E-commerce’s industrial strength in the Tri-state

Call it industrial-size investment.

If there was any lingering doubt about the newfound primacy of warehouse space in and around New York and other major metro areas, Blackstone Group’s $18.7 billion deal with GLP this summer likely put that to rest.

The sprawling portfolio consists of about 179 million square feet across 1,300 warehouse and logistics properties in at least nine states, including 8.5 million square feet in New Jersey, where the industrial market is red hot.

Joel Bergstein’s Lincoln Equities, for instance, had been working on a massive project in the Garden State’s Meadowlands that it initially envisioned as a mixed-use development featuring 500 residential units. But after crunching the numbers, he and his associates came to a somewhat surprising realization: Building the project entirely as warehouse space would be a stronger financial bet.

“We did the economics and found we could do better building a logistics space,” said Bergstein, who’s working on multiple warehouse projects in the tri-state area. Sponsors who want to build industrial properties can now compete on an even playing field with those looking to build residential properties, he added, “particularly in the suburban markets.”

That’s all being driven by the growing number of people who would rather shop online than trek out to the store, according to several industry players tapped into the “last-mile” warehouse sector. The faster consumers want those deliveries to arrive, many are betting, the more valuable warehouse space will become.

Singapore-based GLP apparently came to a similar realization. The massive logistics firm had been weighing an IPO but decided that selling its warehouse portfolio — which it paid $8.1 billion for in 2015 — would be a better way to feed its investors, a person familiar with the matter told The Real Deal in July. A representative for GLP declined to comment on the record.

And the deal nearly doubled Blackstone’s U.S. industrial holdings in one fell swoop. While the private equity giant has made plenty of other big industrial bets in recent years, the GLP deal catapulted it to the lead spot in the burgeoning e-commerce property game in the U.S. — way ahead of other major players like Exeter Property Group, Clarion Partners and Duke Realty — and possibly around the world.

“This transaction fits perfectly with the strength of the Blackstone Real Estate franchise: large-scale, high-conviction, thematic investing,” Nadeem Meghji, the company’s head of real estate for the Americas, told The Real Deal in a statement. “We continue to be the largest investor globally in the logistics sector.”

Prologis, another heavyweight in e-commerce warehousing, is also placing bigger bets on the tri-state, especially in New Jersey, while Amazon has been upping its industrial presence in and around New York City as well.

The “everything store” recently opened a fulfillment center in North Haven, Connecticut, and plans to open another in Burlington County, New Jersey, this year. Amazon recently opened a new distribution center on Staten Island that spans more than 850,000 square feet, and it still has its eyes on Brooklyn and Queens.

But some commercial brokers say they’re already seeing a pullback from clients looking to buy and lease warehouse space due to the limited supply of tenants willing to pay the price per square foot they would want. And concerns about oversupply are starting to creep into places where land is cheaper and more readily available than New York City.

“[My] instinct, having been in the business for 35 years, is when is the music going to stop, and lenders are starting to ask those questions,” said Bergstein. “But every day, demand continues.”

Prime markets

Jeff Milanaik, a partner at New Jersey-based Bridge Development, said he doesn’t expect demand for warehouse space in the tri-state and other markets to fade anytime soon.

“We see the trend to be long-lasting, to be played for a while,” Milanaik said. “It’s all focused on that same last mile.”

Outside of the five boroughs, that seems to be most apparent in the Garden State. Industrial space in New Jersey had a vacancy rate of just 3.3 percent in 2019’s second quarter, with an average asking rent of $9.27 a square foot, according to Cushman & Wakefield. The asking price per foot marks an all-time high and a 9.8 percent increase year over year.

And the state saw about 15.1 million square feet of industrial leases in the first half of 2019 overall, a nearly 28 percent increase compared to last year and the state’s highest midyear total since 2016.

Bergen County saw the most industrial activity in Northern New Jersey in that period with about 1.5 million square feet of industrial leases, while Middlesex County saw the most activity in Central New Jersey with about 8.2 million square feet of leases, per Cushman.

At the same time, several big industrial projects are underway in the state.

Prologis has a 913,000-square-foot warehouse development in Burlington; Dallas-based Crow Holdings broke ground on a 925,000-square-foot warehouse in Franklin Township this spring; and Duke Realty started construction on a 662,000-square-foot warehouse in Newark in February.

“Every industrial developer now is as active as they’ve ever been,” said Jules Nissim, a vice chairman in Cushman’s East Rutherford office who focuses on New Jersey’s industrial market. “I would say that demand continues to outpace supply by three to one.”

