CompStat: Port Activity Surges, Life Science Market Oversupply, and Industrial Trends

Rising Port Volumes, Life Science Oversupply, Downtown Manhattan Office Downturn, Industrial Cap Rates, and Amazon’s Warehouse Activity

In this month’s most notable economic news, CompStak is highlighting the following:

• The Federal Reserve reduced interest rates by 50 basis points in September, the first rate cut since March 2020 amid signs of easing inflation and a minor weakening in the job market. 
• The Los Angeles and Long Beach ports saw their highest TEU volume since May 2022 in July at 939,600 and 882,376 TEUs, respectively. Meanwhile, the Port of New York and New Jersey saw its busiest July in its history and its seventh busiest month on record. The news comes amid a strike that began on Tuesday, October 1, involving 50,000 members of the International Longshoremen’s Association, halting operations at nearly all East and Gulf Coast ports. Although the strike’s duration is uncertain, experts anticipate it will create a positive tailwind for West Coast industrial markets as shippers adjust their patterns.
• The PCE Price Index was up 2.2% year over year in August, a slight decline from the previous month and now 20 basis points above the Fed’s target.
• Core CPI was up 3.1% year over year in August, while CPI for food alone is on the decline, dropping 210 basis points year over year.
• The Consumer Sentiment climbed 3.2% month over month in September, but consumers are halting big moves until after the election.

Check out the full economic updates here.

Chasm between Midtown and Downtown Manhattan Office Rents Expanding

Downtown Manhattan’s office performance is still lagging behind Midtown more than four years on from the pandemic, which corresponds with how these markets have trended against each other historically. A recent article in the Commercial Observer, “In Manhattan Office Leasing, You Can Always Go … Downtown”, discusses how the beleaguered Downtown could be near the bottom and poised for a revival. However, in the meantime, the spread between Midtown and Downtown effective rents continues to expand. According to CompStak’s data, the average effective rent for new leases Downtown is down 15.6% from 2019 to 2024 YTD after falling for the past two consecutive years. Meanwhile, Midtown’s average is within 0.6% of 2019’s level during this year to date. This has led to a widening between rents for transactions completed in these two markets: in the three years preceding the pandemic (2017-2019), Midtown’s spread over Downtown averaged 39.9% vs. 61.1% from 2022-2024 YTD.

Life Science Sector Suffering from Too Much Space as Rents Fall Below Peak

A new report from CommercialEdge highlighted challenges in the life sciences real estate sector, particularly in markets like Boston, San Francisco, and the Bay Area, where vacancy rates have risen by 540, 440, and 550 basis points respectively since August 2023, partly due to overbuilding. Boston ranks highest for the most new construction: more than 10.1 million square feet have been completed in the last ten years. According to CompStak’s data, this oversupply appears to be impacting starting rents for deals that have been completed in 2024. In Boston, the average effective rent in 2024 to date is down 4.8% from its prior peak in 2022, though it increased from 2023’s level. Meanwhile, in the San Francisco Bay Area market life science office rents appear to have peaked in 2023, and are now on par with levels last seen in 2019. Since the beginning of 2023, top landlords for life science space leased in CompStak’s data included industry heavyweight Alexandria Real Estate Equities in Boston and BioMed Realty in the San Francisco Bay Area. 

East vs. Central Industrial Cap Rates Diverging At Increasing Rate

A new mid-year report by Integra Realty Resources has found warehouse capitalization rates are moving up across the country, with those coming from the East rising the most during the second quarter. According to the report, the East region also has the lowest industrial vacancy rate of any region, 4.09%. As previously reported by Colliers, leasing activity has slowed in most industrial markets even as e-commerce continues to drive demand and push rents upward, which would likely have an impact on cap rates. CompStak’s data indicates that of the two regions, the East is seeing a slight decline with the average cap rate dipping from 7.03% in Q1 2024 to 6.95% in Q2 2024 as of sales captured to date. Meanwhile, in the Central region, industrial cap rates have inched up 40 basis points in the second quarter to 7.95%. Moreover, the average cap rate in the Central region has been on the upswing for three straight quarters and is now up 6.1% quarter over quarter in Q3 2024 to date. 

Amazon Closes Some California Warehouses But Space Leased is Up in 2024

Amazon has decided to close two California fulfillment centers, one in Sacramento and the other in Irvine, in early November 2024, in the latest burst of closures from the e-commerce company, which has closed or downsized nine facilities in August 2022 including all its San Francisco stores in March 2023 and a Stockton warehouse in June. According to CompStak data, the top year for Amazon lease expirations will likely be 2030 when 8.6 million square feet of leased space is expected to expire. Of the leases expiring in 2030, the largest is 800,218 square feet at Prologis’s 4501 Patterson Avenue in Perris, California, followed by 756,336 square feet at Overton Moore Properties’s 2801-2901 North Hollywood Way, in Burbank. Rounding out the top three is 707,820 square feet at CenterPoint Properties’s 2995 Atlas Road in Richmond. The closures are reportedly driven by a focus on maintaining larger, more advanced, or lower-rent facilities. However, Amazon has also opened facilities at other California locations as indicated by an upswing in total square footage leased thus far in 2024 over 2023 levels, according to CompStak data. Amazon has leased over 5.7 million square feet in California this year, its highest annual total since 2021, though still 32% below that year’s volume.