E-commerce is driving growth in neighborhoods where malls used to stand tall, and multistory is the name of the game in industrial development today. In Brooklyn, an 18-acre site in the Red Hook district will be the future home to a four-story, 1.3-million-square-foot distribution center – the largest multistory warehouse in the U.S. It’s groundbreaking in its scope and design, but not without its own issues. So what are the challenges with multistory and how can developers make it work? A panel at NAIOP’s I.CON East 2019 sought to answer the tough questions.
Leslie Lanne, managing director with JLL, said the primary driver behind multistory is getting as close as possible to the consumer base. This proximity is more than just mileage – it’s the time it takes to get the goods to the consumer. For example, a warehouse in New Jersey is located only five miles from Brooklyn, but it can be tough to achieve a trip from the warehouse to consumers and back in less than two hours.
“Rent costs are a small part of the overall price of logistics,” said Dov Hertz, president of DH Property Holdings. The bigger fixed costs are in transportation – costs for vans, gas and tolls – and labor. If a driver can make more deliveries based out of a location like Red Hook in Brooklyn versus the Meadowlands in New Jersey, the rental costs are essentially absorbed by the cost of logistics.
The biggest challenge for Hertz is identifying an appropriate site that works for multistory. “Finding a large enough piece of industrial land that is in the appropriate subsection of industrial zoning code (qualifies land for tax abatement) to build a functional, Class A building is literally like looking for a needle in a haystack,” he said. The proof is how many industrial sites are in the pipeline: there aren’t many. Hertz said he believes the minimum land size for multistory is four acres, which gives the land enough depth to ramp up to a second story.
And don’t forget financing: “If the first barrier is finding a piece of land, the second is convincing equity partners that this actually will pencil, ” Hertz said. “It’s impossible to point to another multistory building in New York to show that ours will be successful. They simply don’t exist, which makes it hard to prove it will work. Equity partners say they want to do it and believe in the product, but say it will be impossible to get the project past investment committee. Then there’s one – one that believes in the project and will put their money where their mouth is.”
Once a capital partner is committed, though, they’ll look at it as a longtime hold, said Jeff Milanaik, principal with Bridge Development Partners. “These sites are so few and far between that investors realize they’ll never be able to replicate it again.”
Other challenges come in the form of tenant expectations, particularly tenants who are used to the more wide-open spaces of the Meadowlands. “A lot of tenants are used to having plentiful surface parking, which isn’t the case in urban multistory,” said Brian Milberg, senior partner with Sitex Group.
Multistory isn’t a fit for every tenant. “If your company doesn’t have to be in these well-located multistory buildings, it’s not going to be,” said Lanne. “Some companies will stay in areas like the Meadowlands instead of coming into Brooklyn. And if a company doesn’t need to be there, it will go south or west. It essentially becomes a matter of supply and demand, and the companies that have to be in the more urban markets will make it work.”
Getting the goods in and out of the facility can be a challenge, particularly for projects like the one in Brooklyn that is surrounded by streets that can’t handle multiple large trucks. This means that goods come in at off-peak hours, said Milanaik, and sometimes goods are transferred from large trucks to smaller vans to make it into the facility.
What can be learned about multistory industrial development from Asian markets where multistory has been developed for more than a decade? The committee wholeheartedly agreed on one answer: It works.
The group also agreed that populations will continue to grow in the Northeast Corridor, and demand for and leasing of multistory industrial will surge – but challenges in finding land will remain. “Nobody wants to tear down a functional industrial building in this market, but clients are willing to take down antiquated buildings and go vertical,” said Lanne.
Kathryn Hamilton, CAE, is Vice President for Marketing and Communications at NAIOP Corporate.