CBRE GROUP, INC. REPORT: New Jersey’s Industrial Market Experiences Construction Boom

Overall construction activity in the New Jersey industrial marketplace is up 361.3% compared to this time last year, as developers look to stay ahead of the increased demand for new product, according to findings in CBRE New Jersey’s Fourth Quarter 2012 New Jersey Industrial MarketView Report. Four significant projects totaling 1.90 million sq. ft. are being constructed fully on-spec. In the fourth quarter alone, the amount of space under construction is up 59.2% from the previous quarter, with one build-to-suit and one speculative project breaking ground.

“2013 will be characterized by increased demand for new construction, due to a limited supply of large existing class A availabilities, and stabilizing lease rates,” said William Waxman, executive vice president, CBRE. “Tenants continue to face limited space options, especially those seeking large, class A warehouses, and developers are actively responding to this market scenario with new construction projects.”

Competition over existing available inventory and new construction is driving up lease rates, according to CBRE. Now at $5.32 per sq. ft., the average asking lease rate for New Jersey industrial space increased $0.13 in the fourth quarter. Northern New Jersey’s asking rate increased to $6.02 per sq. ft., while the asking rate in Central New Jersey increased to $4.61 per sq. ft.

Additionally, investors continue to demonstrate active interest in the state’s industrial product as 2012 saw the highest volume of sales activity in the past four years, driven mostly by investors. In fact, investors accounted for 74.9% of sales activity in the fourth quarter.

“Sales activity was significantly stronger in 2012 with investors aggressively reengaging the markets,” said James Tully, executive vice president, CBRE. “Core assets with credit tenants were in great demand as available liquidity searched for safe yields and high returns, especially for assets located in the third largest industrial market in the country.”

This competitive activity has driven down cap rates and driven up values. Users also added to sale activity due to the low interest rate environment. Both groups will likely continue to play a large part in the New Jersey industrial market in 2013 as leasing fundamentals continue to improve.

While New Jersey’s industrial real estate market has demonstrated stability in its recovery during the past two years, the fourth quarter leasing activity reflected the continued uncertain political and economic climate. While the market is beginning to realize rental growth, tenants continue to be very price-sensitive.

The market reacted to these combined forces with a slight pullback in demand. Of the largest transactions completed during the quarter, there were 11 new leases of 100,000 sq. ft. and greater, which is a 47.6% decrease from the same period last year.

Still, the market netted a positive 842,913 sq. ft. of absorption, marking the ninth consecutive quarter of positive momentum. Central New Jersey carried the market in the fourth quarter with 1.32 million sq. ft. of net absorption, while Northern New Jersey saw negative 475,593 sq. ft. of net absorption due to space hitting the market in Bergen and Hudson Counties.

Messrs. Waxman and Tully note that activity at the New York and New Jersey port terminals also continues to increase, which typically prompts growth for the surrounding New Jersey industrial real estate market.