Multistory Warehouses May Be The Future of US Urban Logistics

Urban logistics is undergoing a transformative shift, with the emergence of multistory warehouses heralding a new era in both established and burgeoning markets.

Multistory Warehouses May Be The Future of US Urban Logistics

Urban logistics is undergoing a transformative shift, with the emergence of multistory warehouses heralding a new era in both established and burgeoning markets.

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Good morning. In today’s email: US considers multi-floor warehouse designs. Distressed asset sales slow amid new crisis. Meanwhile, NYC landlords sue Airbnb, tenants over Local Law 18.

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Market Snapshot

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NEW HEIGHTS

Multistory Warehouses May Be The Future of US Urban Logistics

The US is exploring a shift in how warehouses are designed, moving away from single-floor, giant spaces to multistory structures, known as "urban logistics," with multiple levels of docks.

Redefining warehouses: Multistory warehouses have been in use in Asia for over two decades, with some structures in Europe as well. Hong Kong boasts a notable 22-story warehouse, though most are capped at around five floors. The U.S., on the other hand, has only recently started to adopt this approach, with 2023 marking its five-year anniversary in multistory warehouse development. Brands like Amazon are propelling this change, aligning their distribution strategies with the new wave of warehouse design.

Leading the way: Georgetown Crossroads in Seattle serves as a prime example of these multistory structures in America. This three-tier, 590,000-square-foot facility is equipped with multilevel dock doors, truck ramps, and freight elevators. Prologis, the developer behind this initiative, is currently working on an even grander project in San Francisco, designed to accommodate the multifaceted needs of production, distribution, and repair businesses.

NY's multistory boom: NYC is witnessing a surge in multistory warehouses. The city unveiled a massive 1 MSF multistory warehouse at 2505 Bruckner recently, claiming to be the city's largest and most efficient urban industrial facility. There are currently five multistory buildings in NYC, with five more under construction, totaling 9.4 MSF of additional last-mile logistics space in the city.

➥ THE TAKEAWAY

Bright future: The emergence of multistory warehouses from single-floor facilities showcases the logistics industry's forward-thinking adaptability, signaling a move towards optimized urban growth in the U.S. However, developers are dealing with outdated zoning laws, limited land availability, and higher construction costs, with multistory assets costing nearly twice as much as single-story warehouses. Needless to say, challenges still remain.

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LOOMING CRISIS

Volume Of Distressed Asset Sales On Hold As Owners Battle A New Type Of Crisis

Volume Of Distressed Asset Sales On Mute As Owners Battle A New Type Of Crisis

This isn't your father's financial crisis. As distress sweeps across the U.S. and towering debts loom large, property owners are struggling to decide between holding or selling assets amid slow transactions and rising maturities.

Sluggish transaction volumes: The sale of distressed properties has been at a lull this year. In the first nine months, only 205 distressed properties changed hands, significantly lower than in 2009 and 2010. Furthermore, only one fund has been established this year to acquire distressed assets, compared to nine in 2009 and fifteen in 2010. This stems from fundamental uncertainties about future income, contrasting sharply with past crises where distress was often due to poor leverage despite solid asset performance.

Looming uncertainty: With $1.4T worth of CRE debt set to mature soon, lenders are on edge. Preferring not to add underperforming assets to their balance sheets, they've primarily offered loan extensions, hoping for market conditions to improve. However, with no relief in interest rates in sight, this strategy may soon change. Owners are also in a tight spot, deciding whether to infuse more capital into their struggling properties or concede them to lenders.

Shift in buyer profiles: The current crisis has altered the composition of distressed asset buyers. Today, local, smaller private investors dominate 80% of the scene, overshadowing institutional investors and REITs at 13% and 1%, respectively. This marks a stark contrast to 2010–2012, when both institutional and private buyers had a more balanced presence. Today's market demands more than capital; properties often need strategic redevelopment to restore profitability.

Complex path forward: The journey ahead is hazy, with many investors still wary of the risks involved in acquiring distressed properties. Factors such as high maintenance costs, market oversupply, and uncertainty over debt handling continue to influence investment decisions. Whether the market sees an uptick in distressed property sales largely hinges on upcoming debt maturities and how they're managed.

➥ THE TAKEAWAY

Extend and pretend: This isn't a typical financial downturn; it demands strategic insight and a readiness to adapt. More than just capital, the market needs innovative repositioning to unlock asset value. Despite uncertainties, opportunities abound for those willing to navigate this evolving crisis. The story is ongoing, and its outcome hinges on today's strategic choices.

📊 AROUND THE WEB

📖 Read: KKR’s Real Estate Market Review discusses how current market dynamics present a unique opportunity with lower LTV ratios and favorable lending conditions, as well as the potential for high-quality assets to enter the market due to forced selling.

