The Untapped Potential of NYC Industrial

Leslie Lanne and Tyler Peck

With 8 million people, New York City has twice the population of Los Angeles and three times that of Chicago. Yet, just 7.7 million square feet of industrial logistics space has been delivered in New York over the past five years, compared to 22.7 million and 6.0 million square feet delivered in Los Angeles and Chicago, respectively. The total Class A warehouse inventory in New York consists of just 9.4 million square feet (7.1 percent of total inventory), and the vacancy rate remains at 1.8 percent.

While national headlines suggest a pullback in demand for logistics space, this couldn’t be further from the truth on the ground in New York. There is an enormous consumer appetite for rapid delivery, and developers face significant barriers to creating new Class A space.

At least 10.2 million square feet of demand exists from users requiring more than 30,000 square feet of space. Most of these tenants want newly constructed state-of-the-art space, and only 3.4 million square feet of this product is currently under construction. So why was there a slowdown in capital markets activity in 2022, when the tenant fundamentals and supply story were so favorable? The simple answer is the steep rise in interest rates.

Transaction volume in New York City was down 24 percent year-over-year, mainly due to the dislocation in the debt markets. The unprecedented pace of benchmark rate increases by the Federal Reserve pushed the floating rate index (SOFR) above 4 percent, with the 10-year Treasury also surpassing that mark in the second half of 2022. Rising borrowing costs, coupled with more attractive fixed-income yield alternatives, led some industrial investors to hit pause on commercial real estate until values adjusted accordingly. This “sea change” was enough to temporarily stall volumes nationally, and New York was not immune. However, rarely do we see such a dramatic divergence between industrial real estate fundamentals and macro capital markets headwinds. In this case, we have an ongoing secular shift in e-commerce that won’t keep New York industrial down for long.

With demand drivers like faster delivery windows and supply chain resiliency, combined with the expectation that e-commerce will grow another 50.1 percent by 2025, the fundamental outlook remains overwhelmingly positive. In the first quarter of 2023, industrial logistics space boasted an occupancy rate of 96.2 percent nationally, with the Tri-State region and New York City boroughs outperforming at 97.5 percent and 98.2 percent, respectively. Despite economic headwinds, demand remains robust nationwide, as logistics  and distribution companies, and third-party logistics companies continue to expand their networks given widespread capacity issues across the supply chain.

Shortage of Quality Stock

The modern supply chain needs new, technologically advanced logistics space and this is effectively unavailable in New York City’s current industrial stock. The functional obsolesce can be seen in the abundance of 1950’s vintage facilities, and zoning overlays throughout the city make it extremely difficult to correct this. In contrast to the current surge of e-commerce since the onset of the pandemic, there has been a decline in industrial M-zoned land by government officials over the past decade.

The last-mile facilities needed to service New York’s 8 million consumers are in very short supply, and the outdated existing warehouse supply will not provide relief, especially given government zoning policy changes. New York City is now, and will continue to be, more supply constrained than any other market in the country.

It seems that if we don’t correct the supply quality in New York City, the people living in New York will not receive the same level of service as the rest of the country or even have access to the same goods, which is astounding considering the consumer fundamentals.

Even in 2022, when major national e-commerce companies were embracing cost-cutting measures, New York City’s outer boroughs (Bronx, Brooklyn and Queens) had their second-strongest year of leasing activity in history, with 2.6 million square feet leased. This is a 66.4 percent increase from 2021, and was only outperformed by 2020, when leasing totaled 5.2 million square feet.

After looking at underlying forces in the market, we can see that capital markets transaction activity is likely to pick up in 2023. The cost of debt and equity capital is starting to settle as the market normalizes, and there will be continued recognition of the strong supply constraints and the high barriers-to-entry in New York’s infill market.

The New York City industrial market continues to have one of the most compelling supply and demand stories in the country. The strong fundamentals combined with the current underrepresentation of institutional capital will make New York City industrial an attractive investment opportunity over the foreseeable future.

Leslie Lanne is a vice chairman at Jones Lang LaSalle, specializing in institutional Landlord and Tenant representation in the Northeast Region. Tyler Peck is a senior director in the New York City office of JLL Capital Markets. He specializes in investment advisory and equity placement transactions with a primary focus on industrial properties.