New Jersey's Industrial Market Keeps Getting Tighter, But Clouds Haven't Started Gathering
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Demand for warehouse space in New Jersey remains as strong as it has been for years, motivating continuous construction on faith that it will continue.
When developers are in possession of land zoned for industrial anywhere near the Port of Newark and Elizabeth, or along the northern half of the New Jersey Turnpike, they are not waiting around for a tenant to be in hand to start construction.
The vast majority of recent and impending warehouse deliveries have been speculative construction, with tenants preferring to wait until construction is well underway before committing to a space, according to Lincoln Equities Group President Joel Bergstein and Liberty Property Trust Senior Vice President and Regional Director Jim Mazzarelli.
“Moving dirt is not enough, pouring foundation is not enough,” Bergstein said. “Really getting the steel up starts to get people focused, though then the ability to modify buildings to suit people’s needs is much less and costs much more.”
With so many potential users competing for ideal distribution space, it might stand to reason that they would prefer to make a deal early to lock in a price or customize a space to suit them long-term, as Bergstein alluded to. Asked why that isn’t the case, Bergstein had a two-word response: “Good question.”
Bergstein, Mazzarelli and HFF Senior Managing Director Jose Cruz will all be discussing the still-hot market on the industrial panel at Bisnow’s New Jersey State of the Market event at the Hyatt Regency Jersey City Feb 13.
The furious pace of construction over the past few years has begun to slow down, but developers who are still building on what little land is left in prime areas are not concerned about their ability to fill product, even as they build cookie-cutter buildings to hedge their bets on who might be moving in.
“The more competitive the market gets, the less control the tenant has over what the building looks like,” Mazzarelli said. “Right now, nobody is building a building that won’t be garden-variety for any tenant who walks in.”
The curious dynamic wherein tenants are both fighting for space and waiting as long as they can to decide turns out to be beneficial for industrial developers like Lincoln Equities and Liberty. They don’t have to sweat specific build-outs that may not suit whatever second tenant moves in years down the line, and the compressed decision timeline puts them in the catbird’s seat, to an extent.
“What you’re seeing now more than ever is that if a landlord has a 400K SF building and a tenant wants to do a 200K SF deal, the landlord says no,” Mazzarelli said. “So a tenant will take the whole building in certain primary markets and sublet the rest, and take that sublet risk, or they shut down operations somewhere else to fill all the space.”
The ease in lease-up, along with the long development cycle, has driven up land prices to dizzying heights in North and Central Jersey, especially along the Turnpike. So far, most tenants have been willing to pay the correspondingly higher rents, Mazzarelli said, but slightly less convenient locations are also gaining steam.
“Everybody talks about how there’s no land, but remarkably, there are a number of sites which are coming to market,” Bergstein said, citing a former Hercules and Ashland manufacturing plant in Roxbury currently being marketed by JLL, near less-traditional corridor Interstate 80.
Bergstein acknowledged the relative scarcity of a plot that size, on which 3M SF of warehouse space could theoretically be built. Although Mazzarelli believes that land along I-80 drops steeply in value as it goes farther west, away from the ports, Bergstein and Cruz said that if you can find land there, you can find value.
“I-80 has definitely been on the radar, but the challenge there is finding sites that are available to build,” Cruz said. “80’s a great spot, I-78 is the same way — if you can find a spot where you can build, that translates into gold.”
Piscataway, situated on the west side of the Turnpike and along I-278 just north of New Brunswick, has become more active as areas like the Meadowlands have grown as tight as they can get. With its location on the less popular side of the highway, and the continuing trend of speculative construction, Piscataway might be a bellwether for when the market finally changes direction.
“Everyone is keeping their eye on Piscataway,” Mazzarelli said. “Buildings are getting built, but [they’re still] getting leased before it’s finished. And if you go out on 80, they’re getting deals done, and it makes you wonder if the rubber band can stretch that far.”
If Piscataway takes a turn for the worse, it won’t be because of any indicators already present today. For a site there that Lincoln Equities purchased a couple of years ago, its financing underwrote a five-year lease-up, Bergstein said.
“When we took through our approvals in Piscataway, the market for that corridor was mostly regional businesses,” Bergstein said. “The site ultimately ended up getting leased up in under 14 months, so the demand was clearly there. And when we started the approval process four years ago, it was considered very much a secondary market with lots of volume to absorb.”
At this point, consensus seems to be building that a recession or downturn of some kind is due in the next couple of years, but Mazzarelli, Bergstein and Cruz see no reason to believe that the rubber band will snap back too hard even when that happens.
“Recessions are normally driven by oversupply, but we’re not seeing that in the primary markets,” Mazzarelli said. “It’ll have to be something else that causes a downturn, but I can’t imagine not having a recession in the next 24 months … Then again, I’m not an economist.”
When the music that has been playing since 2010 finally stops, industrial real estate might wind up being the chair investors want to sit in. That wasn’t necessarily the case in previous recessions, but the popular refrain for the past few years has been that the market’s drivers are more reflective of a sea change in the global economy rather than anything cyclical.
“Industrial has taken a different position among asset classes,” Cruz said. “In terms of the importance and efficiency [of supply chain] that Amazon and its competitors are focusing on, all that factors into how big of a part industrial plays in the national economy, as well as the regional economy of New Jersey.”
Industrial real estate will be just one of the topics covered at Bisnow's New Jersey State of the Market Event at the Hyatt Regency Jersey City on Feb. 13.