▶️ Watch: Ed Yardeni, President of Yardeni Research, suggests that the current disruption in the CRE market may contribute to the Fed's decision to halt interest rate increases.

🎧 Listen: In this episode of WMRE Common Area, Ryan Williams, founder and CEO of Cadre, shares how the company aims to transform real estate investment with technology while fostering economic opportunities in underserved communities.

LEGAL SHOWDOWN

Landlords VS. Airbnb: Head-to-Head in NYC Over Local Law 18

Landlords file first suits against Airbnb based on NYC’s new short-term rental law

Airbnb's Brian Chesky (Getty)

Landlords in NYC are taking legal action against Airbnb (ABNB) and their tenants, alleging violations of Local Law 18, a recent regulation aimed at curbing illegal short-term rentals.

Short-term standoff: Local Law 18 requires hosts to register their rental listings with the city, enabling platforms like Airbnb to verify their legitimacy before posting them. Additionally, it allows landlords to include their buildings on a "Do Not Register" list to prevent tenants from listing their apartments on short-term rental platforms. However, some landlords claim that Airbnb continues to list properties despite their inclusion, prompting these legal actions.

Enforcement headache: Landlords in NYC are frustrated by the burden of enforcing Local Law 18, which aims to crack down on illegal short-term rentals via Airbnb. The law places landlords responsible for ensuring compliance, and some hosts continue to violate it. Airbnb claims to rely on the city's verification system, while landlords have traditionally included lease clauses prohibiting tenants from renting their apartments without permission.

Legal precedent: Local Law 18 was intended to address compliance by imposing fines of up to $5,000 on violators. After litigation, the law went into effect following a judge's ruling against Airbnb's lawsuit. A judge issued a temporary restraining order directing Airbnb and a tenant to cease advertising a listing in one of the buildings in question, setting a precedent for other landlords to use the new law to enforce regulations on short-term rentals.

➥ THE TAKEAWAY

Power shift: Airbnb had previously sued to challenge Local Law 18, which the judge dismissed, ultimately allowing the law to take effect. This legal action signifies a shift in power towards landlords in regulating short-term rentals, with potential fines of up to $5,000 for violators. Landlords are actively using NYC's Short-Term Rental Law to hold Airbnb and tenants accountable for illegal listings, a significant development in the regulation of short-term rentals in the city.

✍️ DAILY PICKS

  • Permanent hire: WeWork (WE) has named interim CEO David Tolley the permanent CEO as the company renegotiates leases to address financial challenges.

  • Binge bliss: Netflix (NFLX) plans to open "Netflix House" retail venues in the US in 2025, where fans can immerse themselves in the worlds of their favorite TV shows, shop, and eat.

  • Under investigation: Paris is investigating financial transactions involving French billionaire Bernard Arnault and Russian businessman Nikolai Sarkisov over suspected money laundering.

  • Banking on uncertainty: Big US banks reported big Q3 profits, but are concerned about potential future losses in CRE, particularly in office, due to high vacancies and credit loss allowances.

  • Realtor revolt: Major firms are distancing themselves from NAR due to concerns about executive overpayment, secrecy, class action suits, sexual harassment, and a lack of leadership.

  • Million-dollar blueprint: Learn how one person used ChatGPT to launch a successful real estate business with a $1M budget.

  • SoHo sale: KPG Funds has sold its Soho office development, Howard x Crosby, to Spear Street Capital for $48.1M, five years after KPG's purchase and renovation of the building.

  • Plot twists: A robust September jobs report challenges the efficacy of the Fed’s rate hikes, falling crude oil prices provide potential inflationary relief, and resuming student loan payments make everyone nervous.

  • How low can it go? MSCI reports another month of double-digit declines in deal volume for August, with CBD office assets suffering the worst August on record.

  • City of discounts: Rent prices in Oakland, CA, have fallen by 7.2% YoY, the largest drop among the 100 largest US cities, driven by an influx of new housing even as the population declines.

  • Beyond theft: ‘Retail shrink,’ often mischaracterized as in-store theft, can also occur in the supply chain due to accounting errors, with discrepancies in invoices and goods disappearing or being damaged during shipping.

  • Sunshine state rival: Austin, TX, is becoming more desirable for retirees due to its warm climate, low cost of living, and no income tax, surpassing Florida as a top choice for retirement.

📈 CHART OF THE DAY

Large US life insurers feel impact of commercial real estate concerns

In Q3, major US life insurers, like Lincoln National, Principal Financial Group, and MetLife, experienced significant stock declines in contrast to their smaller peers, due to concerns over vulnerable CRE portfolios.

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