Economic activity in the manufacturing sector expanded in March for the 20th consecutive month, and the overall economy grew for the 22nd consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®, but not on Long Island.
As one would expect, 2010 showed little, if any, improvement over 2009 in the industrial real estate market on Long Island. Last year’s report showed signs of stress in the industrial sector with supply increasing, demand falling, rents declining, capitalization rates increasing and financing difficult to arrange. This trend continued in 2010. The New York State Department of Labor indicated the non-farm job count decreased by 22,800 in December 2010. The number of unemployed New York State residents dropped slightly from 797,600 in November to 792,800 in December 2010. The aggregate private sector jobs growth over the year was 70,800 jobs or an average of 5,900 jobs per month in a state with over 12 million people.
Long Island Labor Market
According to the New York State Department of Labor, “the private sector job count on Long Island rose over the year by 12,100, a 0.9% increase, to 990,100 in February 2011. The following sectors added jobs over the year: educational and health services (+5,100), leisure and hospitality (+3,800), professional and business services (+3,500), trade, transportation, and utilities (+3,400), and other services (+2,700). The following sectors lost jobs: natural resources, mining and construction (-3,400), information (-1,300), manufacturing (-1,200), and financial activities (-500). Government employment decreased by 1,500 jobs.”
Looking back to December 2008, the Long Island area unemployment rate provided by the New York State Department of Labor was 5.7%. As of January 2011, the Long Island unemployment rate stood at 8.0%, which is slightly lower than the 8.2% in 2010. The Long Island unemployment rate for February 2011, at 7.8%, is half a percentage point lower than last year’s 8.3% .
History of Demand
The industrial sector is directly affected by employment. The following chart summarizes the changes in manufacturing employment and other sectors that create the demand for industrial space in the Nassau – Suffolk real estate market area based on Woods & Poole data, which is slightly higher than New York State’s estimate. 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. Both are based on the NAICS classification system.
In December 2010, total non-farm employment was estimated at 1,243,000, while total manufacturing employment was estimated at 72,500 by New York State. (Manufacturing employment peaked prior to the 1987 market crash and has continued downward as companies moved to avoid the high taxes and cost of labor.) Although, in 2009, manufacturing companies on Long Island indicated they had a substantial back log of work, employers did not hire more workers in 2010. In fact there was a 0.8% decrease in employment in the manufacturing sector.
In 2010, there were major decreases in employment in building material, transportation, warehouse and utility at around negative 3-5% and couriers and messengers at negative 15.4%. Other noteworthy employment losers were telecommunications, real estate and rental and leasing, accounting, tax preparation and bookkeeping.
On the increase side of the employment ledger were wholesale trade, broadcasting, education services and health services, nursing and residential care facilities, food services and drinking establishments.
As a result of the trends in employment, 2010’s industrial space utilization continued to decelerate on Long Island. Demand for goods and services in the industrial sector must increase for employment to improve in the industrial sector and create demand for additional industrial space. When there is a positive signal, the hungry business owner will hire more employees to get product out the door. Otherwise, 2011 will be no different than 2010.
Statewide, The Empire State Manufacturing Survey indicated that conditions for New York manufacturers continued to improve in March 2011, but new orders and shipments indexes fell but remained above zero, while the unfilled orders index rose above zero for the first time in a year. Price indexes continued to climb, suggesting that price increases had accelerated which is to be anticipated due to the increased cost for energy and raw materials..
For the period between January-December 2010, there were 382 units totaling 7,693,909 square feet of space new added to the market compared to 138 units totaling 3,086,520 square feet of space absorbed during the same period. The amount of square footage that was absorbed is the lowest in years as seen in the chart below. In addition, the number of units transacted at 138 units is lower than the volume (180 units) in 2006.
As of this writing, it appears that it will be many years before any major absorption can take place. Land prices for industrial uses will continue to soften along with rents and improved property values.
This trend is continuing in 2011 as indicated below.
Overall, the pricing is trending downward since 2008. By looking at the size ranges, there was a drastic move in pricing since 2009 in the 10,000-25,000 square foot range, from $122 per square foot down to $99 per square foot in 2010. There is continued softening in the over 50,000 square foot range. However, the change from 2009 at $75 per square foot down to $73 per square foot in 2010 does not seem so drastic; but the larger properties are sitting on the market longer. There is a growing number of properties over 50,000 square feet that are on the market for more than three (3) years as opposed to the historic average of 18 months to two (2) years. Should that trend continue, there will be more downward pricing in 2011. The following chart summarizes the average change in listing and selling price reported by Greiner-Maltz.
Average Listing Price & Selling Price
Average Price Per Square Foot By Size
5,000 – 10,000 square feet = $117 per square foot
10,000 – 25,000 square feet = $99 per square foot
25,000 – 50,000 square feet = $76 per square foot
50,000 + = $73 per square foot
The average sale price in all size ranges trended downward in 2010 as opposed to 2009 where the 5,000 – 10,000 square feet range had an increase. The few transactions during 2010 in the over 50,000 square feet range were due to business consolidations, and most, if not all, did not require bank financing. Because these deals were not subject to financing, the sellers felt confident of a successful close and were willing to sell at a discount. If the transaction was subject to financing, this would put the deal at risk of not closing because of concern the bank will reject the loan application. (In the sellers’ opinion, they sold 17% lower than 2010’s asking price, and 30% lower than 2009’s asking price).
