As the e-commerce industry continues to grow and evolve, demand for industrial warehouse product located in dense urban areas situated with access to transit infrastructure, particularly air transit, has grown.
The industrial sector has been experiencing multiple years of record rent growth, both locally in New York City and nationally, with average asking rents reaching nearly $30 per square foot in western Brooklyn and parts of Queens. This rapid rise in rents is driving property values higher and generating robust investor demand for this asset class. By way of example, the newly constructed
FedEx warehouse in Maspeth, Queens recently sold for nearly $750 per square foot.
Simultaneously, we are seeing the evolution and realignment of the supply chain to match a changing retail landscape. E-commerce sales have caused a 300 percent increase in the demand for logistics and distribution spaces, as opposed to traditional brick-and-mortar retail locations. The impact of e-commerce will only continue to accelerate, and the need for new industrial product will grow along with it. For every $1 billion increase in e-commerce sales, an additional 1 million square feet of distribution space will be required.
And it’s not solely e-commerce companies that are starting to think about how their supply chains need to provide same- and next-day delivery services to meet customer expectations. Instead, this is something on all major retailers’ radar.
For example, Home Depot recently announced plans to invest $1.2 billion to speed up delivery of goods, including 170 distribution centers across the United States.
Closer to Customers
This shift in how goods are purchased as well as the rise in
e-commerce and e-fulfillment is forcing manufacturers and sellers of goods to deliver faster and less expensive services. Customers have now come to expect and demand this service. As a result, there is a strong pull for supply chains to be closer to consumers, therefore increasing demand for expansive infill logistics spaces in urban areas.
But developing industrial logistics and distribution centers in urban markets is not easy. Take New York City for example, where barriers to entry are high due to factors such as a strict regulatory environment, a lengthy timeline to secure approvals, rising construction costs and a scarcity of available land.
Nonetheless, there is good news for developers wanting to break into these urban markets as the current supply chains are near capacity and the time is right to add new industrial product.
More importantly, logistics and air cargo real estate is only a small fraction of overall supply chain costs. The increasing costs of labor and transportation, which are significant components of a supply chain, make the cost of providing the same level of service from a location such as New Jersey much higher in the long run. Tenants can afford to pay higher rent to be in a warehouse located closer to their customers while also yielding significant value creation due to increased service levels, especially in dense urban areas like Queens, which has 2.3 million consumers.
For example, we are primed to develop Terminal Logistics Center, our upcoming 300,000-square-foot, multi-level, multi-tenant industrial building located near JFK airport in Queens. We expect the sustained low vacancy in the JFK market will continue to drive rent growth.
Freight Flow Employment
The efficient delivery of freight through air cargo, port and rail modes is the backbone of New York City’s economy, accounting for approximately 9 percent of private employment in the city, or roughly 300,000 plus freight dependent jobs.
Currently, 200 million tons of freight flow through New York City annually, a number expected to grow by 50 percent over the next two decades. This freight flow includes the import and export of everyday consumer goods, as well as construction materials and food networks.
Unfortunately, the existing supply chain network in New York City has little spare capacity and is functionally obsolete. Accordingly, the growth of industrial spaces near airports by way of private investments from investors and users is critical, and it is similarly crucial for public agencies to support such private investment in this infrastructure. The high cost of going vertical will require some level of public support for this effort to work.
To ensure long-term success, coordination between and among developers and local economic development agencies — as well as introduction of planning and policy efforts targeted to help improve the freight infrastructure to meet industry demand — is critical.