Our prior report on the State of the Long Island Industrial Market indicated the unique characteristics of this market. This report will focus on our observations during 2009 going into 2010 as the industrial real estate market continues under stress with supply increasing, demand falling, rents declining, capitalization rates increasing and financing difficult to arrange. The New York State Department of Labor reported that since December 2008, the number of non-farm jobs on Long Island has decreased by 24,600, or 1.9 percent, and the number of private sector jobs has decreased by 21,800, or 2.1 percent. The area’s unemployment rate was 7.0 percent in December 2009, compared with 6.8 in November and 5.8 in December 2008.
History of Demand
Of course you cannot mention industrial real estate market without a little discussion about employment. As soldiers on the streets and just talking to local captains of industry, we find that new jobs are not being created, the work force is being cut, and others are just maintaining the status quo and waiting for things to get better. 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 unemployment rate in the state spiked back up to 9% in December 2009, after dropping slightly in November. Nassau County’s unemployment rate stood at 6.6% in November while Suffolk County’s was in excess of 7%. However, both manufacturers and other firms plan to increase employment levels in the first half of 2010. During 2009, employment grew in educational and health services but not in the sectors that demand industrial real estate such as manufacturing which continued to experience losses. The largest losses were reported to be in trade, transportation and utilities, natural resources, mining and construction, professional and business services, manufacturing, and leisure and hospitality. Since space utilization on Long Island is well below average, no major demand for new space can be anticipated for the foreseeable future. As a result industrial land prices will remain stabilized or continue to drop along with rents and property values.
Employment is a key factor to watch for potential trends in the industrial sector. According to the Department of Labor, from December 2007 to December 2009, almost all sectors were trending downward, and that trend is expected to continue through 2010. The manufacturing, trade, transportation and utility sectors are all continuing to trend downward going into 2010 on Long Island.
As expected, the inventory of industrial properties new to the market increased in 2009 over 2008. In addition, the amount of inventory absorbed in the market was anemic in 2009 compared to 2008 as indicated by the following chart based on data collected by Tom Attivissimo at Greiner-Maltz.
Basically, there were 511 units totaling 13,095,671 square feet of space on the market in 2009 compared to 441 units totaling 11,216,401 square feet of space on the market in 2008. With respect to absorption in 2009, there were 293 units totaling 6,954,940 square feet compared to 378 units totaling 9,471,123 square feet in 2008.
The average change in price of industrial space in 2009 compared to 2008 did not appear to be as drastic of a change as would be expected when looking at availability versus absorption. Surprisingly, the pricing for industrial space held up for most of 2009 with signs of softening especially in the over 50,000 square feet category.
The average sale price increased slightly for smaller units between 5,000 and 10,000 square feet, while the average sale price for industrial space greater than 50,000 square feet fell more than 10%. This trend may be attributed to carry over momentum from companies in the market from late 2007 and 2008 that continued to have a strong business to substantiate the cost of a move and expansion in 2009. However, there was little new business in 2009. Any company considering such a monumental task of moving a company during this period did so with great caution and ultimately many companies put that decision on the back burner.
The following chart, based on data from Greiner-Maltz, indicates the trend in the average listing price and average sold price from 2002 through 2009.
Prices have fallen dramatically since their peak in 2008 and continued to do so in 2009. The average sale price has dropped approximately 10% during the last year.
Equally, as important as employment, is lending. Small companies’ life blood are loans, credit lines, and banking facilities. Small companies get their economic confidence from the signals they get from the banks. In 2009, the signal that small business got from banks was higher standards for lending (meaning tougher underwriting standards) and not business as usual. This gave small business owners pause in their planning for future expansion and day to day operations. Therefore, no new trucks, no new machines, no extra material to service more customers, no credit lines to make payroll, and, as a result, no new jobs created and no industrial space absorbed. As per the SBA (Small Business Administration), on Long Island, the volume of closed deals in 2009 was down compared to the 2008 volume. The SBA underwrites a NYS Revolving Loan Fund of up to $250,000 that benefits the defense, manufacturing and woman-owned companies. This could have replaced the credit lines that were not provided by the banks.
In 2009, the Industrial Effectiveness Program was temporarily suspended. This NYS grant helped manufacturing companies hire private consultants to assist small businesses to develop and implement projects that result in enhanced productivity and competitiveness in New York State. Also available for growing companies, is the Regionally Significant Program (RSP), which provides a small business with many economic development benefits that reduce the cost of doing business. In 2009, due to budget constraints, Albany has been selective as to which companies obtain approval and June 2010 will mark the sunset of the current RSP. It is Governor Paterson’s intention to have a new program proposed called the Excelsior Jobs Program which claims to be easier to maneuver through the paper work and less complex. However, the overall financial impact will be less than the current RSP. It’s tough times for the small guy while the big players have gotten their bailout.
One can see the relationship between all of the variables that affect industrial real estate. In addition to lending, government incentives to small businesses that encourage businesses to take a chance and start a company or expand an existing one by offering low interest rate loans, training grants, lower real estate taxes, low cost plant engineering consulting and low cost energy are required for job maintenance and creation and industrial demand. Overall, there were no surprises in 2009. The year started with the expectation that it was not going to be business as usual. Looking back, we see that to be the case—businesses cutting back on spending, trying to stabilize their business to stay alive long enough to fight another day. The industrial real estate market on Long Island will remain weak until the course is changed to create and maintain a strong business-friendly economy.
However, on the bright side business activity started off 2010 strongly in the region, according to the survey taken by the Institute for Supply Management-New York (ISM-NY). The Current Business Conditions index jumped to 72.6 in January, the highest level since November 2006, from a revised 64.5 in December. This may bode well for the industrial market going into the third or fourth quarters of 2010.
©2010 Greiner-Maltz & MacCrate Associates LLC.