By Michael G. McGuinness
We are now more than six months into the pandemic that shut down much of New Jersey’s economy in early March. I thought it would be a good time to pause to look at where we are in terms of recovering from the staggering unemployment and economic losses caused by the health crisis (from February to April, New Jersey lost 831,300 jobs). There is some surprisingly good news, but it must be taken with a strong dose of caution.
According to the latest Rutgers Regional Report — Coronavirus Economic Downshift: New Jersey Defies the National Deceleration — the Garden State’s economy seems to be defying the national trend of decelerating recovery momentum. New Jersey’s July employment growth rate was nearly triple that of the nation (3.6 percent versus 1.3 percent), as COVID-19 began to hit other states hard and slowed their economies. New Jersey experienced a remarkable economic rebound over the last three months, as the state regained 341,300 jobs. However, the prognosis for full recovery from the “Great Contraction,” as the Rutgers economists have termed the current crisis, in the state and nation is daunting. “A multiyear economic ascent will be necessary to return to pre-pandemic conditions — or to fully adjust to the new post-pandemic normal.” Indeed, New Jersey needs to regain 490,000 jobs to return to pre-pandemic levels. The resumption of indoor dining on Sept. 4 should help restore jobs to a hospitality industry decimated by the shutdown.
As detailed in the Rutgers report, the jobs regained were mainly in manufacturing; other services; trade, transportation and utilities; construction; and leisure and hospitality. Unfortunately, the sectors of greatest importance to New Jersey’s office markets — financial activities, professional and business services and information — have not shown much life, with miniscule or below-average gains. It might seem surprising that New Jersey’s reopening gains have doubled those of New York City. While New Jersey regained those 341,300 jobs, New York regained only 161,200 during the same period. Although the economies of New Jersey and New York City are quite interdependent (and “will be linked together in confronting new and painful economic realities,” the report says), they are also very different. New York City’s fortunes are more tied to the experiential economy, which was devastated by closings and social distancing requirements, and high-rise office buildings that depend on elevators. New Jersey’s shining star has been the warehouse and distribution sector, with the even greater demands for e-commerce recently moving the Port of New York and New Jersey to No. 2 in the nation, a massive economic engine that sustained us through the Great Recession and has kept our heads above water in the current crisis.
The pandemic will likely make permanent many changes to how and where we work, as companies seek to de-densify workers and avoid exposing them to the perils of mass-transit commutes, and New Jersey’s languishing suburban office spaces are seeing an uptick in demand as satellite offices become a desirable option. Whether this is a short-term or long-term trend remains to be seen.
On the heels of the Rutgers Regional Report, NAIOP Corporate released its latest Industrial Demand Forecast: COVID-19 Spurs Demand for E-Commerce, but Recession Produces Headwinds for Industrial Real Estate. From a national perspective, “The U.S. macroeconomic landscape has deteriorated significantly since NAIOP’s February 2020 Industrial Space Demand Forecast. Most notably, the economy entered a recession that is likely to continue through the end of the year. Although industrial real estate has outperformed other commercial property types this year due to a surge in e-commerce, broader macroeconomic indicators suggest industrial space absorption will decline sharply by 141 million square feet in Q3 2020 and remain negative until it rebounds to positive levels in Q2 2021.” Growth in industrial absorption consistent with pre-pandemic trends, however, is not forecast to resume until Q1 2022.
The pandemic-driven acceleration of the transition of retail sales online will continue to spur long-term demand for industrial space. In urban and suburban communities, same-day and next-day delivery through e-commerce will support industrial absorption. The automation of physical tasks within warehouses and distribution centers has the potential to increase their efficiency, further contributing to e-commerce’s competitive advantage over traditional retail. All of this bodes well for New Jersey’s position as a logistics state. However, NAIOP cautions that it is unlikely industrial real estate will be completely immune from the effects of the coronavirus-induced recession. These include significant disruptions to supply chains and global trade, reduced manufacturing and construction activity and widespread store closures among brick-and-mortar retailers. These trends and the overall decline in economic activity are likely to impair the performance of industrial properties that are not well-positioned for e-commerce distribution. Employment in U.S. warehousing and storage in July remained 2.3 percent lower than its peak in March, suggesting that while the sector has fared better than the overall economy, it is still recovering.
The Q2 2020 contraction in the U.S. gross domestic product, if annualized, was nearly 33 percent, rivaling the early years of the Great Depression. The yield curve, the difference between long- and short-term interest rates and a bellwether of forward-looking expectations of economic growth, has been nearly 50 basis points below the Federal Reserve’s target of 2 percent since January 2019. These market expectations, along with academic forecasts of growth, highlight the headwinds currently facing the U.S. economy.
More locally, I remain optimistic that New Jersey will outperform the nation, especially since NAIOP New Jersey members continue to break new ground and set trends with creative industrial projects, such as our 2020 Deal of the Year finalists. Bridge Development’s Bridge Point 78, in Phillipsburg and Lopatcong, is the result of the remediation and redevelopment of the former 365-acre Ingersoll Rand manufacturing plant site into a Class A industrial warehouse campus that, once complete, will total 3.85 million square feet. Crow Holdings Industrial’s Veronica Avenue project in Franklin Township is a nearly 1 million-square-foot warehouse property and a true trendsetter in reshaping how we view industrial — and establishing Franklin Township in Somerset County as a viable industrial market. Rockefeller Group’s Piscataway Logistics Center (on a former brownfields site) has opened a world of opportunities for companies seeking state-of-the-art warehouse and distribution facilities in a supply-constrained market. Duke Realty’s Steel Run Logistics Center in Perth Amboy totals 1.25 million square feetacross two state-of-the-art distribution facilities.
While we still have a rough road to travel, New Jersey’s diverse economy and demographics translate to lasting strengths that will help us recover more quickly, strongly and sustainably.
Michael McGuinness is CEO of NAIOP New Jersey and has led the commercial real estate development association since 1997. NAIOP represents developers, owners, asset managers and investors of commercial, industrial and mixed-use properties, with 830 members in New Jersey and over 19,000 members throughout North America