Is Much of Current Stock of Land and DCs becoming Functionally Obsolete in Face of eFulfillment?

Multi-story manufacturing and distribution facilities – they are largely a relic of the past, bedeviled by high operating costs as a result of poor product flows and lots of handling, right?

In many cities, empty multi-story facilities can still be found rusting away in certain areas of town, as manufacturers and distributors moved on to the relatively cheap land and simple product flows in the suburbs decades ago.

Supply Chain Digest Says... These multi-story DCs are much more expensive to construct and operate than facilities in the suburbs, with construction costs as much as 50% higher to reach the same square footage. What do you say? Click here to send us your comments Click here to see reader feedback

It may be déjà vu all over again. A combination of rising costs for acreage in prime urban areas at the tame time there is a growing need to get close to customers to enable rapid delivery may be bringing back such facilities all these years later.

We reported in 2017 on how warehouse developer Prologis broke ground on a new 590,000 square-foot facility that will have three levels and be located two miles from the Port of Seattle and five miles from Seattle's downtown.

The first two stories of the DC will focus on crossdocking and transloading and have truck ramp access, using a sort of mezzanine approach on the second level. The third story will focus on storage and replenishment services, and will be served by freight elevators. Back to the future, it seems.

"Major urban areas are running out of industrial space," said Hamid Moghadam, chief executive of Prologis at the time. "The only way the logistics sector can compete is with this more dense format."

Such multi-story DCs are already becoming popular again in parts of Europe and Asia, where land is hard to come by and very expensive. In fact Prologis says it has built 53 multistory facilities in Japan and China.

And the company has another multi-story facility plan up for approval in the San Francisco area, and has just opened a 205,000 square-foot, two-level DC in New York City.

"What we have found is the customer wants to be within the urban population center and is willing to pay the premium for the real estate to be there," Prologis Senior Vice President Pete Crovo told the Bisnow web site.

Others beside Prologis are also active in the New York City area. A developer named Dov Hertz and his DH Property Holdings is planning a 350,000 square foot, three-story distribution center on a four-acre site in Brooklyn.

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And a joint venture between Innovo Property Group and Square Mile Capital Management is developing a two-story, 840,000 square-foot warehouse on a former movie theater site in the Bronx.

These moves show the power of efulfillment, as for decades retailers and manufacturers built DCs in New Jersey to ship goods into New York City.

But now, same day ecommerce deliveries in New York and many major urban areas just aren't possible or affordable if executed from facilities further out of town due to traffic congestion and tolls getting into and/or out of those area.

While most of these new urban DCs in the US are just two or three stories tall, that could change, the Wall Street Journal says. Already,tThere are multi-story DCs in Asia as high as 17 levels.

"There aren't any true limitations," John Morris of real estate Cushman & Wakefield told the Journal. "If the density of population and demand are significant enough and the pricing of land is high enough, the same principle that justifies three stories can justify many more."

Of course, these multi-story DCs are much more expensive to construct and operate than facilities in the suburbs, with construction costs as much as 50% higher to reach the same square footage. So developers are betting retailers and brand companies will be willing to accept higher lease prices to get much closer to customers. In the end, someone has to pay these high costs of efulfillment.

In an interesting comment at a recent conference, Innovo Property Group's Andrew Chung said that there is much turmoil in the market for distribution center space, and that because of ecommerce, much of the existing supply of land and buildings in the US "is functionally obsolete."

Do you see more and more urban DCs going multi-story? Why or why not? Let us know your thoughts at the Feedback section below or the link above to send an email.

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