ATL Partners

Red Hook, a sleepy neighborhood on Brooklyn’s waterfront, is gearing up for a trucking problem that it’s not built to handle.

The area has become a magnet for e-commerce distribution centers over the past few years, thanks to its cheaper real estate and easy highway access. Its cobblestone roads are already crumbling with all the added congestion, and it’s only going to get worse for residents, with at least four new facilities opening as early as 2021, including several leased by Amazon.com Inc.

“It’s almost an arms race in a number of ways to getting these facilities built,” said Jim Koman, chief executive officer of ElmTree Funds, a private equity firm that invests in commercial real estate in secondary markets with no holdings in Brooklyn. “The only way these online e-commerce models work is you have to reach the broadest audience as you can, as quickly as you can.”

Red Hook is part of a growing number of American communities on the wrong side of the online shopping boom. The coronavirus pandemic has turned the country’s thirst for speedy online deliveries into an addiction, and the only thing slowing down the supply is how quickly infrastructure can be built and workers hired. In the U.S, it’s a $600 billion industry that’s showing its best growth in years. Over the week of Black Friday — the traditional kickoff of the holiday shopping season — sales surged about 30%, according to Adobe Analytics.

In the suburbs, e-commerce delivery is less disruptive, with facilities often placed in remote areas. But in cities, especially larger ones like New York, parts of the supply chain need to be in denser areas, often where people live. The big battle among Amazon, Wayfair Inc., Walmart Inc., Target Corp. and others is the final leg of delivery from distribution center to a residence — what the industry calls the last mile. And thanks to the escalating battle to be fastest — Amazon and others now promise two-day delivery or less for many orders — companies need to be even closer to their customers.

Demand for U.S. commercial leases tied to e-commerce delivery surged by 32% over the past three years, according to a report from Jones Lang LaSalle Inc. The brokerage firm estimates demand this year to exceed 2019 by 130 million square feet, with e-commerce companies accounting for nearly 40% of that demand compared with 30% last year.

Blackstone Group Inc. and Prologis Inc. were among the top buyers of industrial real estate in New York City over the past two years, according to Real Capital Analytics Inc. Meanwhile, other investors are seeking developments nearby. Prudential Financial Inc.’s real estate unit recently purchased industrial properties in New Jersey near Interstate 78, a main artery into New York.

For many of Red Hook’s nearly 39,000 residents, the growing impact of e-commerce is already becoming a thorny issue, with increases in noise, congestion and street decay. Locals are organizing to mount some kind of opposition, or at least lessen the blow.

At the center of the debate, is Van Brunt Street, the neighborhood’s core shopping and restaurant district. One group, Resilient Red Hook, is pushing the city’s transportation department to remove the road from its truck route. But even that solution has its limits because it won’t stop the influx of trucks and delivery vans — and will likely push congestion to other parts of the neighborhood. And re-writing the truck map could bring confusion, and even more congestion, said Paul Basile, president of the Gowanus Alliance, a neighborhood advocacy group.

It also doesn’t help that the Brooklyn-Queens Expressway, which funnels traffic into the neighborhood, might not be able to carry the current traffic load in five years. Whether it’s cars, city buses or trucks that are transporting cranes and steel beams, there’s barely enough room for everyone to navigate the narrow streets that shape Red Hook.

Amazon's growing distribution network has alienated communities in the past. In 2015, an influx of delivery trucks reached a breaking point in Robbinsville, New Jersey, leading the mayor to threaten legal action against the e-commerce giant for nearly doubling traffic congestion during the holiday season.

Similarly, Amazon and other tenants of a warehouse located in Sacramento agreed to pay $18 million for an interchange that allowed its drivers to access a major roadway without increasing traffic throughout the area.

Amazon didn’t respond to requests for comment.

New York has been working on a trucking management plan, which includes a study started in 2016 to measure the impact of freight transportation citywide. But the findings, initially slated for a 2019 release, have yet to be published.

Until then, shipping companies like United Parcel Service Inc. and FedEx Corp., and retailers aren’t going to slow down their expansion plans, even if it’s only going to get more expensive. They are willing to pay “super premiums” for warehouse space in high-population areas, according to Todd Soiefer, vice president of corporate development at Pilot Freight Services.

“You can’t be two, three hours away and service that area,” Soiefer said.

Over next three to five years, e-commerce sales could grow in the range of 10% to 15%, according to ElmTree’s Koman. That’s good for real estate investors because there is only so much land in cities, but could also mean more communities joining Red Hook’s plight.

Prime space will continue to be “gobbled up,” Koman said. “E-commerce is here to stay and will only become a bigger part of our lives.”