8A —May 20 - June 16, 2022 — Office & Industrial Distribution Centers — M id A tlantic Real Estate Journal
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O ffice & I ndustrial D istribution C enters By Sean Kelly, Wolf Commercial Real Estate (WCRE) A Snapshot of An Unprecedented Industrial Market in Southern New Jersey
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avigating the New Jer - sey industrial mar - ket since the COVID
demand priced in to current rents proposed to tenants, building purchases and land purchases for new develop - ment. Never in this market’s history have we experienced the current conditions; vacan - cies below 1%, rents increasing 5-15% month-over-month, and record high sales prices for ex - isting buildings and land. There are now new compli - cations on the horizon that are affecting forecasting and underwriting, offering little protection to manage risk. Construction costs have been on the rise driven by booming
tems, racking infrastructure, concrete, steel and other build - ing materials, have lead times varying between 6-18 months. This challenge costs time, as materials necessary to move a project forward aren’t readily available when needed. Before the pandemic, developers could predict with precision when materials would be delivered to a site. Labor availability is another real issue compounding the problem. Further General Con - tractors (GC’s) and construction professionals choose projects that offer scale, in order to
maximize their time and profit margins. This condition has created challenges for develop - ers hiring and selecting GC’s as they no longer have leverage. GC’s are routinely bidding high, so that if they win a project, they are padding their profits. Yet another variable that may add additional stress to the sup - ply chain and demand for con - struction materials are projects funded by the recently passed infrastructure bill. States are anxious to begin shovel ready projects, including road and bridge repair. Mass transit agencies such as Amtrak and Septa are also getting much needed funding to improve their infrastructure and ser - vice. How this impacts prices of steel, concrete and other materials is not yet known but it will put upward pressure on labor availability. Additionally, ecommerce and last mile distribution is driving end user demand, which has resulted in a flood of institu - tional capital into the sector, which is bullish on new devel - opment and leased facilities. Identifying development sites has become increasingly chal - lenging, forcing developers to think outside the box. This includes knocking down office buildings and similar underuti - lized buildings on larger sites well suited for warehouse and industrial development. Never before has highest and best use analysis manifested itself into warehouse and industrial conversions. Many of these sites however, require zoning chang - es, which is yet another difficult variable affecting this segment of the market. Many township and communities are resistant to further development due to truck traffic and strains on their ability to provide utilities and services. We are seeing this exact scenario occur in the Lehigh Valley where a portion of the community and elected officials want to prevent addi - tional warehouse distribution development. Favorably-zoned land how - ever is sometimes found in well-located, in-fill townships with obsolete or vacant office. Given the reduced demand for old and obsolete office product has made demolishing office space feasible, offering benefits to townships recep - tive to the new development, such as improving the tax base and the creation of new continued on page 11A
demand for warehouse space as a result of dramatic increases in ecommerce. Further, labor and materials costs are rising and unpredictable, two of the biggest variables affecting de - velopment costs, making the final cost and delivery dates of these projects virtually impos - sible to predict. Supply chain constraints have also made material costs and lead times unpredictable, the biggest vari - ables for delivering a func - tional, end product for users on time for occupancy. Many components of these facilities, including ESFR Sprinkler sys -
Pandemic in 2020 has cre - ated an ultra- competitive and fierce landscape for users and in - vestors alike. Bu i l d i n g owners hold
Sean Kelly
all of the cards and the sprint to obtain functional, well-located warehouse space is becoming more and more challenging. We are seeing this extraordinary
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