The entire world is being disrupted. Readers of this narrative know this. Here is the latest disruption: vertical warehouses with four stories. Why are these taking off?
–Consumer demand for instantaneous delivery has caused the industry to take a hard look at the “last mile” and seek new ways to speed up delivery.
–Developers are looking to Asia and cloning their multi-tier warehouses and bringing them to a city near you.
Below is a great article on this trend. Here is another if you want to read more.
Currently, the ideal locations for these warehouses are:
- Densely populated urban areas
- Areas with low vacancy rates and high rents
- Areas with high land costs requiring density of development
The whole supply chain is being remade, this is just one way it’s manifesting itself.
To discuss these disruptions further, feel free to give me a call.
Multistory warehouses could help speed ecommerce delivery in urban centers.
“Ecommerce needs three times the space of any other kind of retailing.”
That observation came from Hamid Moghadam, CEO of Prologis, the world’s largest warehouse owner and developer, during a March 14, 2017, interview with Jim Cramer on the TV business program Mad Money.
That same month, Prologis paid a reported $28.3 million to acquire a 205,409-sf former ABC Carpet & Home outlet in The Bronx, N.Y., which Prologis converted into the first multistory distribution center in the eastern U.S.
Online sales pivot on distribution. Consumers who purchase merchandise from their desktop computers or mobile devices have high expectations about quick and reliable delivery. As ecommerce approaches an estimated 12.4% of retail sales by 2020, it is imperative for distribution centers (DC) to be near where consumers live, especially in cities whose transportation infrastructure did not anticipate exponentially more delivery trucks.
But close-in urban real estate is expensive and often difficult to come by for the massive acreage that these DCs require. So some developers are taking a fresh look at building warehouses vertically, and justifying the added cost by the rents these facilities might fetch.
Last October, Prologis, working with Craft Architects and Sierra Construction, completed its first ground-up multitier distribution center in the U.S., a three-story, 589,615-sf facility named Georgetown Crossroads for the Georgetown neighborhood in Seattle where it’s located.
Ware Malcomb, in collaboration with developers DH Property Holdings and Goldman Sachs Asset Management, has designed a 375,000-sf, three-story warehouse on four acres in the Red Hook section of Brooklyn, N.Y., whose construction (by design-builder Hollister Construction Services) was expected to begin in January 2019, with completion scheduled for early 2020. (The developers paid nearly $50 million for this land, according to The Real Deal.
The Red Hook facility, at 640 Columbia Street, is one of five multistory warehouses in New York City that Ware Malcomb is involved in various stages of production, confirms Michael Bennett, LEED AP, Principal with the firm’s Woodbridge, N.J., office.
Ware Malcomb’s three-story warehouse in the Red Hook section of Brooklyn, N.Y., is one of five it has under development.
LAND COSTS DRIVE VERTICALITY
While still a rarity in North America, multistory warehouses are common in Asia, where land costs are prohibitive and smaller trucks are used to ship products. Through October 2018, Prologis had opened 84 multistory warehouses in Asia, and has another 25 under construction, according to Rick Kolpa, Senior Vice President and Market Officer in the firm’s Seattle office.
The attraction of multistory warehouses to American developers corresponds with the doubling over the past five years of land prices for single-story warehouses in the U.S. Spurred by ecommerce, demand for industrial real estate exceeded supply for 32 consecutive quarters through mid-2018, according to CBRE.
Ecommerce’s growth has also instigated demand for instantaneous delivery services. In the first quarter of 2017, UPS polled 5,000 online shoppers in the U.S., 64% of whom expected orders placed by 5 p.m. to qualify for next-day delivery; 61% expected orders placed by 12 p.m. to qualify for same-day service. Three-quarters of respondents said they would pay a premium for expedited shipping.
Meeting those expectations is problematic to achieve, however, as America’s aging infrastructure deteriorates, with one result being intractable traffic congestion.
“Acceptable routes of delivery are diminishing,” laments Kolpa. Quicker delivery increasingly depends on the proximity of warehouses to the product’s destination, the so-called “last mile.” But finding closer-in land within some urban cores with enough acreage to support a single-story distribution center has become exceedingly hard—and expensive.
