The Prologis Oakland Global Logistics Center, a new warehouse complex being constructed on a former military installation, adjacent to both the Port of Oakland and the San Francisco-Oakland Bay Bridge.
The Prologis Oakland Global Logistics Center is just across the Bay Bridge from San Francisco
Last month, 17 years after the Oakland Army Base was closed by the federal government, executives from the real estate developer Prologis and city officials took part in a groundbreaking ceremony for a new warehouse complex on a portion of the former military installation owned by the city of Oakland.
The Prologis Oakland Global Logistics Center is located on a tract of land adjacent to both the Port of Oakland and the San Francisco-Oakland Bay Bridge.
“We expect to see more high-throughput distribution through these buildings,” said Dan Letter, managing director of capital deployment for the Northwest region at Prologis.
Tenants could be shippers or logistics companies seeking to cross-dock cargo between ocean containers and domestic equipment, such as trailers and intermodal containers, or doing consolidation and deconsolidation. The facility could also appeal to companies looking to provide rapid last-mile delivery to businesses and consumers in San Francisco and environs.
“Because of the location of the buildings – across the street from the port but also right in the center of seven and a half million people – we wanted to have all the flexibility to attract the high-throughput as well as the bulk users,” Letter explained.
Today, Nov. 30, Prologis announced it has acquired 62 acres near downtown Seattle, furthering what it calls its “urban infill strategy.”
That site allows for future redevelopment options, but today consists of a warehouse, a cold storage facility, a retail facility, and a standalone office building totaling 963,000 square feet. The site is located four miles south of downtown Seattle, on the southern tip of Boeing Field, and has “easy access to SeaTac Airport and the region’s major transportation corridors,” including the I-5 highway.
In Oakland Prologis plans to build nearly 700,000 square feet of warehousing in three buildings on the land it is leasing from the city of Oakland for 66 years, he said.
The Oakland project will be completed in three phases. Construction of the initial 256,000-square-foot building is expected to be completed in mid-2017. Work on the second 232,000-square-foot building will start in the middle of next year and construction of the third will begin in 2018. All three face Maritime Street, which passes through the middle of the Port of Oakland.
Letter noted the design includes additional yard area for large numbers of containers, chassis and trailers. The buildings are single-story structures with 36 feet of clearance and column spacing that allows for a modern racking system.
“This is a premier location, a major West Coast distribution hub,” he said, with proximity to the port, highways, and on-dock rail and nearby airports in San Francisco and Oakland.
The Port of Oakland, which is overseeing development of another portion of the former Army base, is negotiating with CenterPoint Properties to develop a Seaport Logistics Complex that will be located across the street from a 13-track rail yard the port has constructed. Port spokesman Mike Zampa says the negotiations for that project, which is also aimed at companies doing transloading, are not yet complete, but are “nearing the finish line.”
Prologis said the buildings it is constructing could potentially be used exclusively by online retailers for last-mile logistics. A truck with products picked from one of the warehouses could be in downtown San Francisco within minutes.
“E-commerce is a very important driver of demand,” Prologis CEO Hamid Moghadam told securities analysts in November, touching on a theme that was echoed several times during a day-long presentation for investors.
Chris Caton, senior vice president and global head of research at Prologis, said the company is seeing growth in use of the space it leases by companies engaged in e-commerce, as opposed to retail and business-to-business distribution, transport and manufacturing.
E-commerce activity has grown considerably, and while it now accounts for more than 10 percent of space in the Prologis portfolio, Caton said he believes it is only “in its second inning.” Online sales are expected to grow 162 percent, from $1.5 trillion (7 percent of retail sales) in 2015 to $4 trillion (14 percent of retail sales) by 2020. The trend reflects, in part, the fact that the so-called “millennial” generation consumers are entering their peak spending years and are already accustomed to shopping online, he said.
According to an analysis by Prologis, e-commerce retailers require three times as much distribution space as traditional brick-and-mortar companies.
Caton also says the number of very large global online retailers – those with more than $5 billion in annual sales – has jumped from six companies with a combined $70 billion in sales in 2010 to 14 retailers with $290 billion in sales in 2015. He expects those numbers to grow to 38 companies with $775 billion in annual sales by 2020, with an “explosion” in the number of e-commerce companies that are able to distribute locally and offer same-day or next-day delivery.
Ben Conwell, senior managing director and national practice leader in e-commerce at Cushman and Wakefield says there is a “constant sprint by retailers, as well as logistics companies for retailers, to get more and more product – the broadest possible array of products – as close to the consumer as possible to minimize delivery time, and compress that response time, that cycle time from click until delivery, and to keep up with the ever changing demands of the customer to have more and more speed.”
