Multi-story Industrial Builds Are Two Years Away

In the next year or two, expect to see multi-story industrial developments come to Southern California. With little land available for new development and growing demand for industrial users to be close to population centers, industrial development is going to have to head up. Multi-story warehouses are already commonplace in dense European markets, like London, and in the New York/New Jersey area, there are currently five multi-story warehouses under construction.

“It really comes down to the distance that you need to be from the population base. If you want to be delivering in an hour or two hours and you have 9 million people in Downtown Los Angeles, then you need to be in Downtown Los Angeles,” Louis Tomaselli, senior managing director at JLL, tells GlobeSt.com. “There is no land there, and you can’t build a 400,000-square-foot box, so the only thing to do it to go up.”

While the market has been in need of more industrial product, we haven’t seen multi-story industrial product yet because of the higher construction cost. Until recently, industrial rents didn’t support the construction costs, but they are getting close to making it a possibility. “There are multiples of costs to go higher, but if the rents can support it, then that is going to happen,” says Tomaselli. “Right now, we are already seeing markets that will support multi-story industrial. We haven’t seen anyone take that plunge yet, but I think you are going to see it in the next year to two years.”

Rents are rising, but land prices are also rising. The increased cost of land is making redevelopment more difficult. With land prices reaching record heights for industrial, going multi-story may be the only way to make a project pencil. “We sold the Safeway site in El Monte, which was 56-acres, and it is being torn down to build new logistics buildings,” says Tomaselli. “That, however, was a land price from two years ago. Land prices today have gotten to the point where it actually makes more sense to keep the box that you have and renovate the building. The rent is almost the same, so your return isn’t that much higher for the risk. I think the only way that you are going to see buildings coming down is if you are going to build multi-story.”

Multi-story industrial builds are already going up on the East Coast, another land constrained market like Southern California, and they are going up quickly. “In New York and New Jersey, there are five multi-story facilities going up,” explains Tomaselli. “We went from zero to five in a year. The adoption rate was fast, and it is really about the adoption rate and getting tenants comfortable with a multi-story warehouse. The issue is that they will adopt it because they have to.”