North New Jersey Industrial Market Tightening Up

SUNDAY, MAY 26, 2013 LAST UPDATED: SUNDAY MAY 26, 2013, 11:10 AM
BY LINDA MOSS
STAFF WRITER
THE RECORD

While the office market continues to languish in North Jersey, industrial real estate is rebounding.

The Panasonic building at 100 Meadowland Parkway in Secaucus, which will be vacant later this year.
Hartz Mountain Industries Inc., which owns and manages one of the largest privately held commercial real estate portfolios in the country, leased more than 1.5 million square feet in the first quarter, and roughly 1.3 million of that was for its warehouse assets, according to the company. That activity included six leases for new warehouse tenants, who took about 400,000 square feet of space.

“The market is very healthy from a landlord’s perspective,” said Gus Milano, managing director for Secaucus-based Hartz.

How the market has improved
Area Vacancy rate 1Q 2013 Vacancy rate 1Q 2012 Rent 1Q 2013 (1) Rent 1Q 2012
Bergen 10.3% 11.2% $5.92 $5.68
Passaic 8.4% 8.4% $5.27 $5.14
North N.J. (2) 9.3% 10.3% $5.92 $5.72
(1) Asking rate per square foot a year for warehouse/distribution space
(2) Bergen, Passaic, Hudson, Morris and Essex counties

Source: Cushman & Wakefield of New Jersey Inc.

The overall industrial vacancy rate in North Jersey — Bergen, Passaic, Essex, Morris and Hudson counties — was 9.3 percent in the first quarter, down from 10.1 percent at the end of last year and 10.3 percent in the year-ago quarter, according to Cushman & Wakefield Inc. of New Jersey.

Some of the existing warehouse/distribution space is being taken by data centers, as the region has become one of the national hubs for data-center construction. And while the activity is generally considered positive, data-center operations generate fewer jobs than a warehouse or distribution center would.

“Anytime you’re in single-digit vacancy numbers, that’s a pretty healthy number,” said Marc Petrella, a Cushman senior director. “And in the first quarter of 2013, there were 5 million square feet of new deals done in those northern five counties. Activity is good. Supply is constrained, and so we see the market continuing on a positive trajectory and improving here in the near term.”

Bergen County saw its industrial vacancy rate decline to 10.3 percent in the first quarter from 11.2 percent in the same period a year ago. It was unchanged in Passaic County, at 8.4 percent.

In northern New Jersey, the industrial market is particularly active in not only the Meadowlands, which Petrella called “ground zero” for that real estate sector, but also Teterboro, Carlstadt, Port Newark/Elizabeth and, no joke, New Jersey Turnpike exits.

“I just had to do a report for somebody who wanted the vacancy rates per exit on the turnpike,” said Doug Bansbach, senior vice president and principal of real estate broker Cassidy Turley in Somerset. “The turnpike drives the market because of the truck traffic.”

There are a number of reasons why the North Jersey industrial market is getting a boost, creating an uptick that’s mainly being seen in warehouse and distribution space. Following the Great Recession, there’s pent-up demand for the space. Rising consumer confidence means companies have to supply and ship more goods.

Rising e-commerce sales are fueling the need for distribution outlets in the New York metro area, as well. Retail e-commerce spending surpassed $50 billion in the first quarter, up 13 percent from the year-ago period, according to ComScore.

While there’s growing demand, there’s actually a limited amount of state-of-the-art, Class A industrial space in most of Bergen and Passaic counties, brokers said. No one dared build it during the economic downturn. And some of the existing warehouse/distribution space is being snapped up for a whole new real estate use: data centers. And in general, data-center operations generate fewer jobs than a warehouse or distribution center would.

There are several industrial projects under way, reflecting the increasing strength of the sector. Teterboro Landing, the retail mall planned by developer Catellus for the former Honeywell site in Teterboro, will include a 160,000-square-foot, build-to-suit distribution center, said David Knee, managing director for Jones Lang LaSalle, the broker on the building.

“Multiple developers have been starting to spec buildings, which really was non-existent for several years, and the buildings are slowly getting leased,” said Ken Lundberg, senior vice president at NAI James E. Hanson in Hackensack.

Hartz plans to renovate the 673,000-square-foot warehouse complex at 100 Meadowland Parkway in Secaucus that Panasonic Corp. is vacating in October, Milano said. Panasonic is moving to Newark.

