Recipe for success

New Jersey’s industrial market is hot. With vacancy and availability rates low, rents are going up and space is still in demand. Meanwhile, a cooling in the office market aided by COVID-19’s remote-work realignment has resulted in plenty of supply. That could make for a good match. With demand outpacing supply on the industrial side, older and vacant office properties are being repositioned to industrial.

According to CBRE, there are approximately 8.6 million square feet of office conversions already in the pipeline for repurposing into residential, mixed-use and industrial space. As opposed to office buildings sitting vacant for years, “the supply shifted to the demand,” according CBRE Executive Vice President Jeremy Neuer.

“There’s not enough supply to meet the demand for industrial. There’s certainly not enough supply to meet the demand of … Class-A or newer industrial in our market, as evidenced by the fact that most buildings predominantly that come online in our market are pre-leased … many of which before they’re even out of the ground. And certainly before they’re finished,” he said.

JLL New Jersey’s 2021 fourth quarter industrial report showed the state’s Class-A industrial market with a vacancy rate of 0.5%. Meanwhile, in its office insight report for that quarter, JLL reported an overall vacancy rate of 26.8% in the market, a decline of 30 basis points from the previous quarter.

And it doesn’t look like that’s stopping anytime soon.

New Jersey represents a trifecta when it comes to moving goods, which drives a lot of this activity, Neuer pointed out. Rents are peaking in the industrial market because people want the access. “You’ve got the ports, so the goods can come in; you’ve got the highway infrastructure system, so the goods can get out of here; and then you also have the densest population in the country.

“You’ve got everything that somebody could possibly want with respect to how to move goods through the Northeast,” he said.

And while leasing volume in the industrial sector dropped in the last quarter of 2021 – CBRE cited a lack of supply, the prevalence of pre-leasing due to a lack of space and higher pricing as contributing factors – the market still saw its 20th straight quarter of occupancy growth. In that timeframe, eight industrial buildings completed construction, adding up to 2.17 million square feet, with a cumulative prelease rate of 85%.

“[S]ome of these off-market deals get done because somebody walks in with an offer and, you know, there’s three offers right behind it,” Neuer said. “Because they’re looking for projects. And people are seeking it.”

IN THE ZONE

But, that doesn’t mean that the office building your company may have left vacant is necessarily primed to make the switch.

Logistically, these types of projects aren’t really going to be situated along the Garden State Parkway, Neuer said, because you can’t drive trucks on the roadway: “So you do need access to highways,” be it the New Jersey Turnpike or Interstates like 78 or 287.

Neuer pointed to an area like the Meadowlands as one that offers that access. Whereas developers three decades ago were begging to build offices, he said, now they want to knock those buildings down to make way for Class-A industrial space, because there isn’t any available.

Some municipalities across the state are reevaluating zoning in their efforts to mitigate these kinds of un- and underutilized office properties, which is helping when it comes to lack of supply.

“Somerset-Franklin Township was proactive … is probably the best word, to change their zoning and allow for developers to come in and redevelop office into industrial without having to jump through zoning hoops,” Neuer said.

In the beginning of January, CBRE arranged the sale of 200 Cottontail Lane in Somerset for $30.75 million. At the time, the firm said the new owner planned to reposition the property’s existing 209,000-square-foot office building into a new warehouse-distribution site. Somerset’s Corporate Business District rezoning made the site eligible for industrial use.

“There is a demand for certain kinds of product. That demand is in the multifamily sector and that demand is in the industrial sector,” Neuer said. “And smart, forward thinking municipalities will look at older, Class-C, vacant – even Class-A, vacant – office buildings and say, how to I maximize my tax revenue on that property? How do I make it easy for a developer to come in and enhance my community?”

In Mahwah, the $17.5 million sale of 1000 MacArthur Blvd., which was announced at the end of January, also benefited from the same sort of proactive thinking on the municipal level.

“Right before we went to market, Mahwah changed the zoning to be industrial on a proactive basis,” Neuer, who was part of the team that represented the seller, TD Bank, said. “[I]t made it very easy for TD to go down the path of selling to someone who was going to redevelop the property.”

In the first acquisition under their partnership, Russo Development and PGIM purchased the property, which currently houses a 60,000-square-foot office building, with plans to demolish that building and build a 200,000-square-foot industrial facility.

Looking ahead, JLL predicts that industrial demand will lead to more demolition of outdated office properties, as employers turn to employee amenities and modern workspaces, particularly in a post-COVID era. Over the past five years, the firm said nearly 6.5 million square feet was removed from the office market – with 755,300 square feet lost in 2021.

But that might be fine if it’s helping to fulfill industrial demand.

“There’s older industrial stock in our state that could stand to be upgraded and so, I hate to say it’s like Darwin, but it’s a little bit like Darwin,” Neuer said. “If we keep building newer industrial who’s that going to hurt? Maybe at the end, if the demand wanes a little bit it hurts the Class-C industrial, the older industrial,” but, he added, “and then those buildings become repurposed for something else.”