Going industrial: Why US office space is being converted

As a result, many low-grade office buildings in the U.S., particularly those in industrial zones, have been redeveloped as warehouses designed to meet the growing need for efficient “last-mile delivery” processes to get orders to customers’ doors.

“E-commerce is the major driver of demand for industrial space,” says Steve Jenco, Vice-President at JLL, Suburban Tri-State Area. “Companies are starting to realize they need larger, more sophisticated distribution networks to meet consumer demand for fast delivery.”

New Jersey is one state which is rethinking its real estate requirements. The region known as Exit 8A, due to its proximity to the New Jersey Turnpike that runs along the East Coast corridor, is one of the most active U.S. markets for warehouse leasing.

In the north of the state, one developer recently razed a 500,000-square-foot office building in order to erect 800,000 square feet of industrial space while at 101 Herrod Boulevard, a 67,400-square foot commercial space was replaced by a warehouse that is commanding a record-high rental rate.

Most commonly, the conversions are undertaken by the landlords of the erstwhile office buildings, who have dealt with falling tenancy rates for some time, says Ignatius Armenia, Senior Industrial Analyst, Industrial at JLL. While New Jersey office vacancy rates have been near the 25 percent level during the past few years, state industrial vacancy rates have sunk to 5 percent.

“New Jersey is a well-positioned hub that’s equidistant from Boston and D.C. and an hour outside New York City,” Armenia says. And like fellow port city Los Angeles, the majority of the U.S. population can be reached in a 24 hour drive – all of which makes it ideal for retailers needing an access point for next-day deliveries.

“It’s an interesting phenomenon because traditionally, going from an office building to a warehouse would be a backwards step for developers,” Armenia says. Warehouses are commonly the cheapest type of real estate as they require fewer facilities, but those built for the final stretch of online deliveries need more sophisticated, flexible infrastructure to deal with deploying orders of one or two items, and repacking the returns.

New Jersey is far from being the only state keen to boost its industrial real estate inventory. Chicago’s Millennium Mile project is a uniquethree-storey development under construction below Maggie Daley Park, is the first of its kind in the U.S.. Converted from a parking garage with access at two sub-street levels, its inner-city location is well located for the crucial last-mile delivery to dense Chicago neighborhoods, often within one or two hour windows, says Peter Kroner, Senior Research Analyst at JLL.

“In the last five or ten years, we’ve seen low-grade office buildings being converted into warehouses that support direct-to-consumer delivery,” Kroner says. “The Millennium Mile is the first conversion of parking to warehousing in the U.S., and the success of this project could be a key example of how infrastructure can be repurposed to meet changing needs of urban populations. It also highlights the importance of infill urban industrial buildings in U.S. cities.”

Access on the lowest sub-street level means large delivery trucks can avoid pedestrian traffic and vehicle congestion, while courier vans and cars can use the original parking garage entrances one level up, streamlining the traffic in and out of the site and speeding up order deployment.

The continuing rise of ecommerce means that warehouse demand isn’t likely to drop any time soon. Industrial spaces designed to meet the specific challenges of getting orders to urban customers and managing returns are increasingly crucial aspects of logistics strategies, especially with rising consumer expectations for fast delivery of online orders.

“While we’re not at the point where the office market is so weak and warehouses so desired that property developers are buying office buildings to convert, the demand for warehouses will continue to grow,” Armenia says. In ever-denser urban centers, low-grade office buildings in strategic locations just might be the first to go.