Navigating the New Jersey industrial market since the COVID Pandemic in 2020 has created an ultra-competitive and fierce landscape for users and investors alike. Building owners hold 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 demand priced in to current rents proposed to tenants, building purchases and land purchases for new development. Never in this market’s history have we experienced the current conditions; vacancies below 1%, rents increasing 5-15% month-over-month, and record high sales prices for existing buildings and land.
There are now new complications 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 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 development costs, making the final cost and delivery dates of these projects virtually impossible to predict. Supply chain constraints have also made material costs and lead times unpredictable, the biggest variables for delivering a functional, end product for users on time for occupancy. Many components of these facilities, including ESFR Sprinkler systems, racking infrastructure, concrete, steel and other building 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 Contractors (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 developers 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 supply chain and demand for construction 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 service. 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 institutional capital into the sector, which is bullish on new development and leased facilities. Identifying development sites has become increasingly challenging, forcing developers to think outside the box. This includes knocking down office buildings and similar underutilized 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 changes, 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 additional warehouse distribution development.
Favorably-zoned land however 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 receptive to the new development, such as improving the tax base and the creation of new jobs. Reducing the inventory of obsolete commodity type office product, which is fairly prevalent in South Jersey. We are truly in unchartered waters with little relief in sight. Many experts contend these market conditions are unsustainable, but how long these market conditions can continue is extremely difficult to predict.
Article provided by Sean Kelly, Vice President of Wolf Commercial Real Estate. For more information regarding South Jersey and Philadelphia Market Industrial Trends, or to talk to Sean about industrial commercial real estate listings, contact him at firstname.lastname@example.org.
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