One can see that as unemployment went up, industrial pricing went down, and inventory went up each year as indicated in this report. We still saw downward pressure on pricing and increased inventory, as well, as increased bank workout activity in 2010.
In addition to downward pressure on pricing, there is the increase in fixed costs, including real estate taxes and insurance. For example, as shown in the chart below, one can see the steady increase in real property taxes from 2001-2010 in Nassau and Suffolk counties. In Nassau County, real property taxes on industrial properties increased 79.6%, and in Suffolk County 65.6% increase over the same 2001-2010 time period.
With banks getting rewarded by the federal government with high returns on their reserves, why lend? When the small business owner needs a credit line to make payroll or buy raw material and his banker of 20 years rejects a loan, this sends a signal of doubt to the small business owner. Banks will lend only when the conditions are perfect for the lender. This is usually when the client doesn’t need the money and has all cash. Since 2009, this was the trend which continued into 2010 and is expected to continue in 2011.
Empire State Manufacturing Survey reported that 15 percent of firms reported some tightening in credit standards over the past three months. “When asked how credit availability had changed over the past year, 21 percent of respondents cited tighter credit standards, while 15 percent reported easier credit. When those firms reporting tighter credit over the past three months were asked to identify its effects on their behavior, respondents mentioned a number of effects, but reduced capital investment was cited a bit more often than the others, and a few respondents also mentioned delays in paying vendors and suppliers and workforce reductions. Firms reported fairly widespread increases in borrowing costs, on balance, over the past three months.”
The Small Business Administration has always been a safe place for small business owners to acquire a building loan to renovate for use and machinery with only 10% equity. In times when fixed costs are predictable and a friendly business climate exists, the small business owner will gladly pledge personally for a SBA loan. In these times of complete uncertainty of fixed costs (health insurance, carbon footprints, rising taxes), the signal he is getting for being a brave captain of industry is that of confusion.
The bank is saying, “Come, our doors are open for business” only to get rejected because he has a less than perfect balance sheet, but better ethics than corporate America executives. That is because of supply chain financing, “robbing Peter to pay Paul”. Small business owners have been using supply chain financing for a long time but never to this extent. The small business owner has a good business except no one is paying him on time. Now, they cannot purchase raw materials to produce more goods. So why hire more people? Why expand into a larger facility? So, they sit on their hands and do nothing because the politicians will not fix it correctly. They have been patiently waiting since the first bailout in 2008. (Investors are also on the side lines because the value of their real estate is proportional to the ability of the tenant to pay rent). This trend will continue unless “Geppetto,” the puppeteer, stops rewarding the banks for not lending.
NYS Department of Economic Development has many targeted loan programs for the benefit of the defense industry, manufacturers and woman-owned companies. Some of these programs could be a good alternative to bank credit lines or working capital. Also, The Regional Council is being formed for the bi-county Nassau/Suffolk area for review of projects the state wants to fund.
The Industrial Effectiveness Program (IEP) was temporarily suspended in 2009, and few, if any, IEP’s were awarded in 2010. This New York State grant helped manufacturing companies hire private consultants to assist small business to develop and implement projects that result in enhanced productivity and competitiveness in New York State. Since the sunset of the Regionally Significant Program (RSP) in June 2010, Governor Paterson replaced RSP with the Excelsior Jobs Program. This program has less financial benefits than the RSP; nonetheless, it has been awarded to a handful of select large companies in the state.
Statistically, no new job creation occurred in 2010 or any that would utilize industrial real estate. An increase in service sector jobs (such as health care, social assistance, and education) does not utilize industrial properties nor does it create a new economic base for the local economy. Anticipated higher oil/gas price will increase energy expenses along with real property taxes and insurance. As of this writing, oil is currently over $100 a barrel, up from $37 a barrel earlier this year, and there is talk about the price going higher throughout 2011. These factors do not help make the small business owner feel confident about expanding any time soon. In addition, banks will have to deliver on their promise to lend, but will they put their money at risk? (The underwriting criteria changes when the fixed costs go up). The few government programs that are left are of no or limited use to the small business owner.
Businesses have been waiting for the economy to turn since 2008. They have burned through their reserves, and when rejected by their bank for a working capital loan, they resorted to supply chain financing. When that dries up, and it will, more companies will try to sell their companies or close shop. This of course will increase the inventory of industrial space in 2011. On the flip side, the companies with strong cash balance sheets will be able to take advantage of the deep discounts in industrial real estate, consolidate their operations under one roof and become more efficient and emerge a stronger company as they pick up market share. These companies will be the ones to watch as the economy improves on Long Island one day.
Special Thanks to Maureen McGoldrick, MDM Appraisals, LLC for her contributions.