At the end of the third quarter of 2023 the local industrial sector has continued its trend toward a more “normal” place, following its peak and accelerated growth in recent years.

“Vacancy was so low through the pandemic era, and now that leasing volumes are back to pre-pandemic … the vacancy rate is slowly rising,”  JLL Vice Chairman Rob Kossar told NJBIZ. “We had a bunch of projects under construction that are delivering – some of them are being delivered vacant, which we didn’t experience in the pandemic era but we’ve certainly experienced it prior to that – so we crept up.”

In its lookback at the industrial sector for Q3, released this week, JLL reported a 4% vacancy rate for New Jersey in the period. That figure marked an increase, with 8.1 million square feet in new deliveries – the second largest on record, according to the global real estate services company – during the period.

Year-to-date, 30.5% of deliveries have been pre-leased, a considerable decline compared with the market’s peak of 88.3%. According to JLL, that pushed the vacancy up 120 basis points, with 65 BPs attributable to vacant deliveries.

Still, Kossar said the market still favors landlords as rents continue to rise.

For Q3, JLL pegged the average asking rent in the Garden State industrial sector at $16.60 per square foot. However, what you will pay depends on where you are.

In North Jersey – which includes submarkets where rates are the highest, like the ports – there was a 1.2% increase in Q3 year over year.

“Those companies that operate out of northern New Jersey do so for very good reason, and that’s the proximity to the population and of course, the ability to have the very best labor,” Kossar said.

“For the most part, I think that the bigger and stronger companies that rely heavily on transportation and labor will continue to be bullish on northern New Jersey and I do expect rents to continue to rise, as they did over the previous quarters,” he added.

Meanwhile, Central and South Jersey offer a lower-cost alternative, according to Kossar, which has drawn interest and helped to boost asking rents. JLL pointed to tenant consolidations amid the normalization of the sector, with a push toward more southern and western markets.

According to the firm, in Q3, rates were up 14.5% year over year in Central/South Jersey, underscoring that shift in focus.

Leasing cooled during the slower summer months with JLL reporting a slight decline in activity for Q3 of 6.4 million square feet, 21.3% under the trailing four-quarter average. Just one lease for more than 300,000 square feet was secured in the Garden State for the period, according to JLL, compared with an average of more than three over the trailing eight quarters.

Despite the overall sense of landlord favorability, Kossar said there are still opportunities for tenants, such as subleases that have hit the market. “I think we’re going to see some of those subleases be very aggressive and that you may have an opportunity to get a below market rent,” he said. However, the phenomenon is likely short-term, “because if they’re willing to cut their rate, they’ll get leased quickly,” Kossar added.

Time to make the doughnut

To get an idea of what the future holds, it helps to look at the present. With construction starts leveling off due to the cost of borrowing, other macroeconomic pressures and an increasingly difficult entitlement landscape, construction starts in Q3 were 62.2% under the average from Q1 2019 through Q2 of this year, with just 1.8 million square feet breaking ground.

But in the long run, this dynamic could set the stage for rent increases as the construction cycle stabilizes.

“Overall, I think while we’re facing economic headwinds and certainly a macroeconomic environment that’s not perfect, because there was so much low vacancy in the market … because we were in such a good position, and there’s so many barriers to entry for development, that really we didn’t get out over our ski, so that’s a good thing,” Kossar said.

According to him, that puts projects that are currently under construction in a prime position to lease.

Kossar said it’s a topic of debate, but he sees a “doughnut hole” on the horizon, possibly in the 12-18 month timeframe.

“Because when demand goes back to where it’s going to go, and we don’t have the supply anymore – because these buildings will be leased by then; no new construction starts are starting – there’s going to be a dearth of space,” which will also afford rental rates room to grow.

Then, “things are going to start looking like they did during the pandemic era, because we’re not going to have any supply coming up,” he said.

“There is an undersupply of real estate. And if I was advising an occupier client, I would say, if you need the space, lock it down,” Kossar said. “Try to use the lack of demand in your favor and see what you can do.”

He does expect developers to hold firm on rents in light of that 4% vacancy rate.