The industrial real estate sector ends Q3 with solid fundamentals

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As 2022 approaches, the industrial real estate sector closed the third quarter with strong fundamentals. The vacancy rate is below 3% while rents continue to rise as demand refuses to fall, despite potential economic headwinds. In the region, this differs slightly from the national picture where Cushman & Wakefield reported that industrial supply exceeded demand for the first time in eight quarters.

But that’s not the case in New Jersey.

Here, net absorption and demand are still neck and neck. Despite construction, fierce demand keeps pre-letting strong with around 90% of products in development. “At this time, we have not seen the uncertainty in the national economy directly impact the imbalanced supply and demand curve in our region,” said James Delmonte, vice president and director of research at NAI James E. Hanson.

Kossar

“It is the diversity of demand that is so essential”, JLL Vice President and Head of Northeast Industrial Region Robert Kossar told NJBIZ just before the third quarter close. “Industrial isn’t just e-commerce these days. Everyone is trying to right size their supply chain. Everyone tries to get closer to the customer, which works very well for New Jersey. On top of that, Kossar added that compared to most states, New Jersey also has a “good labor history,” which is becoming increasingly important to occupiers.

“[I]It doesn’t matter if you are a physical store of a manufacturer or any type of wholesaler, it doesn’t matter what you are doing right now. You try to expand your inventory because you don’t want to be without products and you want those products to be closer to the customer,” he said. “[W]whether it is a manufacturer and wholesaler of household appliances or a retailer with physical stores and e-commerce, or a manufacturer of medical devices who must distribute locally. I mean, they’re all active right now.

Construction is also booming. According to JLL’s Q3 Industrial Insight, the building is at “its highest level in history”, with approximately 27.2 million square feet under development – double that of 15 months ago – and 17 .7 million square feet having started in the Garden State since the beginning of the year. According to NAI Hanson’s Q3 2022 Industry Report, 16.5 million square feet of new construction is expected to be delivered over the next five quarters in North and Central Jersey.

Total vacancy rate Q3 2022

For now, the north is leading the way, with the ports – and its 1.8% vacancy rate – still seeing the most activity, with the largest lettable building area (5.2 million square feet) under construction, according to NAI Hanson. This is followed by exit 10/12 with a vacancy rate of 1.6% and an RBA of 3.2 million square feet under construction, reflecting an inevitable shift in focus due to space constraints. JLL reported that the highest concentration of new developments are in central Jersey, where construction is up almost 40% from a year ago.

Kossar said that beyond demand, rent increases still justify all this development. In its third quarter report, JLL found that asking rents increased 34% over the past 12 months to an average total asking price of $15.56 per square foot. “Because construction prices have risen so significantly with inflation,” Kossar said, “landlords also need those higher rents to make deals work.”

Most of the state’s submarkets saw their average asking rents exceed the $10 threshold – except for Exit 7A and Warren & Sussex, which posted rates of $9.03 per square foot and $8.02 per square foot, respectively, in the third quarter. This distinction is unchanged from the second quarter of 2022; but rates are both up from $8.67 per square foot this time at Exit 7A and $7.44 at Warren & Sussex.

space race

The low rents around exit 7A offer both attraction and opportunity. The submarket was included in a group of three identified by NAI Hanson as receiving 70% of the square footage under construction that will be delivered over the next five quarters. And the vacancy rate there is above the state average, the company reported, at 2.7%.

Real Estate Investors bought this 117,000 square foot property in East Rutherford for $37.1 million.” width=”425″ height=”255″ srcset=”https://njbiz.com/files/2022/10/USPF-Diamond-Chemical.png 700w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-300×180.png 300w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-150×90.png 150w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-85×51.png 85w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-136×82.png 136w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-199×120.png 199w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-236×142.png 236w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-346×208.png 346w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-221×133.png 221w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-385×232.png 385w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-131×79.png 131w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-93×56.png 93w, https://njbiz.com/files/2022/10/USPF-Diamond-Chemical-298×179.png 298w” sizes=”(max-width: 425px) 100vw, 425px”/>

In one of the biggest sales of the quarter, EverWest Real Estate Investors bought this 117,000 square foot property in East Rutherford for $37.1 million. – EVERWEST

Kossar said that despite the headwinds and “the kind of negative press surrounding some of the occupants, our tenants in the market continue to increase.”

Inevitably, developers and tenants push the boundaries of where they will locate to gain access to, well, the access that New Jersey provides to move goods where they need to go. According to NAI Hanson’s Delmonte, “renters are always forced to expand their search beyond historically popular submarkets, which has continued to drive up the record rates we’re seeing in places such as the output 8A”. While noting that the market could cool in the coming months, he pointed to “unprecedented demand from e-commerce and big-box retailers” as a driving force.

Kossar said he expects the southern and western parts of the state to continue to do exceptionally well, especially in the future because they have to. “There is nothing left, there are very few opportunities in the filler and this filler opportunity is very expensive.” For example, the JLL report shows that average asking rents in the Meadowlands ($22.02 per square foot) and the Port ($21.31) are well above the state average.

This increase in rents helped strengthen investment in Q3. The biggest sale of the quarter, according to NAI Hanson, was Bridge Logistics Properties’ purchase of a 170,000 square foot site in Linden for $89.5 million. The company reported over 2.8 million square feet of space traded in the sector during the quarter, with cap rates steady in the low to mid 5.0% range.

Best sales transactions of the 3rd quarter of 2022

“Rates are up, capital is up. And therefore, on the acquisition side, it really affects development sites,” Kossar said, emphasizing the relationship between capital markets and the underlying fundamental market. “And then on the stabilized assets that are being sold off, a lot of players are sort of on the sidelines … who have been so active over the last couple of years.”

While things have the potential to slow slightly due to outside pressures, since vacancy is so limited statewide, JLL said any potential increases will still maintain a landlord-friendly environment.

And as Kossar pointed out, “[If] the offers don’t work, they better not rent the space. So I think everyone is kind of in a good position to continue their upward momentum. And while it’s not as good as the past two years, he said “it’s still in a really good place.”

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