From left: Jeff Milanaik, Bridge Industrial’s Northeast region partner; Devin Barnwell, senior vice president and global head of portfolio management for Brookfield Asset Management’s real estate logistics platform; Peter Schultz, executive vice president with First Industrial Realty Trust Inc.; and Nick Pell, president and chief investment officer of Link Logistics, took part in the keynote panel discussion at I.CON East in Jersey City. — Screen grab via I.CON East mobile app/Courtesy: NAIOP
By Joshua Burd
In today’s booming industrial market — with rents rising by the month and supply at unprecedented lows — developers are now grappling with a seemingly unprecedented question: How soon is too soon to sign a lease at a building that’s still under construction?
According to some leading owners, it pays to wait.
“I used to say to our investment committee it’s hard to lease space before they see the walls tilt,” said Devin Barnwell, senior vice president and global head of portfolio management for Brookfield Asset Management’s real estate logistics platform. “People want to see it, they want to know it’s happening.
“Now I’m telling asset managers, ‘Don’t dare lease that space until those walls are tilted and we’re close enough to know what rents are going to look like.’ ”
It was a common theme for Barnwell and other panelists on Thursday as NAIOP kicked off I.CON East, the high-profile conference showcasing the region’s warehouse and logistics sector. Nearly 1,000 developers, investors and service providers turned out for the event at The Westin in Jersey City, in a sign of both the ongoing, record-setting activity in the industrial sector and the pent-up demand for in-person networking opportunities.
As Barnwell and other executives noted during the keynote panel discussion, investors are clamoring for new speculative space to break ground in New Jersey and other top-tier markets, as tenants continue to snap up buildings well before they’re completed. That has coincided with a breakneck pace of rent growth in those areas, raising the prospect that developers will almost certainly get a better deal if they wait to sign a lease.
“Now there seems to be a shift toward almost a business strategy … of doing that because, with the way the market is accelerating, many times you’re leaving money on the table,” said Jeff Milanaik, Bridge Industrial’s Northeast region partner, who moderated the discussion.
Barnwell said that is increasingly the case, although she offered one caveat: “A credit tenant in hand is always a good thing,” so it’s important to balance that certainty with the conditions on the ground and the other opportunities in the submarket.
“It’s knowing what you have and where you fall within the competitive set,” she said. “If you’re the only million-square-footer in New Jersey in a certain market, you should probably be waiting. But if you’re building in a market that’s got a ton of new spec development coming on and it’s all commodity space, it’s time to take the deal.”
Having “more perfect information” also makes it possible to make the right decision, Barnwell said, to the agreement of the other panelists.
“We all have pretty good visibility into the supply pipeline, so you know what your competition is,” said Nick Pell, president and chief investment officer of Link Logistics, Blackstone’s industrial real estate arm. “You know what other competitive buildings are rolling off and you can pick your spots, and I think all of that is certainly more available today than it ever was with data and everything else just being accessible.”
The trend will seemingly continue as long as demand outstrips supply at such a pace, as it has in New Jersey and other top-performing regions. According to JLL, Class A vacancy in the Garden State fell to 0.2 percent in the third quarter, while northern New Jersey has seen rents increase by 30 percent year over year.
The real estate services firm also found that Class A vacancy in the 1.75 billion-square-foot Northeast industrial region — which includes New Jersey, New York, Pennsylvania and Delaware — plummeted to 1.8 percent in Q3, as average rent growth in those states reached 22.4 percent year over year. Meantime, as of midyear, tenants in the region were in the market for a combined 85.3 million square feet, a 20.8 percent rise over the past two years, with new demand still well ahead of new construction deliveries.
The thirst for high-end logistics space has only grown during the pandemic, which has accelerated the shift to e-commerce, and amid the uncertainty caused by the nation’s supply chain crisis. It should come as no surprise, then, that developers are valuing their projects at a price that reflects both the barriers to entry and the difficulty of getting them out of the ground.
“Today that means you’re moving the market,” Pell said. “Every rent that’s getting cut is higher than the last one, so finding that price discovery and willingness to pay is a process. It certainly depends on where the development is and how aggressive you want to be on it, but we’re pushing the envelope because we know how hard it is to deliver a lot of this product in key locations for customers.”
The decision of when to lease a spec project also hinges on a developer’s business model, the panelists said, citing the varying needs of a long-term owner versus a merchant builder. In both cases, however, rents are rising so quickly that developers are increasingly looking to sign shorter-term leases.
“If you’re not growing those rents at a more aggressive level, you’re losing value every day,” said Peter Schultz, an executive vice president with First Industrial Realty Trust Inc. He added that, “in some markets, we’re not going to sign longer-term leases because we’re better off taking the risk at roll” — although such a strategy is better-suited for supply-constrained, high-barrier locations.
In those markets, another option is to push leases with higher yearly rent hikes.
“We’re all seeing that in our business — the bumps are going up,” Schultz said. “The tenants are certainly pushing back on that, but it still gives them certainty.
“We’re not in a big hurry to go long in this environment, but there’s always a risk management and a discipline to that on an asset-by-asset and submarket-by-submarket basis.”