When Amazon announced plans to bring 25,000 jobs to a new campus in Long Island City, real estate players jumped on the transformative potential of the move. The e-commerce behemoth inspired visions of a more cohesive neighborhood that would lure more businesses and developers. Retail would flourish, as shops and restaurants filled the area, and other tenants would chase office space near the campus.
Those hopes were soon dashed as Amazon nixed its Queens plan and Long Island City’s commercial market reverts back to where it was three months ago. Brokers and developers touting the possibilities maintain long-term optimism about the area — but without the Amazon effect, the market is slated to slow. Developers will be more cautious given the robust supply pipeline and office leasing won’t have the same allure, those players said.
“There was a collective understanding that there will be a substantial slowdown of people putting shovels in the ground,” said Jonathan Adelsberg, a partner at law firm Herrick Feinstein. “People thought Amazon would offset any slowdown. So [the decision to pull out] will have a profound impact.”
That slowdown stems in part from the flood of development that’s already occurred. Since 2006, about 16,800 residential units have been added to the market, with another 11,700 units expected to open by 2020, according to LIC Business Improvement District’s 2018 annual report. The neighborhood has largely been a rental market so far, but interest in condo projects — like CBSK Ironstate’s Corte and Adam America and Vanke’s Galerie — has picked up more recently.
Given the robust pipeline, development site deals won’t pick up until firms have a better idea of absorption and demand, real estate players said. That’s especially true as residential brokers, who saw a frenzy of interest thanks to Amazon, are now budgeting more time to offload units.
“With inventory, having Amazon there made people more bullish,” said Michael Tortorici, executive vice president of investment sales at Ariel Property Advisors. “Absorption will happen but it will take some time. How quickly is anyone’s guess.”
Last year, Long Island City saw 21 development sites sales totaling $229 million, according to Ariel Property Advisors. That’s down from a few years ago when the area saw both higher volume and more transactions. In 2015, as the real estate market peaked, there were 34 deals in LIC totaling about $524 million. Prices are down too: Trades in 2018 were averaged $182 per buildable square foot, compared with $208 three years earlier.
“Supply will come into check as fewer development sites transact,” Tortorici said. “This is a market that’s selective.”
The biggest trade last year was Slate Property Group’s $30 million purchase of the development sites at 37-11 30th Street and 30-14 37th Avenue. The developer has plans for a roughly 200-unit rental at the site, The Real Deal reported at the time.
One silver lining of Amazon’s exit is that three months is a relatively short time period for development site activity. Even if developers were newly energized by the news, they had a small window in which to scope out sites and close deals, commercial brokers said.
Plus, the area still has one notable advantage: Large sections of Long Island City are located in an Opportunity Zone. Under the program, investors can defer federal taxes on capital gains until Dec. 31, 2026, reduce that tax payment by as much as 15 percent and pay no taxes on potential profits from an opportunity fund if they hold onto the investment for 10 years. The initiative is part of the 2017 tax overhaul.
“We were bullish even before Amazon because of the Opportunity Zone,” said James Nelson, head of tri-state investment sales at Avison Young. “That will help drive some of the activity.”
Another concern is Long Island City’s office market. Amazon anchoring the neighborhood with a massive new campus was expected to attract other companies who would want to locate in the vicinity. Brokers previously said Amazon could help transform Long Island City into a destination all of its own — not just a neighborhood seen as a satellite to Manhattan’s office market. In the absence of such a dominant presence in the area, the office market looks softer.
“For everything Amazon would’ve brought, it was giving hope to the office market,” said Jonathan Eshaghian, an investment sale agent at Marcus & Millichap. “Now the office market is looking iffy.”
Which isn’t to say the area hasn’t seen a surge in leasing. Year-end 2018 leasing activity totaled 742,000 square feet, a 93 percent increase from 384,000 square feet a year earlier, according to CBRE. That was driven by two large transactions — a 299,793-square-foot expansion by Macy’s at Tishman Speyer’s The Jacx, and a 100,000-square-foot renewal by the New York City School Construction Authority. The Jacx, a massive 1.2-million-square-foot office development, is fully leased.
Nonetheless, without the “super-charge” of Amazon, the area has less luster. With One Court Square, for example, landlord Savanna is struggling to refinance the office tower after losing a 1 million-square-foot tenant in Amazon. Talks to borrow more money or sell stakes in the property are reportedly now dead. Savanna’s loan for property matures in 2020 — just as CitiGroup is scheduled to leave the 1 million square feet of space reserved for Amazon, leaving the building 70 percent vacant.
“The jury is still out with regard to making LIC a traditional office hub,” Adelsberg said. “I’m not suggesting things won’t change, but it’s not likely we’ll see a law firm with 300,000 square feet of space move to LIC.”
The fallout of Amazon’s decision is a major missed opportunity, but brokers and lawyers argued that the long-term trajectory of LIC is unchanged. The positive attributes, like accessibility to public transportation and proximity to Midtown, remain. LIC is the same neighborhood that appealed to Amazon, but the industry hopes the failed deal won’t deter other businesses from considering the area.
“Can New York City entice another company?” Eshaghian asked. “Everything is clearly there. Amazon liked it, another company can like it. It’s already a set table, ready for the diners.”