Real Estate

NY's Class-A Industrial Space Faces 4.8% Vacancy, Amazon Cuts Demand

Despite a 4.8% vacancy rate, New York's industrial sector faces a Class-A oversupply with only 35% of new spaces pre-leased.

By Doug Elli

4/13, 07:34 EDT

Key Takeaway

  • New York faces an oversupply of Class-A industrial space, with a 4.8% vacancy rate and 4.4 million square feet set for completion this year.
  • Amazon's reduction in demand contributes to the surplus, subleasing over 14 million square feet nationwide.
  • Only 35% of new development space is pre-leased, shifting leverage to tenants in a market previously dominated by large e-commerce and logistics firms.

Navigating the Industrial Real Estate Waters

In the bustling city known for its sky-high rents and compact spaces, a surprising trend has emerged within the industrial real estate sector. Despite a healthy industrial vacancy rate of 4.8 percent, mirroring the average of the past few years, some Class A properties are struggling to find tenants. This phenomenon, as detailed in a recent industrial leasing report by CBRE, is not due to a lack of quality or a flight from it but rather a strategic decision by landlords in a market that has seen its fair share of fluctuations.

The Industrial Real Estate Paradox

The first quarter of 2024 witnessed a robust leasing activity in the industrial sector, with 1.1 million square feet of leasing velocity, significantly above the three-year rolling average. However, this did not translate into a decrease in the vacancy rate, which remained flat. This scenario is indicative of a broader trend where the demand for industrial spaces, particularly Class A warehouses driven by e-commerce and third-party logistics (3PL) firms, has cooled off. This cooling is evidenced by Amazon's decision to sublease over 14 million square feet of warehouse space nationwide, signaling a potential oversupply in Class-A industrial spaces in New York.

The Oversupply Challenge

The heart of the issue lies in the speculative development of Class-A industrial spaces, with more than 4.4 million square feet set for completion this year, yet only 35 percent pre-leased. This oversupply has shifted the leverage to tenants, allowing them to negotiate from a position of strength. Landlords, once able to pick and choose their tenants, now face the reality of a market that is not as tenant-hungry as before. This shift is particularly challenging for landlords of large warehouses, who find it impractical to lease out spaces in small increments due to logistical and infrastructural challenges.

A Glimpse into the Future

Despite these challenges, there are silver linings. Some new warehouses, designed for specific purposes like film studios, are finding it easier to attract tenants. This suggests that adaptability and thoughtful construction might be key in navigating the current industrial real estate market. Moreover, the situation at CA Ventures, as reported in multiple sources, highlights the broader market dynamics at play. The company's legal and financial woes, compounded by a market downturn and rising interest rates, underscore the volatility and complexity of the real estate development sector.

A Balanced Perspective

The current state of the industrial real estate market in New York, characterized by an oversupply of Class-A spaces and a shift in tenant leverage, reflects broader economic trends and market dynamics. While challenges abound, particularly for speculative developments, opportunities exist for those willing to adapt and innovate. The case of CA Ventures serves as a cautionary tale, emphasizing the need for strategic foresight, prudent financial management, and adaptability in the face of market uncertainties.

Street Views

  • Brad Cohen, CBRE (Neutral on New York's Class-A industrial space):

    "A lot of the speculative ground-up development is sitting vacant. If you have too much vacancy, which is the case with a lot of new development, and you’re seeking single users, the leverage is really in the tenants favor."