Where Will Multi-Story Warehouses Go?

In this article, you'll discover:

• The rise of multi-story warehouses in urban areas due to land scarcity.
• Factors affecting multi-story warehouse investments, like high construction costs.
• Differences in viability between urban and suburban warehouses.
• Future trends for businesses adapting to evolving warehouse needs.

As the indutrial sector continues to run hot, developments are on the rise, rents are going up, and professionals are starting to wonder…what’s next?

The dynamics of the industrial sector are shifting, leading to a reevaluation of the traditional warehouse model. Because expectations are getting bigger, so why not just build the warehouses bigger?

Several years ago, multi-story warehouses didn’t exist within the national borders. Now, the quickly evolving industry with a combined floor space of a staggering 7 million square feet (and counting) is reshaping the way we think about urban logistics.

These vertical giants pose a crucial question: Is bigger truly better? Well, geography emerges as the primary factor in the decision.

Current Multi-Story Developments Point to Future Trends

Multi-story warehouse have been popping up across the country in the last few years. Now encompassing a growing 7.3M SF, the rapidly growing vertical industry, is finding footholds in particular regions. And where these facilities are located clues us into the future of the asset class and the conditions on which a multi-tiered property can be successful.

So, let’s examine some recent developments to understand what their geography has to say about the limitations on the field in general.

The country’s first multi-tier warehouse was built in Seattle by Prologis. The Georgetown Crossroads facility is surrounded by the city, mountains, and the Puget Sound which limit the land nearby for further industrial expansion.

But since that facility was finished in 2018, most of the multi-story warehouse developments have found a home in New York and its boroughs.

The city of New York just inked its seventh multi-tier warehouse deal with fifteen more in the planning stages. Now as the capital of multi-story industrial developments, they have an abundance of facilities already completed or in the pipeline to be delivered on or before 2025 in the following locations:

• Brooklyn, Red Hook
• The Bronx, Bronx Distribution Center
• Astoria, Queens
• Maspeth, Queens
• Long Island City, Queens

The point is that multi-story warehouses represent a solution for densely populated areas where the land value comes at a high cost. Extending into vertical space above represents a workaround to securing square footage with extreme price tags or sandwiched between land that can't be developed for industrial purposes. 

Avoiding Space Distribution Issues

While these facilities are starting to emerge in cities like New York, their widespread adoption will depend on factors such as land scarcity, demand for space, and local building regulations. In areas where land is abundant and industrial rates are lower, traditional single-story distribution centers may remain the more cost-effective option.

Multi-story warehouse locations don’t make sense yet for regions outside of urban centers and it comes down to several reasons:

1. The land is cheaper
2. Land is less populated, with more room for future expansion
3. Labor is abundant and affordable
4. Close proximity to interstate highway systems
   
   

And while this is all well and good for a vast majority of facilities, it doesn’t stop the fact that demand for consistent delivery in urban centers grows by the day. Accommodating these populations’ desire for fast-service will continue to be a strong capitalizable opportunity.

And at the same time, businesses that rely on sprawling one-story warehouses in more affordable land regions are confronted with expensive shipping costs when delivering to customers in metros. So, to confront exorbitant trucking costs, many tenants are willing to pay a premium for space close to their customer base.

Prologis estimated that transportation is the most significant supply chain cost, comprising roughly 50 percent of the tenant’s logistics cost. And in context, real estate makes up just 5 percent of the total logistics costs.

But this doesn’t mean that only rural landscapes are taken out of the multi-story picture. Developments in suburban areas are unlikely to gain traction. Amazon was forced to pull away from a four-story warehouse in Churchill, PA after locals complained about the potential for excessive pollution and traffic on top of a giant warehouse looming over their neighborhood.

Multi-Story Costs

The cost-benefit of building a multi-story warehouse is not always a reasonable investment. Currently, the value of such developments are limited to areas of land scarcity. Take for instance, that the advent of multi-story warehouses originated in Asian countries where demand for production outpaced land supply.

Now in the U.S., because of land and construction costs compounded with zoning complications, multi-story warehouses are only worthwhile for tenants and investors if rents reach a certain threshold.

In context, nationwide average rents for industrial space hit a record high of $8.94 per square foot in the last quarter. 

Construction costs

On top of securing a plot of workable land for hundreds of millions in urban centers, developers are confronted with another hundreds of millions in construction costs. And according to Bisnow, construction of a multi-story warehouse costs about 40 percent more per square foot than conventional warehouses. Freight Waves estimates that when comparing the cost of construction of a single-level facility versus a two-story structure, there's an additional $150 per square foot from construction costs and double-decking. 

This limits the geographical radius of where these facilities are worthwhile significantly.

To make it worse, is that when it comes to the advanced industrial sector, there is really a market of one. As the biggest player, Amazon is the only applicable tenant in many cases. And the behemoth is dominating the market share of multi-story warehouses in development, with 70 percent of projects under construction.

So, in the end, land scarcity will likely need to become a far-more pronounced issue before, multilevel warehouses become worth it for most companies. In the meantime, large one-story warehouses may be the most sensible option considering there is an abundance of locations. Read the best cities for warehouse space.

What Should Tenants Know About Warehouse Evolution

In cities facing chronic land shortages and restrictive building regulations, multi-story warehouses are becoming more pronounced to meet the evolving needs of urban logistics and e-commerce.

And as the demand for fast, reliable delivery services continues to grow, we can expect to see more multi-story warehouses dotting the urban skyline, particularly in densely populated areas where the last mile is crucial for businesses and consumers alike.

No matter the stance of multi-story warehouses, the industry as a whole has to reckon with the evolution of facilities to accommodate the growing demands consumers are placing on last-mile delivery. And this will influence commercial tenants everywhere.

To stay on top of the evolving demand for warehouse space, corporate tenants need to become aware of the factors that influence their position. Learn everything you need to know about optimal warehouse locations in our free video course and get insight on what to do when touring your next warehouse space!