Marcus & Millichap

Brooklyn Industrial Investment Forecast

Brooklyn Metro Area, 2018 Outlook

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Value-Add Buyers Reimagining Industrial Assets; Owner-Users Raise Bids for Preferred Spaces

Elevated costs pressuring overall industrial market amid redevelopment surge along the East River. Fueled by surging demand for apartments, retail and office space at rates below similar offerings in Manhattan, Brooklyn industrial properties are in high demand among developers and a core contingency of owner-users. As rental rates have jumped significantly throughout the current business cycle, industrial tenants have begun to be displaced by elevated rents and higher-value redevelopment options. New industrial projects will total less than 65,000 square feet for the second straight year, highlighting the prohibitive costs of substantial industrial development as costs move higher overall. Despite the lack of meaningful construction, vacancy has trended higher for roughly 18 months as net absorption turned decisively negative. Zoning changes in redeveloping neighborhoods such as Greenpoint and Williamsburg will allow many of the vacated assets to be repositioned into higher-density uses such as apartments or retail.

Redevelopment uses steering costs upward; owner-users bidding aggressively to procure necessary spaces. Following the rezoning of several neighborhoods along the East River in the early 2000s, the Brooklyn industrial market has transformed substantially, with owner-users being displaced by larger apartment, retail and office projects. Due to this phenomenon, assets in the metro have begun to move toward pricing based on end-use development purposes, particularly as multiple neighborhoods throughout the borough are zoned for greater density. Pricing can reach the mid-$450 per square foot range, with cap rates averaging in the mid-5 percent area. Owner-users remain active in the market yet have been forced to raise bids and look at more outlying locations to procure needed spaces. The shutdown of the L Train remains a major consideration for investors, and it will impact short- to midterm performance trends.

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