Developers in New Jersey are slated to deliver millions of square feet of new industrial space in 2020 and 2021, but market experts say demand will continue to outpace supply.
By Joshua Burd
Users in New Jersey’s booming industrial sector have faced a severe lack of supply in recent years, leading to unprecedented rent growth and an unabated race to find development sites.
New space is on the way — and plenty of it — with millions of square feet slated to come online in the next two years. Yet market experts say demand will continue to outpace supply, given the continued upside of e-commerce and a race by traditional retailers to update their supply chains.
“The demand is there,” said Mindy Lissner, an industrial broker and executive vice president with CBRE. “It’s justifying the pipeline and what’s getting built, so I don’t think we’re overbuilding — I think we need more buildings right now to satisfy requirements.”
Lissner, who is based in CBRE’s East Brunswick office, said projected deliveries through 2020 will add roughly 22 million square feet to New Jersey’s stock of industrial space. About a third of that space is “already leased or spoken for,” she said, adding that the firm is tracking between 40 million and 50 million square feet of current demand overall.
What’s more, those requirements would be enough to fill nearly two-thirds of the overall construction pipeline that CBRE is tracking over a five-year horizon, which comprises about 150 projects spanning 65 million to 70 million square feet. Perhaps most importantly, those developments will provide the functional, modern space that users simply can’t find at older buildings.
“That’s what these clients are demanding,” Lissner said, noting that many tenants require higher ceiling heights to support new forms of material handling equipment and other technology, along with efficient layouts and higher amounts of car and trailer parking.
Much of that new supply will come via large-scale projects that are under construction or on the verge of breaking ground. In Phillipsburg, Bridge Development Partners will soon deliver a 975,000-square-foot distribution center near Interstate 78, the first of what will be six to seven buildings spanning nearly 4 million square feet at full-build-out. Its next three buildings at the site, which would add another 1.2 million square feet, are due to come online by next spring.
Meantime, Advance Realty Investors, Greek Development and PGIM Real Estate recently broke ground in Linden on an eight-building, 4.1 million-square-foot logistics park about 10 miles from Port Newark-Elizabeth. Advance and Greek are also marketing a planned 3.3 million-square-foot industrial campus in Logan Township that would include up to 11 buildings.
Another mega project, a planned 3 million-square-foot complex by Russo Development and Forsgate Industrial Partners, is now slated to deliver its first building in late 2021 after the firms recently closed on 718 acres in Lyndhurst, Rutherford and North Arlington.
That’s not to mention a host of individual developments along the New Jersey Turnpike corridor and in secondary submarkets that have emerged in recent years as much-needed alternatives. Still, both brokers and developers point to the unprecedented vacancy across the state — which was about 3 percent at midyear — along with an e-commerce industry that has seemingly only scratched the surface: Online shopping still accounts for only about 12 percent of overall retail sales in the U.S., a number that is expected to steadily rise in the near term.
“It all comes back to the patterns of the consumers and the paradigm shift in buying habits,” said Jeff Milanaik, a partner with Bridge Development Partners, who leads the firm’s Northeast region. “On top of that, we are severely land-constrained.”
If nothing else, stakeholders highlight the trajectory of Amazon, which has become the state’s largest occupier of industrial space in only about six years, and those that are looking to keep pace. That group includes both pure e-commerce companies and brick-and-mortar retailers that are now trying to catch up and enhance their online shopping platforms.
“Yes, it’s disruptive to traditional retail, but it’s not going away,” said David Knee, a vice chairman with JLL, who leads the firm’s Northeast industrial practice. “And then the traditional retailers are finding a balance and trying to rejigger the way that they’re selling their products.”
Long-established retailers have been responsible for the some of the region’s largest industrial deals in recent years. In early August, Home Depot announced that it would take 1.3 million square feet in Perth Amboy at two buildings to be developed by Duke Realty Corp. The site is minutes from another large industrial park in the city, developed by Bridge Development Partners, which leased 718,000 square feet to Target in 2017 before ultimately selling the complex to Duke.
Other notable deals involving retailers include Ikea’s 975,000-square-foot lease last year at the Matrix Global Logistics Park in Staten Island, which is being built by Matrix Development Group.
“If you think about that concept, we deal with a lot of people who do straddle the line,” said Alec Taylor, a principal with Monroe-based Matrix. “They’re large, established retailers who have sales outlets that are sticks and bricks, but are building up their e-commerce line and they’re trying to find warehouses wherein they can accommodate each approach.”
All the while, both e-commerce and traditional retailers are still vying for locations that can improve delivery times and accommodate the demand for next-day or same-day delivery.
“The key is customer service, so today if a company fails on customer service, they potentially lose that consumer for life,” said Knee, who is based in East Rutherford. “So it’s a battle of supply chain, it’s a battle of customer service, and that’s what everyone is trying to execute.”
