Dov Hertz Talks Multistory Warehouses, Industrial’s Future

“The negotiations became a little more urgent because I think the companies saw the tremendous increase in e-commerce sales, and, therefore, their facility needs increased exponentially,” Hertz said of the major changes he noticed in warehouse deals during the pandemic. (The other big change? “Pandemic” explicitly mentioned within force majeure clauses covering unforeseen events — “Whoever dreamed of a pandemic?” Hertz said.)

Manhattan-based DH Property Holdings has more than 4 million square feet of what it calls industrial logistics space completed or under construction in the Northeast. These include the rare multistory warehouse — most are sprawling, one-story affairs — such as 640 Columbia Avenue in Red Hook, Brooklyn. E-commerce nebuchadnezzar Amazon leases that warehouse and the single-story 55 Bay Street in the same neighborhood.

Hertz talked in a September (virtual) interview with Commercial Observer about the industrial market in general — its strengths, challenges and near-term — and about his company’s national expansion plans. Those plans include the hiring this month of Michael Bennett, an architect and a former principal at international design firm Ware Malcomb, as DH Property Holdings’ director of development.

Aaron Malitzky, the company’s executive vice president, joined Hertz for part of the interview, which has been edited for length and clarity.

Commercial Observer: We all know what’s driving the industrial market in the New York area. What’s the potential for growth, especially as COVID, at least in the Northeast, recedes? And what would be the signs that that growth was leveling off?

Dov Hertz: If you look at the statistics, they say during COVID it peaked at 35 percent maybe of consumers buying online. It had been before that somewhere 12 to 15 percent. So, when you look at that, it really isn’t a huge number of consumer sales driven over the internet through e-sales. Brick and mortar is still taking a significant portion of consumer sales.

I think it goes back to the fundamentals. Certainly, in the younger generation, this is what they know — they know buying online and it’s convenient for them; delivery times have gotten shorter and shorter. I think all of that is going to continue to drive e-sales.

So do you envision an Amazon warehouse tucked into every block in Manhattan?

No, because I don’t think that’s practical or affordable. But they do draw circles around areas — and it’s not just New York City — and they say, “We want to be within a certain timeframe of these rooftops, these consumers.” That’s the model. Walmart and Target are doing it more through their stores; but they are in essence doing the same thing, where they are pushing delivery out quicker.

I don’t see the appetite for e-commerce for the consumer slackening yet. Will it happen at some point? Do I think we’re going to 100 percent e-commerce? No, of course not; I don’t believe that. What is that percentage? Where does it top out, where do you start to see a slowdown? I’m not sure.

Then what sort of industrial is in demand and what will be in demand?

We focus on urban infill markets. We’re currently in New York, Philadelphia, and we’re buying something in Boston. We own some existing properties in Boston, and we’re buying a development property in Boston. We tend to keep urban infill as our focus. In the urban infill market, you have a shortage of sites and you have demand — that, to me, is the perfect storm for a developer.

Aaron Malitzky: If I were to oversimplify, we take into account density and congestion. The reason urban infill markets are interesting is that there is a tremendous amount of density. It’s no different than 20 years ago, when a retailer looked at what market they wanted to open in, which mall they wanted to open in, they looked at density. It’s the sheer amount of consumers in your area — that’s what a retailer’s going to look for. Now, instead of the consumer coming to you, you’re delivering to the consumer.

Ultimately, we’re taking density because that’s what ultimately our users and tenants will chase, and they’re also chasing congestion because the more intense the congestion, for lack of a better phrase, the more the need to be that much closer to the consumer. You don’t want someone delivering for you, that employee, to be sitting in four hours of traffic.

DH: That’s an important cost. The van and driver are fixed costs. If he can do one run or six runs, you’re paying him the same amount. So you want to get the maximum productivity out of your staff, out of your logistics of the supply chain, that you can. You can only do that if you’re close to rooftops.

I was sitting in a car complaining to a friend of mine pre-pandemic, “Traffic in New York City is terrible.” He made a great point that has changed my whole view on congestion. He said, “You made your money because there’s congestion. If everyone could fly back and forth, and there was no problem, the demand for your sites would not be what they are today. So you should embrace congestion.” Going to Aaron’s point, we embrace congestion.

You mentioned some places outside of the New York area. You’re expanding nationally. Can you talk a little more about that?

DH: So we’re starting in the Northeast. We have about a million square feet that we’re building in the Philadelphia market, and we recently expanded into Boston. We are probably one of less than a handful of developers experienced in these urban infill markets building multistory warehouses. Not every market is ready for it because the cost to build those is more expensive than single-story. So you need rents that can justify the costs.

As far as multistory, why do it, then, if it costs more?

DH: The advantage is — if there is demand — you can get more square footage in the same lot size.

AM: You’re creating land that doesn’t exist; you’re just creating it vertically. Someone actually pointed out, on our project at 640 Columbia, it’s a 500,000-square-foot building on 4 acres — but, if you took all of the area that’s being utilized and you spread it horizontally, to the extent that you could do that, it’s really functioning like a 10-acre center. Because there is such a lack of land in our markets, you’re almost artificially creating that land vertically.

How common is multistory industrial?

