By Joshua Burd
Industrial tenants are still yearning for the types of modern, high-end logistics spaces that have flooded the market in recent years. When they may actually sign a lease is not nearly as certain.
That was a key takeaway from NAIOP’s I.CON East conference in early June, where developers said they were grappling with indecision by occupiers that remain cost-conscious in the near-term and watchful of longer-term issues, such as the availability of power. That has tempered some of the enthusiasm among builders and investors that are otherwise bullish on the asset class, sensing a rebound from the market’s recent pullback.
“I think demand is returning, but the decision-making and capital investment is the constraint at this point,” said Brandi Hanback, an executive vice president and co-head of development with Rockefeller Group. “So it’s going to take time.”
The developer has seen an uptick in touring activity and lease proposals, she said, but prospective tenants are still taking anywhere from two to four weeks to respond.
“So it’s very slow, and I think that’s deliberate and tied to the decision-making and the tension internally between ops and planning and the C-suite and capital investment (decisions),” she added. “So when we see some of capital markets normalize, I think some of those decisions will get unlocked and we’ll start to see transactions increase.”
Hanback was among the many executives who weighed in during the two-day conference at the Hyatt Regency Jersey City, speaking during a June 6 panel focused on the East Coast industrial market. The event took place as New Jersey and other top regions navigate a surge in new vacant warehouse deliveries — many of which broke ground at the height of the market in 2020 and 2021 — coupled with tenant activity that has moderated from the pandemic.
That has caused vacancy in northern and central New Jersey to hover around 5 percent this year. For instance, CBRE said the region in the second quarter saw both 5.9 million square feet of leasing activity and 2 million square feet of new space hit the market via new construction.
Yet Hanback and other panelists at I.CON East were optimistic about the market, arguing that the softness stemmed from tenants’ concerns about capital spending rather than fundamentals.
“I think sometimes it’s important to bifurcate those two,” said Emily Cannon, chief investment officer of Atlanta-based Dogwood Industrial Properties. “We still all really like industrial, and there are tailwinds in industrial. It’s a good business, even with the amount of supply coming online. It’s going to be a big jump by the end of this year, but it’s still historically a very good occupancy number for our business. So I see light winds in our sails.”
Landlords are buoyed by what they say is an increasingly active tenant pool. The specific type of user depends on the region, they said, but those companies hail from industries such as ecommerce, food and beverage, manufacturing, health care and construction suppliers.
They also pointed to a recent flurry of deals by third-party logistics providers, a trend that’s being reflected locally in New Jersey.
“There’s been a lot more 3PL activity than I recall seeing in the past couple of years,” said Kate Nolan Bryden, senior vice president with Baltimore-based MRP Industrial LLC. “(So) that could be sort of an interim strategy for larger companies to give themselves a little breathing room before making huge capital investments.”
The panelists cited the impact of consumer spending, which remains resilient despite some weakness in recent months, and continued demand for fast delivery. That bodes well for the types of ecommerce and retail players that led the way for industrial leasing during the COVID-19 crisis. Chief among them is Amazon, which took a well-documented step back in adding new fulfillment space after the pandemic, but has committed to millions of square feet this year as it refocuses on delivery times.
“A lot of companies do use Amazon as sort of a guidepost on how to handle customer service and returns and delivery efficiency,” Bryden said. “So I’m optimistic that, while we’ve seen a question in what the growth strategy is for the other big ecommerce retailers, they’re going to see that Amazon’s model since the holidays has seemed to correct and that they want a piece of that, too.”
Even so, tenants remain concerned about issues such as the availability of power in a time when the grid is increasingly stretched, panelists said. Utilities in markets such as New Jersey and Pennsylvania have grown reluctant to commit large power loads to speculative industrial projects, adding another complication for developers that are marketing the space.
The question is especially vexing for tenants that expect their power needs to increase in years to come, but are either unsure of the timeline or when they’ll have the capital to expand.
“It’s very challenging right now to get power to the customer, but it’s also challenging for the customer to communicate effectively what their needs are going to be,” said Sonya Huffman, chief administrative officer for Link Logistics Real Estate.
Bryden added that “some of our tenants anticipate going to a more automated approach in their warehouse, but don’t know exactly what that’s going to look like, so they’re trying to ask for something forward-reaching because we’re looking for a 10-year term, not always, but I would say typically.” Occupiers must also account for any plans to electrify their fleet or provide charging stations for personal vehicles, whether by regulation or choice.
“Those are things that are being balanced, and it’s tricky when you look at how that works with the overall grid and what’s available today,” Bryden said.
In the meantime, Huffman emphasized the importance of “being very close to your customer, really trying to understand and investing on knowledge.”
“We do that extensively, whether it’s through meeting with our larger customers on a regular basis, just spending time with them and understanding what they’re thinking and what they need, or whether it’s on those smaller spaces,” she said, noting that that Link’s average suite size is around 63,000 square feet.
“We have a lot of those smaller spaces, and sometimes you can spend all of your energy focused on the big guys, but really those smaller ones are what drive your occupancy and maintain your occupancy … And I think just gathering information and investing in those relationships is really what’s going to help all of us make stronger decisions, and that’s a big part of our strategy.”
