Thursday, January 30, 2020

New Jersey's Industrial Demand Hits Uncharted Territory

New Jersey's soaring industrial market is in uncharted demand territory, making it difficult to predict when the leasing will cool, local executives say. And they point out that it comes as the state deals with a negative real estate issue, criticism of its programs to award tax breaks to get companies to do business in New Jersey.

The commentary on two of the hottest topics in the Garden State's commercial real estate industry came during a discussion at the annual meeting of the New Jersey chapter of NAIOP in Short Hills. The trade group hosted a panel on the real estate outlook for the coming year, with the logistics sector in the Garden State and its lapsed corporate tax credits on the agenda.

New Jersey, because of its proximity to New York City and area ports, as well as being centrally located in a densely populated region, has been a big beneficiary of the explosion of demand for warehouse and distribution space. That demand has been driven by the growing popularity of online shopping, spurred by e-commerce giant Amazon, as well as other companies and traditional brick-and-mortar retailers looking to offer quick delivery to demanding consumers.

The phenomenon has resulted in record low vacancy rates and rising rents for industrial properties in New Jersey. But panelist Andrew Merin, a vice chairman at Cushman & Wakefield's office in East Rutherford, New Jersey, questioned how long the sector's hot streak can go on.

During his career Merin said he witnessed a run-up in the state's office market, "with phenomenal growth," and that he saw apartment properties "go off the charts" five years ago.

“However, in my 40-plus years I have never seen anything that rivals the velocity and the change that we’ve seen in the industrial market,” he said. “So we’re seeing things that are unprecedented ... I don’t know how long this is going to last because at some point all things peter out.”

Industrial Predictions

Industrial tenants could be leasing space "out in front of demand," which happened to the Jersey City, New Jersey, office market when it was at its height years ago, according to Merin. Large banks were inking 20-year leases for entire buildings on the waterfront, and ended up subleasing some of that space, he said.

“Now we’re seeing e-commerce people taking huge warehouses depending on the future, so it is unbelievable,” Merin said.

One of his fellow panelists raised the same question but predicted logistics will remain strong this year, with rents continuing to increase.

"The big question is is this the beginning of a trend that’s going to have a long runway to it, or does the market appear to be overheated?" said Ed Russo, president of Russo Development, based in Carlstadt, New Jersey.

The family-owned firm specializes in warehouse and distribution facilities, particularly in Northern New Jersey's Meadowlands area. Russo Development and Forsgate Industrial Partners of Teterboro, New Jersey, are developing Kinsgland Meadowlands, more than 3 million square feet of industrial buildings, on speculation, with no signed tenants yet.

Russo remains bullish on the industrial sector, predicting that rents for distribution sites could hit an "unprecedented" $20 a square foot.

Tax Break Fallout

New Jersey's commercial real estate industry has vocally supported the passage of new tax incentive programs for the state as quickly as possible, joining other business groups in saying the tax breaks are critical to attract and retain companies.

The former programs were administered by the New Jersey Economic Development Authority, which has come under fire and investigation for allegedly awarding incentives to companies that didn't deserve them. The old programs expired June 30 last year, and New Jersey Gov. Phil Murphy refused to extend them. He wants to overhaul the tax breaks, but hasn't been able to reach a consensus with state legislators on changes. The criticism over the incentives has made front-page headlines.

Panelist Christopher Paladino, president of New Brunswick Development Corp., said he expects the state will have new tax incentive programs by the spring. But New Jersey will have its work cut out for it in terms of rehabilitating its reputation in corporate America, in places like New York or Philadelphia or Chicago with companies that may be weighing relocating to or expanding in the Garden State, according to Paladino.

“There’s been so much damage done to New Jersey’s reputation," he said.

Nonetheless, while incentives are important to businesses, he said he'd "never had a CFO or a COO or a head of human resources say to me at the first meeting, ‘What are the incentives?’ ”

Catering to Workforce

Employers are more concerned about having access to an educated workforce, or forging relationships with institutions of higher learning like Rutgers University and Princeton University, according to Paladino.

Higher rents are part of the price that companies are willing to pay to draw employees, according to Merin. He cited the recent announcement that Big Four accounting firm Deloitte was relocating one of its offices in suburban Parsippany, New Jersey, to the more urban Morristown, New Jersey. Morristown boasts a train station and a lively downtown scene with many restaurants, bars and stores.

Deloitte could have stayed in Parsippany and continued to pay about $30 a square foot in rent, but instead it is opting to pay $55 a square foot to move to Morristown, according to Merin.

"That huge differential in the rent meant nothing" because Deloitte is striving to attract and retain quality employees, he said.

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