Major Institutions Building First Multistory Warehouses To Solve NYC's Last-Mile Dilemma

Multistory warehouses are difficult to build, expensive and unprecedented in New York City. But they may be the only answer to meeting the voracious demand from e-commerce customers.

Online sales have exploded and buyers now expect their goods within days, if not hours. As a result there is a growing need for distribution centers in major cities across the United States.

The challenge is building them.

In New York — where more than 11M SF of industrial space was wiped out in rezoning between 2007 and 2016, according to analysis last year from Ariel Property Advisors — industrial developer Prologis is banking on multistory warehouses as the answer.

The San Francisco-based company is marketing space in its 205K SF, two-level warehouse at 1055 Bronx River Ave., which it renovated to feature 10 loading docks that can accommodate 53-foot trailers. 

The former ABC Carpet & Home outlet store is the first multistory warehouse Prologis has developed on the East Coast. The firm is building a 590K SF ground-up facility in Seattle and has another pending approval in San Francisco.
 
“What we have found is the customer wants to be within the urban population center and is willing to pay the premium for the real estate to be there,” Prologis Senior Vice President Pete Crovo said.

Prologis expects to command rent prices that are closer to retail than traditional industrial rents, Crovo said, although he declined to provide exact figures.

Last-mile distribution is big business across the globe. Nearly 25% of consumers in China, Germany and the U.S. will pay major premiums for same-day or instant delivery, according to a 2016 report from McKinsey & Co. 

Investors keen to capitalize on shoppers’ growing willingness to fork over cash for speedy delivery is pushing up the cost of industrial land. Last year, U.S. land prices jumped for development of warehouses because of strong demand and a depleting supply of viable locations, according to a CBRE report released last month. Even land in Northern New Jersey — the cheaper alternative for industrial players — jumped 17% last year, the report showed.
 
Although there is no doubt providing quick delivery to New York City’s nearly 9 million residents is a cash cow, not everyone is sold on investing in multistory warehouses within the five boroughs. 

Innovo Property Group’s Andrew Chung said at a Bisnow event in November his firm had purchased the former Whitestone Multiplex Cinema on 2505 Bruckner Blvd. with a multistory facility in mind — although he said he is not certain that plan will come to fruition.

“The industry is literally being disrupted right now ... It’s going to be interesting how the real estate is utilized,” he said. “It’s changing literally second-by-second. The existing [industrial land] supply is essentially functionally obsolete.”

Prologis, which is the world’s largest warehouse owner, has built 53 multistory facilities in Japan and China, and the company believes the concept is starting to make sense in a number of U.S. markets, but Crovo cautions they can be complex to develop.

“They’re not easy projects to construct and finance,” he said. "You’d better be pretty sure about the design of the building."

Prologis is not the only company banking the multistory approach will pay off. Developer Dov Hertz is planning a 350K SF, three-story distribution center on a 4-acre site in Red Hook. The company is under contract to buy the site, at 640 Columbia St., with Goldman Sachs Asset Management for reportedly close to $50M.

“I think people are still waiting to see if the [multistory] thesis bears out,” Hertz said. “[But] we feel there’s a demand, and there’s very little in the way of supply.”

The proposed building, Hertz said, would feature three levels, with direct loading from the first and second floors.

Hodges Ward Elliott Managing Director Will Silverman marketed the Red Hook site specifically as a multistory facility. Past investor skittishness is diminishing, he said, and a growing number now view multistory as the only viable option.

“During the course of the marketing … we’d call people and they’d say ‘no thanks,’ but then we’d hear back from them a few weeks later after they’d spoken to their top brass or dug deeper into the concept,” he said.

Goldman Sachs' buying the site in Red Hook, he said, indicates both “savvy locals” and institutional investors see the value of putting money into distribution centers.

Now is the time, he said, to get in early and start investing in that type of property.

“If you are worried about the threat of e-commerce to your retail investment, this is a good way to get on the other side,” he said.

Ethan Rothstein contributed reporting to this story.

CORRECTION, JAN. 3, 5:40 P.M. ET: A previous version of this story misstated the number of loading docks Prologis' mulitstory facility in the Bronx has. In total, it has 10 loading docks. A previous version of this story misstated the stages of development of Prologis' Seattle and San Francisco facilities. This story has been updated.