If you think city streets are congested now, imagine a giant distribution center landing smack in the middle of a busy urban environment.
Drivers, pedestrians, cyclists and commercial freight haulers are all vying for the same strip of asphalt. The popularity of ride-sharing services such as Uber and Lyft, coupled with the explosion of e-commerce and consequent need for rapid last-mile delivery, have only served to make things worse.
Now comes the trend of siting big DCs, which used to be located in less crowded areas, right in the middle of major cities. The reason is e-tailers’ need to satisfy customer demand for next- and same-day service, sometimes keyed to specific hours of delivery.
Last May, property developers announced the 2021 opening of a DC in the Bronx, New York. Totaling nearly 1 million square feet, it reportedly will be the nation’s largest two-story fulfillment center. Similar projects are underway in Chicago, Los Angeles and San Francisco.
“Developers’ willingness to spec that type of project shows that the demand is there,” says Matt Powers, executive vice president of retail and e-commerce with property developer Jones Lang LaSalle.
Space within cities is at a premium, he notes, so the solution lies in building multi-story facilities that can pack the maximum amount of square footage into a restricted footprint. That has long been the trend in Asian countries such as China, Singapore and Japan, where highly condensed populations force developers to build up instead of out.
Until now, similar projects in U.S. cities have for the most part been considered economically unfeasible. Not anymore. Developers and their retailing tenants are willing to pay the extra cost of urban land in exchange for being able to reach city dwellers within a matter of hours.
The construction of multi-story facilities, with tight turns needed in order to move vehicles between floors, raises questions of access by tractor-trailer rigs. The 590,000 square-foot DC built by Prologis in Seattle, said to be the first of its kind in the U.S., has three stories, but only the first two are reserved for warehouse operations. The top floor consists of offices and “maker spaces,” notes Powers.
The multi-story design has tended to work better in Asia because of the smaller trucks that customarily serve that region. Heavy vehicles create structural challenges for builders of high-rise facilities. Also of concern to American developers is the possibility of complaints by neighboring residences and businesses about noise, lights, traffic congestion and pollution.
But none of that is stopping the growth of big DCs in certain U.S. urban environments, where smaller warehouses within city limits can no longer meet the demand for product. Now it’s become a question of finding space that balances the need for proximity to customers with zoning and use issues. The Bronx facility, Powers notes, was previously a movie theater complex, so neighbors were accustomed to its presence as a commercial operation.
Local residents might also be somewhat placated by the fact that outbound shipments from those big DCs are moving in smaller trucks, often vans, resulting in less noise and congestion. And local governments are likely to jump at the chance to repurpose inactive land parcels, offering generous incentives for a big warehouse to move in.
Urban property values are generally on the rise, whether due to an influx of higher-income residents, commercial developments such as high-end malls, and the need for more warehouse space. “The demand is there for industrial,” says Powers. “Developers aren’t getting deals on this property. They’re willing to spend a premium to service the end user.”
As to the effect on residential property values, that depends on the location, Powers says. “It could impact residents in proximity [to a DC], but for the most part these are still quasi-commercial areas.”
A bigger concern is finding enough workers to staff these giant facilities. With U.S. unemployment at historically low rates, every service business faces the challenge of obtaining enough warm bodies. And warehouse work in particular, consisting of repetitive and often arduous tasks, isn’t considered an attractive option by many younger job seekers today. Then there’s the fact that the cost of hiring city-based workers is often greater than that in the suburbs or rural areas.
Powers expects the trend of urban warehousing to continue, with a caveat. “It’s not going to be rapid growth,” he says. “This is still a premium.” Retailers are willing to eat the cost of locating in urban environments such as Manhattan for reasons of image and market presence. Industrial enterprises, on the other hand, will likely make choices that are more bottom-line driven at each location.
What’s more, the number of cities that can play host to such operations is limited. Opportunities will continue to arise in tightly contained places such as San Francisco, downtown Chicago and New York City, Powers says, “but that demand isn’t going to translate itself to Dallas or Houston, which are already sprawling themselves.”
Timely, incisive articles delivered directly to your inbox.