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Multistory Warehouses Come With High Cost, Operational Burdens

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Overcoming last-mile delivery challenges in some of the most densely populated parts of the U.S. has pushed industrial developers to pursue multistory warehouses. A new report shows taller warehouses come with their own set of challenges.

Prologis' multistory warehouse facility in the Bronx
Prologis' multistory warehouse facility in the Bronx

“Quite candidly, the users are going to have to change the way they operate in these buildings to make it work efficiently,” CBRE Global Head of Industrial & Logistics Research David Egan said. 

As e-commerce growth drives U.S. industrial demand, rental prices have gone up and companies have come up short looking for last-mile distribution centers close to urban centers.

The average U.S. land price for developing a single-story warehouse has doubled in the last five years to $30/SF, according to CBRE’s Going Up: Vertical Solutions In Industrial & Logistics report. Multistory warehouses are common in densely populated parts of Europe and Asian cities like Singapore and Tokyo, and the concept is coming stateside.

Developers like Prologis are now pursuing multistory warehouses in places like New York City, Seattle and the Bay Area. Amazon has also been reportedly building multistory distribution centers around the country in less dense areas like a Milwaukee suburb and a town outside Raleigh, North Carolina.

Not all multistory warehouses are alike. Shorter trucks that are common in Europe and Asia are conducive with tighter ramps found in those regions’ multistory warehouses. Developers are likely to run into challenges when dealing with 53-foot semitrucks often used for shipping in the U.S. While some argue the solution is to simply use smaller trucks and delivery vans, a Boston-based real estate investor who focuses on industrial properties says it isn’t that easy. 

“Full 53-foot trailers will create a significant increase in traffic and disruption given the already-congested urban location we are assuming [a] multistory warehouse will be built in,” The Seyon Group Managing Partner Andrew Iglowski said. “I’m not sure it’s feasible for developers to take leasing and/or capital markets risk by developing multistory buildings that function solely for box trucks and vans.”

Warehouse

Multistory challenges extend beyond traffic. While Egan emphasized it was too early to give an exact price on multistory warehouse rents, he expects higher costs that will only be easy for larger users to be able to absorb. CBRE Chairman of Americas Research and Senior Economic Advisor Spencer Levy told Bisnow rents in a multistory warehouse could run between two and three times as much as what is seen at a single-level warehouse. 

Iglowski estimates the cost to build a multistory warehouse, including land, will run between $300 and $350 per SF.

“Developers will need tenant prospects that are able and willing to pay significant rental premiums,” he said. “Given that multistory warehouse isn’t yet a fully understood or embraced product type, the tenant will require an exceptionally high level of certainty that the speed of fulfillment is worth the cost.”

Although there may be heavy costs associated with projects like a multistory warehouse, Egan still sees where the benefits can outweigh any price or logistical burden.

Land is expensive, but having a distribution hub minutes from customers in Manhattan may be worth the hefty price tag. While he still thinks the logistical challenges are a tall task for developers to tackle, Egan expects users to eventually come up with a solution. 

“To change the way these users move inventory in and out of a building compared to how they do from a ‘regular’ building isn’t a simple tweak,” he said. “It just requires someone with a little bit of forward thinking who is willing to take a risk.”

Bisnow National Editor Champaign Williams contributed to this story.