Real Estate Journal — Industrial / Distribution Centers — May 24 - June 13, 2019 — 11A
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M id A tlantic
I ndustrial R eal E state & D istribution C enters By Brian Banaszynski, Transwestern Development Company Development pipeline struggles to satisfy Northeast’s demand for industrial product D evelopers managed to deliver enough new space to move the
6 million s/f in the pipeline within New Jersey’s core mar- ket at the end of the first quar- ter, down from more than 14 million s/f under construction in 2017, and much of what’s coming is already leased. In New Jersey especially, developable sites are hard to come by, whether for bulk warehouse product or infill distribution centers. In some premier submarkets, land can cost more than building construction costs, which are also at an all-time high. That contrasts with land prices that were more often 20% to 30% of total development costs 15
years ago. Developers are exploring opportunities west and south of the primary market. With New Jersey’s greenfield op- portunities largely exhausted, most new projects entail envi- ronmental considerations. In some cases, the environmen- tal phase of development has stretched to 10 years or more. Coupled with rising costs for construction materials and labor, this adds a degree of self- governance to the development of new supply. Due to these challenges along New Jersey’s primary corridors, the geography has
expanded, with four million s/f planned outside the state’s core parameters. Developers have also looked farther west to Lehigh Valley, Pennsylva- nia, where the industrial foot- print has increased by more than 25% during the past five years, with an additional 5.5 million s/f under construction. Ongoing strong demand is good news for the industrial sector, not only in the North- east but across the primary U.S. markets. Transwestern believes this reflects not a temporary trend, but a change in consumer behavior that will drive absorption of indus-
trial space in the years ahead. That’s one reason tenants continue to sign leases despite rents that have reached the double digits in some submar- kets. And rather than opt for existing inventory in more remote submarkets, many choose to bide their time for yet-to-be-delivered projects that will provide access to New Jersey’s valuable population density and labor pool. Brian Banaszynski is Transwestern Develop- ment Company’s North- eastern U.S. development partner, based in Florham Park, NJ.
n e e d l e o n New Jersey’s i n d u s t r i a l vacancy up one-tenth of 1 percentage point in the first quarter. But at 3.8% v a c a n c y –
Brian Banaszynski
down from 4.1% a year earlier – some tenants are leasing space even before construction begins. Witness the quarter’s two largest leases, both in the Exit 8A submarket in Middlesex County, where e-commerce furniture company Wayfair signed a lease of 953,595 s/f and, upon delivery, will oc- cupy more than 3 million s/f in Cranbury. In the same development, Crate & Barrel agreed to lease 870,950 s/f, a likely consolidation of its exist- ing footprint. Both leases were in planned, unbuilt product. The growth of e-commerce is the principal driver behind current demand. The sector’s share of overall retail sales is about 9% today, and even conservative estimates expect that portion will increase to 20% over the next few years as more consumers shop online for groceries, household goods and other necessities in ad- dition to discretionary items. That suggests we remain in the early stages of a retail sales shift from exclusively brick-and-mortar stores to e-commerce as companies develop their omnichannel strategies. Additional space for warehousing and order fulfill- ment is anticipated because there are still major retailers without a Northeast presence. It’s little surprise, then, that industrial absorption amount- ed to 10.4 million s/f year over year in the first quarter. That marked the fifth consecutive quarter that 12-month, rolling occupancy growth exceeded 10 million s/f, a first-of-its-kind streak for New Jersey. For developers, the chal- lenge is to deliver supply that will answer industrial demand that shows no signs of weaken- ing in the near term. The first quarter’s pause in occupancy growth followed six years of positive quarterly absorption, and there is limited relief on the way for tenants. Construc- tion contracted to less than
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