Across the Northeast, the high level of demand from retailers, food companies and transportation/logistics firms is outpacing the level of development and redevelopment in the industrial market, causing a severe shortage of product and skyrocketing rents across the region.
At the center of this trend is New Jersey, situated in the heart of the Northeast’s Boston-Washington, D.C. corridor between Philadelphia and New York City. The demand for industrial space in New Jersey is driven by its strategic location and sophisticated infrastructure including air, freight, port and rail options linking it to the rest of the country.
Despite the near-record level of development in the industrial sector, the state faces a product deficit that even the nearly 5.3 million square feet of space currently under construction cannot satisfy. In fact, 93 percent of the more than 21 million square feet that was developed in 2017 and 2018 has already been leased.
Brian Banaszynski, Transwestern Development Co.
Demand has pushed the average asking rent across the state to $8.41 per square foot, an all-time high. Moreover, asking rents are often not listed in new buildings or those under construction, many of which have rents as high as the low teens.
Not listing the asking rents demonstrates how fast-paced and fluid the market is right now. Owners do not want to potentially leave money on the table by listing their asking rents too low. Withholding the asking rent allows owners and developers to adjust each proposal to the prospective tenant, timing, size and other factors, rather than having to compete with their own listed asking rent or continually change the listed asking rent.
With the statewide vacancy rate currently at 3.6 percent, a historic low, many tenants are leasing space before construction even begins. As of mid-year 2019, e-commerce had surpassed 10 percent of total retail sales for the first time. Even conservative projections are estimating an increase to 20 percent within the next few years, as retail trends shift from brick-and-mortar to a hybrid of online and in-person purchasing.
Elevated activity at the Port of New York and New Jersey has been a big driver of industrial growth during this cycle. But land is limited, and developers and users have increasingly had to push westward to New Jersey to find space to build or lease.
It is therefore not surprising that new industrial space in the Northeast corridor continues to be snapped up as soon it hits the market, as more national retailers are requiring space in this region and ones with an existing presence are seeking to increase their footprints.
Deal, Project Spotlight
Two of the largest leases executed thus far in 2019 that are indicative of the red-hot demand in the industrial market were both located in the Exit 8A submarket of Middlesex County: Wayfair’s 950,000-square-foot lease in Cranbury; and Crate & Barrel’s 870,000-square-foot lease in the same development.
With minimal opportunities along the New Jersey Turnpike, developers are shifting their focus west and south. Specifically, the South Jersey/Philadelphia area is seeing a similar dearth of quality available space as northern New Jersey. Low supply and continued demand have put upward pressure on rents, which have increased by 26 percent in the past five years, with the overall average exceeding the $7-per-square-foot plateau for the first time.
Transwestern’s new 207,500-square-foot project, Philadelphia Logistics Center, is working to overcome the low supply and high demand. Situated on 15.5 acres, the speculative development is located within an established industrial park on the northern boundary of Philadelphia’s city limits.
It’s also in a Keystone Opportunity Zone, which provides tax incentives to businesses in this location. There is a 1.5 percent vacancy rate in this particular submarket, which has not had a modern logistics facility developed in years due to lack of available sites. As the project nears completion, it has already seen significant leasing interest.
Transwestern is also developing two warehouse properties in Piscataway, an area that has quickly emerged as a hub for industrial activity. The 16-acre site includes a legacy warehouse that has a developable parking area at a four-way interchange on Route 287. Transwestern will renovate the existing building into a 146,000-square-foot warehouse with modern specifications. On the adjacent parking lot site, Transwestern will develop a 152,000-square-foot, Class A warehouse. Both buildings are slated to be delivered in the fourth quarter of 2020.
Environmental challenges remain for much of the remaining vacant land, but tenants are being patient as they prefer New Jersey’s population density and labor pool. As users continue to flood the market with demand, we are also seeing changes in basic building requirements. Today’s industrial users are increasingly seeking raised ceiling heights to allow for modern racking systems, upgraded fire-suppression systems and life safety fixtures, along with ample parking and loading docks.
Looking Ahead
Developers continue to face significant roadblocks in bringing
high-quality product to market to satisfy what has become an insatiable demand. Acquiring land for development, especially in New Jersey, is proving to be an uphill battle, as sites are increasingly hard to come by.
Even when space is found, rising construction costs are also presenting challenges, and the lack of shovel-ready sites is causing development in primary markets to be extremely complicated, time-consuming and costly. As a result, developer interest is shifting west and south of the primary markets, with over 4 million square feet of development planned outside of the state’s core market.
The geographical constraints on New Jersey have also sparked considerable activity in Pennsylvania’s Lehigh Valley, where industrial activity has expanded by more than 25 percent in the past five years. There is approximately 8.1 million square feet currently under construction in that region.
This trend reflects a fundamental shift in consumer behavior that will continue to drive the absorption of industrial space for many years to come. New Jersey and the rest of the Northeast region only stands to benefit from increased industrial construction and economic development.
— By Brian Banaszynski, partner, Transwestern Development Co. This article first appeared in the October issue of Northeast Real Estate Business magazine.