New Permit Rule For Warehouses Seen As ‘Total Killer’ For NYC Industrial Development

When the New York City Council passed a law last week requiring a special permit for new last-mile delivery centers, they did so touting their desire to limit pollution in neighborhoods like the South Bronx and Red Hook.

But the new policy, which has the support of Mayor Eric Adams, is likely to fundamentally change the industrial real estate market in the five boroughs, owners and developers told Bisnow.

“It is basically going to kill the development of logistics distribution centers the same way special permitting killed hotel development in New York City,” said Dov Hertz, CEO of developer DH Property Holdings.

Under the new rule, any new proposed last-mile facility in the five boroughs will now have to apply for a special permit from the City Planning Commission. With the City Council's tradition of member deference, that means a single lawmaker could decide whether a facility can be built or not.

Industry experts expect its effect will be to push rents up in existing facilities while stopping new developments and redevelopments of old, aging facilities that don’t meet today’s sustainability standards.

The special permit requirement appeared as Mayor Eric Adams pushed to get his signature City of Yes initiative passed by the City Council. City of Yes is aimed squarely at easing outdated zoning requirements in the city, including measures to make it easier for life sciences, food and beverage, retail and entertainment businesses to find real estate.

The lack of clarity on what it will take to secure the permit will put developers off trying to build new projects, said Ryan Nelson, managing principal at Turnbridge Equities, an investor and developer with more than 5.3M SF of last-mile industrial facilities in the Northeast.

“Putting a special permit process in place just throws a lot of opaqueness into that process,” he said.

Nelson also said he expects the special permit requirement for industrial facilities will have a similar effect to the 2021 law that required all new hotels in the city receive a special permit.

The zoning amendment required any new proposed hotel construction, or any hotel expansion of 20% or more, to obtain a special permit from the planning commission in order to move forward.

In the first year after that requirement went into effect, no new hotel permits were issued. The relative lack of hotel rooms, plus high demand from tourists, has led to existing NYC hotels reeling in record-breaking revenues. But the flipside is that even in 2024, no new hotels have received permits, according to the Hotel Association of New York City.

“It's a total killer for development,” Nelson said. “If it's truly a special permit and no one knows the rules, and it's a black box and we just need to go to negotiate, and it's a long process, we're not going to risk our capital and our time to go do that.”

The upside to the policy is that, for existing owners, they can command even higher rents than the already astronomical sums they command.

Demand for industrial space in the five boroughs is already tight. NYC had 158.9M SF of industrial space, with a 4.9% availability rate and a 4.8% vacancy rate during the first quarter of this year, according to a regional report from CBRE. 

The relative lack of availability means that asking rents for existing facilities run an average of $29.95 per SF, more than $10 above average asking rents in Northern New Jersey. Among Class-A properties, the five boroughs’ average asking rents were $36.58 per SF, compared to $24.22 per SF in Northern New Jersey. 

Meanwhile, demand for space in the five boroughs is on the rise. Around 1.1M SF of leases were signed in NYC during the first quarter, 29% higher than the average seen over the last two years, according to CBRE.

At CBRE Investment Management’s 640 Columbia St., a 400K SF industrial property that it bought in 2022 from Hertz and Goldman Sachs Asset Management for $330M, evidence of the city's need for distribution space is on display. 

The facility is fully leased to Amazon, which uses the warehouse to deliver packages within Brooklyn, and somewhere between 85,000 and 100,000 packages leave 640 Columbia St. every day, CBRE Investment Management Chief Investment Officer for Americas Direct Real Estate Strategies Julie Ingersoll said.

There are 4.4M SF of warehouses under construction, most of which are expected to deliver by the end of this year. That could lead to a short-term oversupply, CBRE researchers wrote, but it is likely to be short-lived.

“People will be less willing to speculatively develop projects if they're not sure that they can get approved,” said Graham Stephens, a principal at Innovo Property Group.

Innovo isn’t necessarily going to stop looking for new industrial developments in NYC because of the permit requirement, Stephens said, but it will look at the borough, neighborhood, project, sponsor and council member to evaluate options on a case-by-case basis going forward. 

CBRE Investment Management is also still interested in acquiring and developing industrial and last-mile space in New York City in spite of new regulations, Ingersoll said.

“What I'm looking to do is either buy the modern, fit-for-purpose because there's not a lot of it in the boroughs, or buy a collection of maybe older vintage product, scrape them and rebuild the modern product, because it's just more efficient for our tenants. It’s more valuable,” she said.

Most of the existing industrial properties in NYC are decades old, developers said, meaning that there are limited options for tenants seeking modern buildings without confronting the special permit requirement.

“It doesn't take someone with a degree to understand that these properties are old,” Innovo’s Stephens said. “I mean, a 20-year-old property — that was before smartphones existed.”

Their ages mean they don’t meet today’s expectations for sustainability, Nelson said, and might be subject to penalties from New York's local emissions limit.

In 2021, Turnbridge Equities acquired 807 Bank St., a development site in Brooklyn’s Canarsie neighborhood. The developer removed 8,000 tons of polluted soil to create a 172K SF, single-story, Class-A warehouse with rooftop parking.

The 807 Bank St. development, along with Turnbridge's 1.3M SF multistory warehouse in the South Bronx at 980 E. 149 St., both have much higher LEED ratings than older industrial sites would be able to attain, he said.

“What the special permit requirement does, in essence, is lock in the supply of these old, energy-inefficient buildings forever,” Nelson said.

In the absence of clear guidelines about how to obtain a special permit, Turnbridge will likely look to develop in locations like Texas, North Carolina and Nashville instead, he added.

And as developers turn to other states, New Yorkers will lose out, Hertz said. Fewer developments mean fewer jobs and potentially slower delivery times for packages.

“Those who have been able to develop before this law goes into effect will have an asset that is more valuable than it was earlier,” Hertz said. “But for New York City as a whole, I don't think it's a good thing.”