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Commercial Real Estate Investors Roll into the Bronx

Industrial and Affordable Housing Investors Aggressively Pursue Rehabs and New Development
February 14, 2018
At the intersection of Bruckner Boulevard and the Whitestone Expressway, sedans and semis whizz past the site of a vacant, multi-level movie theater that is about to become one of New York City’s largest fulfillment centers.

Millennials (and other big e-shoppers) should rejoice.

Square Mile Capital and Innovo Property Group are partnering on the repositioning of 2505 Bruckner Blvd., which is being brought to market by JLL. The site has been envisioned as an 850,000-square-foot, multi-level distribution center incorporating a ramp that will permit 53-foot trailers to load from the second floor - thus doubling shipping capability. Extell sold the property to Innovo for $75 million in 2017, according to public records.

"It is really a building on top of a building, with a 30-minute drive to Manhattan, Westchester, Queens, Brooklyn and Long Island City and a 60-minute drive to Southern Connecticut and the rest of Long Island and New Jersey," says Rob Kossar, head of JLL’s northeast industrial region.

Kossar says the facility is sure to be a high-water mark for industrial rents in the region. Of the prospects Kossar says his team has spoken to, two-thirds would like it exclusively for their own use. Although KSS Architects is designing it flexibility, with the option of being multi-tenant, "There is a high probability it will be a single tenant," he says.

2505 Bruckner Blvd. is just one example illuminating the next steps in New York City’s market cycle - commercial real estate investors are converging upon the Bronx.

As Manhattan real estate players contend with whether pricing appreciation has tapped out, market experts studying asset performance in Manhattan versus the outer boroughs discovered the outer boroughs fostered more activity, enriched investors with better returns and demonstrated a higher probability of pricing appreciation compared to Manhattan.

For instance, the average price per square foot for commercial properties inched up 7% year-over-year in the outer boroughs in 2017, but fell 4% year-over-year in Manhattan, according to 2018 capital markets outlook released by Cushman & Wakefield. And while Manhattan’s dollar volume for commercial investment in 2017 fell 45% from its peak in 2015, according to Cushman & Wakefield data, the outer borough’s figure peaked later, in 2016, and in 2017 was only 27% less.

Over the past year, investor capital has eked out of Manhattan into areas surrounding Hunters Point in Long Island City, Queens; Bloomfield, Staten Island; and Red Hook, Brooklyn. Now, it is time for the Bronx to share the spotlight.

"New capital is coming in, recognizing job and population growth. Factors in other markets, like Brooklyn and Long Island City, are also fueling it. The Bronx is a natural progression given its transit system, roads and access to NYC," explains Robert Lella, managing director at Colliers International focusing on Westchester, New York and the Bronx.

Investment companies and developers across the board recognize positive market fundamentals in the Bronx, Lella says.

The Bronx still feels like a value play / less expensive market for investors compared to other markets, notes Joshua Rubin, director in the capital markets group of Cushman & Wakefield.

Fostering Affordable Housing

Meanwhile, public spending has jumped in to sustain the borough long term. According to a year-end 2017 Construction Outlook for the Bronx released by the NYBC, construction starts in the Bronx have surpassed $2 billion over the past three years, with public spending the bucket of majority spending. LIHTC investors have taken note.

Jerome Avenue, for instance, was approved for rezoning by Bronx Community Board 4 in October 2017. The Department of City Planning’s rezoning plan increases density to permit more mixed-use development and create affordable housing through both the City’s mandatory inclusionary housing program and tax incentives.

"The administration’s desire for affordable housing has motivated them to rezone major swaths of manufacturing centers, and the affordable housing schemes have allowed these developers to be extremely competitive in purchasing these sites," notes Jonathan Squires, who also focuses on the Bronx as a director with the capital markets group for Cushman & Wakefield.

"What I’m seeing is developers looking to enter the multifamily arena. There is still a big push for affordable housing - lots of demand for development sites," says Jason Gold, director in the investment sales division for the Bronx submarket at Ariel Property Advisors.

