The New York City Industrial Market Proves Not All Warehouses Are Created Equal

Industrial has been considered real estate’s hottest asset class of the last two years as retailers of all types rushed to lease buildings to meet shoppers’ insatiable online demands. But not all buildings are seeing rents and values rise, and some recent investors may be in for some disappointments.

Industrial values and rents in New York City have experienced meteoric rises, with average asking rents in the outer boroughs increasing nearly 16% last quarter from the year before, according to JLL.

More than 1.6M SF were leased in 2021, while total sales for the year exceeded $1.2B. But industrial players told Bisnow that good deals are increasingly hard to come by in New York City, pushing them to seek investments outside the five boroughs. Frequently, sellers’ expectations are out of step with reality, driven by the exuberance of the last few years.

“Everybody has believed that their industrial building is the Taj Mahal,” said Meridian Capital Group Senior Executive Managing Director David Schechtman, who earlier this year brokered East End Capital's purchase of a warehouse in Sunnyside for $42M and Prologis' $48M purchase of a 4-acre warehouse on 47th Street in Maspeth. 

“Generally, there has been a belief for the last three years that if you have an industrial warehouse or logistic center, your rents are going to skyrocket," Schechtman added. "In some places, if your building is really not up to snuff … they may not have spiked the way most people expected.”

Sellers could be forgiven for banking on big returns. In 2019, for example, Goldman Sachs Asset Management and Blumenfeld Development Group paid $38.5M for a last-mile distribution center at 1080 Leggett Ave. in the Bronx, more than twice its previous sale price of $16M in 2013, The Real Deal reported.

Buyers are becoming more sensitive, however, to each property’s location, design, parking and truck access, making some buildings far superior to others — though not all sellers have gotten the memo.

“I think it's frothy at the moment, partly because Amazon toured every single warehouse," Himmel + Meringoff Properties Chief Investment Officer Andrea Himmel said. "So every landlord thinks, ‘Hey, I can get a [3% cap rate] on $35 triple-net rent,’ when it's really more a $16 rent building, and you can get a four-cap or four-and-a-half cap, maybe, depending on whether it's empty."

In 2019, her company joined with Square Mile Capital Management to buy a two-story, 305K SF property at 1601 Bronxdale Ave. for $89M. She said there are headwinds hitting other assets harder in the city, with an enormous amount of capital chasing those kinds of assets. Nevertheless, many industrial deals on the market aren't making mathematical sense, she and other buyers said.

“We would love to buy industrial goods in the boroughs. We still think it's fundamentally lacking,” she said. “We want to double our money in a deal, and I can't envision an $850-per-SF purchase price turning into $1,600 or $1,700 per SF in value.”

At least one other recent buyer has come to the same conclusion: Madison Realty Capital sold an over 600K SF warehouse in Jamaica, Queens, earlier this month for $73.5M, Crain's New York Business reported, less than the $78M MRC and partner Artemis Real Estate Partners paid in 2017.

Because of the difficulty of buying sites for prices that make sense, Himmel + Meringoff is looking outside of the city for its next industrial purchases.

“Why not look to Connecticut for industrial?” she said. “It's undersupplied, it's got I-95, and it services the Northeast Corridor.”

Dov Hertz, whose DH Property Holdings is behind some of the most ambitious industrial projects in the city, said his company is expanding into other markets because New York remains such a challenging environment.

“It is not that we're not looking for deals in New York, it's just hard to find appropriate deals, deals that work,” he said, noting that his most recent purchases were in Philadelphia and Boston.

“There's only a limited amount of industrial space,” Hertz added. “We're looking at the West Coast, LA, San Francisco Bay Area market. We only focus on urban core infill products. So we're only looking to go to the major cities, which by their very nature were constrained. So it was sort of always looking for the needle in the haystack.”

Hertz, along with Bridge Development Partners and Banner Oak Capital Partners, is planning a 1.3M SF, multi-story distribution hub at 75-81 20th St. in Sunset Park. He said the facility, which scored $442M in construction financing from JPMorgan Chase last year, is receiving serious tenant interest, though he declined to give specifics.

Last year, Amazon reportedly locked down more than 300K SF at Hertz and Goldman Sachs’ 640 Columbia St. multi-story facility in Red Hook, and Hertz said the e-commerce giant's interest as a tenant is still enormous — even with its plans to own its own industrial real estate in the future.

“I think Amazon might be a buyer in New York, but I don't see them being able to move at the pace to compete with a New York developer,” he said. “[And] it’s not a one-horse town — there are other tenants in the market.”

In the last year and a half, Amazon has begun planning to switch its strategy from leasing tens of millions of square feet a year to buying and developing its own facilities, Bisnow reported last year.

The news sent ripples through the market, though many players have stressed the tenant market runs much deeper than the Jeff Bezos-founded company. 

But Amazon’s influence is still enormous, said Shaun Pappas, a partner with law firm Starr Associates who represents clients on industrial deals.

“It factors into it, more so than I think most would admit,” he said. “They're the biggest player in the industry. They're the biggest name in the game, and I think that a lot of time and money and effort is spent in evaluating what their next move looks like.”

He said that in the last year or so, there has been some concern about the pricing for industrial assets getting top-heavy, but he said it is hard to argue against the voracious demand for space and record leasing.

In New Jersey, he represents Shirzad Zarei, whose company, ZBK International, takes warehouse space for book distribution. Zarei told Bisnow he leases space in three separate warehouses for a total of 70K SF because he hasn’t been able to secure space in one location or find a location suitable for purchase.

"It might sound crazy that we have 10 different warehouses, but the main reason is because it just is impossible to find spaces," he said.

Schechtman said Amazon’s interest has pushed up rents and sales prices but said that it doesn't mean that buyers will or should pay whatever a seller asks.

“Buyers need to be pragmatic about what they're buying and what their expected appreciation is. Things are not going to double just because you're buying industrial,” he said. “At some point, rents have to plateau. …. Even for Amazon, with its limitless money, at some point the rent is going to be too damn high.”