NEW YORK CITY—Last-mile warehouse buildings are globally the number-one desired product type due to the stability associated with industrial assets, according to a recent  with Colliers International in Irvine, CA.

In today’s Q&A, Cole Schotz real estate practice member Michael E. Jones brings the conversation to New York, with practical tips for anyone interested in these assets.

GlobeSt.com: We know last mile warehouses are a popular asset class. But what are the challenges with such projects?

Jones: Retailers need to be able to provide delivery within hours to their customers.

The challenge is to find a building in a location that can reduce the user’s delivery time while keeping its overall supply chain costs low. To accomplish this, the user must find the correct size warehouse, with adequate employee and truck parking, zoned for the user’s use, in close proximity to a dense population with the right demographics (typically millennials with disposable income who make a significant number of online purchases) and close to a highway network that can provide easy truck access, without heavy traffic congestion and high tolls.

Profit margins have not dramatically increased with these types of properties and in fact may be relatively thin because the cost to acquire and renovate older industrial buildings can be very high and not always offset by the higher rents tenants are currently paying. 

GlobeSt.com: What are the most popular locations for last mile warehouse for New York City-based businesses?

Jones: They are typically looking in New Jersey, the Bronx and Brooklyn. Last mile warehouse space is primarily used to ship directly to consumers very quickly after an order is placed, similar to the Amazon model.

GlobeSt.com: How competitive is it to acquire warehouses in the New York City metropolitan area?

Jones: Either for acquisition or for lease, it is extremely competitive. There is a low supply of warehouse properties while there is heavy demand driven by e-commerce. Industrial property, including last mile warehouses, is currently a favorable asset class and institutional money is now chasing industrial property. For instance, national REITs are entering the New Jersey industrial market and are paying above market prices just to get into the New York metropolitan area market.

GlobeSt.com: How difficult is it to build new warehouses compared to buying a pre-existing structure and renovating it?

Jones: It’s very difficult to build new warehouse space in the New York metropolitan area due to the scarcity of available land required to construct a large warehouse with adequate parking and truck access. There are high land and development costs, environmental remediation costs, zoning issues and lengthy governmental approvals which can take 12 to 18 months or longer.

Purchasing and redeveloping an existing building may save some construction time and costs. However, this can also be complex and expensive as many industrial buildings are outdated with low ceilings, small bays, insufficient loading, insufficient parking, and would require significant improvements to accommodate a highly automated warehouse operation.

GlobeSt.com: In leasing warehouse spaces, what are specific points property owners should consider when negotiating contracts?

Jones: Property owners should be aware of the following:

(i) The building will suffer heavy wear and tear due to the great volume of product moving through the building and the high number of employees required to operate the facility. Therefore, the owner should obligate the tenant to be responsible for all repairs and maintenance of the building during the term of the lease.

(ii) The owner should require the tenant to provide a large security deposit or should require a corporate guaranty from a credit entity so that the owner will have recourse if the tenant defaults under the lease, including if the tenant fails to maintain the facility.

(iii) The tenant should be required to maintain relatively high limits of commercial general liability insurance since the operation of a last mile warehouse is very labor intensive and high volumes of product will move through the facility increasing the potential for insurance claims.

(iv) The owner should insist on using its lease form to adequately protect the owner and its property.

GlobeSt.com: What about specific elements to meet the needs of retailers?

Jones: An owner or developer should include clear ceiling heights of 32 to 40 feet, heavy ceiling loads that can accommodate HVAC and solar systems, bays of 50 x 50 feet or more, abundant loading docks providing high and ground level doors, sufficient area to allow trucks to maneuver around the loading area, adequate truck and employee parking, sufficient power to run elaborate racking and conveyor systems, adequate office space and heavy floor loads.

If possible, the warehouse should be located very close to a good highway system with access to a port.