As the e-commerce industry continues to grow and evolve, the demand for industrial warehouse product located in dense urban areas situated with access to transit infrastructure, particularly air transit, has grown. The industrial sector has been experiencing multiple years of record growth in rent both locally in New York City and nationally, with average asking rents reaching the mid-to-high $20s per square foot in western Brooklyn. This rapid rise in rents is driving higher property values and generating robust investor demand for this asset class. For example, the newly constructed FedEx warehouse in Maspeth, Queens recently sold for nearly $750 per square foot.
Simultaneously, we are seeing the evolution and realignment of the supply chain to match a changing retail landscape. E-commerce sales have caused a 300% increase in the demand for logistics and distribution spaces, as opposed to traditional bricks and mortar retail locations. Significantly, the impact of e-commerce will only continue to accelerate, and the need for new industrial product will grow along with it. For every $1 billion increase in e-commerce sales, an additional 1 million square feet of distribution space will be required.
And it’s not solely e-commerce companies that are starting to think about how their supply chains need to provide same and next day delivery services to meet customer expectations; rather, this is something on all major retailers’ radar. For example, Home Depot recently announced plans to invest $1.2 billion to speed up delivery of goods, including 170 distribution centers across the United States.
This shift in how goods are purchased and the rise in e-commerce/e-fulfillment is forcing manufacturers and sellers of goods to deliver faster and less expensive services – which customers have come to now expect and demand. In sum, there is a strong pull for supply chains to be closer to consumers, therefore increasing demand for expansive infill logistics spaces in urban areas.
Developing industrial logistics and distribution centers in urban markets, however, is not easy. Take New York City for example — where the barriers to entry are high — due to factors such as a strict regulatory environment, a lengthy timeline to secure approvals, rising construction costs, and a scarcity of available land.
Nonetheless, there is good news for developers wanting to break into these urban markets, as the current supply chains are near capacity, and the time is right to add new industrial product.
More importantly, logistics and air cargo real estate is only a small fraction of overall supply chain costs because of the increasing costs of labor and transportation, which are significant components of a supply chain and make the cost of providing the same level of service – from, say, a location such as New Jersey – much higher in the long run. Tenants can afford to pay higher rent to be in a warehouse located closer to their customers while also yielding significant value creation due to increased service levels, especially in dense urban areas like Queens, which has 2.3 million consumers.
For example, we are primed to develop Terminal Logistics Center – our upcoming 300,000-square-foot, multi-level, multi-tenant industrial building located near JFK airport in Queens as we expect the sustained low vacancy in the JFK market will continue to drive rent growth.
In speaking with Rob Hinckley, Managing Director at HFF, on the subject, he had these insights to share:
“The debt and equity capital markets demand for industrial product has increased considerably over the last 12 months as a result of capital reallocation trends (decreasing retail exposure and increasing industrial exposure) and the secular shift of company supply chains due to e-commerce. All types of capital from core to opportunistic and investors ranging from traditional pension plan advisors to sovereign wealth funds are participating. A few insightful data points from Green Street were recently released regarding the industrial market:
- In-place rents are below market rates meaning that NOI growth should remain consistently high over the next few years. (Property values have much more room to run).
- Industrial is one of the only property sectors where cap rates have declined over the past twelve months. Higher cash flow has also boosted values.
- A combination of mounting labor shortages and other factors lengthening construction periods resulted in a downward revision to supply forecast for this year with some spillover into ’19. (Total 20 bps decrease, in line with 2017 growth rate at around 1.7%)
In aggregate, there are growing rents, tighter cap rates, and lower supply than originally anticipated. These dynamics coupled with a record amount of capital seeking industrial create the perfect storm for continued growth and investor appetite. We expect industrial product to remain the darling of the commercial real estate industry over the near term with capital increasing allocations across the board.”
The efficient delivery of freight through air cargo, port, and rail modes is the backbone of New York City’s economy, accounting for approximately 9% of private employment in the city or roughly 300,000 plus freight dependent jobs. Currently, two hundred million tons of freight flow through New York City annually, a number expected to grow by 50% over the next two decades. This freight flow includes the import and export of everyday consumer goods, as well as construction materials and food networks.
Unfortunately, the existing supply chain network in New York City has little spare capacity and is functionally obsolete. Accordingly, the growth of industrial spaces near airports by way of private investments from investors and users is critical; it is similarly crucial for public agencies to support such private investment in this infrastructure. The high cost of going vertical will require some level of public support for this effort to work. To ensure long term success, coordination between and among developers and local economic development agencies, as well as introduction of planning and policy efforts targeted to help improve the freight infrastructure to meet industry demand, is critical.