Long Island is a unique industrial real estate market. It is surrounded by the Long Island Sound and the Atlantic Ocean, and has limited access through New York City by trucks over bridges, limited train access, and a very limited number of ports for sea access. Long Island was once the cradle of aviation and provided room for expansion of industrial and warehouse space as New York City was transforming into the financial capital of the world, driving up prices on industrial real estate in the five boroughs. The demand for industrial space on Long Island continued through World War II, the 1950’s, and 1960’s. Beginning in the 1970’s, the industrial real estate market shifted as the aerospace, aircraft and supporting industries suffered during the recession of the 1970’s. Today is no different as the industrial market suffers from the current recession, while the Long Island economy continues to shift to service industries, and high tech and biotech development expands.
History of Demand
The following chart summarizes the changes in manufacturing employment and total employment in the Nassau-Suffolk real estate market area. The New York State Department of Labor data is based on non-farm employment estimates, by place of work, which provides the most up-to-date employment estimates available by industry and is based on the NAICS classification system.
The downward trend in manufacturing is quite obvious even though total employment has continued to grow modestly. While economic incentives exist to attract manufacturing companies to Long Island, they have failed to stem the losses. In addition, financing has been available with 40% financing from the Small Business Administration and 50% bank financing, but the activity has been weak from October 2008 through May 2009. SBA activity has improved from late spring 2009 to present and that trend is expected to continue. The Small Business Administration also has increased project limits that permit larger transactions.
Employment is a key factor to watch for potential trends in the industrial sector. According to the Department of Labor, from November 2007 to October 2009, almost all sectors are trending downward, and that trend is expected to continue through 2010. The manufacturing, trade, transportation and utility sectors are all trending downward, which all effect the demand for industrial real estate. The only sectors that have a positive trend are education, health services and government.
While the demand for industrial space has weakened, the supply is constrained with very little new construction in the bi-county area. Users of industrial properties are trying to lower their fixed costs by looking hard at their real estate. Many companies are outsourcing their warehouse operations to logistics companies. Others are reducing their inventories, consolidating operations and have laid off workers. Because of this consolidation and plant layoffs, industrial properties have been coming on the market. In 2009, the industrial available inventory for lease or sale remained level with 2008, as indicated by the following chart based on data (six months) collected by Greiner-Maltz.
If one looks back over the last 6 months of industrial activity, market activity is improving. Although there is no positive absorption (except for May 2009), the gap has closed a bit in the last two months as indicated on the following chart of monthly activity based on data collected by Greiner-Maltz.
Sysco acquired the old A&P warehouse in Central Islip for a total of 526,000 square feet in May, which accounts for about half of the total square footage absorbed. A transaction of this size comes along once every 5-10 years on Long Island, and Sysco was in the market for a number of years. More buildings have been leased than sold during this period. This has been caused by a number of factors. Business owners want to hold on to the cash they have to maintain stability and not tie it up in brick and mortar. Landlords in the second half of the year have become ferociously competitive with concessions and work letters to attract new tenants and retain existing ones.
In addition, financing is reportedly available but difficult to obtain. The traditional banks are more inclined to lend with the SBA as opposed to a conventional transaction that requires 30% cash. With SBA financing, the small business owner can keep more working capital in the company for growing it or emergencies, which could help the industrial sector.
The following chart provides data from Greiner-Maltz on the average number of months required for properties to be absorbed historically.
As for pricing of industrial properties in the first half of the year, owners’ expectations were still high, especially in the under 50,000 square foot range. The smaller the building, the higher the expectation, and that was a trend that carried over from 2008. The over 50,000 square foot building has been difficult to sell or lease. Prices have decreased substantially for larger buildings, especially 80,000 square feet or more. Even as prices have dropped to a number that would have been a great deal in 2008, there are no takers. As time marched on in 2009, a new crop of purchasers was entering the market; their mantra is “let’s steal it” and owners who can hold the line on price do not sell. The landlords that want to sell or lease drop the price to meet market. The following chart, based on data from Greiner-Maltz, indicates the trend in the average listing price and average sold price from 2002 through 2008.
Prices have fallen dramatically since their peak in 2008 and continued to in 2009.
The industrial real estate market on Long Island will remain weak until the economy recovers. Even then, the bi-county area has several factors that will restrain the demand for industrial space. First, the economic base of Long Island has been shifting since the 1970’s to a service-based economy. Changes in transportation, technology, automation and manufacturing processes have eliminated the need to have manufacturing processes near the consumer. Secondly, the high cost of doing business on Long Island has led to a geographical shift in the demand for industrial sites. The cost of housing, real estate property taxes, corporate taxes and labor is among the highest in the nation. Third, the transportation of goods on and off Long Island is difficult with limited means of ingress and egress, and traffic congestion increases the cost of moving finished materials off Long Island to other markets.
Over the long run, some positive factors will create demand for industrial space on Long Island. Those companies that are located in Queens and Brooklyn will continue to look toward Nassau and Suffolk County because land is scarce and the cost of space is higher in those locations. New industrial construction is constrained by the current economic conditions making existing, high-quality space desirable as indicated by the escalating sale price per square foot through 2008. Older industrial buildings may be converted to an alternate highest and best use at a reasonable cost. Finally, vacant land is scarce on Long Island and that has a positive impact on the value of existing industrial properties. These factors will soften the impact of the current downturn in the market.
©2009 Greiner-Maltz & MacCrate Associates LLC.