Industrial Leasing In NYC Slows by 55% As E-Commerce Retailers Pull Back

Industrial leasing in New York City is experiencing a slowdown as e-commerce retailers step back from their aggressive search for distribution spaces in the region. This shift in demand could spell trouble for developers who have invested in building expensive spec warehouse space in the outer boroughs. Even recent entrants in the studio space may face similar challenges.

The fourth-quarter industrial leasing in New York City hit a new low of 235,000 square feet in 2023, marking a 55% decrease from the previous quarter's leasing total and a 71% decline from the quarterly average over the past two years, according to the recent market report from CBRE (CBRE). The average industrial lease size also shrunk to just 7,000 square feet in the fourth quarter, a 25% reduction from the third quarter and 60% lower than the two-year average. While economic uncertainty and high interest rates are identified as contributing factors, the broader pullback in the tech industry, particularly for companies like Amazon, is also affecting the market. Industrial leasing in the five boroughs reached its peak in the fourth quarter of 2022 at over 1.5 million square feet and has since cooled off in 2023.

The vacancy rate remained unchanged at 4.8% in the last quarter, and the industrial sector saw a slight decrease in employment numbers, with warehouse and factory employers cutting approximately 7,500 jobs, representing a 1.2% reduction of the sector's workforce in the city. The majority of these job losses were in logistics and fulfillment companies, which accounted for around 7,100 lost jobs. Compared to the fourth quarter of 2022, the city has lost approximately 14,500 industrial jobs, translating to a 2.3% contraction.

Despite the current challenges, there is still significant construction activity in the city, with around 4.7 million square feet of industrial space under development, most of which is expected to be completed in 2024. However, industry experts are expressing concerns about the pricing of warehouses and industrial land, suggesting that there could be a 15 to 30% reset in industrial rents. The few developers who are building ground-up industrial space in the five boroughs remain optimistic, but the market dynamics pose potential difficulties for those who have underwritten high construction costs.

A New Era for Industrial Development in New York City

Ryan Nelson, an accomplished managing principal at Turnbridge Equities, is spearheading an ambitious and groundbreaking project in the South Bronx. His creation, the Bronx Logistics Center, will be the largest new industrial project in the city, boasting a massive 1.3 million-square-foot warehouse building. What sets this development apart is not just its size, but its innovative design featuring two warehouse floors totaling 580,000 square feet and an impressive parking capacity of 730,000 square feet. With asking rents ranging from the mid- to high $30s per square foot, this project is positioned as a premier destination in a city where average industrial rents tend to be lower, typically in the range of $25 to $28 per square foot.

One key advantage of Nelson's project is its uniqueness in the market. Other than a new warehouse located in the eastern Bronx, which offers 250,000-square-foot floors, there are no other developments of this scale and quality. Curiously, despite Amazon securing a lease for 569,000 square feet of the nearby property, 244,000 square feet still remain unoccupied. This scenario underscores the demand for brand-new, state-of-the-art industrial spaces in New York City.

Nelson also highlighted the challenges posed by existing warehouse properties in the city, most of which were built several decades ago and fail to meet the evolving needs of tenants. With low ceilings, limited loading capabilities, and insufficient parking, these older buildings are no longer attractive to the tenants seeking out innovative spaces.

While Innovo Property Group and Affinius Capital are working on a smaller warehouse project in Long Island City, Nelson emphasized the limitations of its floor layout. In order to secure 250,000 square feet, a tenant would need to occupy four separate floors. In contrast, Nelson's Bronx Logistics Center offers large, contiguous floorplates that can accommodate various industrial operations efficiently.

Additionally, the current trend in New York City is witnessing a surge in studio and production facility development. With projects like Wildflower Studios in Astoria, East End Studios in Sunnyside, and Sunset Pier 94 Studios on Manhattan's West Side, there's a growing demand for specialized space to support film and TV production. Even Greenpoint's CineMagic recently acquired a warehouse in Long Island City to establish a new production facility.

This thriving industry has attracted new players hoping to capitalize on the glamour associated with film and television. However, industry veterans like Doug Steiner, who operates Steiner Studios, remain skeptical about the viability of these ventures. Steiner believes that while there is institutional equity capital available, newcomers lack the knowledge and experience that is essential to succeed in the highly competitive New York City market. He expects that the influx of new competitors, driven by the allure of the industry, will ultimately lead to a saturation of the market with excess supply and lower prices.

The industrial and studio development landscape in New York City is undergoing a significant transformation. Ryan Nelson's Bronx Logistics Center represents a bold step towards providing cutting-edge industrial space, catering to the evolving demands of modern businesses. As the city continues to attract new players in the studio and production industry, the future remains uncertain, with questions about the sustainability of these ventures lingering in the minds of industry insiders like Doug Steiner.

A Changing Landscape of Industrial Space in New York City

New York City's industrial space market is experiencing a shifting dynamic, as demand and supply struggle to find equilibrium. While some players, like Amazon and third-party logistics companies, have scaled back their presence, others remain optimistic about the leasing potential of industrial properties.

One such proponent of the market is Nelson, a representative from Turnbridge Equities. Confident in his ability to secure leases, he is overseeing the development of two projects: Bronx Logistics and a smaller warehouse in East New York, Brooklyn. However, he will face competition from another multistory warehouse project by RXR and LBA Logistics in Brooklyn, as well as a three-story warehouse being built by Wildflower in College Point, Queens.

The demand for industrial space in New York City is diverse and expansive. Nelson attributes this demand to various drivers, such as studios, food companies in Hunts Point, e-commerce companies, and even the City of New York itself. The leasing activity experienced a temporary slowdown in 2023 but picked up pace in December. Nelson is already in talks with multiple potential tenants for his Brooklyn project.

Leslie Lanne, an industrial leasing broker at JLL (JLL), also recognizes the ongoing demand for industrial space, even at higher price points. She expresses her excitement about the current cycle of Class A industrial building construction in New York City, which has not been seen in nearly 80 years. Lanne points out that the market has over 8 million square feet of tenants, but only 7.4% of the total space qualifies as Class A. Despite this demand, she notes that there are currently no construction projects in the pipeline for the foreseeable future.

This transformative period in New York City's industrial space market presents both challenges and opportunities for developers and tenants alike. As the landscape continues to evolve, it remains to be seen how the demand and supply dynamics will ultimately shape the future of industrial real estate in the city.

Evolving Trends in Warehouse Leasing

Despite a challenging year for warehouse leasing in 2023, there is a growing understanding among industrial brokers that a rebound may be on the horizon. While data indicates a 40% year-over-year decrease in leasing, the demand for warehouse space remains high in New York City and other major markets. Throughout this period, vacancy rates have increased from a low of 3% to the current 4.8%, indicating a scarcity of functional properties available.

Rico Murtha, a broker at Cushman & Wakefield, acknowledges that the majority of tenants seeking warehouse space prefer smaller to midsize locations no more than 100,000 square feet in size. These tenants are often service-oriented companies and understand the importance of being located within the five boroughs for efficiency and cost-effectiveness. Elevator repair firms, contractors, concrete mixers, and food delivery companies are among those seeking warehouse space in proximity to Manhattan.

While the market is gradually recovering, Richard Warshauer, an industrial leasing broker at Colliers, believes it will take years rather than months for the new warehouse buildings to be fully leased. One significant factor impacting leasing decisions is the preference of logistics tenants to avoid occupying top floors in multistory warehouse buildings. The concern stems from potential delays caused by parking and accessibility issues, particularly for time-sensitive operations. For these tenants, rental costs account for only about 5% of their logistics expenses, with equipment and payroll being the primary cost drivers.