“The building is 40 years old and we have plans to make it a new, modern distribution building,” he said. “We’re going to raise the roof to 32-foot clear [from 24 feet]. There are very few 32-foot clear buildings that are half a million square feet or more. It’s a rarity. So it will be a pretty spectacular product to have in this market near New York City.”

That facility won’t be ready until the second quarter next year, but Milano said, “I already have tenants that I’m in negotiations with.”

Hartz also plans to demolish a 200,000-square-foot office building at 1 Panasonic Way in Secaucus.

“That parcel will be redeveloped as either an expansion of the warehouse or other possible uses,” Milano said.

Consumer spending and e-commerce sales have been on an upswing, and that fuels the need for industrial space.

“Warehouses fill up based on consumer consumption,” Lundberg said. “If, specifically, retail sales go up or companies are convinced they are going up, they will purchase more product, hence the need for more space.”

Added Milano, “There’s retail demand, and many of our third-party logistics companies support the retail industry.”

E-commerce is now a big part of that consumer equation. Amazon, with its same-day-delivery pledge to customers, has taken a huge stake in industrial real estate in Central Jersey, planning a 1-million-square-foot fulfillment center in Robbinsville. To keep its same-day-delivery goal, Amazon needed to have a distribution center close to New York City, but needed more industrial space than Bergen County, a mature market, had to offer, brokers said.

Ultimately, there will be a trickle-down effect for North Jersey, real estate officials said. Distribution centers need to be near large populations of end-users, Lundberg said.

“What’s going to help northern and central New Jersey, like the ports, is all the feeders that go to Amazon,” said Nicholas Nitti, CBRE first vice president in Saddle Brook.

Amazon isn’t the only company doing e-commerce, or promising quick deliveries to customers, that is leasing space in New Jersey. Online grocery seller Peapod said in December it is taking 345,000 square feet at the 880,000-square-foot Pulaski Distribution Center in Jersey City, Nitti said. His company represented Peapod in the deal, while Jones Lang LaSalle represented landlord Prologis. And most brick-and-mortar stores are now doing e-commerce, selling merchandise from websites, as well.

“We do have tenants that are in e-commerce businesses, there’s no question about that,” Milano said. “That’s part of the [warehouse/distribution] space they need for what they do. And some of the retailers have e-commerce within distribution space that they have under lease with us. So that’s certainly a segment of the market today.”

Rents for industrial space have also been trending up. In the first quarter the average asking rent for warehouse/distribution space in North Jersey was $5.92 a square foot a year, up from $5.72 in the year-ago quarter, according to Cushman. In Bergen, it was $5.92, compared with $5.68 in the first quarter last year. And in Passaic County, the rate was $5.27, up from $5.14 the prior year.

Rents on some of the new state-of-the art warehouse space are pricing in the mid-$7 range, Bansbach said.

“There is a slight uptick in asking-and-taking rents with fewer concessions that landlords have to make in terms of free rent and how much money they have to give a tenant to retrofit the space,” Knee said.

North Jersey has the largest concentration of data centers in the nation, and Bergen and Passaic’s stock of warehouse space is being eaten into by those centers, diminishing the supply as the demand is surging.

There’s been a burst of such activity in the past year. Digital Realty Trust Inc. acquired a former 271,000-square-foot Roche building at 701 Union Blvd., Totowa, for $16.8 million to transform into a data center. Earlier this year, Hartz sold a 283,215-square-foot building at 2 Emerson Lane, Secaucus, for $18.4 million to CoreSite Realty Corp. to convert into a data center. And late last year, Internap Network Services signed a long-term lease for 100,000 square feet in Secaucus for a data center. Those three deals alone took roughly 654,000 square feet out North Jersey’s pool of warehouse space out of 285.7 million square feet in overall industrial space.

All in all, the industrial real estate market has become extremely complex and challenging for brokers, Nitti said.

“In addition to understanding all of the industrial inventory and pipeline projects, you now need to understand inbound-and-outbound freight; space planning; logistics; drayage costs [the price between picking up a container at the ports and delivering it to another point]; flood and water tables; how will gas prices and tolls affect the distribution model; and how do traffic patterns affect it,” Nitti said. “Companies are scrutinizing many different pieces of the supply chain to get the most effective and efficient model so they can outperform their competitors and grow in this economy.

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