By Steve Lubetkin and Joshua Burd
Industrial developers and companies seeking logistics space are unlikely to face lasting damage from the coronavirus pandemic, experts say, but the market is still poised for major changes amid disruptions to supply chains and consumer spending habits.
Without question, New Jersey figures to be at the forefront of those trends.
“The consumer base remains healthy, and I think a lot of the organizations and manufacturing companies, not only in the U.S., but overseas as well, are going to look to relocate or expand in the United States, especially if a large portion of their consumers are located here, which most are,” said Nicholas DePaolera, an investment sales professional with NAI James E. Hanson in Teterboro. “I think for the time being, the consumer population here will continue to purchase things. It’s just a matter of how they go about doing that. With e-commerce and shopping online now, you’re going to see a spike there as well.”
While state and federal officials did not ramp up social distancing requirements until mid-March, market watchers did point to some impact on first-quarter activity. A report by JLL noted that less than 1 million square feet of tenant demand in New Jersey was put on hold in Q1 as a result of the pandemic, but noted that greater economic uncertainty, shelter in place and restrictions on non-essential business have limited tenants’ ability to tour the market and refill the leasing pipeline.
Accordingly, the market averaged 5.3 million square feet of new tenant requirements for each quarter in 2019, whereas January through March 2020 saw just 1.8 million square feet of additions, JLL found. In total, the number of tenants searching for space decreased 15 percent over the previous quarter.
“The global pandemic’s short-term effect on the market remains in flux, as the length and severity of its impact on the economy have yet to be determined,” Alex Kachris, an analyst with JLL, wrote in the firm’s New Jersey Industrial Insight Report. “Nonetheless, the market’s low vacancy rate, disciplined construction activity and the proliferation of e-commerce are extremely compelling, holding the market’s medium to long-term prospects relatively unchanged.”
In the near term, developers are seemingly allowed to proceed with many of the warehouse and logistics projects that are under construction. An executive order by Gov. Phil Murphy halted all nonessential construction in the state effective April 10, as part of the ongoing push to slow the spread of COVID-19. But the order did include an exemption for projects involving facilities at which any one or more of the following takes place: the manufacture, distribution, storage or servicing of goods or products that are sold by online retail businesses or essential retail businesses, as defined by Murphy’s earlier directives.
A spokeswoman for the governor confirmed that the exemption applies to industrial buildings that have a lease agreement in place with the likes of an online retailer or essential retailer, but was still under construction at the time of the executive order. Less clear is whether the exemption applies to speculative projects in which there is no tenant agreement in place, despite the likelihood that they would be leased to an essential e-commerce, retail or logistics user.
It’s been a critical question in a state where demand far outpaces supply and where developers in recent years have raced to deliver large-scale spaces. At the end of Q1, CBRE found that 38 buildings totaling 14.5 million square feet were under construction in the state, up from 28 buildings and 10.3 million square feet in the prior quarter.
Despite the positive outlook for the industrial sector, some tenants have asked for rent relief or to restructure their leases through midyear, according to Jeff Milanaik, a Northeast region partner with Bridge Development Partners. Yet he said New Jersey’s stable of institutional and deep-pocketed private owners are well-equipped to handle such requests “because it’s a normal course of doing business — we’ve done it in previous cycles and we’ll do it again.”
One concern, he said, is how individual owner-occupiers and owners of smaller buildings will fare if those businesses are significantly impacted by the downturn.
“I have a question in my mind about what that’s going to look like when we come out,” Milanaik said. “I don’t think it’s going to be terrible, because we’re all supply chain-driven, so we will still be doing that, but will there be a shifting of the sands with those individual businesses? Probably. Will that create a vacancy of a large proportion? If it does, I don’t think it’s going to be for long.”
For one thing, he pointed to the growing sentiment among economic and public health experts that the United States can no longer function with a “just in time” three-month supply of food and goods. The pandemic has exposed the flaws in that approach, those experts say, paving the way for an expansion of the supply chain and a more resilient system.
“Fundamentally there’s going to be a paradigm shift in that supply chain model,” Milanaik said. “And that inherently means more goods will be on the ground in the United States, which really, in my mind, bolsters the need even more so for that asset class and what we do.”
Other stakeholders wondered if disruptions to the global supply chain, especially with respect to products made in Asia, would lead to a reshoring of certain manufacturing.
“Certainly in China, where a lot of the goods are manufactured and raw materials are coming from and finished consumer goods are coming from, that was severely disrupted on their end,” Michael McGuinness, CEO of NAIOP New Jersey, said during an interview in mid-March. He noted that only about 35 percent of the goods from China are actually handled through the Port of New York and New Jersey, making the port a little bit more diversified, and therefore protected from the Asian traffic declines.
“That does give us some protection from putting all our eggs in one basket,” he said, adding that prices for consumer goods are likely to rise as supplies of those products fail to be replenished.
As of mid-March, railroads hauling Asian goods that serve New Jersey didn’t appear to be under any significant financial pressure from the virus, according to railroad strategic planning consultant James R. Blaze. Little of the containerized cargo carried by rail is destined for e-commerce or other retail distribution centers, he said, given the railroads’ inability to provide the kind of pinpoint scheduling truckers are able to offer.
Blaze, a former strategic planner for the U.S. Railway Association that oversaw the creation of Conrail, says railroads “don’t knowingly participate in the e-commerce space,” which is mostly served by trucking companies.
“Truckers are the heroes, whether it’s getting your prescriptions filled or I getting toilet paper,” Blaze said.