Industrial space on Long Island, by comparison, had a 5.1 percent availability rate in the second quarter of the year, up from 4.3 percent in 2018, data from JLL shows.

New Jersey’s last-mile warehouse market has seen more projects and deals than Long Island due to the state’s “central location” in the Northeast, according to Alex Kachris, a researcher at JLL.

But some firms are starting to invest in smaller satellite warehouses in Nassau and Suffolk counties to avoid the “massive congestion” that comes with getting on and off the Island, CBRE industrial leasing and sales broker Bill Waxman noted. Those spaces will allow them “to go out early in the morning and make deliveries on Long Island a little bit more efficiently,” he said.

And while Westchester and Connecticut have yet to see the same spark in activity, Waxman predicted that won’t be the case for much longer. He said there’s already been a lot of chatter about both markets as companies look to close additional gaps in their supply chains.

“The Fairfield County area in Connecticut is very up and coming and I think you’re going to see, over the next year or so, some interesting developments there,” Waxman said. “My radar is all over that.”

Symbolic change

Zach Aarons, co-founder of the venture capital firm MetaProp NYC, said there has been a paradigm shift in recent years between how investors value warehouse and retail space.

“In 20 or 30 years, it’s all going to be one thing,” he said,  suggesting that the industry could soon see “a merger between a Simon Property Group and a Prologis.”

“It’s all going to be one category, and I believe you’re going to see fewer and fewer REITs that just do malls and fewer and fewer REITs that just do logistics,” Aarons added. “There’s going to be … some transformational deal like that that’s going to usher in a new era of thinking about these categories.”

Some say that shift could start to take place in assets that have gone from symbols of America’s obsession with shopping to symbols of brick-and-mortar retail’s decline: traditional shopping malls.

“The era of guaranteed 100 percent occupancy in the shopping mall is over,” Aarons said. “So what do you do with this fallow real estate? Warehouse space in malls might be a really interesting growth angle.”

The issue of vacant malls has even made its way into the 2020 presidential campaign thanks to Democratic candidate Andrew Yang, who included the American Mall Act as one of more than 100 policy ideas on his website. The proposal stresses that as malls grapple with the ongoing rise of online shopping, there is a growing urgency to rethink the use of such properties.

“Offices, churches, indoor recreation spaces, anything we can do to keep these spaces vital and positive is an enormous win for the surrounding community,” the candidate wrote on his website.

Yang’s campaign did not respond to multiple requests for comment.

Aarons pointed to two main factors driving up the amount of money investors can now make from warehouse space. “You’re able to charge higher rent because the market is really competitive now,” he said. “And you’re delivering a level of service that you would have never thought possible to deliver 10 years ago.”

Innovo Property Group’s Andrew Chung, who has invested roughly $1 billion in industrial properties throughout New York City, pointed out that even most big-box retailers deliver products to customers’ homes if they prefer these days.

“Even if you buy in a store now, there’s an expectation to be able to have it delivered rather than having to carry it home,” Chung said.

Sealing deals

Blackstone’s plan, boiled down, is to capitalize on the growing number of retailers moving their supply chains closer to customers in urban markets, according to the company.

Central to its massive warehouse deal was the firm’s belief that e-commerce will continue to rise in popularity, Ken Caplan, Blackstone’s global co-head of real estate, said in a statement.

Though commercial brokers differ on how much of a game changer Blackstone’s purchase is, there was almost universal agreement that it was a good move for the firm.

Alexander Cocoziello, managing director of capital markets and investment at New Jersey-based Advance Realty Investors, said warehouse space “has the longest runway of any real estate asset class, so I’m imagining [Blackstone] has been trying to do this for a while.”

Blackstone wouldn’t disclose its plans for specific assets in the GLP portfolio but indicated that it may look to sell some of the properties and hold onto others. The private equity firm is already in talks to sell a chunk of the assets to Prologis for about $1 billion, according to Bloomberg. Representatives for Prologis did not respond to requests for comment.

For now, Blackstone will tuck the portfolio into its Link Industrial Properties arm, which manages about 180 million square feet of industrial space around the country.

John Reinertsen, one of CBRE’s top brokers in the outer boroughs of New York, said it’s not unusual for companies to shed industrial properties after buying in bulk, which can lead to even more investment sales activity.

“When you buy portfolios, sometimes there’s stuff in there that doesn’t really fit, and you can get rid of that immediately,” Reinertsen said. “The other properties need to be leased. So you lease it up and make it more attractive and then spin it off, one by one.”