E-commerce growth and supply chain hiccups contribute to surge in industrial property sales
Most investors considering prime real estate in New York probably think of gleaming office towers, posh apartment buildings, and luxury retail spaces. But there’s another sector exploding with no slowdown in sight: industrial real estate, which is currently in high demand throughout the greater New York area. In reality, Real capital analysis ranks industrial property as the second most popular type of commercial property (after rental apartments) nationally, with $166.1 billion in sales in 2021, up 56% from 2020.
People who weren’t in the market at the height of the pandemic are now desperate to get in, says Jakub Nowakindustrial specialist and team leader at The Nowak Group of Marcus & Millichap.
“The sentiment I would use to describe demand from both the investment community and owner/users is FOMO or ‘fear of missing out’. 2021 has been a banner year for industrial property sales, with many many players who stayed on the sidelines in 2020 want to return to the market, and we expect this trend to continue.
Make Market: Industry Defined
“Industrial” can mean different things, and in New York’s urban core, Nowak sees the category as encompassing a broader universe that extends beyond your typical single-story warehouse. For example, he says that while many multi-story facilities built in the first half of the century became offices, they are still located in traditionally industrial areas, and many operate with a fusion of uses, where some could be traditional warehouses, while the rest can be creative, creative or storage space. A dedicated studio space for the city’s burgeoning film and television production studios is also included. Indeed, the sector includes the biggest industry sale of 2021: the takeover of Kaufman Astoria Studios by a joint venture between Hackman Capital Partners and Square Mile Capital for $600 million.
Based on its broader definition, it pegs industrial property sales in 2021 across all boroughs at $3.5 billion.
It also quantifies two distinct markets: the vast majority of winning bids for the purchase of an industrial property under 30,000 square feet come from owners/operators, such as distributors, importers/exporters, contractors and other businesses that need an industrial footprint within the city limits and prefer to own rather than rent; while properties above this threshold sell primarily to professional or institutional investors with the aim of adding value by capitalizing on skyrocketing industrial rents or redevelopment. Notable examples include Centerpoint Properties’ purchase of two Amazon-anchored Bronx properties: 1080 Leggett Avenue, a 145,000 square foot Amazon Fresh facility that sold for $116.5 million; and 511 Barry Street, a last-mile facility that sold for $119 million, as well as Realterm Logistics’ purchase of a truck terminal in Brooklyn at 523 Gardner Avenue for $70,000,000.
New consumption patterns drive demand
While low interest rates are helping to drive interest, demand is being driven by several hot sectors, driven by increased demand for e-commerce space, as well as ghost kitchens, auxiliary companies and subcontractors. “There’s an insatiable need for new e-commerce space, especially when it comes to last-mile delivery and reaching consumers quickly in New York’s boroughs,” Nowak says. “Fierce competition within the industry has resulted in expected delivery times being measured in hours, not days, which is driving demand for fulfillment centers located minutes away from high-density residential areas.” He also said seen an increase in demand for land for parking facilities, often purchased opportunistically by investors who intend to hold the property and realize future value rather than commit to immediate development.
Finally, the continued disruption to the supply chain has created strong short-term demand for inventory storage as companies seek space to store goods locally to hedge against delays along the chain. supply. “The market is betting you can fill the vacant space immediately and when existing logistical challenges ease, e-commerce fulfillment demand will quickly absorb the new availability,” says Nowak.
Compounding the shortage of space is that this growing demand has not been met by commensurate new development completions, with minimal new inventory built due to construction delays resulting from the Covid-19 lockdown and increasing building supply and labor costs. The “New York City Industrial Market Overview and Outlook” prepared by Marcus & Millichap Research Services showed completions dropping to just 151,000 square feet in 2021, with an expected rebound to 2,230,000 square feet in 2022.
The elements of the ideal industrial space
Whether they use it themselves as landlords or are investors looking for attractive opportunities that will appeal to tenants, the requirements used to evaluate a functional industrial space are the same. Nowak sees large plots of land over 100,000 square feet among the most demanded by industrial developers, as they allow for the construction of a multi-story building with space for ramps large enough to accommodate 53-foot container trucks. feet serving the upper levels of an installation.
Other attractive elements include an outdoor parking space for parking and shunting deliveries, raised loading docks that can easily dock containers, and high ceilings that provide the ability to stack goods vertically. Another key advantage is the absence of interior columns, which allows maneuverability in a space.
And of course access to major truck routes is vital, as well as properties located in areas with little or no traffic. Nowak says the city has already largely considered these geographic elements when designating its Industrial Activity Zones (IBZs), citing popular areas like Sunset Park, Red Hook, East Williamsburg, Jamaica and many parts of the Bronx. and Queens, to name a few.
A strong market ahead
The factors driving today’s growing demand are unlikely to subside, and Nowak predicts that 2022 will bring the same. E-commerce will continue to lead the way; while he doesn’t expect to see the same growth trajectory over the past two years, for many shoppers who shopped online for the first time during the pandemic, shopping online has become a habit who is here to stay. “As a company, we remain extremely bullish on the industrial market, locally, regionally and nationally. Our industrial business continues to grow, driven by market factors of course, but more due to the continued concentration of our specialist agents in the industrial sector,” said John HorowitzSenior Vice President and Division Head – Northeast for Marcus & Millichap.
“Add in related challenges, such as the current supply chain disruptions and ongoing last-mile delivery headaches, and it’s easy to grasp the lure of warehouses and other related industrial properties,” said Nowak. He sees more opportunities in increased completions that will bring more inventory to market; in particular, he expects to see more multi-story facilities being built that will cater directly to e-commerce and last-mile delivery.
“There is a race to build last-mile facilities as quickly as possible,” he says. Two major projects he cites are DH Holdings’ 1.3 million square foot development on the site of the former Sunset Park industrial park in Brooklyn and the 350,000 square foot Triangle Equities development near the airport. JFK.
“Based on current economic conditions, our research team expects vacancies to fall from 6.1% in 2020 to 4.7% in 2022. In New York, that number is expected to be even lower,” Horowitz said. .
Nowak sees the biggest constraint as the lack of opportunities. “There simply aren’t enough sites at a large enough scale to accommodate the development of modern last-mile facilities. As a result, there is huge competition around opportunities when they arise.
Of course, conditions can change quickly, and the industry is paying close attention to how New York City Mayor Eric Adams and his administration will approach zoning issues and how new zoning ordinances will continue to allow the development of last mile facilities within the urban core and industrial activity areas of the city.
Additionally, Horowitz encourages investors to watch for potential interest rate hikes. “The Fed has a balancing act ahead of it as it tries to bring inflation down, without derailing the economy,” Horowitz said. This is a priority for buyers wanting to keep rates low for as long as they last, and for sellers looking to sell before rates impact buying prices.
Potentially higher short-term inflation also makes investors more aware of rental terms, Nowak notes. “Real estate has traditionally been a fantastic hedge against inflation, and over time it should keep pace – but only if rental conditions allow it,” he says, adding that now is the time to reset conditions so escalation clauses keep pace with higher rates. On that note, investors should also be aware of a specific business model’s sensitivity to inflation, citing a recent food distribution facility they listed, where a key selling point was its ability to continue to operate despite the economic environment. “These are the kind of tenants that investors want to have.”
Other examples of savvy inflation hedges he mentions include 311 Scholes Street, a net-lease dining facility that Nowak’s team markets exclusively in East Williamsburg, Brooklyn, with annual rent increases of 4%.
Overall, the outlook is good, confirms Nowak. “Sellers have decided now is the right time to trade, given the market situation over the past 10 years, and buyers are eager to gobble up stocks.”