The growth of e-commerce is also fueling persistent demand from FedEx, UPS and other delivery companies, insiders say. The same is true for third-party logistics companies, commonly known as 3PLs, which are expanding alongside their fast-growing clients and can often provide more flexible solutions to smaller e-commerce startups or retailers.
Logistics firms were among the most active tenants in the second quarter, seemingly jumping on the few spaces that were available in northern and central New Jersey.
“That’s driving the need for the immediacy of the space or getting it as soon as possible,” said Matthew Turse, a senior vice president in Avison Young’s Morristown office. “So even that is putting pressure on the market, because it’s time-sensitive for these people to be out and fulfilling the obligations of that contract, of which there seems to be a continued healthy amount through the various forms of commerce.”
Brokers also acknowledge another sign of balance in the market: Developers and landlords are seeing demand from users of all sizes, from 150,000 to more than 1 million square feet. The common thread is that tenants — especially e-commerce companies and those that support them — are seeking newer space to support their business models.
For owners, the pipeline of e-commerce requirements is not without challenges. The rapid growth of online retail has meant that landlords are increasingly forced to deal with newer companies that may not have a lengthy credit history.
“We’ve done deals like that, we’ve passed on deals like that and we’re currently looking at deals like that,” said Taylor, the Matrix principal. Making those decisions can be difficult, he said, noting that “traditionally, we underwrite very solid fundamentals when people expose their financial information to us.” But with less-established companies “you’re frequently talking about nonfinancial analyses such as our assessment of their idea, their business plan, how good is their idea and how good are they going to be at executing.”
He added that, “fortunately, we’ve never done one that we’ve regretted,” although Matrix has passed on deals in which the companies later went on to do well. That raises another dilemma for a prospective landlord: The evaluation of “whether they’re going to be around to pay the rent … is a meat-and-potatoes decision for a developer,” but one that can also have implications beyond a single lease or a single building.
“The other consideration is almost as important. That is, if you establish a really good relationship with a burgeoning company, your upside is well beyond whichever building is in consideration,” Taylor said. “They may grow and they may grow very quickly into a second, third and, beyond that, a fourth and fifth building.
“So there’s a real incentive to want to believe in their story and to be their developer of choice in whatever area you’re in,” he added. “But you have to weigh that against the fact that, like every other startup in the history of America, the odds aren’t always in their favor. A good idea doesn’t mean that it’s all going to work. It can be tricky.”
A developer can protect itself with measures such as a credit enhancement facility that goes down as a tenant’s performance improves, Taylor said. Doing so is nothing new for landlords, who dealt with such tenants even before the dawn of e-commerce.
“We had companies looking for space in the ’90s, before this trend, who were burgeoning and growing,” Taylor said. “(They had) a great product or a great story and maybe they had come up with a better way to do distribution — and you wanted to be their landlord because you believed in them, but their books weren’t there.
“Nothing changes intrinsically because they’re e-commerce. It’s still an analysis of what you think will happen with them.”
Developers and their leasing teams also face some uncertainty when trying to project demand from e-commerce companies, whose growth can be fluid and sudden. Knee, the JLL broker, said his team often gains clues from following other major markets.
“One of the bigger indicators for us is the West Coast,” he said. “So sometimes when the West Coast gets a big lease with someone and we haven’t seen that tenant here, usually — I’d say about 60 to 80 percent of the time — that tenant winds up looking on the East Coast in Jersey, New York or Pennsylvania six to 12 or 18 months later.
“So we do get a good look at some companies that have to come east if they’re setting up on the West Coast, so that’s been very helpful for us.”
Not to be forgotten are the other industries that have long anchored New Jersey’s warehouse and distribution sector, including food and beverage, apparel and manufacturing. Landlords are seeing activity from every angle, while Knee noted that existing tenants are becoming eager to renew in light of the market’s surging rents and the difficulty of finding space.
“Typically, the renewal provisions are giving notice of between nine and 12 months to the landlord,” Knee said. “We have tenants that, two years out, are saying, ‘Let’s renew now.’
“For almost everyone we’re doing, they’re trying to look ahead before they have to give notice.”
Tenants pre-leased about a quarter of the industrial space under construction in New Jersey during the second quarter. Experts say that number could rise dramatically in the years to come as shovels hit the ground and walls go up for new buildings across all submarkets, especially as the construction pipeline ramps up in earnest.
“The business hasn’t changed in the sense that, unless you’re dealing with a company that really wants a build-to-suit and understands the build-to-suit, everybody wants to know: Are you actually going to deliver a building — do you have approvals and are you going to build it?’ ” Milanaik said. “Once you get the pads ready, there’s serious interest.”