Prologis has built the nation’s first multi-level warehouse. Will the tenants come?

 The new Prologis Seattle facility (Photo: ProLogis)

The new Prologis Seattle facility (Photo: ProLogis)

In the Georgetown Crossroads district of south Seattle, the next generation of American distribution center design is being ushered in.

There, logistics development giant Prologis (NYSE:PLD) has erected the nation’s first multi-story industrial warehouse, a three-level, 590,000 square-foot facility located minutes from downtown, near the Port of Seattle, and close to multiple rail nodes. It has not yet announced any customer sign-ups. The price tag wasn’t disclosed and company officials were unavailable today to comment.

The bottom two levels are dedicated for fulfillment. The first floor, occupying more than 239,000 square feet, has a 28-foot clear height, 130 truck courts, and 60 truck aprons. The second floor, with more than 170,000 square feet, has a 24-foot clear height and an elevated 130-foot court served by two ramps that can accommodate big rigs. Level 3, at more than 180,000 square feet, has a 16-foot clear height and two loading docks supported by three forklift-accessible freight elevators. The floor has been designed for office, manufacturing and light warehousing use, but not for heavy-duty fulfillment.

The Seattle facility may be the first of its kind in America, but it will not be the last. Two multi-story facilities will open in New York City either late this year or in early 2019. One is located in Brooklyn’s Red Hook district, where ground will be broken in the first quarter, according to real estate and logistics services giant JLL Inc., which is managing and leasing space for both projects. The other is near Bruckner Boulevard off I-95 in the borough of The Bronx. That project is slated for groundbreaking in the second quarter.

Others are planned or have been proposed in San Francisco and Los Angeles, though, according to industry sources, plans to build a two-story facility in Los Angeles were scratched because of high costs and a challenging design to support 53-foot trailer moves in the available space. Building a two-story structure can cost $150 per square feet more than the traditional single-level facility because of higher material and construction costs that come with double-decking, according to ballpark estimates from CBRE Services (NYSE:CBRE), which brokers industrial transactions between landlords and tenants.

The multi-story warehouse concept has gained mindshare in the past couple of years as e-commerce growth fuels demand for last-mile fulfillment to meet the hyperkinetic needs of today’s consumers. There is also no doubt that rates have escalated for warehouse space in general as vacancies hit all-time lows in a number of markets. The average land price for single-story warehouse development in the U.S. has doubled in the past five years to $30 per buildable square feet, according to CBRE data.

Yet multi-story facilities are likely to have their place in only a few select cities. The criteria for green-lighting such a project would be outrageously expensive urban property, close access to multi-modal shipping networks, and a dense population of folks who typically order their stuff online and expect it delivered no later than the next day. Cities that lack those characteristics would likely find such initiatives unnecessary and a massive money-flush.

The variable in all this is the aging urban warehouse ecosystem, which is mostly made up of obsolete structures not configured for modern-day fulfillment. Prologis is replacing a 50-year old warehouse with the new facility. The advanced age of many urban warehouses could be a key selling point for developers and their partners, according to Leslie Lanne, a JLL managing director who oversees the Northeast. Most warehouses in New York City date back to the World War II era, and lack the number of loading docks needed to support fast-cycle fulfillment. she said. “If speed to your customer base is important, you need to have loading docks,” Lanne said.

In addition, the old facilities have narrow column-spacing, while the new design has wider spacing, she added. The biggest concern for prospective tenants would be the ability to get outbound vehicles off the premises to meet their appointed rounds through congested streets, Lanne said.

Still, the traction may be long in coming. Michael Mikitka, CEO of the Warehousing Education and Research Council, a group composed of warehousing executives, said the sentiment among warehousemen is that the U.S. is not at a point where multi-story warehouses “have to be done or can affordably be done,” especially with the abundance of space relative to Asia and Europe.

Some even cast doubt on the whole urban fulfillment center concept and, with it, by extension, the need to erect vertical warehouses. Chris O’Brien, chief commercial officer for freight broker and third-party logistics giant C.H. Robinson Worldwide, Inc. (NASDAQ:CHRW) told a conference in April that the urban fulfillment is arguably the most overrated concept in supply chain management today, saying demand is insufficient to offset high land costs, fierce competition for the space from other uses, and facilities construction issues. Most quick fulfillment turnarounds can be executed from traditional locations 1 to 2 hours away, O’Brien said.

In Asia, multi-story warehouses are old hat, mainly because space in choice industrial locations has been exorbitantly priced for decades. The granddaddy is a 22-story behemoth in Hong Kong, a 20-year-old facility so enormous that marathons are run in it, according to Troy Shortell, CBRE’s head of its Asian supply chain advisory. Then there is a newer facility in Hong Kong, 8 stories high and 7 million square feet in capacity. Both facilities handle a large chunk of the goods moving in and out of the countries, not just e-commerce, Shortell said.

To address the challenge of laying miles of conveyors in in a vertical direction, mid to high-rise Asian facilities utilize an ultra-narrow design that Shortell said resembles a corkscrew configuration. Spiral truck ramps at older facilities are designed only to handle trucks hauling trailers 25 feet long, although the modern facilities can accommodate 40-foot equipment. The 53-footers are out of the question.