New Jersey Industrial Market Displays Remarkable Resiliency Amid Pandemic
By Mark Russo, director of research, Newmark Knight Frank
The industrial markets of Northern and Central New Jersey have held strong thus far in 2020 as heightened e-commerce activity has offset the disruption caused by COVID-19. Total e-commerce sales rose by 31.8 percent in the second quarter relative to that period in 2019, according to data from the U.S. Department of Commerce.
While demand for retail and office space has been negatively impacted, steady rent growth and stable vacancy highlight the resilience of the industrial sector. Industrial tenants moving into new deliveries have helped generate 4.2 million square feet of positive net absorption year-to-date. Vacancy currently averages 4.3 percent, down from 4.5 percent a year ago. Meanwhile, the average asking rent grew by 2.1 percent over the past year to a record mark of $9.20 per square foot.
Online Shopping Fuels Leasing
Social distancing measures and store closures caused by the pandemic have accelerated the adoption of online shopping. This has led to increased demand for logistics and distribution space among e-commerce companies.
In fact, e-commerce deals have accounted for 75 percent of industrial leasing activity in Northern and Central New Jersey since April, compared to a quarterly average of 17 percent during the past three years. Amazon has signed more a dozen leases totaling 4.6 million square feet so far in 2020. The e-commerce giant most recently leased 953,595 square feet at the newly built 343 Half Acre Road in Cranbury, pre-leased newly constructed space in Lodi and Avenel and signed multiple leases in Kearny.
Cold storage is another asset class that represents an industrial bright spot and that has benefited from the growth in online shopping. Many consumers tried online grocery delivery for the first time this year. A survey conducted by Brick Meets Click/Shopper found that 46 percent of these consumers are likely continue to use online grocery delivery platforms even after COVID-19 subsides. In addition to grocery stores, medical and pharmaceutical research companies are also major users of cold storage space, which further highlights the importance of this product type during the pandemic.
Supply chains have been pushed to their breaking points this year as consumers have rapidly shifted their purchasing behaviors, exposing some weaknesses in the process. Distributors looking to avoid similar delays in the future will likely consider expanding their warehouse capacities by leasing additional “just in case” space, which may further boost demand for industrial real estate.
Completions Rise Despite Ban
A temporary ban on certain construction projects in New Jersey in response to COVID-19, which was lifted in May, had little impact on demand for new development. New deliveries amounted to more than 6 million square feet during the first half of 2020, compared to only 4.7 million square feet during the first half of last year. More than 80 percent of these new projects are preleased.
Most projects were deemed essential due to the growing importance of warehouses used to facilitate the delivery of food and supplies. The total amount of space currently under construction is approximately 9.8 million square feet.
Tenants Expand Beyond Core
The supply of construction sites and available buildings along the New Jersey Turnpike remains tight, forcing some companies to consider locations further west and south of core submarkets such as Exit 8A. We have seen several deals transacted in these submarkets, such as U.S. Elogistics leasing 570,777 square feet at 703 Bartley Chester Road in Mount Olive during the first quarter of 2020.
Mark Anthony Brands, a beverage company that produces and distributes White Claw spiked seltzer, signed a major lease at a newly delivered building in Warren County. The company took 419,640 square feet at Bridge Point 78 in Phillipsburg on the Pennsylvania border. The deal, which is expected to create up to 100 jobs, is the second major transaction at the site following Uniqlo’s 975,761 square-foot lease signed last fall.
The success of this project is part of an ongoing trend of tenants in the market expanding their searches further west along I-78 as available space and developable land sites closer to New York City dwindle.
Near-Term Outlook Bright
The industrial sector is expected to be the anchor of New Jersey’s commercial real estate market for at least the remainder of this year. However, it will not be completely immune from disruptions to the economy as a slowdown in activity among more vulnerable occupiers, such as brick-and-mortar retailers and manufacturers, will weigh against demand from e-commerce, logistics and cold storage users.
The market will likely feel some impact from the recent flurry of retail bankruptcies over the next 12 months. For example, New York City department store Barneys, which filed for bankruptcy last year, vacated its distribution facility at 1201 Valley Brook Avenue in Lyndhurst during the second quarter.
Landlords and tenants can expect stable vacancy and continued rent growth during the second half of 2020 as e-commerce serves as the key driver of absorption moving forward.