What Does Walmart's Acquisition of Parcel Portend for NYC’s Already Competitive Industrial Market?
Prices Per Square Foot in the 50,000- to 100,000-SF Warehouse Sector May Increase, Sources Say
In early October, Walmart announced it had acquired Parcel, a New York City-based, same-day, last-mile delivery company. The big-box behemoth cited online shoppers' growing demands for speed, flexibility and reliability of delivery as its impetus for the deal. But the strategy appears to be utilizing Parcel's delivery infrastructure to better service Walmart's online shoppers in New York City - a top market for purchasing via its Jet.com and Walmart.com marketplaces, according to Nate Faust, senior vice president of the U.S. e-commerce supply chain at Walmart.
Faust says he sees more upside for Walmart's same-day deliveries through this acquisition. Citing Jet's testing of free same-day delivery to New York City customers, he says Walmart plans, "to leverage Parcel for last-mile delivery to customers in New York City - including same-day delivery - for both general merchandise as well as fresh and frozen groceries from Walmart and Jet."
Following its acquisition of Jet.com, Walmart has been anecdotally identified as the strongest Amazon competitor. However, more and more retailers, from Macy's to Costco, appear to be trying to catch Amazon, and to do so, they are realizing they need help, says Neil Stern, senior partner at McMillan Doolittle, a national retail analyst firm.
"It's clear that the next battle in the online retail world will be based on speed of delivery. We have rapidly moved from customer expectations of three- to five-day delivery to two-day delivery becoming the norm. Now, Amazon is pushing the boundary to focus on one-day delivery and even same-day (within two hours) delivery with programs like Amazon Prime Now," Stern says. "And, it's not just Amazon. The proliferation of third-party services like Instacart is making this expectation increasingly prevalent, particularly in large metro markets. The costs and logistics of offering this service can be a huge challenge for retailers. Walmart's acquisition of Parcel and Ikea's acquisition of Task Rabbit are two small examples of retailers recognizing that they are going to need help in battling Amazon, and look for other companies who can help them more rapidly innovate."
The implications of Walmart's Parcel acquisition, and of implementing its strategy just as others ramp-up against Amazon, are considerable for the New York City industrial market, which is already contending with robust demand for infill and warehouse space and rent costs coming in much above the national average.
Asking rents per square foot for New York light industrial assets this year stand at $14.20, according to CoStar data, and is expected to rise to $15.21 by 2022. Nationally, meanwhile, the asset class' asking rent per square foot is $8.43, expected to increase to $9.23 by 2022.
"Walmart paid less than $10 million for the company - it was an investment in talent and in the distribution network serving the five boroughs and in growth capacity. I think it is going to create more demand for 50,000- to 100,000-square-foot space servicing NYC," says Jakub Nowak, associate broker specializing in industrial and development at Marcus & Millichap. "The New York City industrial market is coming full swing. Amazon already has many warehouses in the boroughs. As other retailers seek last-mile distribution / fulfillment warehouse space, we will see an increase in price per square foot."
Those desiring to follow the Amazon model would probably lease space, notes Nowak, considering the tax advantages that leasing provides. "Amazon sits on a big pile of cash, but still leases," he explains.
Nowak expects the asset class to demonstrate continued strength through the next six months, in light of the upward pressure on industrial rents in the New York City area, adding that property values are expected to remain steady or increase in the near term, if interest rates don't shoot up too quickly.
At the same time that investors, brokers and developers are looking for applicable space, they are finding it is in short supply.
"It is a supply-constrained market for industrial, and costs for space are already high," says Nowak, adding that because of redevelopment and rezoning, industrial real estate in NYC is a scarce commodity, with a limited number of strategic industrial spaces sized from 50,000 to 100,000 square feet.
In the battle to compete for convenience, the focus for e-commerce fulfillment is on distribution centers located closer-in to New York City's e-shoppers. That means the Outer Boroughs are increasingly being eyed.
"Infill industrial demand to service New York City is off the charts. In the four boroughs, virtually every developer is looking to expand its portfolio into the boroughs. There is equal or greater demand for property in close proximity to the boroughs - Northern New Jersey and Long Island," said Stan Danzig, vice chairman of logistics and industrial at Cushman & Wakefield.
Year-to-date investment sales volume for industrial assets in the Outer Boroughs has jumped year-over-year, and sales were for larger assets, according to an October 2017 CoStar Market Analytics report on the New York Outer Boroughs Industrial Market. In the first half of 2017, 30 industrial sales transactions totaling about $537.2 million closed, compared to $454.8 million across 42 transactions in the first half of 2016. CAP rates in the first half of 2017 average 4.59%, compared to an average 3.3% CAP in the first six months of 2016. Nationally, year-to-date industrial-asset sales volume is up about $5 billion compared to the first half of 2016, according to CoStar's National Industrial Report.
"Everyone is looking to get a footprint for distribution," says Danzig. He points out the historical trend was to build or look for space 70 miles south of New York; now there is tremendous demand up north. Industrial developers are building on land that was too expensive to build on before, and demand fundamentals are supporting prolific development even with high rent, Danzig says, adding that tight supply means occupiers are even looking at outfitting existing buildings.
For instance, Prologis in January purchased ABC Carpet's former 205,409-square-foot warehouse at 1055 Bronx River Ave. in the Bronx for $38 million, or $185 per square foot, according to CoStar data. The San Francisco-based REIT re-fitted the property and expects it to be fully leased by the end of this year or the first quarter of 2018, according to Danzing, who adds that ABC Carpet has moved to Industry City in Brooklyn.
Amazon recently announced it will occupy the entirety of an 855,000-square-foot warehouse that Matrix Development Group is building as part of its 200-acre, four-building Global Logistics Park development in Bloomfield, Staten Island. The first building, at 975,000 square feet, reportedly already has a tenant for 600,000 square feet, says Danzig.
Staten Island seems to be on the radar in a big way, with many following suit after Amazon's million-square-foot deal there, Nowak says, adding that Jamaica, Queens, East New York and the Bronx are markets showing some availability for large floorplate space.