Queens Offers Industrial-Strength Solutions to Last-Mile Challenges, And Investors are Taking Note
Largely due to the rise in online shopping – e-commerce sales worldwide are projected to nearly double from 2016 to 2020, according to Statista – industrial is becoming the new retail, and in the realm of industrial assets, Queens is the new Staten Island, Nassau County, or Northern New Jersey. Today, Queens is competing with these well-known distribution hubs for e-commerce fulfillment, and, accordingly, is attracting significant attention from investors.
Why is Queens becoming the first choice for the Last Mile? One reason is its proximity to urban customers. Today’s online customers expect prompt and inexpensive delivery of their online orders, with “prompt” meaning as little as one to two hours, as with Amazon Prime Now. Given these time constraints, retailers and distributors are gravitating toward warehouse space within cities themselves.
For rapid deliveries within New York City, the Northern New Jersey distribution centers – once the default go-to sites – don’t quite fit the bill. As New York Post writer Lois Weiss points out in a recent column, leasing warehouse space in New Jersey is cheaper than in the boroughs, but there is a downside to the former: “Trucking packages into Midtown is both time-consuming and pricey.”
Delivery from Queens, in contrast, is quick and cost-effective, thanks to the borough’s transportation amenities, which include major airports and expressways, and densely-populated neighborhoods. Together, these attributes provide a distinct competitive advantage for last-mile fulfillment.
Significance for Investors
The appeal of Queens for e-commerce providers is clear. But what is the appeal for investors? High demand and low supply. A shortage of industrial space stems from the residential and office conversions that have characterized Queens development in recent years. As a consequence, industrial space is at a premium, and rents are rising rapidly.
The Maspeth neighborhood, where FedEx Ground recently established a distribution center and UPS leased a 475,000 square foot facility, is a case in point. David Schechtman, Meridian Senior Executive Managing Director, is marketing for sale a 151,000 square foot industrial building at 58-30 Grand Avenue in the area. According to Schechtman, rents that were $9 – $12 per foot in the property a few years ago are closer to $20 per foot today.
The exponential growth in e-commerce has created interdependencies between the retail and industrial asset classes. “Retailers typically need less storefront space these days, but if they offer any kind of delivery arrangements, they need warehouse space,” notes Schechtman. Those retailers who lack nearby warehouses can’t meet current standards of last-mile service, which McKinsey & Company identifies as a “key differentiator for e-commerce providers.”
Last-mile service may also become a key differentiator for investors. In the coming years, owners of warehouses in Queens and other urban centers are likely to enjoy returns (of a very different type from those associated with delivery).
Why You Should Pay Attention to Properties in Tax Classes 2A and 2B
Consider this scenario: you’re a multifamily investor and encounter the perfect value-add, 24-unit, walk-up building in Brooklyn. That particular neighborhood shows no signs of slowing down, and rents in the property are low relative to the market. You purchase the building and begin repositioning, anticipating the ability to realize substantial turnover and rental growth.
Once completed, your building undergoes a tax reassessment. Suddenly, you’re hit with a considerable increase in real estate taxes, and your hard-earned increase in rental income is heavily diluted by the increase in taxes.
Fortunately, there are options in New York City that allow investors to mitigate this tax burden. Buildings that fall under the city’s class 2A and 2B categories – totaling 10 units or fewer – have capped tax increases.
State law limits how much the assessed value of class 2A and 2B buildings in New York City can rise each year – no more than 8% from the year prior, or 30% over five years. The assessed value of these 2A / 2B properties is calculated as either 45% of your building’s market value or the capped assessment amount, whichever is lower. Because of these caps, most 2A / 2B properties will fall well below the 45% threshold, creating an arbitrage between what the market value of the property is and what its taxes are.
Another advantage: These caps remain if the building is converted to condominiums. The tax class then gets passed along to the purchaser of each unit, which provides a very real incentive for homebuyers and arguably allows the property investor to achieve a better individual sales price in a condominium exit.
Many investors have traditionally overlooked these 2A and 2B properties, however, focusing instead on acquisitions with more economies of scale. But we’re in a tricky market right now – it’s proven very difficult to find value in the same places we did three or four years ago. The political climate for landlords has created an uncertain environment for turning over units and adding value, and strong demand for larger multifamily buildings have kept returns low despite an uptick in interest rates.
But consider this economic argument: if you increase the market value of that same 24-unit multifamily building versus three eight-unit class 2B buildings for the same amount, it will take a disproportionally longer time for the eight-unit properties to reach the same assessed value as the single building. Assuming for this example that all income and other expenses are identical, the 2B investor will generate a higher net operating income, purely because of the restrictive cap on yearly tax increases.
In a market like New York City, real property taxes make up a remarkable portion of city revenue ($25.8 billion in the 2018 fiscal year, or 45% of revenue, which is expected to jump to an estimated $27.7 billion in the fiscal year of 2019). Given these numbers, class 2A and 2B properties may be just what investors need to hedge against an increasingly tax-burdened marketplace.
Recently, my colleague Abie Kassin and I brokered the $100 million-plus portfolio sale of 28 buildings throughout Brooklyn and Manhattan. Many of those buildings – comprising 210 residential units and 12 commercial units – fall into the class 2A and 2B category. The portfolio, which is being purchased by a local real estate private equity and asset management firm, is expected to close in August.
Richard Velotta, managing director at Meridian Investment Sales can be reached at (212) 468-5924 or email@example.com.