Warehouses Are on Fire (in a Good Way!)
By Emil Ghatan October 19, 2018 9:04 am
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Warehouses, logistics, distribution and storage facilities are often portrayed as “bottom-feeders” of real estate. Even though many of these sites are now modernized, the category lacks the status or glitz of say, residential high-rises, professional office, or Class A or B commercial properties.
At least, that might have been the view not too long ago—but warehouses and storage are essential to the other real estate classes.
As a Queens-based real estate investor, I have always been intrigued by the role and economics of this sector. Within the past two years, there has been a boom of such real estate deals in the borough. It’s a reaction to the federal government’s new policies to promote manufacturing in the United States. Investors now see warehouses and storage as opportunities.
Two examples can be found in the acceleration of the cannabis industry and the continuous growth of e-commerce with a commensurate need for space.
Some real estate investors are even beginning to convert “big-box” retail sites, which have gone out of business. The retail sector’s need for space is not shrinking—it is transforming. It is going from showrooms and consumer hospitality, to warehouse storage and distribution.
Manufacturing combined with the latest fast track economic expansion has ignited demand for warehouses and storage buildings. An interesting trend is the need for high-end, sophisticated warehouses and storage space in comparison to basic “big-box” facilities. The new pool of buyers, investors, lessors and renters want computerized, robotic capability. They want state-of-the-art automation, monitors, tracking and security systems.
Another aspect of warehouse and storage space, which is increasing, is climate-controlled and refrigerated locations. Manufactured, processed food distribution has also been growing.
Technological enhancements and accessories could drive up costs at warehouse/distribution centers by as much as 60 percent.
It becomes critical for a successful manufacturer or exporter/importer to carefully review the efficiency and economics of occupying warehouses and storage properties as part of their costs of doing business. This real estate sector has been notoriously rife with fraud, misrepresentations and interests who look to take advantage. Businesses enjoying the current economic boom can become victimized by supply/demand conditions as part of fulfilling a pressing warehouse need. Investors in Manhattan warehouse space may now discover a “4 market cap.” Meanwhile, the same investment in a Queens warehouse may mean a larger facility and a “14 market cap” return. What warehousing and logistics are worth must be carefully calibrated.
A business owner can easily get tripped up. There is a valuable role here for the reputable broker who can become an information asset to a business seeking to acquire, lease or rent.
Transportation and efficiency of shipping are part of warehouse storage appraised values. Obviously, the facility that is located near major highways and arteries is worth more than the facility that lacks easy access, perhaps on streets where it is difficult for trucks to make turns and navigate. Public transportation is important, too. Employees here need to be able to get to work with minimal cost.
Being close to airports and ocean docks increases the value of these properties.
Let’s look at Long Island City as a case study. This Queens community near both the Queens Midtown Tunnel, the Long Island Expressway and the Ed Koch Queensboro Bridge was traditionally a major warehouse storage hub for decades. In the past 20 years, there has been a dynamic conversion of zoning. Former warehouses are now residential high-rises or in the process of being converted into high-rises. Millions of warehouse storage square feet have been eliminated.
While Long Island City is gone for warehousing and distribution, I believe the Bronx and Staten Island are hot at this time for rehabilitated or new facilities. Both have strategic geography favorable for these purposes. The Bronx offers excellent connections for transport from other boroughs, from Northern New Jersey, and into Upstate New York where an increasing number of mega warehouses are located. Staten Island has connection advantages to Jersey and Philadelphia.
The going rate for warehouse storage is about $10 to $15 a month for a 4-by-4-foot pallet (so a jack can lift and move products/materials). Climate-control could be as much as $40 per month. The price varies depending on the industry. The general thesis is that at this time, industrial rents are rising rapidly, above the inflation rate.
Sources like PriceWaterhouseCooper, the Urban Land Institute and Colliers (CIGI) International now all rank the industrial sector as their top choice for 2018 when compared with the other real estate sectors.
Emil Ghatan is the CEO of Macaby Group.
