Multistory Warehouses Require Multistory Rents

New York is starting to get comfortable with the idea of growing its industrial warehouse space vertically instead of horizontally. Several multistory warehouses, which are common in Asia, are under development in the Bronx, Brooklyn and Queens. 

Rising on 14 acres in an Opportunity Zone in the Hunts Point neighborhood is the Bronx Logistics Center, a 1.3 million square foot multistory warehouse scheduled to be completed by the end of this year. The $381-million project is a joint venture of Turnbridge Equities and Dune Real Estate Partners.

The Bronx Logistics Center is about a mile from one of the nation’s largest food markets, the Hunts Point Food Distribution Center, where more than 155 wholesalers sell $3 billion worth of meat, fish and produce annually.

Record-high occupancy levels in industrial warehouse space—only 1.6 percent of all warehouses in NYC are available for lease, according to JLL—and a diminishing number of sites large enough for new 1 million square feet single-story warehouses have city officials looking up rather than out for new industrial space.

But the warehouse crunch may have to get a lot worse in other urban markets before they consider embracing a multistory warehouse growth strategy like the one starting to take root in New York.

This is because amortizing the special construction costs of building multistory warehouses will require rents that are much higher than the current national average.

Multistory warehouses can cost up to 40 percent more to build than single-story facilities with comparable space. The foundation and structural system of a multistory facility must be engineered to bear the additional weight of trucks picking up loads from industrial space on multiple floors, each with high ceilings and loading docks.

For example, a new three-story 397,000 square foot warehouse built by DH Property Holdings and Goldman Sachs Asset Management in the Red Hook section of Brooklyn is configured with first and second floors that each offer 28-foot ceiling clearance and 14 loading docks, and a third floor with 18-foot-high ceilings. An elevated truck court allows full-sized trailers to access the second floor via a truck ramp, while the third floor is accessed by a freight elevator.

Experts estimate that industrial rates need to be as high as $30 per square foot to justify the investment in multistory facilities. Currently, only New York, Boston and Seattle can command rents high enough to make multistory investments attractive, with Chicago and Philadelphia the most likely markets to rise to this level anytime soon.

Prologis, which in 2018 built the first multistory logistics facility in the US in Seattle, notes that strategically located multistory facilities offer tenants the ability to save money on delivery costs for last-mile services, partially offsetting higher rents. Payroll and fuel account for a much larger percentage of warehouse tenants’ operating costs than rents, which usually consume less than 10 percent of budgets.

Geography rather than market conditions were the primary factor in Prologis’ decision to go multistory with its Georgetown Crossroads logistics center in Seattle, where adjacent mountains and Puget Sound limit available land for industrial space expansion.