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    March 8, 2022

    To Tackle the Warehouse Shortage, Industrial Developers Are Looking Up

    Two decades ago, industrial was hardly considered a glamorous asset class. Industrial properties were simple and inexpensive box structures, and they filled a necessary real estate function—to house manufacturing facilities and machinery or store products.

    Then, ecommerce changed everything. 

    Today, consumers buy about 13% of goods online, and that number is increasing rapidly. Last year, ecommerce sales hit a record $870 billion, up more than 14% from the previous year, according to data from the US Census Bureau. This activity is near single-handedly driving insatiable demand for warehouse, distribution and logistics facilities—and it is why many commercial real estate leaders have dubbed industrial the industry’s new darling.  

    Emergent demand for real estate is always good news in our business—but in this case there is one looming problem: demand is wildly outstripping supply, and developers are running out of room to build new product. Innovative developers are realizing that if you can’t build out; you can build up—envisioning a world of multistory warehouses in big cities across the country.  

    Three-Story Vertical 

    A standard warehouse box is a single-story structure with generous clear heights, in some cases reaching 40 feet, dock high loading and truck space. These facilities are sprawling, and over time, industrial developers have had to move further away from population centers to find the space to build. For online shopping, this has been counterintuitive, because ecommerce warehouses inherently need to be close to shoppers. A multistory warehouse, as the name suggests, is a box with multiple levels and a vertical truck ramp and loading docks that give truckers access to every floor. 

    The concept is a perfect solution to the dearth of developable industrial land. Multistory warehouses can utilize smaller development sites while maximizing square footage and the profit potential of the land. In many cases, this also allows developers to build on smaller urban infill sites near population centers, ensuring faster delivery times and supporting same- or next-day delivery that many consumers have come to expect from online retailers. 

    Prologis, the largest industrial developer in the country, completed the first multistory warehouse in the US in November 2018, a three-story, 590,000-square-foot facility in the Georgetown Crossroads district of south Seattle, near the Port of Seattle. At the time, it was a novel concept, and it took just shy of a year to secure a tenant—but ultimately, Amazon leased the entire property. Since then, multistory warehouse developments have sprung up in New York, San Francisco and Washington D.C., including a three-story warehouse on track to deliver late this year in Red Hook, Brooklyn, that is already fully leased to Amazon. Amazon has said they expect the facility will reduce delivery times to the New York City Metro to mere hours, rather than days. 

    Prologis expects that growth of the on-demand delivery model will drive more development of multistory industrial facilities, and major retailers like Target and Walmart are actively pursuing leases at new multistory developments.

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    Multistory Comes at a High Cost

    Vertical industrial properties aren’t a new concept. These properties are already standard practice in densely populated areas of China and in other global metropolitans, like London and Sydney. In the US, they simply weren’t economically feasible until now. A Wall Street Journal article estimates the cost to build a multistory warehouse is anywhere from $30 to $130 per square foot higher than a single-story warehouse. With standard construction costs already at record rates, multistory properties come with a considerable price tag. 

    So, why do these deals work now? Well, to start, there is a severe shortage of available warehouse space. By the end of 2021, the US industrial vacancy rate reached a record low of 3.2%, and in leading industrial hubs, the availability rate is even lower. Los Angeles, the top industrial market in the country—thanks to the San Pedro Port complex—has a .52% vacancy rate, meaning nearly zero space is available for lease. Despite the limited space, US leasing activity topped a record 1 billion square feet last year, with 432.5 million square feet in net absorption, an 81.4% increase from 2020. 

    But while demand is ramping up, new construction activity is waning. CBRE reports that industrial construction activity was down 10% last year—and it isn’t due to lack of trying. Developers are quite literally running out of space to build. Many are already expanding into emerging markets with strong population growth or markets with port, rail and air connectivity. Nashville, Las Vegas, Central Florida, Austin, Louisville, Kansas City and Indianapolis are all on the list of top construction markets for 2022, but this still isn’t enough to meet the demand, particularly because it doesn’t address supply constraints in mature industrial hubs. 

    The limited availability of industrial stock has, of course, driven rents to historic highs. At the end of 2021, US industrial asking rents were $9.10 per square foot, a year-over-year increase of 11%. The early editions of multistory industrial properties have also captured higher rent premiums, both because of property quality and centralized urban locations. Asking rents for Prologis’ Seattle project, for example, are 15% to 30% above market rate. These record rents are offsetting the high construction cost of multistory industrial facilities. Finally, these properties are making financial sense. 

    Technology Helps Cut Costs

    The market fundamentals have started to make multistory warehouse deals pencil, but construction management and project delivery technology software is also helping to curb the high cost of construction and mitigate risk to the developer, further enhancing the viability of vertical industrial construction. 

    Northspyre is among those technologies. The platform uses predictive analytics to help developers manage budgets, reduce administrative tasks, improve communication and increase transparency. These technologies are becoming popular across all real estate asset classes, but they are particularly beneficial on new development innovations, like multistory warehouses, which are not only expensive but also higher risk as developers test the model and market demand.

    Operational technologies are also playing a major role. Multistory warehouses are built to accommodate warehouse automation, like autonomous trucks, drones and robotics. These technologies are reshaping the logistics industry and reducing the operational costs of logistics and distribution, allowing industrial tenants to afford higher rent premiums on multistory properties. But, more than the cost, it is crucial that ecommerce retailers have access to the latest buildings to house and support these new technologies, which are becoming integral to the modern supply chain.

    Multistory warehouses are initially emerging in popularity to solve a supply problem, but make no mistake, these properties are an example of how real estate is evolving in step with technology.

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