cost breakdown and the cost of transportation and labor, which is a lot more than occupancy costs, which is 3%-6% of the total logistics spend versus 25% for labor, and then even more for that than transportation. Companies are having to focus on the larger chunks of their budget and being closer to their consumers…which may save a lot of money down the road.”
Another challenge for multistory warehouse development, said Walaszek, is related to site selection, as he explained that it is very difficult to identify sites for this type of development.
“You are looking at urban areas that are likely surrounded by residential properties and other types of uses, and so there is a lot of competition for multi-family, office, other types of uses, and it is difficult, I think, sometimes to make the argument for an industrial building in a highly populated area,” he said. “That is the number one challenge for this. There is not a standard format for this; it is going to vary from market to market.”
CBRE also announced this week that the availability rate for U.S. industrial real estate fell by 11 basis points in the third quarter. This is the 33rd consecutive quarterly decline, as demand for warehouses, distribution centers and other industrial property continues to outpace supply, it said. CBRE also noted that availability of U.S. industrial real estate dipped to 7.1 percent in the third quarter, the lowest point since 2000.