Chasing The Unicorn: Why Industrial Developers Seek Out Elusive Urban Infill Sites

The vacant lots that dot the dense cores of American cities might seem unloved, but they have a set of secret admirers.

In their race to build ever closer to urban consumers, industrial developers want to snap up these properties and turn them into distribution and logistics hubs so they can provide cheap and speedy delivery to the urban masses.

However, finding a viable infill site can be a struggle. Even if an industrial developer identifies a property, it can still face stiff competition from developers from other asset classes, as well as myriad financial and logistical hurdles. 

But with industrial land scarcer than it has ever been, the opportunity to build on these underdeveloped lots is attractive enough to inspire developers to face down immense challenges.

“Developers are turning over every rock looking for these sites,” JLL Managing Director Leslie Lanne said. “And whenever they stumble on a well-located infill property, they're sure to encounter competitors who want the space just as much.”

What Makes Urban Infill Desirable?

For infill properties to be attractive, Lanne said that cities need two factors: population density and vehicle congestion. To go after the pricey and comparatively small properties in urban cores, there has to be a sufficiently large group of consumers the developer hopes to reach. More importantly, there has to be sufficient traffic to make delivering goods from larger suburban facilities prohibitively expensive or time-consuming.

New York, with its crowded population and bridges and tunnels that act as bottlenecks for traffic, is a case study for why urban infill sites are desirable, as are cities like Boston, Seattle and San Francisco. And though cities like Los Angeles and Chicago have more dispersed populations — and a larger amount of developable suburban land — their sheer size makes their downtown infill properties attractive.

Companies like Amazon have voracious appetites for urban logistics centers to act as staging grounds for last-mile deliveries. But as demand rises and traffic gets worse, smaller, traditional logistics customers — including food and beverage distributors and mechanical suppliers — are now also seeing a pressing need for space at these hyper-local sites.

“If you supply liquor to every restaurant and bar in a neighborhood, you have to make sure that those runs are as short and efficient as possible,” Lanne said.

The Long Road To Acquisition

Though many cities offer the right sorts of properties — parking lots and vacant lots of 1 to 5 acres or buildings that have sat empty or underused for decades even as entire neighborhoods have grown up around them — the task of actually acquiring those properties can be fraught with difficulties.

First, the properties may not be zoned for industrial use at all. Lanne said that New York City alone has lost 7M SF of viable industrial space because areas in the outer boroughs have been “upzoned” for residential or office use. And though a developer could apply to have a property rezoned for industrial, those efforts are often fruitless.

“It’s an uphill battle to fight to bring industrial back,” Lanne said. “The developer and investor community is focused on areas that already have the appropriate zoning in place.”

And though they might stand to make a serious windfall, the owners of these infill properties may simply not want to sell, Lanne said. For some, these properties have been in the family for generations and are currently throwing off a modest income. And unlike large logistics firms, owners who sell their properties might be exiting real estate for good.

“It’s not like a big firm that would be able to execute a 1031 exchange for other properties,” Lanne said. “Often, these people have no other place to put their money.”

Even if they find a willing owner, industrial developers may end up in a bidding war with developers who want to build residences or offices. And while multifamily has historically outbid industrial, Lanne said the rising demand for and rent from warehouse spaces have industrial investors digging deeper in their pockets to win these sites.

The Struggles Of Development

Actually turning an infill site into a logistics hub presents further difficulties. Many infill sites have none of the requisite infrastructure. Developers can find themselves retrofitting 1970s-era buildings that were never meant to accommodate box trucks, let alone 53-foot trailers. And unlike greenfield sites, urban infill sites may sit atop sewer systems, electrical wires or even subway lines, making it burdensome to dig a new foundation.

While navigating permits and local restrictions is one challenge, industrial developers also face another constraint: parking. Distributors don’t merely need a warehouse to store goods, they also need space to park fleets of trucks and cars, since street parking is often insufficient in dense urban areas.

“The result is that many developers have to go vertical,” Lanne said. “To justify the price, they choose multistory facilities to give themselves enough density and floor space.”

Building a multistory facility comes with immense engineering and logistical challenges, including how to keep traffic flowing from street level to the top floor and back down. Feasibility studies and design work, not to mention the actual construction, do not come cheap.

“There are certainly teams that know how to put one of these warehouses up, or rehab an older asset,” Lanne said. “But the bottom line is that development plans are incredibly expensive.”

An Impressive Payoff

The good news is that developers will likely be rewarded handsomely for their struggles. Though only a few multistory industrial infill sites have been delivered, early signs suggest that leasing and rents are strong.

Georgetown Crossroads, a multistory warehouse in south Seattle developed by Prologis, was fully leased less than a year after its delivery, with most of the 590K SF taken by Amazon, according to the Seattle Times. 

Lanne is overseeing leasing at 2505 Bruckner, a multistory distribution center under construction at the intersection of the Cross Bronx Expressway, Hutchinson River Parkway and Brucker Expressway. Even in this early stage of construction, Lanne said she has already seen tremendous interest from potential end users of the warehouse.

As these infill projects continue to deliver, Lanne said, the industry will be able to determine which techniques and designs and even what construction materials and finishes have worked, and which can be improved upon.

“We’re in an exciting time,” Lanne said. “We’re getting to see how these first buildings work in operation and learn for the future.”

Lanne will be moderating a panel on industrial development at urban infill sites at NAIOP’s I.CON Spring Industrial Conference, April 2-3, in Huntington Beach, California. 

This feature was produced in collaboration between the Bisnow Branded Content Studio and NAIOP. Bisnow news staff was not involved in the production of this content.