As Coronavirus Infects Most Real Estate, Industrial Emerges Stronger Than Before
While most of the economy has shrunk amid the coronavirus pandemic, the industrial sector is growing as e-commerce booms.
With online retail giants — notably the sector’s behemoth, Amazon — expanding their warehouse footprints rapidly to meet growing demand for online shopping and delivery, industrial rents in New York City and the Tri-State area are being driven up amid overwhelming leasing demand.
Asking rents for New Jersey industrial space increased 1.4% year-over-year in the second quarter of 2020, and leasing activity increased 36% over Q1, according to CBRE. New York City's outer borough industrial markets all saw increases in rent, led by the Bronx, which saw industrial asking rents jump 25% year-over-year.
Where most other commercial real estate asset classes have seen their values drop over the past few months, industrial has benefited significantly from stay-at-home orders.
“Industrial fulfillment and last-mile logistics is on fire, and there is not enough supply to meet the overall demand,” Square Mile Capital CEO Craig Solomon said.
Industrial vacancy rates also pushed down in most markets, the report showed, with Staten Island’s dropping from 10.3% to 2.4% year-over-year. The Bronx was the only borough that saw an increase, with vacancy rates increasing from 5.9% to 7.5% year-over-year.
Since the New York area saw its first case of coronavirus in early March, the retail market has become increasingly virtual, accelerating a trend that was on the rise over the past few years. Swaths of Americans pivoted from shopping in-store to shopping from their computers overnight: Online retail orders were up 129% year-over-year in the U.S. and Canada in April, data from Commerce Insight shows. Orders increased 40% between May 26 and June 1 compared to Feb. 24 and March 1, according to JLL.
Before March, around 11% of U.S. retail sales took place online, said JLL Vice Chairman Robert Kossar, who heads the brokerage's Northeast industrial efforts.
“We got a jump …. we always knew we were getting to 20%, the question was how many years is it going to take us,” Kossar said. “This whole experience accelerated it.”
These new converts to internet retail are not expected to return to a brick-and-mortar store like they did before March, even after the threat of the virus is over.
Despite a lull in industrial investment sales during March, April and half of May, capitalization rates are getting lower as investors awaken after a hiatus during the shutdown, Kossar said.
As office leasing hit an 11-year low in Q2 and more than a fifth of hotel loans go delinquent — with retail loans not far behind — the industrial market has had an inverse impact, as more people than ever rely on distribution centers, and fewer rely on offices, shops and hotels.
“It’s made for the perfect storm,” Kossar said.
Amazon is by far the dominant presence in the market, signing the biggest two leases in New York in Q2 for delivery centers at 26-66 Metropolitan Ave., a 300K SF warehouse, in Flushing, Queens, and at Prologis’ 1055 Bronx River Ave. in Soundview, which is just over 205K SF.
While Amazon has yet to report its Q2 earnings, it brought in $75.5B in Q1, over $15B more than the $59.7B it brought in last year. The company's stock price has soared. It closed on March 1 at $1,949.72 and opened July 15 at $3,080.23. It is pushing forward with distribution expansions nationwide, including seven new last-mile centers in Maryland and more than 1M SF of new space near Atlanta.
Jeff Bezos, the company’s CEO and the world’s richest person, has gotten $35B richer since the start of the year as unemployment nationwide reached its highest levels since the Great Depression. He is on track to become the world’s first trillionaire in the next decade, due in part to Amazon's growth as a result of the surge in e-commerce.
While sources say e-commerce companies, particularly in the food and health sector, are driving much of the increased demand in the Tri-State industrial market, smaller industrial spaces under 100K SF, have remained strong this quarter as well.
Fine arts company Maquette increased the square footage of its lease from 48K SF to 96K SF at North River Co.'s Matsil Building in Queens. North River Director Forrest Mas said the company is also seeing enormous interest for another 52K SF space in the same building.
The demand for space is only expected to increase as the pandemic continues.
“I don’t think we’ve seen COVID fully play out,” CBRE Senior Vice President Larry Schiffenhaus, who focuses on industrial in New Jersey, told Bisnow in an interview Tuesday.
This accelerated growth in the market overall has prompted developers to think more immediately about the renovation of space and how to create more supply in the market.
Metropolitan Realty Associates CEO Joe Farkas said he is planning to transform emptied big-box retail spaces into distribution centers. While this was a move that the company was already making as the market trended toward e-commerce, the pandemic has prompted him to double down on bringing more industrial space to the market.
"Everybody wants industrial,” he said. “Well, how do you give investors industrial at a price where they can make money? ... We like to find assets that we can buy inexpensively, use our construction, architecture and engineering skills to redevelop and then lease in the current market to current tenants that are viable.”