A rendering of 2505 Bruckner Blvd., a planned 691,000-square-foot distribution center in the Bronx by Innovo Property Group and Square Mile Capital — Courtesy: JLL
By Joshua Burd
Retailers and other industrial tenants have long counted on northern New Jersey as a hub for distribution into New York City.
But as Rob Kossar notes, that may not be enough with the rapid rise of same-day delivery.
“The only way you’re going to be able to get to Brooklyn and Queens is from Brooklyn and Queens,” said Kossar, a vice chairman with JLL and head of its Northeast industrial region. “So you’re going to have an extraordinary amount of development coming here over the next few years. Every retailer that does business in the city of New York is going to be doing same-day delivery over the next two to three years or they’re going to cease to exist.
“And the only way they’re going to do that is from facilities inside New York.”
Developers are now responding to that new reality, Kossar and other panelists said last week during NAIOP’s national I.CON industrial conference in Jersey City. With an aging inventory and a lack of available space, investors are making big bets with new projects and acquisitions in the outer boroughs, banking on the need for modern “last-mile” distribution facilities.
“You have a new paradigm,” said Andrew Chung, CEO of Innovo Property Group, whose firm has announced plans to develop a multistory, 691,000-square-foot logistics center at 2505 Bruckner Blvd. in the Bronx. He said the firm and its partner, Square Mile Capital, believe that both ecommerce and brick-and-mortar retailers will need to be within the borders of New York City in order to provide same-day and potentially even two-hour delivery.
That demand will justify the rents needed to develop in an expensive, infill market such as New York City, Chung said. Innovo and Square Mile reportedly purchased their parcel, the former site of the Whitestone Multiplex Cinemas, for around $75 million.
But the panelists also noted that higher rents would be offset by a reduction in transportation costs, which are typically the most expensive part of ecommerce and logistics.
“This is all about churn — how many runs can I do out of the same facility?” said Dov Hertz, president of DH Property Holdings, which is building more than 335,000 square feet of multistory industrial space at 640 Columbia St. in Brooklyn. “I want to do as many runs as I can because the driver that I’m hiring is a fixed cost, I’ve got to pay him for the day.”
The two-day I.CON event drew more than 800 to the waterfront Hyatt Regency in Jersey City. Attendees took part in everything from a tour of an Amazon fulfillment center to themed networking sessions, along with programs that covered brownfield redevelopment, cold storage facilities and a range of other topics.
When it came to serving the last mile in New York City, the panelists debated which of the outer boroughs provided the best opportunities to reach millennials and others who would demand same-day delivery. The discussion focused on not only the key population centers outside Manhattan — including 2.6 million people in Brooklyn and 2.3 million in Queens — but also the access to and from each of the boroughs.
Some panelists raised the prospect of using existing buildings as a potential last-mile solution. Both Omer Mir Ahmed and Michael Coppola detailed plans by their respective firms, Seagis Property Group LP and LBA Realty, to acquire smaller to midsized properties in the boroughs.
Ahmed said there is opportunity for such acquisitions in part because some longtime users can no longer afford to operate there.
“There’s turnover in these types of buildings, where people are struggling to make it work because of wage pressure,” said Ahmed, a principal with Seagis. “That’s being replaced by other tenants. One of those tenants certainly are retailers who are testing out this philosophy with small product, which we think we can really accommodate.”
Panelists also raised concerns about the lack of parking at many infill industrial sites in the outer boroughs. What’s more, many buildings may have limits when it comes to functionality and the ability to serve a modern ecommerce or omnichannel user.
Glen Bartley, a vice president with Goldman Sachs & Co., also noted that the boroughs are atypical when compared with other industrial markets. But the company actually saw that as an opportunity: Goldman has not only partnered with Hertz in the 640 Columbia project, but has purchased several existing buildings in the city.
“Unlike almost every other industrial market across the country, the boroughs is opaque,” Bartley said. “It’s not well covered by major research institutions, it’s a lot of fragmented ownership. And then you have these demand factors that are coming into play and we felt like there was just opportunity that we could seize by really rolling our sleeves up, touring a lot of sites and trying to find something that worked.”
Above all else, the discussion continued to focus on the costs of redevelopment in the outer boroughs and the reality that certain tenants will pay a premium for being so close to their customers.
“The big question is: Does that user come in and pay (two times) the market for a brand new, functional, quality building that is currently not here?” said Peter Crovo, chief investment officer for NFI Real Estate. “And that’s the bet that I think a lot of people are taking, some people in different ways.”
Kossar, who moderated the discussion, was confident that the demand would be there. And he said there is more than one case to be made for having the numbers work for new construction.
“The transportation delta gives you the opportunity to get the rents in that $30 zone,” he said. “But the truth is that’s not really the equation. The equation is: If I have fence posts up and I can only distribute from inside of New York to get to New York, where is the other alternative?
“The other alternative, for the most part, would be the pick-from-store model,” Kossar added. “So $100 a square foot in retail space, versus $30 or $35 a square foot in space that’s designed specifically for ecommerce.”