By Frank Gunsberg, Colliers International
The New Jersey real estate industrial market remains extremely active. Around exit 8A of the New Jersey Turnpike, for example, where rents in the most recent down cycle were in the mid $3.00/SF net range, are now approaching the high $7s/SF net range, with annual increases on top of typically 3.0% per annum.
And these rents are not just for smaller buildings. They are for large, regional distribution centers in all size ranges, including the biggest near 1,000,000 square feet. Heading further north as far as Bergen County, the pattern is the same and then some, with asking industrial rents for new product in the low to mid-teens.
Years ago, the value of an office building was roughly twice that of an industrial building. Due to the lack of industrial product in New Jersey today and an aging office building market, in some areas they are close to the same dollar per square foot selling price. This is truly remarkable and begs the question, why is this so?
New Jersey has always been geographically unique. It is a link between Philadelphia and Boston with the New Jersey Turnpike being the trucking artery helping to make the connection. It also hugs the belly of New York City, a heavily populated behemoth that needs the goods that flow to it from nearby New Jersey and elsewhere. With a low unemployment rate and a healthy economy, Landlords and Tenants see the trend of low industrial vacancy rates and higher rents continuing in New Jersey.
But this may be an optimistic trap we’ve seen many times before, often due to influences out of the real estate market’s control. For example, in 2008 the US economy collapsed, causing huge losses for banks and major corporations. It was so bad, there was a real concern that the entire Western economy would fall apart. With a huge infusion of bail out capital from the government, disaster was averted. The US led the recovery and eventually other worldwide economic engines followed.
From 2008 to the present, E-Commerce has evolved as the lower cost alternative for purchasing goods and services at the expense of brick and mortar stores. Although this has caused a number of major retailers to cut back or declare bankruptcy, companies like Amazon have prospered. In the past several years they have gone from a blip on the screen to over 10,000,000 square feet of warehouse/distribution space in New Jersey alone, with additional expansion planned in the Garden State.
Amazon has also expanded its business model by purchasing Whole Foods, and other companies that will likely increase Amazon’s demand for industrial space in close and/or immediate proximity to the dense population/consumer centers. Reading the above, what could go wrong to affect this robust industrial market picture? Plenty.
In 2008, many people faced foreclosure on their homes because they lost their job and could not afford their mortgage payment, insurance or maintenance. They still needed a place to live, which caused a boom in the apartment rental market. So many apartment buildings were built, are under construction or planned, that an argument can be made that New Jersey may eventually have more apartments for rent than enough people to fill them.
Under the heading “Influences beyond our control” are things related to issues in Washington. Tariffs, ours and theirs, can have an unwelcome effect on the economy. The tax bill caused a prediction by some economists of huge deficits, which now seems to be the case. Blocking migrants from entering the US may create a problem during harvest time, causing food prices to spike. Rising interest rates alone can put the brakes on a thriving economy. These are a few examples of things out of the market’s control that can turn an economy from robust to bust.
When an economy makes a 180-degree turn, not every industrial tenant may be able to pay the rent. If that happens, the New Jersey industrial real estate market may suddenly be faced with unexpected vacancies and lose its glitter.
Therefore, despite continued low interest rates, a prudent developer may want to take a more conservative approach by not financing their projects to the hilt. In the past, a 50/50 loan to equity ratio was considered appropriate protections from market fluctuations.
Those that have the willpower to maintain a conservative posture will likely weather any economic storm they will face. Others may be part of another story, written at another time.
Frank Gunsberg is an Executive Managing Director with Colliers International of New Jersey and is based out of the company’s Parsippany office. He can be reached at firstname.lastname@example.org or at (973) 299-3088.