By Joshua Burd
It’s been 30 years since Jim Petrucci began his first project in the Lehigh Valley.
He still remembers the reaction.
“In 1988, when I told people I was going to do a project in Bethlehem, Pennsylvania, it was like it was the other side of the world,” said Petrucci, the president of J.G. Petrucci Co. Inc.
These days, Petrucci is far from the only New Jersey-based industrial developer with projects in eastern Pennsylvania. With a limited supply and an increasingly savvy approach to logistics, tenants are pushing the historical boundaries of the New Jersey industrial market and expanding not only westward, but to the southernmost parts of the state and to the east to New York City.
As occupiers explore these new frontiers, developers and brokers in New Jersey are following suit with a more regional approach to the warehouse and distribution sector.
“This is happening in real time,” said Rob Kossar, a vice chairman with JLL. “And if you don’t look at the business from a regional perspective, you can’t execute.”
Kossar leads JLL’s New Jersey offices along with its Northeast industrial office, which was launched in May 2017 in response to the regionalization of the market. Based in East Rutherford, the platform now oversees the firm’s industrial practice as far west as Central Pennsylvania, as far south as Delaware and to points north and east through New York City, Long Island and parts of New York State and New England.
It’s a logical extension for JLL and other firms in a state where the industrial sector is booming and vacancy is at 3 percent, especially given how the market’s footprint has already changed.
The borders between individual submarkets inside New Jersey began to shift several years ago. Tenants that were adamant about being in the Meadowlands in prior cycles are now willing to consider western submarkets such as Totowa, Fairfield and Wayne. Those that previously needed to be near Port Newark-Elizabeth are now content to be in Carteret, off Exit 12 of the New Jersey Turnpike, or even farther south.
David Knee, who leads JLL’s Northeast industrial practice with Kossar, also pointed to the more recent growth of a submarket like the Interstate 287 Corridor, starting in Piscataway, which has become an offshoot of the Exit 10 region around Edison.
But tenants have now blurred the lines and stretched the boundaries of what was historically the northern and central New Jersey industrial market. For instance, Kossar said tenants or investors with regional distribution needs have multiple options between New Jersey and Pennsylvania. For some, the choice is between Exit 8A and the Lehigh Valley — while others may look elsewhere — depending on factors such as the proximity of a FedEx or UPS hub, the availability of labor or whether the user is distributing to physical stores or to e-commerce customers.
Kossar added that another section of the Garden State — starting at the southern edge of Central Jersey and heading south — “is probably the area with the most growth that’s coming.” But points as far west as Harrisburg also have a favorable trajectory because of their ability to accommodate big-box projects for regional users.
The opportunities have pushed development teams to expand outward from northern and central New Jersey.
“Looking for land is really what it boils down to for us as a developer,” said Johanna Chervak, director of real estate development for Rockefeller Group’s New Jersey and Pennsylvania region. “And as opportunities start to narrow down in the 8A market, we’re looking to gain a foothold in the Lehigh Valley, seeing it as a viable alternative to New Jersey and 8A.
“It’s become a proven market, as shown by the growth that’s happened in the last 10 to 20 years.”
Rockefeller is developing facilities of 1 million square feet and 291,000 square feet in Allen Township, Pennsylvania, which will rise alongside a 1.1 million-square-foot distribution center that the firm is building for FedEx Ground. Across the roughly 129 million-square-foot Lehigh Valley submarket, there was about 8.4 million square feet of industrial space under construction as of midyear, JLL reports, with nearly 26 million square feet of active requirements in the market.
The New Jersey industrial sector is also expanding to the east, but for different reasons. While tenants have long counted on submarkets like the Meadowlands as a hub for distribution and replenishment into New York City, the rapid growth of same-day delivery has changed the equation. Kossar said those who wish to make same-day, direct-to-customer deliveries in population centers like Brooklyn and Queens — which have a combined 5 million residents — must do so from inside the city. That is pushing national e-commerce users, retailers and other tenants — along with developers and investors — to look at the outer boroughs in order to compete.
“(They’re) evaluating the need to be in the city proper,” Kossar said. “And my own view is 100 percent of them are going to determine that they need to be in the city, but the question is: How much do they need to be in the city and how much can they do from New Jersey?
“If you think about it, servicing Midtown Manhattan from New Jersey is not a problem — certainly, on the West Side,” he added. “It’s really when you get over the East River to Brooklyn and Queens. That’s where the people live that live in the city and it’s also a target-rich environment for e-commerce companies because it’s a heavy concentration of millennials with disposable income.”
That trend is “in its infancy,” Kossar said, but several projects are now taking shape. JLL represents two developers that have announced multistory projects in the outer boroughs: a 335,000-square-foot facility at 640 Columbia St. in the Red Hook section of Brooklyn, by DH Property Holdings and Goldman Sachs & Co., and a 691,000-squarefoot logistics center at 2505 Bruckner Blvd. in the Bronx by Innovo Property Group and Square Mile Capital.
DH Property Holdings is also teaming with Bridge Development Partners’ New Jersey-based group, led by Jeff Milanaik, to buy an 18-acre property in the Sunset Park section of Brooklyn. The waterfront site is home to an existing industrial park, but reportedly is zoned for up to 1.6 million square feet of new development.
Another longtime New Jersey developer, Matrix Development Group, saw an opportunity to get closer to Brooklyn, Queens and even Long Island when it acquired a 200-acre site on Staten Island’s West Shore, where it is building a 3.5 million-square-foot industrial park. The developer’s vision has been validated in a major way over the past year, as it has inked leases of 855,000 square feet and 975,000 square feet with Amazon and Ikea, respectively.
