Inside New York and New Jersey’s Industrial Boom, Fueled by the Death of Retail
Industrial property has never been sexy as a building or an asset class. At most, such properties might be converted into lofts, a modern office or a party venue. (Extra points if they’re near a bridge with a particularly noisy elevated subway.)
Traditionally, industrial properties were the purview of passive investors who didn’t seek huge returns.
Until now. All of a sudden, developers are clamoring for warehouse space in the five boroughs and New Jersey. Prices and rents are skyrocketing, and there are not many large sites available anymore, even for buyers with extremely deep pockets.
In New York City, industrial real estate is rapidly disappearing as the city rezones large swaths of the outer boroughs to pave the way for new residential buildings.
“The M-zoned [industrially zoned] pockets in Brooklyn have shrunk over the years because of rezonings, and now there are more discussion of rezonings in Gowanus, Williamsburg, Bushwick,” said Dan Marks, a partner and commercial broker at TerraCRG. “It puts a lot of pressure on the remaining M-zoned areas.”
Across the East River in New Jersey, the market for industrially zoned land is also heavily constricted and expensive. But unlike in New York City, developers are building millions of square feet of new industrial space along the New Jersey Turnpike. And e-commerce tenants and businesses that cater to them are taking huge blocks of industrial land on both sides of the river, often paying more than old-school warehouse or light manufacturing tenants.
Traditional industrial businesses are being priced out of former manufacturing enclaves like Gowanus, Greenpoint and Long Island City, Queens, and as a result, industrial investors have lost interest in these neighborhoods. Owners in these areas are increasingly converting their buildings to creative office space. Or they’re waiting for a residential, hotel or office developer to come along and pay top dollar for their site. Buyers struggle to negotiate with industrial owners who value their properties as if they’ll be rezoned for residential or mixed-use development, even though the city isn’t planning to rezone the properties or the neighborhood.
“A lot of the owners are sitting on real estate that they think is going to be converted to higher and better use,” said Brian Milberg, a principal of Sitex Group, an industrial investment firm that recently paid $110 million for several acres of warehouses in Red Hook, Brooklyn. “They all think they’re sitting on the next high rise residential development. It’s about educating these sellers that industrial is really the highest and best use for their properties.”
That means few manufacturing parcels in the five boroughs or New Jersey are hitting the market or changing hands. In Brooklyn, TerraCRG sold 28 industrial and office sites for a total of $95 million in the first quarter of 2017, according to its latest market report, which groups industrial and office properties together. The dollar volume of commercial sales in the borough has dropped 77 percent since the first quarter of 2016 and slid by a third since last quarter.
Meanwhile, the value of Brooklyn commercial property has shot up 20 percent, because a handful of small properties closed for eye-popping numbers.
In February, a 9,000-square-foot industrial building at 1340-1342 60th Street in Borough Park traded for $6.3 million, or $700 a square foot. A few days later, the 13,447-square-foot former headquarters of the American Society for the Prevention of Cruelty to Animals, located in the Gowanus industrial zone at 233 Butler Street, sold for $9.5 million, or $706 a square foot. New owner MacArthur Holdings plans to transform the century-old two-story building into a “unique retail concept,” DNAinfo reported in March.
The average sale price in the borough has risen to $389 in the first quarter of 2017 from $325 per square foot in the first quarter of 2016.
“You still have a number of property owners that are chasing record-breaking prices,” Marks said. “When that happens and they’re not willing to adjust their price expectations, the transaction volume will stay low.”
Real estate investment trusts and private equity funds are on the prowl for industrial property in New York City, because of the shift toward e-commerce and the dwindling viability of traditional retail as assets. “These are the kinds of companies that want to spend $50 million on a transaction and attract tenants like distribution companies, but there just isn’t that much out there,” Marks said.
E-commerce is also driving down vacancy rates at industrial developments in New Jersey, where there is slightly more inventory.
Milberg said Sitex was “bullish” on buying industrial in the five boroughs with the aim of attracting distribution and e-commerce tenants. “We are on a mandate to acquire up to a billion dollars worth of industrial real estate in New York City over the next few years,” he explained. “We’re one of the most active buyers and developers just across the river in New Jersey. And this Red Hook deal is just the first of many in the five boroughs.”
Digital retail giants like Amazon and Apple are creating a fundamental shift in the industrial real estate market, Milberg said, and now “all these institutional funds want to put their money in industrial real estate. It’s creating more competition for us.”
“Change in retail is a boon for the industrial market,” he said. “As retailers move toward e-commerce distribution, that means fulfillment happens in places like our Jamaica property.”
And as a growing number of industrial properties are converted to apartments or office space, suppliers who help fulfill orders for companies like Amazon and Wal-Mart have few options to rent large space in the city limits. Corporations want to reduce their transportation costs and get goods from their warehouses to customers’ homes as quickly as possible. That final step in the delivery chain is called “last-mile distribution” in e-commerce jargon.
“Everything was being converted from industrial when last-mile distribution was becoming really important,” added Zegen. “There’s a lot more being taken out of the system—being converted out of industrial—than being put back in.”
Despite their endangered status, traditional manufacturing zones endure in New York City. They’re just farther away from Manhattan than they used to be. The South Bronx, East New York, Brooklyn, and Maspeth, Queens have become prime spots for industrial tenants, like construction suppliers, trucking companies and food distributors, said Neil Dolgin, a co-president of commercial brokerage Kalmon Dolgin Affiliates. These formerly undesirable neighborhoods have suddenly become hot real estate because rents are semi-affordable, wide streets allow an 18-wheeler truck enough room to turn around, and there are old warehouses with ceilings high enough to accommodate unloading from a 72-foot-long tractor trailer.
