2017 Fall Forecast: NJ’s strong industrial market creates challenges for tenants & investors
Tenant demand for industrial space in Northern and Central New Jersey continues to be robust with a vacancy rate of about three percent. By comparison, the office market has an overall vacancy rate of about 25 percent. During the last two years industrial rents have gone up as much as 30 percent, which is unprecedented in my 30 plus years of experience. Over the past two years, we have been advising our industrial clients to do early renewals and plan ahead so they get the best rent, are not held hostage later, or worst case, find that they have to move out. It is going to be interesting to see what is going to happen if this trend continues and I believe it will, well into 2018. It may cause some businesses to extend their leases where they are, even if the space is not ideal, and prohibit business expansion in some instances. For example, if someone called right now and asked us for 20,000 s/f in the Middlesex County area, there is limited availability. If they need 100,000 or 150,000 s/f there are also few choices. For a business region as dynamic and populated as ours, that says a lot. Companies in Northern and Central New Jersey that need space and have not planned ahead may have to take sizes and locations they do not want. Someone recently asked me how the tight industrial market has impacted our firm. It has made us highly proactive. We do a lot of investigative work to present our clients with the best opportunities. We have long-term relationships with landlords, developers and investors and keep abreast of product availability on a daily basis. We have to because there is such a shortage of industrial product. How did the market get so tight? As we came out of the recession and companies began to expand, they absorbed what was vacant. Prior to the upturn, there was very little new/speculative building in the industrial market for 10 years. It was overly expensive for investors to build brand new based on the rents at the time. Most investors bought existing buildings and repurposed or renovated them. The industrial buildings that are being built on spec today are, for the most part, big box warehouses best suited for large companies that are in the logistics business, such as an Amazon or Best Buy. There is not enough development to accommodate tenants who want 20,000 to 50,000 s/f. Those types of small and mid sized businesses are a big part of our economy. Even if someone wants to build new right now, it does not solve the problem today. By the time they acquire land, which is in short supply, get the approvals and build, it takes 18 months. Investments The industrial market is strong throughout the state as it relates to investments. I have spoken with industrial investors who are looking for vacant office buildings that they can knock down and repurpose. I think over the next year we will see more of that. We have recently brokered office properties to investors that will likely repurpose them. I look forward to seeing what they do. There are a lot of companies in the investment arena that have raised equity to buy industrial properties. They face challenges as there is not much product available. Properties that are available are trading at very low cap rates, because there are so many investors chasing so few good deals. Some companies that have owned commercial real estate for a long time are using this opportunity to sell industrial because they think we are at the top of the market. Most of these sellers want to defer capital gains by doing a 1031 exchange. The big question in doing these deals is, will they be able to find a property within the required time frame to satisfy their 1031 exchange. Somehow, someway, we manage to do it, but it takes a lot of research and creativity to make it happen. David Zimmel is CEO of Zimmel Associates, a full service corporate real estate services firm located in Edison, NJ.