Despite supply chain disruptions, the Garden State industrial landscape remains strong.
In the fourth quarter of 2021, vacancy rates in the sector hit a 20-year low of 2.3%. Absorption also set a 20-year record, totaling approximately 14.5 million square feet. That’s according to Avison Young’s Fourth Quarter New Jersey Industrial Insights Report, which was released on Feb. 15.
According to the report, at 3.0%, absorption as a percentage of existing inventory was at its highest post-2001 recorded level last year due to high demand.
But with demand remaining high, supply is still low.
“Industrial leasing activity remained steady in 2021 but did not reach pre-COVID levels due to the lack of available supply,” Avison Young New Jersey Principal and Managing Director Jeffrey Heller said in a statement accompanying the report. “As a result, we’re continuing to see a trend of antiquated office buildings being repositioned as industrial assets in an effort to satisfy the surging demand in the New Jersey market.”
A number of recent transactions in the Garden State demonstrate this effort to meet the demands of the industrial sector. In January, partners Russo Development and PGIM acquired a site in Mahwah where they’ll demolish a 60,000-square-foot office building to redevelop the property into a Class-A, 200,000-square-foot industrial building.
Meanwhile, with demand unrelenting, base rents in the sector went up by 17% over the course of 2021 to more than $14 per square foot, according to the report–the highest average rent for the past 10 years. Landlords have also been able to withhold concessions in the industrial sector. Avison Young found tenant improvement allowances are down by 24.8% since 2020.
As industrial demand persists, more than half of the square footage under construction in the industrial sector is for buildings under 500,000 square feet, which Avison Young said negates any construction-driven supply concerns. The firm reported there are 144 properties in the industrial development pipeline, adding up to a cumulative 44.1 million square feet, with Linden boasting the most project starts at six.
And investors are still responding: Avison Young found valuations went up by 13.8% from the start of 2020.
“Investment activity in the New Jersey industrial market has surged to over $5.7 billion since 2020 as strong sector fundamentals that largely benefitted from the COVID environment continue to attract investors,” said Matthew Turse, a New Jersey-based senior vice president at Avison Young who specializes in the industrial sector.
That activity is likely to continue. “We anticipate that in 2022 investors will look to capitalize on rising rents via shorter deal terms in the five-to-seven-year range that allow them to reset rents on a more frequent pace,” Turse said.