Rapidly expanding logistics operations from businesses serving dense urban areas are transforming traditional warehouses. In many markets, developers and construction firms are combining larger floorplates with taller clear heights to meet the insatiable demand for new warehouse space from e-commerce behemoths and third-party logistics firms. The surge in the construction of multi-story facilities is solving problems around land scarcity but creating new operational challenges.
Decades of urbanization across the globe have made finding large parcels of land for traditional single-story warehouses a major challenge with only two solutions: build further out, or build further up. These days, real estate professionals in any major city will tell you, the only way left to go is up. New technology, adaptive construction techniques and innovative operations are making multi-story warehouses more viable for many businesses with the operational sophistication to utilize these more complex layouts.
“Given that the concept of multi-story warehouse development is relatively new, capital and tenant understanding, interest and acceptance of this product is still in its infancy; many want to see more ‘proof of concept’ before committing to this type of facility,” says Tommy Lee, Trammell Crow Company’s chief investment officer. Lee predicts efficacy concerns around multi-story warehouses will wane as brand-name tenants continue to demonstrate success in leasing and operating this new style of logistics
facility.
Highs and lows
From an investment standpoint, the main advantage of a multi-story warehouse facility is increasing the net rentable area for a given, and increasingly quite expensive, plot of land. From an occupier’s standpoint, the greater proximity to the dense urban area makes up for the difficulty of operation via decreased transportation costs, says Logan Smith, head of European logistics at Hines.
It is hard to beat the perfect location. Proximity to ports and other major transportation hubs in major gateway cities, where high land prices are common, offers key strategic advantages for occupiers, in addition to the population centers themselves, by reducing the overall truck traffic on existing infrastructure.
“Challenges consist of construction cost and timeline, and, if speculatively built, leasing the top levels can sometimes be seen as more risky or less certain,” says Smith.
The first major hurdle for a multi-story warehouse is site selection. Most jurisdictions have detailed zoning regulations dictating where warehouses can be built and how high they can go, limiting the options for development. Building codes and land-use regulations have not caught up to such a relatively new product offering. In Europe and North America, more policy work is required to better accommodate increased warehouse density.
Logistics is rarely seen as land’s highest and best use, but that is changing as e-commerce grows.
For developers and owners with a viable site, the need for intricate planning, advanced technology integration and specialized equipment can contribute to increased construction costs and longer timelines. All told, the cost to build a multi-story warehouse is roughly double the cost of a single-level asset, according to JLL research on multi-story warehouses and their towering future.
More than one floor for parking and loading, ramps, lifts and cranes can overcome space constraints, but ultimately reduce the leasable area to an average of 75 percent, according to Hines, which owns a nine-story industrial property in Singapore.
Most of the obstacles presented by multi-story warehouse facilities are met by the occupiers themselves, which can make finding the right tenant that wants to take on the challenge more difficult.
Efficient truck access, dock management and material flow between floors often require automation and advanced technology systems to avoid disruptions. Inventory management, order fulfillment and transportation co-ordination take on enhanced importance when managing a multi-story facility with moving parts across multiple floors.
Additional warehouse complexity and the hazards of a multi-story facility also require more in-depth employee training and new safety considerations.
Depending on jurisdiction, multi-story warehouses may be subject to additional regulatory compliance. None of these challenges are overwhelming by themselves, but it takes a special type of operation to meet them all head-on. That makes finding the right tenant or partner critical. Tenants specializing in e-commerce are more likely to see the benefits of multi-story facilities.
In Asia, where populations are far more dense, multi-story warehouse development has been ongoing for at least two decades. Some warehouses in Hong Kong are a whopping 22 stories tall. Similar projects in Europe, located mostly near air-traffic hubs, have followed suit. Multi-story warehouses have only just begun to see prominence in North America as developers and occupiers respond to rising land prices and increased consumer demand.
Tractor trailers measure six meters longer in North America than in European and Asia-Pacific markets, making ramps and truck parking in multi-story facilities more difficult. Multi-story warehouses are commonplace across Asia and growing in relevance in Europe with just over six million square feet of multi-story space, according to brokerage CBRE. While only a handful of multi-story warehouse facilities are operational in the US, roughly 5.6 million square feet of planned multi-story space is in the pipeline, targeting the densest American cities like New York, San Francisco and Seattle.
“We have seen proof of the concept with institutional capital and credit-worthy tenants in markets like Seattle and New York, but the product is still relatively new compared to traditional industrial products,” says Lee, who expects the adoption of multi-story warehouses to continue to grow exponentially. If e-commerce continues to grow and land constraints in coastal markets persist, expect to see more and more multi-story in the future.
Hines’ Smith agrees, pointing to the increasing awareness that logistics is an essential component of urban infrastructure.
A higher purpose
Across most of the globe, multi-story warehouses are a niche offering, purpose-built for an innovative tenant or to capitalize on a unique location. Asian industrial markets, where major cities are grappling with growing populations and intense land constraint issues, offer a glimpse of what the future of logistics may look like. Asia’s solution to finding more warehouse space is a result of the same issues beginning to bubble up in many other regions.
Multi-story warehouse development is a pivotal shift in the logistics landscape, opening a new horizon for dense in-fill development and modern supply chains. Consumer behavior is changing, demanding quicker deliveries and more diverse product offerings, requiring agility and proximity to store and distribute a wide range of products.
Just as e-commerce has fundamentally changed brick-and-mortar retail design, so too is it changing the warehouses serving as the backbone of worldwide logistics chains.
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