Editor’s Note: This post was originally published on JLL Real Views.
For warehouses looking for space to grow in many of America’s big cities, the only way to go is up.
Take New York City. The rise of e-commerce and same-day delivery is ramping up demand for industrial space in one of the country’s biggest consumer markets. That demand is colliding with the city’s chronic land shortage — and city restrictions aimed at easing traffic congestion — leading some property developers to plan multi-story warehouses.
A rarity in America and most of the Western world, vertical warehouses are common in Asia, where smaller trucks can more easily navigate ramps to upper floors.
Three planned developments—in Brooklyn, the Bronx and Queens–are designed to accommodate the 53-foot trailers used in the United States. The first of their kind on the East Coast and among the pioneers in the country, these projects demonstrate how the increased urgency behind online fulfillment is upending the long-established economics of warehousing and distribution.
“In the past, American cities were typically served out of sprawling distribution centers far from town,” says Robert C. Kossar, who leads the Northeast Industrial Market team at JLL. “Because of the demand for same-day delivery and the need to be closer to the customer, that is changing.”
In the traditional model, packages flowed into New York City from one-story New Jersey warehouses, Kossar says. Developers and occupiers have favored these horizontal facilities because they are roughly 50 percent cheaper to build–and land in suburban areas comes at a steep discount to city pricing.
That setup sufficed–until consumer expectations changed. In 2017, 46 percent of consumers expected the possibility of next-day delivery when making purchases—up 3 percentage points from the previous year, according to the UPS Pulse of the Online Shopper study. Same-day service was expected by 20 percent of consumers, up 4 percentage points.
Customers are also willing to pay for it. In 2016, 25 percent of consumers, and 30 percent of Millennials, were willing to pay significant premiums for the privilege of same-day or instant delivery, according to a study by McKinsey & Company. These premiums arguably justify high urban industrial rents. “It’s not about cost at a certain point—it’s about getting to customers by a certain time,” Kossar says.
Proximity is especially key in high-traffic cities like New York, where Mayor Bill de Blasio is beta testing anti-congestion measures that include delivery restriction times.
“That is going to further exacerbate the issue, so in order to deliver quickly in New York City, you are going to have to be within the city proper–in Brooklyn, Queens or the Bronx,” he says. “In many cases, in order to have enough space, you’re going to have to build more than one level.”
Capital leads the way
While retailers are well aware that New York is about to experience a surge of warehouse fulfillment demand, developers and investors are leading the charge to pave way for a multi-story future.
Goldman Sachs Group, in partnership with developer Dov Hertz, expects to begin building a three-story facility in Red Hook, Brooklyn in 2019. The warehouse will have truck ramps to the second floor and elevators that can hold a forklift going to the third floor.
On the other side of New York City, a joint venture between Innovo Property Group (IPG) and Square Mile Capital Management is planning a two-story warehouse in the Bronx that spans 840,000 square feet.
“Its central location allows it to function as a distribution center for businesses that serve more than 8 million consumers who live within 10 miles of the facility,” says Andrew Chung, CEO of IPG.
Meanwhile, a large parking lot near John F. Kennedy International Airport is in the planning phase to become a three-story warehouse.
While only three vertical projects have been formally announced, other proposals are brewing throughout the boroughs, Kossar says.
In addition to multi-story warehouse projects, some single-story developments are springing up in the dense urban areas where customers are located. Wildflower LTD is moving quickly on its plans to build a two-building horizontal project near the South Shore of Brooklyn.
“When you think of the fact that the 2016 population of Brooklyn alone–just one of the five boroughs–is almost the same as the entire city of Chicago, it becomes clear how essential this project is,” says Leslie Lanne of JLL’s Northeast Industrial Market team.
Wave of the future?
New York is not the only city seeing warehouses rise. Prologis kicked off the trend in the U.S. with a three-story facility in Seattle that it expects to complete in September. It is planning another one in San Francisco.
“San Francisco, New York, and Washington D.C. will have several projects before we start to see them in other cities,” Kossar says. “It’s all about time, density and traffic.”
Multi-story warehouses are an increasingly common sight in cities outside of the U.S. Several two-story warehouses are being built speculatively in and near Sydney, Australia, says Michael Fenton, who heads JLL’s industrial team in Australia.
For a logistics company in Australia, transport makes up 50 percent of business costs, while rent is only 4-7 percent, according to Fenton. “This makes proximity to core markets a critical consideration for occupiers,” he says. “In a land-constrained city like Sydney–where a lot of industrial product was redeveloped into residential buildings – building vertically is the only logical next step.”
The fact that the vertical trend is taking on in markets as different as Sydney and New York is telling. The rise of same-day delivery is impactful, and it’s only just beginning. As consumers expectations continue to shift toward this on-demand model, it is likely to have a ripple effect, spawning multi-story warehouses across the globe.
“When same-day delivery becomes the new normal, these warehouses will be in high demand in every urban market,” Kossar says.