NYC’s Industrial Market Poised to Weather the Coronavirus Storm
As the last few weeks have made clear, it’s still too early to make accurate forecasts in the face of the evolving COVID-19 pandemic. However, there is good reason to believe that the city’s industrial sector is uniquely positioned to weather the coronavirus disruption.
Many industrial and warehousing businesses enjoy ‘essential services’ status and are allowed to operate in spite of Governor Cuomo’s recent business shutdown. These include warehousing, distribution, logistics and fulfillment, the manufacture of food, medical and other ‘essential’ goods, telecommunications and data centers, auto repair, select construction sites and construction supply, skilled trades including electricians and plumbers, business storage, mail and shipping services, trash, recycling and building repair, maintenance, security and disinfection services. Furthermore, as a March report by Prologis points out, the logistics sector at large is positioned to handle inventory supply and demand disruptions due to standard long-term occupancy contracts, which buffer cash flows from short term disruptions, and the ability to address shortages by shifting to more regional supply chains in the future.
Today’s vacancy rate stands at a comfortable low of 4.6% across approximately 182 million square feet of industrial space in the city. Against that backdrop, projected completions of approximately 1.5 million square feet for the year should add only slight upward pressure to vacancy rates. While some companies may postpone commitments for large space blocks as they cautiously monitor how the economic outlook develops against the backdrop of the ongoing pandemic, coming off of historically strong demand for industrial space within the city should insulate industrial owners from having to make any significant rent concessions in the near future.
According to Marcus & Millichap data, total dollar volume for the city’s industrial and warehouse building sales surged by 25% year over year, from $1.9 billion in 2018 to $2.35 billion in 2019. During the same time period, the average price per square foot rose from $423 to $453-per-square-foot, while the average cap rate dipped down to 4.7%, breaching the 5% benchmark for the first time during this real estate cycle.
While property values in the broader NYC investment sales market peaked in 2014 and 2015, the industrial sector bucked the trend and continued on a steady climb in values through the beginning of this year. The sector’s average price per square foot has grown by an average of 10% annually since 2011. This astounding growth is due to the unique supply and demand disparity resulting from the transformation of urban industrial real estate experienced starting with Bloomberg’s 2003 rezoning of many manufacturing neighborhoods. The ensuing wave of conversions from industrial into residential, creative office, retail, hotel and self-storage uses reduced the supply of industrial space and allowed for rapid rent growth after the city’s creative and manufacturing economy revival during this market cycle. With rents for grade A industrial space within the boroughs breaching $30 per square foot and the vacancy rate as low as 3% in 2016, the stage was set for developers to engage in large scale industrial development within the city’s limits for the first time in decades.
Since 2017, industrial investment sales drivers have gradually shifted away from redevelopment into ‘higher and better’ commercial uses and toward a renewed demand for actual warehouse and manufacturing space. Creative office redevelopment has all but stopped after many of the multi-story manufacturing buildings converted into creative offices failed to attract large scale TAMI tenants. Meanwhile, legislative changes resulted in a practical moratorium on the development of new hotel and self-storage facilities within the city’s manufacturing zones.
In addition to longstanding warehousing and manufacturing uses, this new demand for industrial space is driven in large part by the rapidly growing e-commerce and logistics industries. Some major move-ins by companies in this space since 2017 include Amazon, UPS, FedEx and Fresh Direct. In fact, most of the city’s 6.5-million-square-foot industrial development pipeline projected to be completed within the next three years caters directly to the seemingly insatiable demand for last-mile delivery and distribution space needed to service New York’s population. Living up to the promise of delivery within hours of an order being placed requires goods to be shipped from fulfillment and distribution centers located within the city’s urban core. The lack of land parcels large enough to accommodate the needs of modern delivery and logistics services has ushered the unprecedented development of multi-story warehouse facilities with massive truck ramps able to accommodate container truck delivery. Examples include DH Holding’s 1.3 million-square-foot, seven-story development in Brooklyn’s Sunset Park and Turnbridge Equities four-story 1.2 million-square-foot development in the Bronx.
Another significant demand area includes movie and TV studios, in part thanks to a $420 million annual tax credit from NYS. Silvercup Studios, Steiner Studios, Kaufman Astoria Studios, Broadway Stages, Lionsgate and Netflix have all recently completed or started expansions and new developments within New York’s boroughs, while Wildflower Ltd. in partnership with Robert DeNiro recently initiated a massive, 680,000-square-foot studio development to rival Hollywood in Astoria, Queens.
It is not only the large sites that are in demand. Buildings of approximately 25,000 square feet or less have seen additional price pressure with properties within this size range fetching up to a 20% premium per square foot as compared to their larger counterparts. This is in large part due to strong demand from owner-users who make up the majority of purchasers within this size range. Ghost kitchens — facilities set up for the preparation of delivery-only meals; in particular, have emerged as major players within this category.
Jakub Nowak is an Associate Real Estate Broker and Team Leader at the Nowak Group of Marcus & Millichap