Monday, November 18, 2019

Last-Mile Warehouses Within Philly City Limits Are No Sure Thing

Matthew Rothstein, Bisnow East Coast

The same issues that have long sent businesses and developers to the suburbs — high real estate taxes, strong unions and slow-moving or complex land entitlement processes — remain.  But demand has been so strong for last-mile distribution centers close to Center City that suburban rents have risen to narrow the gap. Now, Philly has a 4M SF pipeline of industrial development. "Historically, [Philadelphia] was just not in favor at all, but just in the last two to three years there has been new investor interest, new ground-up development," Cohen said. "It’s the first time it’s made economic sense in a long time, which is consistent with the last-mile trend."

 Since Philly's dense population core is such a small portion of its total size, it stands to reason that the massive area that is Northeast Philadelphia would be targeted for industrial development, and to a degree that has been happening. The first speculative warehouse in over 30 years is under construction in that area — the Philadelphia Logistics Center. But one of the chief advantages the logistics center has is close access to two major interstate highways: Interstate 95, which provides direct access to Center City, and I-276, a quick way to get either to New Jersey or to the western suburbs. As vast as Northeast Philly is, a small percentage of it has access to those crucial thoroughfares.

“If you’re in Northeast Philly and have to work your way back a couple of miles to I-95, it may take you 10 minutes to go through those streets," NFI Industries Chief Development Officer Michael Landsburg said. "In Bucks County, it may just take three minutes.” The urban street grid makes proximity to highways even more important than it is in the suburbs or rural distribution hubs like the Lehigh Valley for any facility that uses trucks to bring in or ship out goods. Complicating matters further is that truly undeveloped land suitable for industrial construction simply doesn't exist within city limits. What land is there has a history of some sort. The Philadelphia Industrial Development Corp. has been the primary source of warehouse-suitable land coming to market, but it has all but run out of space to offer, Maister said.  PIDC is also leading the charge in making land contaminated by previous manufacturing suitable for new development. The process of environmental remediation, whether PIDC or a private company carries it out, can add years to a project's development timeline, hampering the quasi-public organization's ability to replenish its supply. These difficulties have not been enough to deter investors from aggressively seeking deals, all interviewees for this article agreed. Because rent isn't a large portion of warehouse occupants' bottom lines, capital sources feel that if their development partners can turn a site into a finished product and lease it up, their deal is a slam dunk. Those on the ground are less certain. “The dynamics of the markets, the prices being paid and the rents required to be in those locations, that’s surprising to us," Landsburg said. "It will be interesting to see if [landlords] can hit their pro formas ... It remains to be seen what kind of rents these developments are going to get, because a lot of them haven’t leased up."

NFI, a third-party logistics operator based in Camden that owns and leases warehouse space across the country, does not hold any space within Philadelphia. One of the main reasons for that, Landsburg said, is that inner-ring suburban areas like Bucks County and South Jersey take about the same amount of time to access Center City as the expansive Northeast. "You could probably serve the same consumers more cost-effectively in South Jersey," Landsburg said. For last-mile distribution, many retailers and logistics companies have been trying to figure out how close is close enough. That question was spurred on by Amazon's transformational two-day shipping, which the entire retail market has scrambled to match. With Amazon looking to move the goal posts again to one-day delivery, some may wonder if that will play more into Philadelphia's hand. But the e-commerce giant's ballooning costs in the past two quarters may lead others to believe two days is enough — and two-day shipping doesn't require logistics networks to be as close. "Everybody who's been doing store fulfillment and e-commerce fulfillment out of one facility is trying to get to two days," Maister said. "The drive for one-day and same-day shipping is coming from one major player, and everyone has to decide if they want to or can catch up."

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