SADDLE BROOK, NJ—(SBN)—Several key “paradigm shifts” will be driving decision-making in the industrial real estate sector, involving behavior changes by consumers and industrial tenants, and increasing size requirements, says Tom Monahan, executive vice president at CBRE.
“It’s the consumer habits, they have changed drastically,” he tells StateBroadcastNews.com in an exclusive audio conversation. “The other paradigm shift is really the needs of the tenants, and that has changed dramatically, viz a vis location, last-mile location, cube, higher ceiling heights, more trailer parking, more car parking, availability of labor to support the larger building. We also see a paradigm shift in the size of the requirements in northern New Jersey, which is traditionally a market servicing the local economy, we’re seeing a great deal of those requirements becoming larger than in the past.”
Listen to the complete conversation here.
With third quarter leasing activity in 2016 surpassing second quarter figures by 20.9 percent, the New Jersey industrial market has begun approaching its carrying capacity, according to CBRE’s Q3 2016 New Jersey Industrial MarketView Report.
“E-commerce does have a major impact on our business,” he says. “Those companies that need to service the e-commerce companies, such as the transportation related industries, we’re seeing a noticeable increase in demand, which is putting a little bit of a strain on the inventory in the market, because we’re at about a four percent vacancy rate, which is pretty low overall in New Jersey.”
The 6.8 million square feet of new lease commitments signed in Q3 2016 topped the average leasing velocity for the last four quarters, which measured 6.64 million square feet. Continued robust leasing pushed the state’s availability rate down to seven percent—its lowest point since Q2 2007. Moreover, Central New Jersey’s availability dropped below seven percent for the first time since 2005.
“We’ve witnessed positive industrial absorption in 22 of the past 24 months, which speaks directly to the sustained demand from tenants and their need to service the vast surrounding consumer base,” Monahan says. “As consumers increasingly gravitate towards making purchases online, the demand for industrial space in specific New Jersey locations will continue to grow.”
While no major e-commerce transactions were signed in Q3 2016, demand from courier delivery services companies was a major leasing driver throughout New Jersey. To keep up with growing demand for its services, FedEx continued its strong leasing activity, expanding its New Jersey footprint by 480,000 square feet, with two new build-to-suit sites. Over the past 12 months, the shipping company has now signed new leases in New Jersey totaling 1.63 million square feet.
“The latest UPS Pulse of the Online Shopper report estimates that two of every three shoppers expects to be able to place an order before 5 p.m. and receive next-day delivery,” says Lou Belfer, senior vice president at CBRE. “This expectation is a major force behind the aggressive leasing from courier delivery services companies, and we’re seeing the positive effects ripple across the industrial sector.”
Increased demand and tightening supply continue to be the major themes throughout the New Jersey industrial market. The feverish activity in the eight New Jersey Turnpike core submarkets has accounted for 82.8 percent of the state’s leasing velocity thus far in 2016.
Ceiling heights of 36’ clearance are becoming the norm for buildings of less than 800,000 square feet, Monahan says.
“Once we start approaching a million square feet, because of the lack of available land in north Jersey, and central New Jersey for that matter, landlords are opting to go 40 feet high if possible—there are restrictions, floor loads, water pressure and some other issues—only because there’s scarcity in sizeable developable sites and landlords are protecting their interests in future expansion for those tenants,” he says. “I think they are ahead of the curve in New Jersey.”
Notably, the sustained demand has driven average asking lease rates in four of these eight submarkets above their pre-recession peaks. As of the third quarter, availability in these markets registered at 6.4 percent, forcing users looking for space to either pay a premium for the remaining inventory, consider ground-up development or look for alternative submarkets to house their operations.
Looking ahead, the Trenton/Route 295 and Princeton submarkets will experience higher volumes of activity, as supply tightens and rental rates increase in the eight New Jersey Turnpike core submarkets.
The Trenton/Route 295 and Princeton industrial markets have already begun capitalizing on this, as their lack of development, lower lease rates and convenient access to the New Jersey Turnpike give them appeal to both users and developers. In the third quarter, the Trenton/Route 295 submarket recorded the third largest leasing velocity in Central New Jersey, driven in part by FedEx’s major commitment for a new 340,000-sq.-ft. foot build-to-suit facility. Aurobindo USA, a pharmaceutical company based in India, broke ground on its new 567,000-sq.-ft. U.S. headquarters in East Windsor Township. This move serves as a strategic expansion for the company, which already has industrial space in Exit 8A, into the Einstein Alley corridor.
New construction activity in the industrial sector remains strong, with the completion of seven projects in the third quarter of 2016. Overall, these facilities, which are already 61.2 percent leased, total 1.93 million square feet, bringing the year’s total to 3.93 million square feet—a figure which exceeds the 2015 total by nearly 400,000 square feet
As northern New Jersey’s market tightens, tenants only focused on the lease rate component of cost might venture further south in New Jersey or west into Pennsylvania, Monahan says.
“If you’re shopping rate and rate only, not drayage, not labor, tenants can afford to venture a little bit further south or north or even west,” he says. “Those tenants that have to be within close proximity to the ports, that have to be in close proximity to large labor pools, those demands in northern New Jersey will continue.”
As demand for industrial space continues to strengthen, the quarter saw developers break ground on nine new projects totaling 2.10 million square feet The year-to-date total of 6.15 million square feet has already exceeded that of 2015, as well as each previous year, with the exception of 2013. With three months left in 2016, this year could easily set a new record for construction starts.
Steve Lubetkin is the news director for StateBroadcastNews.com. Steve’s journalism background includes print and broadcast reporting for NJ news organizations.
In May 2019, he began anchoring and reporting for the new weekly podcast, “The CRE News Hour,” a news and features program focusing on the commercial real estate industry.
From 2014 to 2019 he was New Jersey and Philadelphia editor for GlobeSt.com and filled in covering Chicago/Midwest and Atlanta.
He has won numerous awards for his audio and video news reporting from the Garden State Journalists Association, and he has also been recognized for video by the New Jersey Chapter of the Society of Professional Journalists. He has produced audio podcasts on CRE topics for the NAR Commercial Division and the CCIM Institute.
Steve has also served (from August 2017 to March 2018) as national broadcast news correspondent for CEOReport.com, a news website focused on practical advice for senior executives in small- and medium-sized companies.
Steve also reports on-camera and covers conferences for NJSpotlight.com, a public policy news coverage website focused on New Jersey government and industry; and for clients of StateBroadcastNews.com, a division of The Lubetkin Media Companies LLC.
In March 2021, he was elected to the board of directors of the New Jersey Chapter of the Society of Professional Journalists.
Steve has been the computer columnist for the Jewish Community Voice of Southern New Jersey, since 1996.
You can email Steve at firstname.lastname@example.org.