Industrial Development Shifts Westward From Port
Demand for industrial space is roaring throughout the submarkets surrounding the Port of New York and New Jersey, propelled by the port’s handling of a record amount of cargo thus far in 2019.
As a result of the healthy demand, as well as more product coming in and out of the port, landlords are enjoying positive rent growth accentuated by a limited supply of quality industrial space.
The port experienced record growth in cargo volume handled during the first six months of 2019, according to internal data from the organization. The number of 20-foot equivalent units (TEUs) handled by the port has already exceeded 3 million for the year and surpassed 611,000 in June alone.
This figure represents an all-time record for the port during the first half of the year, enabling it to surpass the Port of Long Beach for the first time in 20 years.
Increasing amounts of inventory coming in and out of the port translates to greater demand for industrial space to store, process and ship product. But the port submarket has but a meager supply of real estate to meet the demand.
Due to a limited space available for lease, the industrial submarket experienced negative net absorption of 114,000 square feet in the first quarter of 2019, the first negative report since 2013. Positive net absorption year-over-year was recorded in growing industrial submarkets west of the port, especially along the New Jersey Turnpike, according to data from Transwestern.
“As consumer spending continues to grow and products pour across the shore, the Port of New York and New Jersey continues to set annual records,” says Matthew Dolly, research director at Transwestern’s New Jersey office. “As industrial growth throughout the state shows no signs of abating and new construction is at its lowest level in three years, the need for high-quality product in the market is driving infill development.”
A large and growing population in the New York City area lies at the root of the supply-demand imbalance. To meet the needs of this consumer base, industrial developers and users alike need to be in close proximity to their customers in order to minimize freight and distribution costs.
But the lack of available land and space is forcing developers and users to target sites further removed from the main terminals. Projects and leases are being executed in parts of New Jersey that are located further away from New York City boroughs. Redevelopment plays that aim to convert old office buildings into industrial spaces are also becoming more commonplace as demand for space exceeds supply.
“Developers are having difficulty keeping up with tenant demand, given the lack of available space and land to build on,” says John Obeid, senior director of suburban Tri-State research at Colliers International. “Construction is sprawling further from the port itself as developers build outward and modernize old properties.”
By The Numbers
The inventory of warehouse and distribution assets in port submarkets totals roughly 80 million square feet. Of that 80 total, about 19.5 million is Class A industrial space.
Per Transwestern, the port submarket’s vacancy rate currently stands at 3.6 percent. The Houston-based firm notes that this is the fifth consecutive quarter in which the submarket has achieved sub-4 percent vacancy.
“A relatively small percentage of modernized industrial product is fueling rent increases, particularly in the Class A space,” says Steve Elman, executive director of Cushman & Wakefield, who notes that rising construction costs are also contributing to higher rents. “Asking rents are continuing to trend upward at 2 percent increase per quarter, approaching $13 per square feet.”
During the first quarter of 2019, total leasing activity increased by 20 percent in the New Jersey industrial submarket. Approximately 2.4 million square feet of positive net absorption was recorded during the second quarter of 2019, according to data from Transwestern.
As of the second quarter of this year, the volume of industrial product under construction was at its lowest point since 2016, according to Transwestern. This trend underscores the strong need for more space, particularly within infill locations. And while sources say construction activity should pick up in 2020 and 2021, demand is expected to move in lockstep with new deliveries.
An Array of Drivers
High demand for an array of consumer products — electronics, furniture, apparel and other popular retail products — has led to a land grab for port real estate among e-commerce and distribution companies, notes Elman of Cushman & Wakefield.
“About 27 million consumers live within a two-hour drive of the port (approximately 150 miles) and 59 million live within a five-hour drive (approximately 300 miles),” says Elman. “There is a need for industrial space to support the demands of the population and the shift from bricks-and-mortar to e-commerce. Developers are responding to a need to deliver product as quickly as possible to the end-user.”
A need for more housing to support this growing population base has also contributed to growth in imports of building supplies, construction materials and similar products. Chemical products that require container storage are also growing in volume at the port, which now handles about 4.1 million containers per year.
“New Jersey has diverse user base, and leases are going to be filled with e-commerce companies, food companies, transportation companies and any type of consumer products,” says Elman.
The growth is expected to continue, regardless of the impact of broader economic factors like tariffs or trade wars. To that end, the port recently released a 30-year plan for the future growth and development of the port.
The new plan builds on the previous plan, which invested approximately $6 billion in modernization initiatives. Those projects included deepening the port channels and expanding the container terminals, as well as increasing roadway capacity and completing the ship-to-rail network. A $1.7 billion project to raise the Bayonne Bridge, which began in 2013, is complete, and the space beneath the bridge can now accommodate larger container ships.
“By our calculations, there is approximately 2 million square feet of speculative construction underway in the greater Port of New York & New Jersey submarket,” says Jesse Harty, senior vice president and market officer at Prologis. “We recently completed three buildings totaling 1.2 million square feet. We leased the space to customers who needed quick access to the port, needed to utilize the heavy truck corridor, and wanted to take advantage of the close proximity to New York City.”
But even with developers working diligently to add more supply, demand is so strong that even a flurry of new deliveries is not likely to put much of a dent in the vacancy rate.
“Prologis research sees this pent-up demand reflected in a high proportion of build-to-suit projects and strong pre-leasing in the construction pipeline,” Harty says. “By our calculations, overall vacancy is below 4 percent while Class A vacancy is less than the overall market. We do expect increased construction in 2020 and 2021, but we also expect demand to keep pace barring any global economic change.”
With virtually no vacant portside sites still available in New York, developers are continuing to expand into New Jersey. Approximately 5.3 million square feet of industrial construction was underway in New Jersey at the end of the second quarter.
That figure marks a decrease of about 2 million square feet that was under construction at the same time in 2018, and roughly 33 percent less than the volume of construction in New Jersey at the end of the second quarter in 2017.
Cushman & Wakefield is leasing Lincoln Logistics Bayonne, a development on 94 acres that can accommodate between 150,000 and 1 million square feet of speculative development. The site offers proximity to the New Jersey Turnpike and the 800-foot Global Container Terminal and offers 5,000 feet of water frontage for barge capability.
In the largest single property sale in New Jersey during the second quarter, Duke Realty acquired 90 acres of land in Perth Amboy for $78.5 million. The site was formerly occupied by manufacturer Gerdau Ameristeel and is now slated for development into a warehouse and distribution facility.
“As the best product in the primary corridors becomes scarcer, corporate tenants expanding their geographic parameters to find more options,” says Lori Zuck, managing director at Transwestern. But these secondary submarkets have also tightened, pushing rental rates as much as 25 percent to 35 percent higher in the past few years.”
Local developers Advance Realty Investors and Greek Development recently broke ground on Linden Logistics Center, an eight-building industrial warehouse facility totaling 4.1 million square feet across 350 acres.
Russo Development and Forsgate Industrial Partners acquired 718 acres of land in The Meadowlands to develop 3 million square feet of industrial space.
Edgewood properties recently purchased a 104,000-square-foot vacant office property in South Plainfield, just west of Staten Island. The office’s proximity to I-287 and I-95, as well as Routes 1 and 22, makes it a prime asset for conversion into an industrial warehouse and distribution facility.
Boston-based TA Realty recently purchased an 81,000-square-foot industrial warehouse in Avenel, which includes 11 loading dock doors, with plans to expand to 19. The property offers direct access to the New Jersey Turnpike, Route 440, the Goethals Bridge and Garden State Parkway.
—By Alex Patton. This article first appeared in the August-September issue of Northeast Real Estate Business magazine.