Wednesday, March 6, 2024

Majority of Industrial Space Under Construction in New Jersey Is Not Pre-Leased

By Mateusz Wnek CoStar Analytics

Industrial developers and property owners are bracing for a challenging leasing environment later this year and into 2025 owing to the amount of new industrial space set to be completed this year and what appears to be a shift in tenant preferences since many of the largest projects first broke ground.

Currently, there are 18.2 million square feet of industrial space under construction in New Jersey, with 90% still available for lease. This year's influx of new supply is widely expected to weigh on the Garden State’s fundamentals, particularly in Northern New Jersey.

The metropolitan area is already reeling from an abnormally weak year for industrial space demand. Last year, net absorption, or the change in occupied space, posted the first annual negative reading since 2012. CoStar expects a second consecutive negative print in 2024, pushing the average industrial vacancy rate for the region roughly 100 basis points higher to 5.1%.

Middlesex County has the most new industrial space underway in the state, with 4.7 million square feet in the pipeline and 4.3 million square feet of that being marketed as available. Perth Amboy is the epicenter of development activity here, with over 1 million square feet being developed in a pair of Bridge Point Perth Amboy buildings. Both distribution centers are expected to be move-in ready on April 1.

Like these two facilities, New Jersey's industrial construction pipeline is littered with mega-sized properties still looking for tenants. According to CoStar’s construction data, the average property being built is 172,000 square feet. Additionally, 32 logistics assets currently under construction are larger than 200,000 square feet, accounting for 67% of all space underway. Meanwhile, just 8% of space at the largest properties is pre-leased, setting the stage for a fierce concession environment early in 2025.

Against this backdrop, industrial operators have noted that over the past 12 to 18 months, industrial tenants have largely ceased committing to new space before touring the completed property. Few expect pre-leasing volumes to return to pandemic-era highs.

Additionally, CoStar data, backed up by broker sentiment, has shown that industrial tenants in the market today increasingly prefer buildings sized between 50,000 square feet and 150,000 square feet. That could work against new properties measuring over 250,000 square feet that are nearing the finish line but designed for single-tenant use.

With landlords facing the choice of holding out for a big-box tenant or opting to subdivide their new buildings, it’s conceivable that full occupancy for many of these large properties may be a long way off. As a last resort, property owners might eventually contemplate repositioning some assets into alternate uses, such as cold storage facilities, data centers or film studios.

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