Based on their population densities, vacancy rates, and potential ecommerce penetration, CBRE sees several metros—including San Francisco, Miami, Chicago, Los Angeles, Dallas/Fort Worth, Houston, and Atlanta—as being ripe for multitier warehouses.
“At some point, there’s a need for an urban distribution solution, and multistory warehouses seem to be the logical fit,” says Ed Klimek, AIA, NCARB, Partner with KSS Architects, which designed a 700,000-sf, two-story warehouse that is expected to start construction in March 2019 on a 20-acre site along Bruckner Boulevard in The Bronx. Its developers Innovo Property Group and Square Mile Capital Management reportedly paid $75 million for the parcel.
Situated at a six-way interstate intersection with highway access to port and city, this building, when completed in late 2020, would be 15 minutes from 9.4 million residents. The design includes 28- to 32-foot ceiling heights, a two-lane ramp, a 130-foot truck court, 90 loading docks, 800-lb floor load capacity, a fenced perimeter, and onsite parking with 486 spaces. The building will also offer 55,000 sf of corporate office space.
“Innovo wanted something that would maximize the land, optimize the building, and would be adaptable for single and multiple tenants,” says Scot Murdoch, AIA, Partner at KSS.
In designing the facility, KSS and its development partners took into account the business audience, the state building codes for entrance and egress, the balance between total square footage and the number of truck docks needed, and even how to skin the building (its façade blends precast panels below and heavy-metal panels above).
Prologis, says Kolpa, hasn’t found much difference in the construction cost of multi- vs. single-story warehouses. (Prologis hasn’t revealed the cost for Georgetown Crossroads in Seattle). But Bennett of Ware Malcomb says the cost for a multistory warehouse in New York would run anywhere from $185 to $280 per sf, depending on how its rentable space is defined. That compares to a construction cost of between $60 to $110 per sf for a comparably located single-story warehouse.
Without revealing numbers, KSS’s Klimek and Murdoch say their cost estimates pencil out within Bennett’s range.
KSS Architects has designed a two-story, 700,000-sf distribution center, 2505 Bruckner Boulevard, that could get started in 2019.
BETTER LOCATION, HIGHER RENTS?
Multistory warehouses nearer to urban centers are expected to be able to charge higher rents, although proof of that theory is still anecdotal.
Bennett believes higher rents can be justified by emphasizing that a vertical warehouse “provides tenants with a Class A opportunity, closer in.” He also notes that such warehouses are nearer job centers at a time when warehouse tenants in general are having a harder time hiring and retaining workers.
What makes a multistory warehouse unique, says Bennett, is its “stacking and ramping” features that can handle 53-foot trailers. Ware Malcomb’s design also “future proofs” the building so that it can accommodate “vertical transportation” elements like robotic rovers for picking and drones for delivery. The façade will include solar panels to get the building as close to net zero energy consumption as possible. And its layout will be flexible enough to convert to more office space if warranted. Bennett anticipates that Red Hook’s third floor will be leased primarily for light manufacturing.
Prologis’s Seattle warehouse is equally flexible on each of its three floors, which can be subdivided. Its first two floors, with 24-foot and 28-foot clear space, respectively, have up to 100 dock-high doors available. The third floor is for build-to-suit office and maker spaces.
Kolpa was reticent about discussing where else Prologis is looking to build multistory warehouses. He would only confirm that a facility in San Francisco is “pending.”
It remains to be seen how broadly developers embrace this concept, particularly in markets like Texas where land is still plentiful and relatively affordable.
JLL reported last spring that a large parking lot near New York’s John F. Kennedy International Airport was in the planning stage to become a three-story warehouse. And KSS has two warehouse projects in the works in Washington, D.C., one of which would be multistory.
Klimek observes that while multistory warehouses are definitely a trend, they won’t be the be-all and end-all solution. “Multistory warehouses will continue to be site-specific,” he says.
The 2505 Bruckner Boulevard facility has 74 loading dock doors on the first level, with the second level for freight and office space.
We all know we have to do our homework when analyzing any business opportunity. Doing due diligence from every side and perspective will help protect your interests (and money). Below are some reminders and a priority list for conducting your due diligence to limit your risks and hopefully ensure your ROI:
– Financials first, all else is a waste of time until the numbers pass the smell test.
