Thomas Tucci Sr., DTZ
The New Jersey industrial market is experiencing a renaissance of sorts with robust leasing activity in both Northern and Central regions of the state, increasing asking rents and more than 4.5 million square feet of industrial space delivered in 2014. All of these factors point to an even stronger 2015 as developers take advantage of improving market conditions. As we continue to see users and investors competing for the same properties, which in turn creates bidding contests resulting in higher sale prices, we pause and ask, “Can users compete with investors in this environment? And furthermore, should they?”
To answer these questions, we need to look back at how we arrived at the current conditions. Towards the fourth quarter of 2013, asking rents and vacancy rates seemed to reach equilibrium. For each quarter after, asking rents steadily increased and vacancy dropped as demand rose. In the fourth quarter of 2014, vacancy in Central New Jersey fell to 7.2 percent, and asking rents rose from $5.35 to $5.42 per square foot with increasing demand along the New Jersey Turnpike corridor. Throughout the year, positive absorption totaled more than 2 million square feet in this region, making it the sixth year in a row the market posted positive absorption. For the duration of 2015, we expect tenants to continue moving from New York, but they will still require locations with close proximity to the city in order to effectively service the area. Rents will continue to rise as demand for newer, quality warehouse and industrial space increases, while supply dwindles — especially in Northern New Jersey.
Over the past five years more than 10.8 million square feet of new industrial construction has been completed. Today the market is on pace to deliver 11.5 million square feet over the next three years and 21.1 million square feet of future development has been proposed. High-profile developers are active. For example, Prologis currently has three separate approved sites totaling 1.2 million square feet, of which, 285,000 square feet will hit the market in 2015. In addition, Heller Construction has proposed building 4 million square feet in the New Jersey Turnpike Exit 8A submarket.
This level of demand is not escaping the attention of investors from outside of the state, who are entering New Jersey with large-scale development plans and stabilizing assets across the board. For example, Goodman Birtcher has proposed a $350 million redevelopment of a 143-acre site with 2.8 million square feet of Class A product in Linden.
In addition to interest from outside state borders, investors who stepped back from New Jersey during the downturn are now returning. Several high-quality investors, like First Industrial, are looking for land sites and redevelopment opportunities as well as stabilized assets. Principal Financial plans to redevelop 230,000 square feet in the Meadowlands, and Cohen Asset Management recently announced the purchase of a 370,000-square-foot industrial property in Edison.
While the robust leasing, sales and development activity is beneficial at every level, the players involved need to carefully consider the current and proposed building stock to make sure they are positioning themselves properly. Finding the right distribution center in the desired location at a price point that is not cost prohibitive can be a tricky equation. If a user becomes an owner, resources — whether financial or talent-based — will be diverted from the core business focus to asset management. As the business expands or contracts, an owner-user may lose some of the flexibility that is inherent in leasing, especially whether to subdivide or move into a more appropriately sized property.
Current market conditions require a sophisticated buyer to evaluate all the moving parts ranging from physical considerations to market and economic conditions. As with every market cycle, users need to consider both the upside and potential downside to owning assets versus the cost of leasing in relation to the cost of moving their goods from one point to the destination.
— By Thomas Tucci Sr., Senior Vice President, DTZ. This article originally appeared in the March/April 2015 issue of Northeast Real Estate Business magazine.