Adaptive Reuse Meets E-Commerce as Tenants Work to Bridge the Last Mile

Older Industrial Requires Creative Solutions and an Acceptance of Trade-Offs. End Quote

Chicago, IL (1888PressRelease) June 22, 2016 - The drive by e-commerce retailers and third-party logistics providers to gain deeper penetration into the urban markets is beginning to result in some interesting industrial real estate solutions. In particular, we are seeing the race to shorten the last mile give rise to more adaptive reuse of well-located existing buildings - a trend in which creative solutions and well-considered trade-offs are yielding valuable improvements in proximity to customers and successful economic results.

Why adaptive reuse? Very few markets offer opportunities for developers and e-commerce tenants to get deep into urban areas through new construction. Increasingly, we are seeing users choosing to "settle" for older product in order to achieve highly desirable proximity to dense populations. In some cases, property owners make the investment in time and capital to knock down obsolete manufacturing or warehouse buildings and develop new buildings to modern specifications.

An East Coast Benchmark
A high-profile East Coast project for Amazon set the benchmark. KTR Capital Partners, prior to its acquisition by Prologis, redeveloped two adjacent infill industrial buildings at Exit 12 of the New Jersey Turnpike for the e-commerce giant. Located less than 25 miles from Manhattan, both buildings had been occupied by C&S Grocery.

The first, a 500,000-square-foot structure initially used for ambient grocery storage, had significant loading door capacity along with extensive truck and trailer parking. However, the systems were run-down, the floor was a mess, dock packages were obsolete, and the ceiling height was too low for ideal modern fulfillment storage. The building also had 75,000 square feet of office space on three stories - far more than any e-commerce or 3PL would use. KTR and Amazon invested about $35 million to adapt the existing shell with new floors, doors and roofing and upgrade power and cooling systems. Ultimately, the project created one of the first Amazon sortation centers on the East Coast, enabling same-day delivery to Manhattan.

Next door, KTR and Amazon invested $15 million to redevelop a specialized building of the same vintage. About 100,000 square feet of the 240,000-square-foot facility was a full-height cooler - a real boon in a market with an acute shortage of chill space. KTR kept that valuable fit-out but rebuilt the balance of the site with 300,000 square feet of modern, 36-foot clear ambient storage space and offices. The building became the local launch center for Amazon Fresh and also serves as a small-scale fulfillment center for high-velocity conventional product.

This campus represented Amazon's first sizable deep-dive into an urban market. The obvious goal was to accommodate the company's growing Prime Now offering. The ground-up construction alternative would have required landing about an hour further south along the Turnpike at Exit 8A or further south - where, at the time, Amazon was constructing its 1 million-square-foot Robbinsville fulfillment center. However, for a user like Amazon, it was worth paying a premium and going into a remodeled building versus a brand-new facility to gain greater proximity. In turn, the firm has been able to roll out and service additional multiple last-mile depots as part of Prime Now in the New York metropolitan area. Today the company operates a number of additional new and existing facilities in the northern NJ/NYC market.

In the Works on the West Coast
Today, Prologis is working to position multiple urban infill properties on the West Coast for similar purposes. In San Francisco, the company recently purchased a 17-acre site immediately south of the Mission District. Located in a close-in industrial market with vacancy of about 3 percent, the site is within three blocks of a Caltrans station. A Highway 280 overpass bisects the property, providing outstanding accessibility. While the design process is in the early stages, Prologis will tear down four 1940s-era wood frame warehouse buildings on the property. A two-story distribution scenario is being considered. If it moves forward, it would be the first project of its kind in the Bay Area and perhaps the entire country.

In one of two potential redevelopment plays in south Seattle, Prologis purchased a 13.5-acre parcel that had been used as a trailer lot on East Marginal Way South. The company is evaluating the potential of a multi-story project for this site that would allow for up to 550,000 square feet of occupied space in two buildings, with both on-grade and elevated truck courts. The second story design would allow for both direct truck access and freight elevator access between floors.

And Prologis is not alone. News recently broke about smaller developers pursuing industrial adaptive reuse opportunities in Los Angeles and in other major cities. And Prologis is not alone, nor is this trend limited to coastal markets. Developers of all sizes are pursuing industrial adaptive reuse opportunities in most major markets across the country. If you're not seeing it in your market yet, you will soon.

Balancing the Trade-offs and Advantages
Growing e-commerce demand for close-in older industrial properties comes with several common challenges. It is expensive to buy infill sites purely for their dirt value, and the permitting process for razing and rebuilding can be lengthy. Oftentimes, excavating previously developed urban sites unearths environmental issues that must be rectified. In some cases, the associated costs can then flow down to the user in the form of higher rents.

At the same time, living with the inefficiencies of an existing building can be difficult. These facilities tend to have low ceiling heights, fewer loading doors, and parking with poor circulation both for truck and employee vehicles. Additionally, column spacing tends to be narrower than what today's distribution users are seeking. Power almost always requires an upgrade.

Yet while trade-offs may be unavoidable, the adaptive reuse of older industrial for e-commerce fulfillment will only accelerate in the coming years as companies strive to close the gap between product and consumers. Will developers find new ways to alter these properties to meet the needs of modern e-commerce tenants? Or, will tenants modify their operations for less-than-ideal environments in order to be close in? Most likely the answer lands somewhere in the middle, and it certainly will be interesting to see the creative solutions put forth by both sides.

About Cushman & Wakefield
Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 43,000 employees in more than 60 countries help investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow ( @ ) CushWake on Twitter.

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