Bricks, steel, and staying power: The resilience of industrial real estate in South Jersey

By Scott Mertz, SIOR, NAI Mertz

Interest rates, inflation and now international intrigue, in the form of tariffs and trade conflicts are leading to continued uncertainty in commercial real estate. In a year that was hoped to bring encouraging developments in the macroeconomic factors impacting CRE, we still have more questions than answers. That’s kept all players in the market, whether investors, developers, or occupiers, largely on the sidelines waiting for more favorable conditions to address their requirements. Despite that, deals do continue to get done in Southern New Jersey. Looking at the industrial sector specifically, there is still healthy demand in the market and at activity level consistent with historical standards for the region, albeit abated from the heights of the warehousing boom at the start of the decade.

The industrial vacancy rate in Southern New Jersey has been creeping up since the tail end of the pandemic and has now hit double digits at 10.6%. But a good portion of that vacancy can be attributed to the record number of big box facilities that were delivered to market over the past three years. Where previously these large class A facilities were finding tenants during construction or immediately upon delivery to market, the leasing of these building is taking longer periods and more creativity and flexibility on the part of owners. Landlords are becoming more flexible, subdividing larger spaces to cater to users seeking spaces in the 100,000 s/f range, and more creative in their leasing proposals, offering free rent and other tenant improvement allowances and creative expansion structures to continue to capture peak lease rates. As you would expect, large scale development has cooled given the softening of demand. There are still several projects under construction that will be delivering this year that may sit vacant for a period if the prevailing economic conditions persist for the remainder of the year.

One bright spot for industrial assets has been the performance of shallow bay warehousing. These spaces, typically ranging from 15,000 to 50,000 s/f, can be critical for last-mile logistics operators, while also drawing demand from smaller firms that are more locally focused, such as contractors and service providers. These properties have attracted the attention of investors as their multi-tenant composition and regular turnover allow landlords to bring rents in line with current market rates, which remains at an all-time high in South Jersey. Because of that value-add potential, variety of product available for acquisition in the shallow bay arena can be limited and competition among buyers intense.

Value-add opportunities are central to investors’ strategies in the region at the moment. Both the softened demand and rise in construction costs have led to a pause in new development and instead shifted focus to renovating older existing industrial product or even converting office or flex buildings to distribution use. While capital expenditures are still required for redevelopment efforts, they are lower than new construction and that has proven more amenable to obtain financing and ultimately provide more profitable returns.

With its strong fundamentals and a centralized location in the Northeast corridor, Southern New Jersey is literally in a good place to weather any downward turn in the national or global economy, whether subtle or seismic. The market adapts well to shifts in demand as evidenced by the surge of construction to meet the demand for big box product followed by the rise of shallow bay leasing. Southern New Jersey remains on the radar of tenants and investors as even in periods of uncertainty, deals continue to get done.

Scott Mertz, SIOR is president of NAI Mertz.