Declining deliveries and a steady stream of consumer demand for e-commerce are buoying New Jersey’s industrial market, despite supply constraints and regulatory hurdles.
Industrial deliveries were down 58% year-over-year in New Jersey in the third quarter, resulting in heightened absorption figures, according to a Newmark report. And with high borrowing costs and local regulations likely to keep construction suppressed, executives at Bisnow’s Northeast Industrial and Manufacturing Conference in October said existing landlords are poised to benefit — though not necessarily through rent spikes.
“We feel really good about the supply-demand imbalance and performance of those properties that are properly zoned and in well-connected locations,” investment manager Realterm Vice President of investments Nick Dupuis said onstage at The Westin Jersey City Newport.
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Net absorption in the northern and central New Jersey submarkets hit 3.2M SF in Q3, according to Newmark’s report. The 7.4M SF signed year to date is more than double last year’s entire volume, putting the market’s industrial real estate on pace for its best year since 2022.
The market is likely to continue in the same direction: Tenant space requirements total around 80M SF, Stonemont Financial Group Vice President, Development and Acquisitions Brian Danahy said onstage.
“If all those tenants occupy that space, you're sitting at quasi-zero vacancy,” he said. “You're going to continue to have that downward pressure on the market in a positive way.”
New York City and northern New Jersey’s status as two of the most densely populated regions in the U.S. translates to demand for warehouse space from e-commerce giants and third-party logistics companies.
Demand from big-box tenants looking for 400K SF or more is strong enough that those larger spaces are quickly snapped up by tenants, said James Holbrook, founder and executive chairman of warehouse leasing operating platform Warehub.
Meanwhile, there are just five buildings under construction that are poised to deliver in the next year, Turnbridge Equities Managing Principal Ryan Nelson said, which will likely contribute to an even tighter market than this year — including for big-block space.
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“You're getting some scarcity on the big-block side,” he said. “We haven't seen that in a while.”
Some of that shortage of space in New Jersey also comes from development hurdles linked to complex authorization processes for industrial developers, executives said. In recent years, municipalities across the state have made zoning amendments and imposed new size limits on warehouses as locals protested proposed developments in their towns.
Those rules have created an entitlement risk, industrial developer Greek Real Estate Partners warned in a blog post this summer. Zoning alone no longer provides certainty that developers will be able to build a project at the size that developers seek to address market needs.
Combined with other necessary processes, like getting a five-year Department of Environmental Protection permit, this means a lot of uncertainty for developers, Prologis Vice President of Leasing and Development Mikki Columbus said.
“New Jersey has a really hard entitlement process,” she said. “You have these sites that have been entitled that are coming up to the point where they might no longer be able to build anything close to what they currently have approved.”
That same restriction, however, makes approved sites and new ground-up development all the more exciting, Kurv Industrial Senior Vice President of Investments Stefan Sansone said.
“When you're able to get a site approved, it truly is irreplaceable in many of these municipalities,” he said.
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Developing in the market is still appealing despite regulatory constraints, executives said. Instead, the main obstacle to developing, investing in or acquiring more industrial assets comes down to interest rates.
“They've spiked so high,” Nelson said. “Everything's more expensive. It's harder to buy. People don't want to sell buildings because cap rates are now blowing out or expected to blow out. So, keep watching the 10-year Treasury.”
Those factors will keep that scarcity in place, according to Jim Cadranell, a senior managing director at JLL. And for landlords of existing property, that means a potentially easier time finding financing to hold them over even if lease-up periods take longer than they expect.
“We just always seem to be able to find a lender who's willing to give a new three-year loan,” he said.
Even so, macroeconomic concerns, including the cost of borrowing, mean lenders don’t necessarily want industrial owners to wait for the highest possible rents to fill up their spaces, Saxum Real Estate Managing Principal Anthony Rinaldi said.
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While it depends on who the lender is — some equity partners will want landlords to lease up whatever vacancy exists, while others will want landlords to push rents, he said — he falls into the former category.
“Nothing kills an [internal rate of return] faster than not leasing an asset, and that downtime really can drag the returns of the deal,” Rinaldi said. “Especially in a market like now, with what's going on in the 10-year — the last 60 days alone have thrown a monkey wrench in a lot of people's plans.”
Ultimately, however, that might lead to limited revenue increases for landlords and slightly lower returns than their lenders might otherwise expect in such a demand-heavy, supply-constrained market, said Helen Paul, an executive director at Cushman & Wakefield.
“We're probably a couple deals away from feeling like there's a little bit of an inventory crunch,” she said. “But the rent growth is going to be lagging.”
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