– SWOT (strengths, weaknesses, opportunity, threats) analysis. Assess all sides of the business to see if it is sustainable for the future.
– Is the owner essential to operations?
– Know what you will owe in tax post-acquisition.
– And the biggest takeaway is to always work with a team of accounting, legal, and commercial real estate professionals to understand all sides of the deal.
Several times a year, we will have a client bring us into an acquisition (under an NDA) or strategy change to analyze the potential transaction or change from a real estate perspective. They get real numbers for their project, not just a plugged number that may be way off.
We are here to help. Call us if you have any questions.
A Guide to Analyzing Business Opportunities
There are important elements to consider when analyzing business opportunities and reviewing a business with the intent to purchase. Taking the time complete a thorough investigation is critical to discover the hidden facts.
Don’t invest time or energy until you’ve seen the financials. I estimate that only 30% of owners who request an evaluation have realistic expectations. It is my policy to see a recent 12 month income statement before investing too much time.
Why is the owner selling?
Is there competition or new technology threatening the business? Answering this question will typically involve speaking with owners of similar operations in other markets and using as many other resources as possible to investigate completely.
Can future potential income be taken into consideration? It’s important to know the potential that exists to add value to the operation. That future potential should not be used to form your opinion of how much it is currently worth.
How integral is the current owner to the success of the business? If the owner is the current principal driver, are you able to find a suitable replacement who can achieve your future growth expectations?
How do you deal with unreported cash taken from the business? It’s difficult to substantiate and cannot be used to determine its current value.
Make sure the owner has talked to his accountant and is aware of tax implications of the sale. You don’t need to hear after investing time and money in your due diligence process that the owner has decided not to sell due to excessive tax that will be triggered upon disposition.
Determining the price
Internally generated income statements are acceptable for my initial review. An important part of my formal due diligence must be analysis of “Notice to Reader” statements used for tax purposes.
There are obviously many different types of businesses which means that there could be a high amount of capital assets (such as a manufacturing plant) or low or no assets (such as an insurance company). Typically the value of the business will be more weighted on the reconstructed EBITA rather than the value of the assets.
EBITA is an acronym for earnings before interest, taxes and amortization. Before calculating EBITA it is always necessary to determine if it is necessary to reconstruct the expenses. Examples of when adjustments are required include but are not limited to, attributing market value numbers for all wages including Operations Management ( the current owner(s) may be paying themselves above or below market ), removing personal insurance or vehicle expenses, adjusting for a one time legal expense or an unusual non-reoccurring capital improvement.
There may be occasions when you know that property taxes or lease costs will be increasing considerably next year. Factors such as these could significantly reduce the bottom line.
Businesses such as hotel/motels, apartments and self-storage facilities are commonly appraised by applying a cap rate to EBITA to arrive at a combined value for the business and real estate.
The formula is different in examples where the business could easily operate from an alternate location but the real estate and businesses are nonetheless being purchased together. In that case it is necessary to calculate the value of the real estate and the business with separate methods.
Differences between an Asset Sale & Share Sale
Agreeing to enter into a “share sale” means that you will be assuming the owners depreciated book value of the current assets. This will impact your annual corporate tax payable. I advise that the owner’s accountant calculate the consequences of a “share sale” to both buyer and seller. Be sure that the “share sale” purchase contract provides for the liability of future employee remuneration and unknown legal issues that could surface.
It is common practice to establish an “asset sale” value based on 3 to 4 times EBITA on businesses under $10M. Businesses with a value above $10M warrant a higher multiplier. Once the “asset sale” number has been established, the “share sale” value is arrived at by reducing the “asset sale” price by an amount equal to the savings in tax that a seller will realize by entering into that “share sale”.
Is there deferred maintenance or outdated systems which will require significant capital expenditure in the near future?
Does the business rely upon one or two key clients or is it well diversified?
Is it important for the owner to spend time training the new owner?
Financial institutions aren’t typically excited about lending based on “goodwill”. Are you aware of the amount of initial investment and ongoing cash that will be required?
Is the purchase/sale contract a document which has been developed for this type of specific business purchase? There are many elements of a business sale that differ from a real estate purchase.
This gives you a quick overview of some things to consider. Be sure to engage a team of professional accounting, legal and commercial real estate advisors to assist with due diligence and closing.