The New York Building Congress (NYBC) said that 2017 would be the third consecutive year that construction starts top $2 billion. Residential accounted for 53% of the value, public works accounted for 20%, institutions contributed 15% of the pie and commercial properties amounted to 11%.

Commercial spending was healthy, but not as active as affordable housing and public spending, according to Andrew Hollweck, NYBC senior vice president. He says he expects all three sectors to remain strong through 2018, however.

"The Bronx is a real hub for affordable housing, a model for how to do things for the rest of the City," he says, pointing to unique affordable housing models rising in the Bronx, including 100% affordable.

Fulfillment from the Bronx

Affordable housing aside, investors’ most in-demand asset class appears to be industrial. That translates to fulfillment warehouses. South Bronx neighborhoods, like Mott Haven for instance, are acutely positioned for such properties to facilitate quick delivery into Tri-State markets.

Developers in Mott Haven are looking for larger sites, 100,000-plus square feet, notes Gold, who sold four such sites in the South Bronx in 2017.

"Due to the proximity of the South Bronx to Manhattan and the major thoroughfares running through it, the demand for industrial property is extremely high and demand has also diversified. One- and two-story warehouses, as well as industrial land ideal for last-mile distribution are also attracting industrial end users such as manufacturers and storage companies arriving from other, now more expensive, boroughs," Squires says.

"Now investors and tenants are looking at industrial properties in the Bronx through transportation access - it is all about which areas have access to the Interstate supporting truck traffic, since you are looking to penetrate the most population," says Kossar. "We predict those areas are going to become vital industrial markets in the Bronx."

Industrial investment into the Bronx totaled about $430.4 million, up 9% year-over-year, according to Ariel Property Advisors. About 161 industrial properties sold, or 7% more than last year.

Investors are putting dollars into Bronx industrial sites right now, intones Lella.

"They are retrofitting some properties just by improving the general access, renovating and incorporating more efficient space-planning on a building-by-building basis," he explains.

Colliers is seeing the retrofitting trend across all sizes, from 10,000 to 250,000 square feet and more, in some cases. Although a lot of investors are looking to build, an equal number are looking to refurbish and renovate existing sites, adds Gold.

The retrofitting and renovation has been, "Extremely creative, with more efficient space and use of sites. These multi-story warehouse distribution concepts are fueled by demand for this space," says Lella.

However, some industrial has been converted to mixed-use, which lowered has lowered supply in the borough.

One of the reasons that demand is outpacing supply for Bronx industrial properties is the quality of existing stock, Kossar notes. There is a dearth of modern facilities.

"Fortune 500 companies and e-commerce companies are looking at transportation efficiency in logistics, which means they need new product with higher ceilings, more loading doors, parking. The old stock does not have these features," he adds.

Kossar says he is watching the Prologis Bronx site at 1055 Bronx River Avenue, adding that, "Who leases that facility and for what use will be a good barometer as to how modern sites are received by the user community and thus developed in borough and throughout the City."

Specialty Users Also on the Hunt

Institutions - including museums, charter schools and hospitals - are also looking to the Bronx for growth.

The Hip Hop museum and Rap Hall of Fame are looking for space in the South Bronx, according to Cushman & Wakefield’s Rubin, while there has been expansion in the medical office sector stemming from St. Barnabus’ joint venture with L+M Development Partners.

Organizations and office-occupiers from many industries - healthcare, education or the film industry, like Silver Cup Studios and York Studios, among others - are helping to drive improving Bronx fundamentals, notes Lella.

Space is also being sought to build hospitals and charter schools, adds Gold, and for charter schools, investors are seeking sites in North Point and the South Bronx.

"Investors are still anxious to jump into the Bronx," Gold says. "Trends in this borough will continue to appreciate."

Diana Bell, New York City Market Reporter  CoStar Group   
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