“Early indications are that it’s absolutely every bit as accepted as northern New Jersey, with added benefits to the other boroughs and to Long Island,” said Joseph Taylor, CEO and president of Matrix. “There’s a significant market out there.”
Staten Island provides easy access to those markets and “yet we’re still able to service all of New Jersey, just as if it were a mile farther west across the river into Elizabeth,” Taylor said. The site, which was formerly home to a field of oil tanks, was once earmarked for an 82,500-seat NASCAR racetrack that was later derailed by public backlash, paving the way for it to become an industrial parcel.
For Matrix, the complex has become a vital addition to its portfolio in the region, especially given the difficulty of assembling large sites in the Meadowlands, the port district and other nearby submarkets. The Monroe-based firm has broken ground on a third speculative building in the Matrix Global Logistics Park, which will measure 450,000 square feet, and hopes to begin work on a final building that will be close to 1 million square feet.
Interest from tenants remains robust, Taylor added, noting that “the labor in Staten Island is fantastic” and that occupancy costs are “very competitive” with northern New Jersey. Matrix has achieved rents that are comparable to recent deals involving larger facilities in the Garden State’s major submarkets, he said.
In contrast to Exit 8A and the Lehigh Valley, Kossar believes tenants are less likely to compare prices between the Meadowlands and the outer boroughs, given that users that need to be inside the city have only one other alternative: paying hundreds of dollars per square foot for retail space and using a “pick-from-store model.” That pales in comparison to the $30 per square foot for new construction in Brooklyn or Queens, where a tenant will end up with a facility that was actually built for e-commerce.
“That’s the math,” Kossar said, “so it’s a very different game.”
Industrial tenants have become increasingly sophisticated in how they evaluate and design their supply chain, experts say, which has prompted them to consider new submarkets. Developers and brokers have followed suit, leading to projects in places such as Burlington County and even farther south along the New Jersey Turnpike.
In Salem County, Matrix is building out its 3.5 million-square-foot Gateway Business Park that is already home to tenants such as Jet.com and Goya. The complex is just minutes from the Delaware border and allows tenants to serve populations in and around Philadelphia, Wilmington and Baltimore.
The expansion of the market has also required new levels of expertise from brokers and developers. Knee said “you really have to look hard at the labor” when exploring a lesser-known or less-heralded market, especially for larger requirements that will have more employees, “so labor analytics are a huge driver.”
“Even though the real estate costs have driven up, the other two, transportation and labor, are still the deciding factors of where someone will go — certainly on a larger-scale project,” said Knee, a vice chairman with JLL. “So all of those are things that we have to be experts in as well — not just finding them a real estate solution.”
Kossar added that users with regional distribution needs are now beginning to confront labor shortages in the western end of the Lehigh Valley, similar to the issue that tenants have found at Exit 8A in recent years. Developers in the Lehigh Valley are even confronting the types of land shortages that are now pervasive in northern and central New Jersey, which will likely keep a lid on vacancy and leasing activity until new space is delivered.
Supply is perhaps even more constrained in New York City’s outer boroughs.
Kossar said it’s hard enough to find smaller, older facilities, but the opportunities for new big-box development are even slimmer. There are barriers at every turn, he said, pointing to the lack of sites zoned for industrial use, a dearth of large sites and the difficulty of finding one that’s for sale at a price that makes financial sense.
Those constraints are a major reason why the early entrants in the city, such as “New York City-oriented developers that weren’t necessarily in the industrial business in the past, but they knew New York City.” Those include the developers of the Bronx and Brooklyn projects that JLL is now marketing, which “had an ability to uncover sites that traditional industrial players were not able to uncover because they just didn’t operate in the city.”
Kossar added that there are other projects that have yet be announced that “would be a great opportunity for both the developer themselves, but also the occupier community to have scale inside the city.” Meantime, “many of the traditional players here in New Jersey are in the market looking for New York City opportunities.”
And as those builders and occupiers look for sites in the outer boroughs, Kossar noted that there are longtime existing New York City tenants that simply “don’t belong there anymore” or no longer need to be there. For a firm like JLL, having a regional presence can allow it to capture more deals like the one it completed for B&H Photo, which relocated from the Brooklyn Navy Yard to a 590,000-square-foot fulfillment center in Burlington County.
“The e-commerce companies, retailers and the big names that we know and that we’ve been doing a lot of work for — they’re going to need to be there in boroughs,” Kossar said. “So you’re going to see this crisscross happen, and it’s already started.”
For all of the benefits that Pennsylvania has gained from the interest of new developers — from New Jersey and elsewhere — there is a downside: Approvals have become harder to come by.
“The market is evolving,” said Jim Petrucci of J.G. Petrucci Co. Inc. “We’re very active throughout New Jersey as well, so we understand what operating in a mature market is like. People that come into Pennsylvania and expect easy pickings in terms of getting approvals or low barriers to entry — those days are long, long gone.
“In many ways, it’s more complicated operating in Pennsylvania right now than it is in New Jersey. And it takes more time, in a lot of cases.”
One major reason is that residents have grown concerned about the influx of truck traffic associated with new industrial projects. And there have been plenty: According to JLL, developers have completed nearly 14.3 million square feet of industrial space in the Lehigh Valley since 2016, with another 8.4 million square feet under construction.
With the newfound traffic concerns, Johanna Chervak of Rockefeller Group said developers must be willing to work closely with government agencies and assist with new infrastructure, such as the $50 million in road improvements that Rockefeller is funding for its two projects in Allen Township.
“You’ve got to be able to go in there and do that to improve the conditions,” Chervak said. “You want to be a responsible developer and work with the community to respond to their needs as they’re evolving and changing and reacting to this growth that’s happening out there.”