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Why Multistory Industrial Buildings Won't Be Coming To L.A. Anytime Soon

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When industrial giant Prologis built the first ground-up multistory warehouse in the U.S., it was a wake-up call to the rest of the players in the industrial marketplace. 

The new vertical development in Seattle could push industrial projects up and help create the path for other developers in the U.S. to follow, said CapRock Partners Vice President of Acquisitions Taylor Arnett.

Allen Matkins’ Jonathan Consani, CBRE Kurt Strasmann, Pacifica Capital Investments' Steve Leonard, Kidder Mathews' Jon Reno, Dedeaux Properties' Alon Kraft, Wonderful Real Estate Development's Joe Vargas discuss the industrial market at a panel at Bisnow's Southern California Industrial & Logistics Summit Aug. 20 at The L.A. Grand Hotel Downtown in Los Angeles
Allen Matkins’ Jonathan Consani, CBRE Kurt Strasmann, Pacifica Capital Investments' Steve Leonard, Kidder Mathews' Jon Reno, Dedeaux Properties' Alon Kraft and Wonderful Real Estate Development's Joe Vargas discuss the industrial market at a panel at Bisnow's Southern California Industrial & Logistics Summit Aug. 20 at The L.A. Grand Hotel Downtown in Los Angeles

"They are the right group to pave the way for multistory warehouses," Arnett said after Bisnow's Southern California Industrial & Logistics Summit on Tuesday. 

As e-commerce continues to thrive and drive up the cost of leasing and sales of industrial buildings especially in urban and dense areas, many developers such as Prologis and others are developing or looking into building multistory industrial products to meet their tenants growing needs.

The development of Prologis' Georgetown Crossroads, a three-story, 590K SF building near the Port of Seattle and downtown Seattle, is the first of its kind in the U.S. The project is near completion and already has one tenant — Home Depot — signed up.

In New York, a JV of Bridge Development Partners and DH Property Holdings are building a four-story, 1.3M SF distribution center, considered to be the largest multistory warehouse in the U.S.

Rexford Industrial co-CEO Howard Schwimmer said his company was exploring building a four-story warehouse in downtown Los Angeles but the industrial market is so hot here that they leased the building before plans could get any further.

"There is still a lot of demand for other [industrial] products out there," Schwimmer said at the event. 

So is it worth building up? And when are these vertical industrial buildings coming to Los Angeles

Not yet and not anytime soon, experts say.  

"I don't think it's coming right away," CBRE Executive Managing Director Kurt Strasmann said. "It's going to come and it's a function of time but pricing is not there yet. The construction costs of a multistory industrial building becomes exponential at a certain point and lease rates will have to come up a little bit and it's not just quite there yet."   

Why Multistory Industrial Buildings Won't Be Coming To L.A. Anytime Soon
Georgetown Crossroads is the first multistory warehouse built from the ground up in the U.S.

More than 230 people attended Bisnow's Southern California Industrial & Logistics Summit Aug. 20 at the L.A. Grand Hotel Downtown in Los Angeles.

At the event, panelists discussed the state of the Southern California industrial market, the difficulties of finding labor, automation and the amenities war spurring the rise of creative industrial projects.

"There's like this convergence of entertainment, media, tech and creative office spilling over to the industrial side," Trammell Crow principal John Balestra said.

Most of the panel discussions centered around multistory buildings, a fairly new type of development in the U.S. that could be the future of the industrial landscape especially in urban and dense locations nationwide. 

Multistory industrial buildings are common in parts of Asia and Europe but those buildings are usually smaller and don't have the trucking clearance height or building codes one needs in the U.S., Balestra said.

Fueling the demand for multistory buildings in the U.S. is e-commerce.

With more consumers ordering products online and wanting instant delivery, high-profile e-commerce businesses are looking to establish a presence in last-mile locations to service clients within hours, Arnett said. 

But because of the high cost of buildings and a lack of availability in these types of locations, those type of distribution centers and warehouses are hard to come by.

So one option is to build up. This would allow developers to increase density and charge more rent on the same amount of land, Arnett said. 

"As consumers are increasingly willing to pay a premium for speed-to-market, companies will be willing to invest and commit to these hyper infill locations to stay competitive, especially near the coastal markets and downtown Los Angeles," Arnett said.

Attendees network at Bisnow's Southern California Industrial & Logistics Summit Aug. 20 at The L.A. Grand Hotel Downtown in Los Angeles
Attendees network at Bisnow's Southern California Industrial & Logistics Summit.

CBRE's Strasmann said Los Angeles' South Bay area and the San Francisco Bay Area would be great places to build a vertical distribution center. Both places are in super-dense areas and have shown the highest demand. 

"I think you'll see that trend here," Strasmann said. "I just don't see it happening anytime soon."

The biggest obstacle developers face is financial, Rexford's Schwimmer said.

"The difficulty is underwriting it," Schwimmer said. "It's very expensive and you have to be very forward-thinking in your rent. That's why you haven't seen anyone building it in Southern California. Underwriting tells you it's not a good product to develop. It sounds good but it's not financially viable.

"It's a tough product to develop," Schwimmer added. "Someday, you'll see more but it hasn't happened yet."

Trammell Crow's Balestra said trying to get the project entitled will also be difficult. Many cities have height and floor area ratio restrictions. 

Though it has been successful in Asia and parts of the world, it is still an unproven commodity here, Balestra added.

"Given the complexity and the fact that traditional industrial buildings still work, it's pretty hard to go on a different direction today," Balestra said.