In December, Turnbridge Equities paid $29M for 303 Louisiana Ave. in Brooklyn, with plans to demolish the existing building and build a 90K SF warehouse.
Today, Managing Principal Ryan Nelson said it is unlikely that the company would do the same.
“We're doing that because we can get it done in time before all this legislation,” Nelson said. “But to buy a piece of land today, it’s too much risk.”
Turnbridge Equities' Bronx Logistics Center under construction in October 2022.
When City of Yes for Economic Opportunity passed in June, it included a provision that requires distribution centers to go through a special permitting process that would give local politicians power to block a project. The legislation, made public in May, was immediately dubbed a “total killer” for the sector.
The rule is set to take effect in the coming months, but it has already chilled the market.
“We can't get stuck holding a piece of land that we would then have to go through ... a two-to-three-year process,” Nelson said. “No one's doing it.”
No new industrial developments broke ground in the fourth quarter, according to a report by CBRE. There is still 3.7M SF of new supply under construction across the city, but investors are skeptical of what, if anything, will get built in the near future.
Former First Deputy Mayor Maria Torres-Springer agreed to the new regulations as part of negotiations to get the citywide rezoning passed. A 30-day scoping notice for the permitting process is to be issued by the end of March, according to her letter to the city council. A draft of recommendations for other policies should be submitted to the council by July 2025, with a final version provided by the end of the year.
“The biggest issue that would scare off developers and scare off capital is the uncertainty of making it a special permit process,” AEBOV Industrial Real Estate Brokerage founder Daniel Tropp said. “Anytime you take something that could be as of right and you're saying now it's up in the air, that's going to spook the capital, understandably.”
The lack of construction follows a period of heavy investment, which has resulted in a near-term oversupply of logistics space. In Q4, New York City had a 5.5% vacancy rate, although rents are up 12.4% year-over-year, according to the CBRE report. Demand has also fallen, with the 400K SF of leases signed in Q4 37% below the two-year average.
In general, land zoned for manufacturing use has dwindled as the city has shifted to service other needs, predominantly housing. Rezonings between 2002 and 2015, primarily under former Mayor Michael Bloomberg, reduced the total percentage of industrial land in the five boroughs from 21% to 14%, City Limits reported in 2018.
Then, under former Mayor Bill de Blasio, several more chunks of the city were rezoned from their historic manufacturing use, including the Jerome Avenue Neighborhood, Inwood, the Bay Street Corridor and Gowanus.
In addition to changes under City of Yes, rezonings pioneered by Mayor Eric Adams are also shrinking industrial zones. That includes the Bronx Metro-North Plan, which allows residential uses in sections of Parkchester/Van Nest that previously could only be used for commercial and manufacturing.
Those reductions, as well as local resistance to warehouses and the truck traffic they bring, has already caused sales of land ripe for development to plummet.
“I could probably count on one hand the number of development sites that have traded [in the past two years],” said Tropp, whose brokerage tracks manufacturing site sales.
Instead of dealing with New York City’s unfriendly environment, industrial developers have decided to look elsewhere, CorePoint Real Estate founder and Managing Principal Marc Smouha said. Last year, nearly half of the deals he did were with New York-based firms buying outside of the state.
“We're doing the majority of our deals out in Florida now, and we're based in New York, so that should say a lot,” Smouha said. “A lot of these groups are just looking to divest or lessen their footprint in New York and continue to increase deploying capital throughout the Southeast.”
That includes the sale of a 61K SF portfolio in Tampa and Sarasota, Florida, to Ultimate Realty. Despite the firm’s long history of investment in New York City, including residential conversions, it shifted its focus to acquiring industrial buildings in other parts of the country in 2020, according to its website.
Ultimate’s list of target markets includes Miami, Nashville, the Washington, D.C., and Baltimore area, and Raleigh, North Carolina. The firm didn't respond to Bisnow’s request for comment.
Courtesy of Turnbridge Equities/Arqui300
A rendering of Turnbridge Equities' warehouse development at 303 Louisiana Ave.
As the number of new buildings in New York City begins to drop, that makes existing buildings more valuable — and could reduce incentives among their owners to implement improvements that reduce emissions.
Nelson said that much of the existing inventory in the five boroughs is aging, with many properties built in the 1950s. Still, their valuations will likely rise.
“You hear all the time from tenants — we're talking Class-C is being nice to these buildings — they're run down, owners don't put money into them, they're definitely energy-inefficient, they're polluted, but there's no incentive to clean them up,” Nelson said. “Rents will increase dramatically because there's just no space.”
A lack of inventory near the city also means distribution centers will have to be farther from customers while companies still try to fulfill promises of same-day or next-day delivery. That distance could limit the use of electric vehicles, Nelson said. Amazon’s electric delivery van fleet can drive up to 150 miles.
“There's going to be a point in time where people are going to say, ‘Why can't I get the things I ordered sooner?’ or, ‘Why is air pollution worse?’” Nelson said. “It's because you're creating all these problems [through] legislation that doesn't really solve the problem.”
Instead of creating a special permitting process, under which it is unclear what will or won’t be approved, legislators should outline standards for new last-mile delivery centers, developers and brokers said. That could include LEED certifications, electric vehicle mandates or requirements to employ workers from the neighborhood.
“Groups can underwrite and adapt and move ahead,” Tropp said. “Anytime you say each one is going to be independently reviewed, that's when people are just going to flee altogether and look for a more certain market to play in.”
CORRECTION, FEB. 28, 2:25 P.M. ET: A previous version of this story misstated when the special permit rule for last-mile warehouses was passed by the New York City Council. This story has been updated.
