Industrial rents in New Jersey and other top markets are rising at unprecedented rates, leaving investors hungrier than ever for properties across the asset class.
By Joshua Burd
It may well be the golden age of New Jersey’s industrial market, where rents are not only soaring, but rising at an unprecedented rate.
That has left investors hungrier than ever for properties across the asset class — with little sign of being deterred by surging prices, fierce competition and any fears that the pace will slow.
“The word ‘structural’ is really in play here,” said Kevin Welsh, an investment sales broker and executive managing director with Newmark, “because when you’re looking at rental rate growth and you’re looking at 20 percent per annum, there has to be something more going on behind the scenes than people worrying about some sort of cyclical change. And in my mind, that’s how this is playing out.”
The Garden State is like many other top-tier industrial markets that have ascended over the past decade. Vacancy has reached record lows as demand far outpaces supply, thanks to the proliferation of e-commerce and the growing focus on supply chain continuity, leading to an age of prosperity for landlords and developers.
It’s also never been a better time to sell. Capitalization rates, or cap rates — a calculation of an owner’s first year of rental income divided by the purchase price — have fallen below 3 percent for several recent trades of high-end New Jersey industrial properties, in an indication of rising values for sellers and lower yields for buyers.
“It’s rarified air, for sure,” said Jose Cruz, a senior managing director with JLL Capital Markets. “Sub-three is rare, but three to three and a quarter is feeling more and more like the norm.”
Cap rates are likely to compress further, he said, given the lack of available industrial space and the continued influx of new investors, many of whom are redirecting their capital from asset classes such as office, retail and even apartments.
“You’re getting good rent growth in multifamily, but it’s not to that level,” Cruz said. “So the rent growth is a big part of the story, aside from a lack of options.”
Investors are paying up for industrial buildings of all types, including older, less functional warehouses and those in secondary markets. According to the brokerage firm NAI James E. Hanson, the average sales price for northern New Jersey industrial deals rose last year to $202 per square foot, marking a 35 percent increase from 2020. The research, which tracked nearly 16.8 million square feet of industrial trades in 2021, also found that the average cap rate was 5.3 percent.
That demand was on full display in several high-profile deals in 2021. Last summer, CenterPoint Properties paid $91 million or $332 per square foot for a 274,430-square-foot FedEx facility at 63-65 Stults Road in South Brunswick, touting the site’s low coverage ratio of just 23 percent. In mid-December, investment firm Faropoint closed on a 10-building, 654,633-square-foot light industrial portfolio in Bergen and Morris counties, buying the properties from Kushner Cos. for $132.5 million, or $202 per square foot.
Mary Lang, head of Americas direct logistics strategies for CBRE Investment Management, said the company is counting on “very heady rental rate growth” in the top 15 U.S. logistics markets, including North Jersey.
“For that top tier, we’re projecting between 25 and 35 percent rent growth, still, over the next five years,” Lang said, speaking in early November at NAIOP’s I.CON East conference. She quipped that, “from an underwriting perspective,” the standard, stabilized cap rate is “largely worthless, because old leases in this case can be leases that were signed nine to 12 months ago. In places like northern New Jersey or Southern California, you’re probably 20 percent off the mark in rental rates today for a lease that was signed last August in those markets.”
It’s no surprise, then, that the state continues to draw investors that are new to the region or to the asset class altogether.
“It’s on everyone’s radar,” said Jon Kristofich, a director and broker with NAI James E. Hanson in Teterboro. “You have people that historically have not been industrial buyers looking to become industrial buyers. And there’s a learning curve — you can’t just step in at this point where it’s the most competitive marketplace unless you’re willing to spend money at the levels we’re talking about, which some of them are.”
First-time industrial buyers even include Taconic Partners, the accomplished New York-based investment firm, which announced in late December that it had closed on its first industrial property, acquiring a 296,000-square-foot warehouse in Morris Township for $55 million alongside joint venture partner Nuveen Real Estate. The deal came just weeks after news of Faropoint’s purchase of the Kushner Cos. portfolio, which marked its first deal in North Jersey despite having amassed more than 20 million square feet in other markets.
“When you can’t find those premier, Class A buildings in the top three to five markets in the state, but you still have to put the money to work, that’s led to looking at secondary and tertiary markets,” Cruz said. “But it’s also led to product types like flex space, where it’s still industrial.
“There’s still rent growth there because there’s demand for that space, because it’s functional and it’s also not easy to find,” he added. “It’s not on every corner of New Jersey, so if you have a need for that space, your options are limited.”
Buyers are still likely to find value, even in such a seller’s market. Juan Arias, a senior consultant with CoStar Advisory Services, said that’s especially true for properties that are near ports or those in so-called last mile locations near consumers, “where you have the strongest rent growth story and long-term rent growth potential.” That means an investor “can buy in at a low cap rate and feel comfortable with it” because location, in those instances, is more important than any other aspect of the property.
Arias also noted that, as industrial has become an institutional property type, it’s increasingly drawing investors from locations such as Japan and Europe, “who are coming in with lower capital costs” and bidding aggressively. They’re also doing so with the knowledge that the U.S. lags much of Asia and Europe in terms of e-commerce adoption, making them all the more bullish on rent growth here.
“Those players that come from those countries feel way more comfortable with the story, so they’re willing to come in at 3 percent or lower cap rates,” Arias said.
As a consumer, Lang said she had no reason to doubt that perspective.
“I never want to underestimate our ability to want things as quickly as possible, because I think as a culture, we desire everything yesterday,” Lang said. “So it’s nice to see actually that we are being outpaced currently, because I have no qualms about assuming that we’re going to ramp right up and meet some of these other countries as well.”
Welsh, who moderated the I.CON East panel discussion, said the need to protect the nation’s supply chain will also fuel the industrial market and sustained rent growth. The pandemic exposed companies that lacked the inventory to protect against shipping delays, he said, causing many to secure additional warehouse space domestically in order to meet their customers’ needs.
“A lot of folks never even heard of the words ‘supply chain’ until this pandemic,” said Welsh, who leads Newmark’s investment sales team in New Jersey. “And the safety of supply chains is now driving a lot of what’s happening.”
Those prospects makes it worthwhile for CBRE Investment Management and other established players to remain competitive against newer entrants, even with rising acquisition costs and lower yields in the short term. But the ability to do so is a function of a company’s access to capital, its business model and whether it has a shorter- or longer-term strategy.
“It’s a capital question,” said Jim Clewlow, CenterPoint Properties’ chief investment officer and executive vice president, who noted that “everybody is a little bit different.” For his company, which is owned by the California Public Employees’ Retirement System, or CalPERS, “the cost of capital … is extremely low and very focused on long-term appreciation.”
“It’s an income vehicle, but at the end of the day, we’re not buying things or developing things to go flip it tomorrow,” Clewlow said during the I.CON panel. “There isn’t some high hurdle rate or some burning sensation in my pocket every time we have a vacancy.”
He added: “It comes back to the fundamentals. When the world is changing like it is … you have to go back to the basics.”
For all of the demand, brokers say it’s not always easy to find a willing seller, especially for older, infill properties with multigenerational owners. Greg James, NAI Hanson’s director of capital markets, said many landlords balk at giving up the property after experiencing the rent growth for themselves. And if they do sell, it’s incumbent upon them to quickly reinvest the proceeds in order to defer capital gains taxes, as allowed under the government’s Section 1031 like-kind exchange program.
“That’s the tough thing for some of the old-timers,” James said, later adding: “You still have 1031, but where else would you put the money? And I think some of them like the idea of ‘they know what they know.’ ”
