Market Intel: Multistory Industrial: Tracking Rent Growth in Existing and Potential Locations for the Emerging Asset Class

SKIP AHEAD TO:

• Where are current multistory properties built or under development?
• Industrial Starting Rents in Seattle and NYC Markets with Multistory Development Are in Double-Digits
• Multistory Buildings in New York City Can Access More than 17 Million Residents Within 60 Minutes or Less
• Other Markets Approaching or Surpassing $20 per Square Foot in Industrial Starting Rents are on the West Coast

The industrial market has had an impressive last few years with robust rent growth and record setting lease volumes. While many questions are recently circling about how the sector will perform in 2023 with the impact of rising interest rates and risks of recession, it is worth looking at the innovations in the sector and trends that have emerged to tackle space shortages and the competition for the last-mile. One such innovation has been multistory industrial development. In this week’s post, CompStak explored multistory industrial properties and the markets in which they are being built as well as the markets that are trending towards the double-digit annual rents that are needed to support the greater construction costs of multistory development.

We uncovered the following findings:

• New York City is currently the hub of multistory industrial development but the first U.S building was built in Seattle;
• Amazon’s lease in the multistory development, 55-15 Grand Avenue in Queens, New York is the most valuable active lease by remaining term in New York State overall;
• Multistory buildings in New York City can access more than 17 million residents living within a 60 minute drive or less;
• Other markets trending up or above $20 per square foot include parts of the Bay Area, San Diego, Seattle’s east side, and Los Angeles and Orange counties.

Where are current multistory properties built or under development?

In 2018, Prologis completed the nation’s first multistory industrial property in Seattle, which is now currently leased to Home Depot and Amazon, according to CompStak’s data. While the first multistory building was completed on the West Coast, New York City is currently the hub of multistory industrial development with at least seven properties tracked as existing or under construction throughout the boroughs including Queens, Brooklyn and the Bronx. There is one property underway in Chicago, 1237 West Division Avenue, in West Town just outside the city center and The Loop. Not surprisingly, as many of these properties are developed for last mile delivery capabilities, Amazon is the dominant leaseholder overall in these multi-story properties. 

Multistory industrial properties are a new concept in the United States and have emerged as a property type due to land and zoning constraints as well as low existing supply pushing developers to think of building up, instead of out. However, this type of development is expensive, and is said to only be feasible with double-digit industrial rents. Despite an impressive gain in rental rates across the country since the pandemic began, there are still only a few places where rents for closed transactions are $20 per square foot or more (or approaching close to it). 

Industrial Starting Rents in Seattle and NYC Markets with Multistory Development Are in Double-Digits

According to CompStak’s data, the average starting rent in New York City boroughs including Queens, Bronx and Brooklyn was more than $24 per square foot in 2022, reflecting a 26.7% uptick since 2019. Meanwhile in 6050 East Marginal Way’s market, Seattle Close-In, which includes the submarkets directly outside the CBD, including South Seattle, the starting rent averaged $16.72 per square foot through the pandemic but is now up 4.9% from 2019 based on 2022’s closed transactions. In Chicago’s overall industrial market outside the central business district, rents are now averaging in the double-digits except in the North Chicago submarket where 1237 Division Avenue is under construction. In North Chicago, the average starting rent was $12.11 per square foot throughout the pandemic but this average falls short of the rental rates being inked in New York City or Seattle’s markets. Notably, Amazon’s 1 million-square-foot lease at 55-15 Grand Avenue in New York City is the most valuable lease based on active leases and value by remaining lease term in New York state overall, according to CompStak’s data. 

Multistory Buildings in New York City Can Access More than 17 Million Residents Within 60 Minutes or Less

Multistory industrial properties are in last-mile urban or urban adjacent locations, where their cost to build and above average rental rates can be justified by tenants’ ability to access large volumes of customers within a short time frame. In New York City, 2505 Bruckner Boulevard, owned by Square Mile Capital and Innovo Property Group (IPG), can access the largest population among current NYC multistory properties.  More than 18.6 million residents are reachable within a 60 minute drive time according to U.S. Census data and more than 9.4 million are within a 30 minute drive. Current multistory buildings in Brooklyn, 640 Columbia Street in Red Hook, and 55-15 Grand Avenue in Queens, can access 17.8 and 17.9 million residents, within 60 minutes, respectively. In Chicago, 1237 West Division Avenue is being developed just outside the city center and the Loop (about 2.1 miles from the John Hancock Center) and a future tenant could access a population of more than 5.4 million residents within 30 minutes or less. 

Other Markets Approaching or Surpassing $20 per Square Foot in Industrial Starting Rents are on the West Coast

Since construction costs for multi-story logistics or warehouse space and last mile real estate are expensive, multistory development requires double-digit rents in order for projects to be feasible, rents of $30 per square foot or more generally stated as the minimum threshold. According to CompStak’s data the weighted average starting rent for transactions completed in multistory industrial properties to date is $37.29 per square foot, with Amazon’s lease at 55-15 Grand Avenue commanding the highest starting rent ($40 per square foot) among these deals. While New York City is the hub of multistory development, CompStak evaluated other markets where average industrial rents were approaching or surpassing $20 per square foot that may be potential areas for multistory development going forward. Other markets with rising double-digit rents close to or surpassing $20 per square foot are on the West Coast. In the Bay Area, the Peninsula and Bay Area South markets averaged $22.96 per square foot and $19.55 per square foot, respectively, in 2022 overall. These markets can serve as last mile locations for both San Francisco and San Jose. Moving south along the West Coast, industrial starting rents in Los Angeles County averaged $19.57 per square foot in 2022 and were up more than 50% year over year. Meanwhile in Orange County, the average industrial rent reached more than $18 in 2022. Finally, in San Diego’s industrial market outside the central business district, the average starting rent reached $17.13 per square foot in 2022, helped by activity outside the central business district especially in Miramar, Carlsbad and Rancho Bernardo. 

After a ninth straight interest rate hike announced on March 22, 2023 (+.25 points), the cost of capital and borrowing keeps rising. After this week’s meeting, the federal funds target range is now at 4.75% to 5%, the highest since October 2007. Therefore financing new construction is becoming more challenging, which will likely hamper the pipeline for the industrial construction and additional multistory development across the country in the near future. With several projects planned and under construction and not yet leased, CompStak will be tracking the rental rates achieved and tenants taking space in these multistory properties. 

Are you interested in learning more about industrial rental rates in multistory industrial properties and last mile locations?