By Joshua Burd
Among the many changes that have come to New Jersey’s industrial market — especially those that have rallied investors — Rob Kossar points to the differences in how leases are structured.
In past cycles, rental rates typically would stay flat for the first five years of a lease and then see a 12 to 15 percent bump in the sixth year. Essentially, landlords were not seeing their rental stream reflect inflation during those first five-year increments.
But during the most recent downturn, “rental rates dropped so precipitously, so fast,” that owners were eager to find tenants, Kossar said. So they lowered their rents, but built in annual increases in hopes of trying to bring them back up to where they were before the crash.
Today, every industrial lease has an annual bump, somewhere between 2 and 3 percent. And it has led to some unintended consequences in how investors view those assets.
“It wasn’t really driven by the fact that investors would like it and it would enhance value,” Kossar said. “It was actually driven by that mentality that happened during the recession of just trying to get back to status quo. And now it’s put us in a much better place from an investment standpoint to have these annual bumps in every lease. And it’s in every lease.”
Not to mention that lease terms are longer than in past cycles, he said. That’s driven largely by the rise of e-commerce users, which typically spend more on infrastructure inside their fulfillment centers and will commit to a longer term as a result.
Add in the fact that, the larger the size, the longer the lease. And make no mistake: Deal size is growing.
“We’re seeing these mega deals, these million-footers, so it lends itself to longer terms,” Kossar said. “We used to see a 10-year term (and think that was long), but we’re seeing 15, 20 years. So there’s no question you’re seeing longer leases.”
