By Neil A. Dolgin
There has been considerable discussion about how commercial real estate has been transformed in the wake of the Covid-19 pandemic, along with impacts on tenants and landlords. Both have faced challenges that I have covered in my prior post, Factors Shaping the Future of Commercial Real Estate in NYC.
Emerging Trends in Real Estate, a trends and forecast report published annually by PwC and the Urban Land Institute, suggests that the industry survived far better than expected at the outset of the pandemic in March 2020. “By forcing people to work and live differently, the pandemic revealed hitherto unknown reservoirs of flexibility in how the property sectors could function — and changed expectations of how people will use properties in the future,” the report said.
The retail and office segments of the marketplace suffered the most and still have yet to recover. But overall, the crisis had a “relatively muted” impact overall on commercial real estate fundamentals, according to the report.
“With low debt levels and relatively stable cash flows, borrowers continued to pay their mortgages, and distressed sales were few — to the shock and disappointment of many opportunistic investors looking for a deal,” the report said.
The industrial building segment has shown remarkable resilience throughout the pandemic, so much so that the clients we serve in logistics, manufactung, distribution, and services who are looking for space, are facing challenges in finding suitable buildings in New York City’s outerboroughs. There are several reasons.
Scarcity – With the economy recovering, buildings are in great demand throughout the outerboroughs and most are currently occupied, thus choices are increasingly limited. Our own buildings have recently bounced back to over 95% occupancy. It has also not helped that many industrial areas have been rezoned and are being rezoned from industrial to residential and mixed use. Former industrial buildings are increasingly being displaced by high-rise residential housing and trendy neighborhoods.
Safety – Neighborhood safety – is the location a safe place for employees and parked cars — is an issue that is being raised increasingly by companies. Higher crime rates in an industrial neighborhood can dramatically reduce a building’s appeal. Rising crime in a few areas of the City is a concern and it’s our hope that the new administration of Mayor-Elect Eric Adams will make neighborhood safety a top priority.
Age – Our founder and my grandfather, Kalmon Dolgin, established our company in Brooklyn in 1904. Industrial buildings that were built in the early 1900s as New York City began to industrialize are in need of drastic renovations in order to accommodate the needs of today’s manufacturing, logistics and last-mile businesses. These business have specific requirements for ceiling heights, electrical capacity, HVAC, loading docks, highway access, and surrounding streets that can accommodate today’s long haulers.
Pricing – Some companies that are holding out for improved rental deals are being disappointed by landlords who are unwilling to negotiate downward on their asking prices. Throughout the pandemic, many tenants sought rent relief and lease modifications from landlords who were generally cooperative. It was this unique collaboration that helped many businesses survive.
Amy’s Bread, the nationally renowned bakery and bread retailer whose KDA-owned headquarters are located in Long Island City, attributes their survival to an adjustment in rent we gave them during the height of the pandemic. Founder and president Amy Scherber said, “We have been working with Kalmon Dolgin since 2011 and they were one of the ways that we really survived after demand plunged and sales were 30% of what they had been the year before. Pricing issues are causing some companies to relocate to locations in New Jersey, Pennsylvania, Westchester or Long Island, where rentals are more affordable. On the other hand, the challenges and costs of navigating rush-hour traffic to do business in the City is generally why companies will make do with rents in order to capitalize on the opportunities in the New York City marketplace.
Landlords face similar challenges:
Pricing – During Covid-19, the industrial sector was seen as critical infrastructure because many of the businesses that kept New York City alive during Covid-19 operated from New York City’s outerboroughs. While the industrial sector has been resilient, landlords have taken a major financial hit. It’s not surprising that rent prices per SF are the highest we’ve seen, but tenants are generally stepping up. During the pandemic, many landlords had trouble managing their operating expenses (OPEX) because of rent reductions, rent deferrals and rent abatements that helped tenants to stay in their premises. Today there are still squatters who are failing to pay their rent obligations and continue to cite the pandemic. The biggest challenge for landlords is recovering financially while meeting their building’s OPEX which are rising dramatically due to inflation.
Remarking on New York City’s famously high rents and operating costs, Tim Wu wrote in the New York Times, “The city and state need to act, imposing a broad set of remedies to lower commercial rents. If they don’t, the city faces the prospect of a lingeringly weak economy hamstrung by rents that are, as the saying goes, too damn high.”
The city has also always been difficult to deal with in terms of building inspections, new local laws and the costs required to stay in compliance. We just paid a large penalty on a building for violations that were cleared up years ago, and the city is denying all of it. We believe that Mayor-Elect Adams and the New York City Council should consider the financial challenges and costs of red tape in the bureaucracy that building owners and tenants face every day in recovering from the pandemic.
“Significant vacancy levels and other factors related to the pandemic have had unintended consequences for operating expense (OpEx) calculations and reconciliations,” according to BOMA International. As operating expenses rise, rents generally follow. If building owners end up operating in negative financial territory as far as costs go, and rental prices no longer cover OPEX, then landlords will eventually have to sell their buildings. If this continues, we could see a slew of buildings coming available in the next five to seven years. These industrial neighborhoods could also be rezoned for residential use that will result in a further decline of the City’s industrial and manufacturing sectors as companies migrate to states that are more affordable.
Neil A. Dolgin is co-president of Kalmon Dolgin Affiliates. Founded in 1904, Kalmon Dolgin Affiliates (KDA) has grown into one of the New York metropolitan region’s leading commercial and industrial real estate firms. Kalmon Dolgin Affiliates specialize in all aspects of real estate services for developing, managing, selling, leasing and marketing commercial and industrial property. KDA’s highly-trained professional brokers offer clients a practical, street-wise approach to commercial and industrial real estate brokerage, leasing and sales, supported by the latest in real estate marketing, management and research technology.