DH: In New York, there are a number of multistory buildings. In other markets — in Seattle, Prologis just did one in Seattle — it has not come to a lot of the urban infill markets. But we believe that is just a matter of time. You have tremendous rent growth; as the rent growth continues, it will justify the cost. As the demand growth continues, you will have the perfect storm to build multistory.

Can you talk about rents, where they’ve gone during the pandemic?

AM: It’s really market by market; you’re really getting in the weeds because of Class A and Class B and Class C. In some markets, there were rent growths of greater than 30 percent year over year.

There is rent growth nationally, and, then, on a market-by-market basis, it does vary. Certainly, in the markets with a lot of density, it’s been significant; and, in some markets, where demand had not been that big, that demand was created later — Philadelphia’s a good example; Philadelphia saw 30 percent year over year rent growth last year.

What was it like to work with Amazon? Did they approach you?

DH: They have local brokers. They’re out there — at this point, they’re one of the largest users of newly developed [industrial] buildings in a number of the urban infill markets. So they have a broker in every market; they came to us.

You both touched on the idea that there’s top-notch space in industrial, and then there’s an increasing bifurcation. Not all will be state of the art. What happens, then, to those that are not state of the art? Do they become redeveloped? Do they become more valuable simply because of their locations?

DH: It really depends. Let’s use New York City as an example. A lot of the not-Class A buildings — we’ll call them the existing stock — are in the old model of what an industrial building looked like, which was the 12-story, 10-story, limited freight elevator-type building. They were trying pre-pandemic to repurpose them into creative office space. 

Then you have the one-story industrial buildings that are lot line to lot line, and they use the street as their loading docks. That’s, again, tough because if I’m in the e-commerce business and I have a lot of through-put, I can’t be blocking the street every time I’m doing a delivery or every time I’m pulling out.

Then, you have a minority of buildings that I would say are true Class B buildings that do have some level of loading court on the property. Those have created value. It’s a trickle-down effect. You have the Class A-type tenants taking the Class A buildings; but there’s enough demand, certainly in New York, among Class B-type businesses who still need to be in close proximity to the city — the food and beverage business, the electrical contractor. Those types of businesses that service New York City need warehouse space.

It’s trickle-down: As the Class A becomes worth more, the Class B becomes worth more — obviously, depending on the functionality of the building.

How do you design these buildings and what are some of the things you anticipate in order to sort of future-proof them and make them usable and desirable five, seven, 15 years down the road?

DH: In order to do what you’re asking, you really have to understand the needs of the e-commerce tenants and develop a building no different than you’d develop a one-story building in New Jersey, as an example. Except that we’re developing multistory at times. I look at it as taking numerous one-story buildings and putting one on top of the other. Ultimately, what you’re providing is a best-in-class e-commerce logistics distribution center that meets their needs today.

Now, there’s no way to know what their needs are 10 to 15 years from now. Nobody has that crystal ball. But we do know what they need today, and we try as much as possible to have some flexibility and built-in additional functionality.

AM: We’re following new trends closely. They’re all developing in real time. There’s a lot of technology, whether it’s automated delivery or bicycle delivery, rather than car delivery, if you’re trying to get block by block in Manhattan or in Brooklyn. We look at a lot of that, and make sure that the functionality of the building will allow for that whether it’s today or in the near future.

The other thing that I think is really interesting, and that we have done already in our buildings in New York, we are seeing that tenants are not yet running on electric vehicles. But we’re putting in the infrastructure today with the additional electric capacity to allow for extra vehicle charging stations. A lot of these tenants — be they FedEx, Verizon, Amazon — have all announced that they’ll be moving toward having 100 percent or a large portion of their vehicles electric. We’re putting that infrastructure in place because we are signing longer-term leases.

So, are the actual four walls of the building changing? Predominantly, no. But are there kind of small, nuanced things that we’re doing to future proof? The answer is yes.

So you’re saying they’ll even accommodate bicycle delivery?

AM: It’s easy to do because, ultimately, a curb cut that works for a van to leave a building will work for a bicycle. Some of it is not as challenging as one would think.

DH: But the electric charging stations, that’s a matter of forward thinking and understanding that what today’s parallel thinking is, is going to grow as more and more of these companies move to electric vehicles. So, there, you need to understand potentially what those needs will be and put in those requests today so you’re outfitted for it.

Construction, material and labor costs have been on kind of a yo-yo the last 12 to 18 months. Does that affect the development of industrial? How do the costs play into your decision-making?

DH: The development business is always a gamble. You’re always going to have those elements where costs that you underwrote when you bought the building go up — they rarely go down — and it’s a factor that you just sort of, you put in some contingencies.

But rental rates have also gone up, so you sort of hope that your income side goes up more than your expense side; and that, at the end of the day, you end up okay. There are no guarantees in this.

AM: Different than a residential building, an industrial building is a lot less exposed to the sheer amount of products that have to go into it from a development perspective. It’s predominantly a big box of steel and concrete. The steel pricing has been a yo-yo the last two to three years. We have looked at, on some of our projects, is there a way to switch to poured concrete instead of steel from a structural perspective? So far, to date, the traditional way to build, with steel, has been more economically efficient.

Tom Acitelli can be reached at tacitelli@commercialobserver.com.