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October 30, 2017

Is Industrial Space Going Vertical?

Demand for domestic goods has grown exponentially in recent years, yet the available land for manufacturing and storage of those goods is dwindling. With multi-story warehousing, companies can strategically place goods closer to the consumer, and increase the usable square footage of a warehouse without expanding their footprint.

Multi-story warehousing is common in Asia, where high demand for space has forced developers to go up. In population-dense Hong Kong and Singapore, these warehouses vary from 5 to upwards of 12 floors.

Land is Scarce

Demographics are shifting towards urbanization, with steadily increasing numbers of people moving into cities and placing more pressure on available land. Everyone is competing for in-fill land: residential, office, hospitality, and industrial developers want to find strategically located parcels near population clusters.

At the same time, major metropolitan centers like Los Angeles, San Francisco, and Seattle are reporting historically low vacancy in the industrial and warehousing sector. Simply put, demand for warehousing is high but available space is hard to find.

When you look at the Seattle market, it’s no wonder Prologis chose the city for America’s first multi-story warehouse. Warehouse rents jumped 17 percent in the area over the last year and the vacancy rate is hovering under two percent. At the same time, the metropolitan area’s population grew by 86,000. With skyrocketing demand, and a premium on space, it makes perfect sense to go vertical in Seattle.

Optimizing Available Space

As the World Property Journal notes, “Site areas for warehouse development are typically smaller in Asia due to densely populated cities.” Metropolitan areas in the United States are now facing those same challenges. With cities like New York, Los Angeles, and Miami reporting population densities surpassing 20,000 people per square mile, it places a premium price tag on available resources. For real estate developers, that price tag is for securing land. For manufacturers and businesses, it means higher leasing rates in key locations. Look at Los Angeles, where the asking lease rate for industrial space has risen 13.15% over the last year. With this in mind, how can companies cut their warehousing costs?

First, by maximizing every square inch of space by going vertical. Take General Mills as an example of just one of the thousands of companies looking to safely supplement their storage, inventory, and production with vertical expansion. Their new vertical rack system increased their storage capacity by 42 percent and freed up valuable floor space, allotting for an additional 24 percent more inventory products.

Second, by reducing logistics costs. Industry experts estimate Seattle’s vertical warehouse leasing rates will be greater than standard warehouse rates, but companies can still save money by locating goods closer to customers. Combined with efficient vertical storage, companies optimize their available space and store more product in prime markets.

Going Vertical Isn’t Cheap

One of the restrictions to building multi-story warehousing is the costs. Retrofitting an existing warehouse is next-to-impossible because the structures need different engineering to handle the increased loads. The spaces further require different clearing heights and accessibility considerations, like freight elevators and potentially multi-level shipping truck access. The additional architectural and structural engineering requirements and longer build out time initially drive up the construction costs which translate to higher rent prices. However, it’s important to take a long view. As urbanization continues and space stands at a premium, locating product closer to population centers could offset transportation costs. So, in today’s business environment, it easy to see why vertical industrial space is becoming an attractive option.