Tenant Demand Challenges New York’s Industrial Market – The Real Deal

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We all know about the flight to quality in New York’s office market. But, the city’s industrial real estate is experiencing almost the exact opposite. 

Some Class A properties are having trouble finding tenants. But don’t call it a flight from quality. In some cases, landlords are sending prospective tenants away. 

Despite the city’s reputation for sky-high rents and tight spaces, the industrial vacancy rate stands at 4.8 percent. That’s right around the average for the past few years. 

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The first quarter of 2024 brought solid leasing activity, with 1.1 million square feet of leasing velocity, according to an industrial leasing report by CBRE. 

That’s a solid 300,000 square feet above the three-year rolling average. But absorption for the quarter was flat, leaving no change in the vacancy rate. 

Industrial properties haven’t been on the wild ride as offices have over the past four years. But the asset class has seen ups and downs. 

In the early days of Covid, e-commerce giants like Amazon ate up industrial space, as more Americans turned to online retailers for shopping. Third-party logistics firms — which handle supply chains for companies without Amazon’s logistics resources — also scooped up industrial space throughout the city. 

These types of tenants demanded huge spaces in modern, Class-A warehouses. 

That spark in demand led to a boom in new development. There is more than 4.4 million square feet of industrial space set for completion this year. Much of it is Class-A products geared toward e-commerce and 3PL tenants. 

But the demand from those businesses has softened over the past two years. Amazon alone put more than 14 million square feet of warehouse space up for sublease across the country in late 2022 and 2023. 

As a result, New York may have an oversupply of Class-A industrial. 

“A lot of the speculative ground-up development is sitting vacant,” said Brad Cohen, a senior vice president and industrial broker at CBRE. “If you have too much vacancy, which is the case with a lot of new development, and you’re seeking single users, the leverage is really in the tenants favor.”

Of the 4.4 million square feet of development space in the pipeline, only 35 percent of it is pre-leased. There is demand for these spaces, but it’s trickling in slowly. 

Cohen described a scenario where a landlord of a million-square-foot warehouse met with a tenant who only needed 30,000 square feet. At one time, a deal between the two would have been unlikely, as the landlord would hope to hold out for a bigger tenant. But that bigger tenant isn’t coming.

Unlike offices, an industrial landlord cannot fill a million-square-foot building one 30,000-square-foot lease at a time. Multiple tenants can cause logistical headaches and have infrastructural challenges (loading docks, elevators, parking, et cetera). 

There are, however, some new warehouses built for other purposes, such as film studios, that could be better positioned to find tenants, according to Cohen. 

“There’s new construction that’s thoughtfully built, and it’s priced well,” he said. “Those landlords have tremendous leverage.”

What we’re thinking about: Could a correction be in order for NYC’s Class-A industrial? Send a note to [email protected].

Closing Time

Residential: The priciest residential sale on Friday was $10.4 million for a 7,700-square-foot townhouse at 41 West 87th Street, on the Upper West Side. Shaun Anders of Douglas Elliman had the listing. 

Commercial: The most expensive commercial sale of the day was $14.6 million for a 20,800-square-foot, 25-unit property at 141 Ross Street, in South Williamsburg. 

New to the Market

The highest price for a residential property hitting the market was $12 million for a 5,500-square-foot townhouse at 48 Willow Place, in Brooklyn Heights. Deborah L Rieders of The Corcoran Group has the listing. 

Matthew Elo

A thing we’ve learned: New York Public Library’s main branch, located on Fifth Avenue and 42nd Street, houses over 50 miles of shelves filled with books. That’s enough to stretch from the library to Princeton, New Jersey. 

Elsewhere in New York

— More than 70 years after it was first announced, plans for a Second Avenue subway extension in downtown Manhattan have been kicked further down the road, Gothamist reported. There is already work on the way to extend the line to 125th Street in East Harlem. But the MTA determined that it would prioritize a westward expansion into Harlem rather than the downtown line. 

— NYC officials are trying everything in the war on rats. Their latest plan: birth control. Lawmakers introduced a bill yesterday that would deploy salty birth control pellets across the city’s rat mitigation zones. According to the New York Times, one pair of rats can produce 15,000 descendants in a year. The birth control pellets could slow that process, without the downside of poison.   

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