For slightly cheaper rents, companies can look farther afield to Canarsie, Spring Creek and Brownsville in Brooklyn, Woodside, Astoria and Jamaica in Queens, Bathgate in the Bronx, and neighborhoods along the western edge of Staten Island. Typical asking rents for industrial space in many of these neighborhoods range from $15 to $18 a square foot, according to Dolgin. At the high end, renovated light industrial space in Industry City, a former warehouse complex in Sunset Park, can fetch up to $25 or $30 a square foot.
Some of the cheapest industrial space in New York City can be found on Staten Island. In fact, the forgotten borough is home to the largest new warehouse complex under construction in the city. Matrix Development Group is putting up four buildings with 3.2 million square feet of space on the western shore of the island in Bloomfield, right beneath the Goethals Bridge and just south of the New York Container Terminal.
The New Jersey-based company purchased three parcels along the Arthur Kill, just across the water from New Jersey, for a combined $128 million. Alec Taylor, a principal at Matrix, predicts the project will be worth $750 million by the time it’s complete. The first building is under construction and will be finished by the end of the summer.
Asking rents in the complex are just $10 a square foot. But Matrix is offering triple-net leases, making tenants responsible for property taxes, building insurance and maintenance. The buildings will have 40- to 46-foot ceilings, offering enough height to accommodate tall stacks of inventory and unloading from large trucks. E-commerce tenants typically look for 24- to 36-foot ceilings, Dolgin said. By contrast, older warehouses in New York City are typically much smaller and shorter, with ceiling heights ranging from 10 to 25 feet.
Matrix is building the complex on speculation, but they are negotiating leases with a few tenants, according to Taylor. While he hopes to attract e-commerce tenants, he wants to appeal to a broad range of warehouse users and can build to suit different needs. “We are as likely to lease to someone distributing garments as car parts or construction supplies,” he added.
If his firm signs a digital retailer, it will add more parking spots because Amazon-like tenants usually have more employees. But if an e-commerce company doesn’t move into the complex, Matrix can eliminate the extra parking and configure the property as a traditional warehouse by adding loading bays on either side of the building for shipping and receiving.
Industrial property is similarly hard to come by and expensive across the river in New Jersey. The Garden State is the third largest industrial market in the country with 650 million square feet of warehouse and manufacturing space. Only 4.8 million square feet of property traded there last year, according to Kyle Schmidt, who works on Cushman & Wakefield’s capital markets team and focuses on the New York City suburbs.
“There were very few transactions relative to the size of the market,” he explained. “Less than 1 percent of the market traded in a year when everyone is trying to get into the market.”
Buyers in New Jersey worry about the same issues as they do in the five boroughs: a dearth of industrially zoned land and stubborn owners who don’t want to sell for the prices that industrial investors expect to pay.
There’s 9.4 million square feet of industrial space under construction in New Jersey, Schmidt said, and 51 percent has been preleased. If a couple more large transactions go through, it will be 71 percent preleased by the time construction wraps.
However, asking rents are less than half of what they are in New York City. Statewide, the average asking rent for triple-net leases is $7.17 a square foot, according to data from Avison Young, and the priciest asking rents—for new construction in northern New Jersey—are $10 to $12 a square foot.
Target recently struck a big deal at an under-construction industrial complex in Perth Amboy, N.J., leasing an entire 718,200-square-foot building at 980 High Street, according to recent numbers from CBRE (CBRE). The discount retailer will occupy a small part of the 103-acre BridgePort Logistics Center, which is being built by Bridge Development Partners. In the past few months, a few other large tenants have leased space in New Jersey. Truck distributor Automann USA took 365,000 square feet at 400 Docks Corner Road in South Brunswick, and Union Beer Distributors signed on for 302,727 square feet at 46 Meadowlands Parkway in Secaucus.
Industrial leasing activity in New Jersey has also slowed dramatically. Roughly 4.9 million square feet were leased in the first quarter of 2017, down from 12.3 million square feet in the first quarter of 2016, according to a market report from Avison Young. The commercial brokerage’s report blames the drop on a dearth of available space.
The rise of e-commerce is one of the primary drivers of New Jersey’s industrial boom, and the engine of the shift toward e-commerce is broader than is readily apparent, brokers said.
“It’s more than the Amazons and Wayfairs of the world, which have done a significant amount of transactions in New Jersey of late,” said Jules Nissim, an executive vice president at C&W who specializes in industrial space. “You also have your ancillary businesses—your box companies, transportation companies, the FedExes and UPSes and DHLs. And there are a tremendous amount of businesses whose sole business is a supplier to Amazon or other e-commerce companies.”
Milberg agreed. “The e-commerce effect is not just a tenant signing a lease on a building,” he said. “We have a company that supplies a garden hose to Amazon, and they fulfill the orders from their warehouse. You would have no idea it’s e-commerce related.”
Ultimately, he predicts that the e-commerce industrial wave will cool. “The next downturn will be when there’s massive consolidation in all these startup companies,” he explained. “People won’t need these massive warehouse facilities. There are several companies that are taking up massive spaces—either Amazon will buy them or the top two or three companies buy the smaller ones and consolidate into one. That will be the next fundamental shift for us in the industrial sector.”