The U.S. industrial market keeps rising. Will distribution centers rise up with it? Many believe the multi-story distribution center is the answer to solving the increased demand on e-commerce shipping and dense populations in land-constricted geographies. Since late 2017, there have been a few multi-story warehouse projects that have launched across the U.S., demonstrating that demand is rising in the commercial real estate world for this relatively-new concept.

Prologis’ Seattle development is America’s first new construction multi-story warehouse, a nearly 600,000-square-foot three-story property with truck ramps and loading docks on the second floor. Additionally, a few multi-story warehouses are proposed or already underway in New York City. While the U.S. currently has only a few true multi-story warehouses in progress, perhaps we can take cues from our neighbors across the Pacific who are advancing quickly in this space.

Is There Really Nowhere to Go but Up?

It’s no secret that land is scarce in population-dense core markets like New York City, Chicago and Los Angeles, where coveted final-mile distribution centers are crucial — but will building up be a growing trend that reaches secondary markets? James Breeze, Colliers’ National Director of Industrial Research believes there is quite a way to go. “Since multi-story warehouses cost about double what a single-story warehouse costs to build, have much higher rents, and aren’t as functional because of difficulties with logistics like truck turning, a multi-story warehouse would only be in demand in a market where an occupier would willingly pay a very high rent for not much functionality,” Breeze notes. “For now, dense population centers with limiting space constraints are prime opportunities for multi-level industrial development.  But with growing populations, even secondary markets will encounter industrial space challenges in some capacity.” So then, what will industrial development look like there during the not-so-distant future?

Taking Cues from Japan

Asian markets have already adopted the widespread use of multi-story warehouses. Prologis, one of the leading providers of industrial real estate and warehouse space in Asia, has industrial property in 25 different Asian markets: 19 in China, 5 in Japan, and 1 in Singapore — many of which are multi-story. Here we’ll look at two secondary markets in Japan where multi-story warehouses are not so out of the ordinary.

Fukuoka is a city with a population density of 11,605 people per square mile compared to Manhattan’s 27,000 people per square mile. One of Japan’s fastest-growing cities, Fukuoka sits halfway between Shanghai and Tokyo, two global financial hubs, making it a rapidly growing hub for logistics and distribution. In the northeastern part of Japan’s mainland sits Sendai, with a less concentrated population density in comparison to Fukuoka at about 3,563 people per square mile. The wholesale, retail and electronics industries have a strong presence here, which has driven the demand for more industrial property. About 14% of the area’s economy comes from manufacturing.

Boston

One secondary market poised to see multi-story warehouses in the near future is Boston. As the largest city in New England, Boston spans 90 square miles and is home to one of the most densely populated regions in the U.S. While neighboring New Hampshire is a growing distribution market with year-to-date absorption of 2.4 million square feet, it may not be close enough for final-mile distribution or have suitable land to quench long-term facility demand.

The Boston-Worcester-Providence area, which also includes parts of Connecticut and New Hampshire, has a regional population of over 8 million people. According to a 2018 Politico study, Boston took second place in U.S. cities that have the most millennial influence with 23% of Boston’s population between the ages of 25-32, and an overall median age of 32. And for today’s millennial consumer, timeliness of deliveries ranks high on their list of requirements for purchase satisfaction.

With dense population and limited space for expansion, the question becomes how long before Boston runs out of land zoned for industrial and companies are forced to build vertically?

Miami

The Miami metropolitan area, which also includes Fort Lauderdale and Port St. Lucie, FL, is another secondary market that shows signs that multi-story warehousing may be in its future. With a regional population of nearly 7 million people, Miami is the most populous metro region in the Southern U.S. It is also one of the largest urban areas in the country, and people between the ages of 20 and 44 make up about half of its population. From 2010-2015, Miami’s urban core grew by more than 10%, with a 42% growth of educated millennials in the urban core.

Miami proper is comprised of more than 400,000 people in 36 square miles, making it one of the most densely populated cities in the U.S, sharing this spotlight with New York City, San Francisco, Boston, Chicago and Philadelphia. Miami has the third tallest skyline in the U.S. with over 300 high-rises. While there is currently 7 million square feet of industrial product under construction in the region, much of it is located away from core population areas, and long-term there is a little land to sustain this level of development. Will multi-story distribution centers be part of that vertical landscape?

San Francisco

While San Francisco is typically regarded as one of the top core U.S. markets, it’s certainly more of a secondary market when it comes to industrial property. This west coast tech-hub is most likely where we’ll see the next multi-story warehouse developments, well before other secondary markets like Miami and Boston. A mecca for young professionals, the San Francisco area is a hotspot for final-mile distribution. Although there’s abundant land available in Stockton and Central Valley, there’s nothing in the immediate area — making it a prime contender for where multi-story warehouses could catch on first in terms of secondary industrial markets.

The Pendulum is Swinging…Albeit Slowly

It’s likely that multi-story warehousing will gain more momentum in core U.S. markets in the next few years, and it’s also plausible that we’ll see development in secondary markets in the decades to come. As e-commerce continues to captivate the retail world, young consumers increasingly expect faster delivery times when purchasing goods online.

The correlation between final-mile distribution centers and millennial influence is strong: Consumers between the ages of 18-34 make up the largest share of Amazon Prime members, at 39%. E-commerce giant Amazon, and its subscription service Amazon Prime, is a staple in the lives of younger American consumers. Prime promises 2-day delivery to all members, with 1-day and often within a few hours’ delivery in select metros. To keep up with consumer demand for goods to be delivered as quickly as possible, final-mile distribution centers need close proximity to their target populations and will likely be more abundant in both core and secondary U.S. markets in the years to come. With a lack of available space to build traditional single-story warehouses in these densely populated and land-constrained cities, third-party logistics companies will need to get creative and start building up in order to keep up.

This article was written by the U.S. Colliers Editorial Board, whose mission is to produce new and noteworthy commercial real estate thought leadership pieces to create conversation around proactive content. The Editorial Board focuses on CRE trends in the United States, and is comprised of Colliers marketing, research, communication and service line leaders.