As part of that push to bring goods to consumers as quickly as possible, he said retailers are looking to position inventory as close to the customer as possible. Brick-and-mortar retailers can do that by fulfilling order from stores, or inviting customers to “click and collect,” i.e. order online and pick up their orders at the store.
“But long term, we see an inevitable push to shorten that last leg of delivery to the consumer, that last mile,” he said.
With limited space and high cost in urban areas, Prologis has begun building a multi-story warehouse in Seattle. While unusual in the U.S., the company says multi-story warehouses have been common in Japan for 20 years.
While not appealing to all tenants, the company believes they are attractive to shippers that need close proximity to dense population centers, where the cost of land in some areas is approaching $50 per square foot. Prologis anticipates a need for multi-story warehouses not only in the U.S., but in European cities such as London and Paris as well.
Conwell, who was director of North America real estate for Amazon before joining the Cushman and Wakefield, said increasingly companies are making “adaptive reuse” of existing buildings that may have been built 30 or even 50 years ago as warehouses, buildings that may not be ideal in today’s modern supply chain, but have “outstanding proximity to large population centers.”
With those buildings, customers might say “it would be great if it had more parking, it would be great if it had maybe a little more clear height,” but they are “willing to trade those want-to-haves for the most important must-have, and that is the golden location,” according to Conwell.
He said Amazon is a leader in this trend, but large transportation companies such as XPO Logistics are also moving in the same direction.
As an example, he pointed to companies doing “white glove” delivery of products such as appliances or furniture. A company simply cannot do that kind of work in New Jersey from a distribution center in Toledo, Ohio.
“It’s that last mile where we’re seeing more transportation companies figure out, ‘you know, we don’t need a lot of space close to the consumer, but we do need the ability to do cross dock – 53-foot line haul trucks in and delivery vans or step vans outbound,’” he said.
Conwell noted a project in Carteret, N.J., near Exit 12 on the New Jersey Turnpike, where KTR Capital Partners, now part of Prologis, and Amazon spent $50 million to redevelop two older industrial buildings that had been occupied by a grocery company, turning them into an Amazon sorting center for same-day delivery to Manhattan, just 25 miles away, and a refrigerated warehouse for Amazon Fresh.
“There has been, and I expect there will continue to be, very strong demand for this kind of last-mile delivery,” he said. And he says companies are searching for warehouse space even closer Manhattan.
“There are companies that are madly trying to find cross-dock, last-mile delivery space in Brooklyn and in Long Island City, some even in Staten Island and in Midtown and up in the Bronx. The way I like to phrase it is ‘you can never be too close to the customer,’ and we’ll see those deals being done more commonly in those really, really, close-in areas.”
Conwell said adaptive reuse warehouses tend to be more expensive than new facilities. One reason for this is that the capital cost of real estate in those areas is much higher – a buyer in a market like New York, must compete with developers that may want to use the same building for offices or even housing.
And while they tend not to be as highly automated as model e-commerce fulfillment centers, such buildings often require improvements to bring them up to ADA requirements, better lighting, and new loading docks.
“So granted, all of that is more expensive, but the game, and every year this becomes more and more…is ‘how do I get closest to the customers so I can do next-day and then ultimately do same-day delivery like those guys in Seattle (that is, Amazon) do?’” he said.
According to Conwell, “everybody loses money on last-mile” and most retailers have little choice but to turn more and more to 3PLs for online fulfillment.
“The only way our 3PL clients – and most of them realize this – are going to avoid losing money doing this work is to build enough scale, try to create enough size and some economies where you can do it more cost effectively,” he said.
Cushman and Wakefield projects there will be an initial increase in providers of last-mile delivery services, followed by a period of consolidation in the industry.
Conwell noted there is also an environmental element to the direction in which the industry is headed.
If deliveries “are aggregated at a last-mile adaptive reuse building in Brooklyn, it’s a lot greener to do that and then have a single channel doing final delivery for multiple customers, than each one of those different retailers doing their own or contracting solely with the delivery company to do that,” he said.
“Historically we have seen that retailers don’t always play very well with others,” he added. “Whether it’s multi-tenant buildings or – heaven forbid – sharing a single fulfillment and delivery operation. That has got to change and I’m quite convinced that’s going to change, that there are going to be these buildings that are run by 3PLs, for instance, that might serve Best Buy and they might serve a Kohls and they might serve a Macy’s.”