'There Is No Shortage Of Money': Tenant, Investor Demand Pushing Industrial Prices Higher
While owners of hotel, retail, office and even multifamily properties in New York are experiencing financial woes and identity crises, the industrial sector seems to be stable and growing going into the fourth quarter of an unprecedented year.
Developers are seeing an extraordinary upswing in leasing, rental rates and investment sale prices across the New York City area’s industrial market as e-commerce surges and demand for logistics space soars, speakers on a Bisnow webinar panel about the industrial market said last week.
“[Industrial] was a stepchild at best ... and now all of the sudden now that and multistory residential in the suburbs are the only two food groups that anyone is interested in talking about,” said Dov Hertz, a developer focused primarily on logistics. “There isn’t the COVID discount in industrial today … and I don’t see one happening [in the future].”
Ryan Nelson, managing principal at investment and development firm Turnbridge Equities, said deal activity has been increasing significantly amid the coronavirus, driving the cost for these spaces up.
When Turnbridge Equities was bidding on a two-building industrial portfolio in a major East Coast city before the coronavirus hit, the first round offers were at $70M, Nelson said. Offers are now up to $100M despite no change to the property or building, he said, and the process is still ongoing.
Investors and developers are looking to cash in on a surging e-commerce market. While Q3 data for industrial has still yet to be released, a JLL H1 report released this summer showed that e-commerce companies leased 56M SF of warehouse space nationwide in the first half of this year, compared to 9M SF in the entirety of 2019.
“You’re seeing tremendous demand on the tenant side and increased rent, and that’s continuing to drive pricing,” Nelson said.
Since March 15, Turnbridge, which holds investments across asset classes in New York, New Jersey, Florida, Virginia, Texas and North Carolina, has inked leases for 800K SF of its near 3M SF of industrial space in the New York and New Jersey area, Nelson said, adding that demand from companies looking to lease up this kind of space has driven rents up 10% to 15%.
Hertz said that every part of his 2.3M SF of industrial space is either under lease, about to be leased or in negotiations to be leased.
His DH Property Holdings owns industrial property throughout the city. It is currently developing 1.3M SF of industrial space in Sunset Park, Brooklyn, on a property it purchased in 2018. In March, when the pandemic's toll on real estate was just beginning, he predicted that the rise of e-commerce would ultimately benefit the industrial sector.
As lenders emerged from their slumber while the area was on pause during the worst of the crisis in the region, Hertz said, debt and equity is now being funneled toward the industrial sector more than before.
“There is money out there — there is no shortage of money — and it’s a question of where do they want to allocate … historically both equity and debt has been under-allocated in industrial, but today wants to allocate a lot more towards industrial,” he said. “It’s a favorable environment as far as what we’re getting from both equity and debt.”
Still, the movement of the market hasn't been completely untouched by the coronavirus. While demand has been soaring, the city’s slower-than-normal permitting process is leading to project delays, Simone Development Cos. Assistant Vice President of Leasing Josh Gopan said. Typically, a process that would take about three months can now take twice that.
“It seems that tenants are willing to wait so, I think that’s a sign of a lack of supply of product,” he said.
Gopan said all of Simone Development's projects are under lease negotiation and demand is “through the roof.”
While cost and demand for e-commerce spaces increases, ghost kitchen company Kitchen United’s Senior Vice President for Real Estate Development Kwame Brathwaite said that he is seeing the opposite happen in the retail sector. Kitchen United decided to make a strategic shift toward leasing retail space instead of industrial space right before the coronavirus, he said.
“As I am negotiating, I am getting a lot more leeway, because there is this shift post-COVID in the retail space, so what I am finding is my deals are getting a bit easier,” he said.
Hertz said that overall, the pandemic has propelled the industrial market faster than anyone expected.
“For those of us in the industrial space ... it’s unfortunate that [the coronavirus] has created so much suffering in the world, but it has certainly accelerated our business model,” he said.