Bob Murray and Clark Machemer – AARON HOUSTON
Speculative development in the warehousing-industrial space fell off sharply following the Great Recession, and continued to lag while other segments recovered. But a robust economy and the rapid expansion of e-commerce have spurred demand for warehouses that are near ports and population centers, according to some experts. It all means that developers are finding it easier to get financing for industrial projects even if they haven’t found tenants yet.
“Investors have a strong appetite for industrial properties,” said Clark Machemer, senior managing director Northeast at Crow Holdings Industrial, which recently broke ground on a 900,000-plus-square-foot spec industrial property on Veronica Avenue in Franklin Township (Somerset County). “Industrial has come back fairly strongly; that and multifamily make up the two strongest markets in New Jersey.”
From 18 holes to a warehouse
The $100 million-plus Franklin Township spec warehouse, which is being built on a former golf course covering just under 100 acres “not far from the New Brunswick train station,” is the third such project Machemer has been involved with recently. “We anticipate completion by the first quarter of 2020, and most of the speculative warehouses over 500,000 square feet are already preleased by the time they’re completed,” he added. “This facility will meet market needs, with 40-foot clear heights, and enough space for adequate car parking, docks, and trailer spaces.”
Rendering of the planned warehouse in Franklin Township. – CROW HOLDINGS
The developer also addressed the “employee experience,” noted Machemer. “Plans for a glass element in the façade for more natural light are being considered, along with parking space for food trucks near the facility’s office section. We already started marketing the warehouse with Cushman & Wakefield, and there’s already been significant interest.”
The project is being financed primarily with traditional construction loans, he added, noting that “because of New Jersey’s strong market you can go up to 65 percent on a spec warehouse,” with the balance from multiple sources, including Crow Holdings and a limited partner.
The tenant demand for logistics isn’t limited to “next day” delivery providers that want easy access to and from ports and the greater New York population center, Machemer said. “Today, almost all retailers, even the brick-and-mortar ones, have some e-commerce presence. There’s been a significant reshuffling of the supply chain, and they’re adapting with an increased demand for warehouses.”
Other players in the spec space include a joint venture between Advance Realty Investors, Greek Development and PGIM Real Estate, which in June announced a groundbreaking on Linden Logistics Center, a 4.1-million-square-foot logistics park in Linden located on a formerly vacant 350-acre tract.
The joint venture partners plan to construct eight Class A warehouse buildings designed to meet the needs of logistics, distribution, fulfillment, manufacturing, last-mile-delivery and other modern-industrial users. “We are extremely excited to lead the leasing efforts for one of the largest industrial and innovative developments in this region,” said CBRE Executive Vice President Mindy Lissner, who’s helping to lead a 10-person team as exclusive leasing agents for the property. “We look forward to engaging with the growing number of food, consumer product, e-commerce and other industrial users searching for a first-class space in this thriving commercial corridor.”
A new look for storage facilities?
The increasing demand for warehouse space may lead to a change in the way some facilities are configured, according to John Alascio, an executive managing director in Cushman & Wakefield’s Equity, Debt & Structured Finance group.
“One of the spec warehouse deals we’re working on in New York City involves a two-story warehouse,” he said. “The idea would involve a ramp to the second level that would allow a van to access the inventory to make same-day deliveries. Prologis previously built a similar one near Seattle.”
The three-floor, 590,000-square-foot Prologis Georgetown Crossroads was completed last year as the first of its kind in the U.S., according to Prologis. It features truck ramps leading to loading docks on the second level, and a third floor, served by forklift-accessible freight elevators, for lighter-scale warehouse operations, according to a company announcement.
Alascio
“The idea is to be able to quickly break out the components and get them out for Amazon, and other companies,” said Alascio. “We’re currently looking at similar projects in Brooklyn and Queens. They would likely range from 300,000 square feet to 1 million square feet. This is where the market’s going, because companies want to be close to population centers.”
Overall, he added, the market for spec industrial debt and equity financing “has been red hot for the past 18 months or so. Demand has been driven by online and same-day delivery activity, while at the same time there’s a lack of zoned and permitted land in and near ports.”
Banks and nontraditional lenders — including private equity groups, real estate investment trusts, debt funds and life insurers — are getting more comfortable with speculative warehousing deals, he noted. “In some cases, banks and nontraditional lenders are providing nonrecourse loans. Many now favor warehousing loans over multifamily,” Alascio explained.
He said other Cushman & Wakefield brokerage assignments for spec warehouse development include Lincoln Logistics Bayonne. The full‐service real estate development and property management company Lincoln Equities Group closed last year on the 152.9-acre former Military Ocean Terminal at Bayonne, a peninsula site that had to be elevated by six feet with about 1 million cubic yards of fill to meet post-Hurricane Sandy standards. Construction is slated to start next year, but parcels are now available for sale or lease. When it’s completed, the site will host about 1.6 million square feet of industrial warehouse space.
Developers are willing to bet on continued demand for warehouse space because of the “orderly rise,” which suggests it’s not a bubble, according to Alascio. “We’re seeing a major shift in the way consumers shop and goods are transported,” he added. “So there’s a long runway to this trend. At the same time, the CAGR [compound annual growth rate] for per-square-foot rents has gone through a generational shift for industrial, and developers are going further out, to the western counties of New Jersey and Pennsylvania’s Lehigh Valley along major roadways. Meanwhile, lenders are comfortable with the market yield they can get, based on lease pricing.”
Nationally, demand continues to outpace a four-year surge in warehouse development—much of it speculative—and allay any fears about overbuilding, according to a June report by real estate services firm CBRE. “There currently is more than 255 million square feet of warehouse space under construction, 70.2 percent of it on spec,” notes the MarketFlash release. “Since 2015, however, warehouse demand has outpaced new warehouse completions by 169 million square feet and rents have increased by 19.2 percent , according to CBRE Econometric Advisors.”
With 7 million square feet of speculative warehousing space under construction, a 3.4 percent vacancy rate, and annual rate growth of 4.8 percent, the New York-New Jersey market ranked in the top 10 nationally during the first quarter of 2010, according to the CBRE report. E-commerce, food & beverage, wholesaler and third-party logistics users have dominated pre-leasing activity and “are the best candidates to occupy” any post-construction space that’s still available.
