The number of building permits issued for warehouse construction in New Jersey has fallen sharply in the last year, according to recent data from state and industry sources. These sources also point to a new increase in vacancies and a slowdown in the rate of rent growth in mega-buildings that has been occurring across the state for several years.
Analysts and companies that collect industry data say the breakneck pace of growth of the past few years cannot be maintained because supply from developers already outstrips demand from customers. They say high interest rates are preventing investors from adding more space, and uncertainty around economic growth is undermining confidence in further expansion.
Data on rents, availability, and building permits shows that warehouse tenants are less willing to pay big bucks for space. A frenzy of speculative construction is leaving more expansive structures vacant and developers scaling back plans to build more.
Industry insiders also note that developers continue to feel headwinds from warehouse opponents fighting the buildings at the local level. In Congress, 20 warehouse-related bills were first introduced last year in response to growing local concerns that the buildings clog traffic, worsen air quality and contribute to warehouse “sprawl.” is currently awaiting consideration by lawmakers.
According to data from the New Jersey Department of Community Affairs, the area eligible for building permits for “storage” buildings (primarily warehouses) will plummet to 16.2 million square feet in 2023, about half the size of the previous two years. . Lowest level since 2018.
Monitoring vacancy rates and interest rates
Tim Brill, a land use expert with the New Jersey Conservation Foundation, said the DCA data appears to be driven by high vacancy rates for existing warehouses, high interest rates and reduced availability of commercial loans. . Brill said the state's new stormwater regulations may have led to an increase in the number of building permits in the first half of 2023, which eased strict requirements for projects before regulations taking effect in July. He said the number of applications may have increased rapidly.
“This year will be a little more than half the rate of 2021 and 2022,” he said.
But Dan Kennedy, president of the New Jersey chapter of NAIOP, a trade group for the commercial real estate industry, argued that the DCA data likely indicates a return to a normal pattern of economic activity after the upward distortion caused by the pandemic. . .
Even before the pandemic, the surge in construction was driven by consumers' shift to online ordering, and logistics companies needed to find space to store mountains of goods before they could be delivered.
“The DCA data reflects a return to normality rather than a negative outlook due to variables that typically drive the pace of construction, such as rising interest rates, environmental regulations and zoning,” Kennedy said. Ta.
New Jersey has added more than 43 million square feet of warehouse space in the past five years, an increase of about 9% over the previous five years, according to commercial real estate firm Newmark, which publishes quarterly reports on the market. And despite recent signs of slowing, the industry still has 10.1 million square feet of warehouses in the pipeline, the company announced in February.
Even before the pandemic, the surge in construction was driven by consumers' shift to online ordering, and logistics companies needed to find space to store mountains of goods before they could be delivered. This trend was accelerated by consumers forced to stay home during the pandemic.
Warehouse Central, New Jersey
New Jersey's reputation as a warehouse state is further enhanced by its central location in the populous Northeast. We are an entry point for large amounts of imported consumer goods through a dense network of highways and rail lines, and the Port of Newark/Elizabeth, one of the nation's busiest container ports. .
The vacancy rate for industrial properties (mainly warehouses) in northern and central New Jersey rose 1.4 percentage points year over year to 4.4%, according to first-quarter data from Newmark. The increase was the largest since the first quarter of 2010.
“Vacancy rates are expected to rise for the remainder of 2024 as the market recalibrates and highly optimized construction deliveries continue to outpace net absorption.” — Newmark Report
Newmark called the increase “significant” and attributed it to a slowdown in leasing activity and an increase in new construction space.
Net absorption, the industry term for new building occupancy, turned negative for the first time since the first quarter of 2015, showing demand is not keeping up with supply.
A Newmark spokesperson said: “With new construction progressing well, space is in oversupply while tenant demand has retreated from the highs recorded at the peak of the COVID-19 pandemic.” Stated. “These factors, combined with a slowdown in leasing activity and an increase in available space, have resulted in more space being added to the market than being removed.”
“Tight economic situation”
Additionally, due to frequent tenant consolidations and downsizing, the amount of industrial land sought by tenants decreased by 17% year over year to 5.4 million square feet. There were only six leases of 150,000 square feet or more in northern and central New Jersey in the first quarter, compared with 11 in the same period last year, Newmark said.
The amount of new industrial land under construction fell to 12.8 million square feet from 14 million square feet in the previous quarter, as developers and investors responded to “tight economic conditions,” according to the report.
Despite rising vacancy rates, asking rents rose again, reaching a record level of $16.83 per square foot..
“Vacancy rates are expected to rise in the remainder of 2024 as the market recalibrates and highly optimized construction deliveries continue to outpace net absorption,” the report said. There is.
With signs of slowing demand, many warehouse owners are looking for opportunities to subdivide space in the first three months of the year, as “a large proportion of large warehouse space remains vacant for long periods of time.” Ta. Asking rents have increased over the past four to five years, Newmark said.
But even with these changes, the company said northern and central New Jersey will remain “a globally important hub for investors and logistics activity.”
Rent continues to rise
Despite rising vacancy rates and more space available across the market, asking rents are $16.83 per square foot, driven by demand for top-tier “optimized” space The report said it had risen again to a record level.
In a separate report for the Philadelphia metropolitan market, Newmark said South Jersey's industrial real estate vacancy rate rose from 5.6% in 2020 to 8.5% in the latest quarter. According to a Newmark report, market asking rents fell 2.1% year-on-year as demand slowed, the first decline in seven years.
According to the report, many of the Philadelphia market's largest rentals in recent periods were in South Jersey, including a 668,000-square-foot development in Burlington County and another 371,000-square-foot development in Salem County. It was there.
Newmark's data is broadly consistent with research from global real estate firm Cushman & Wakefield, which found vacancy rates for industrial buildings in central New Jersey rose to 6.5% in the first quarter. , more than double the 2.9% in the first quarter of 2023. In northern New Jersey, the latest vacancy rate was 6%, which was also more than double the previous year.
Nationwide, the vacancy rate rose to 5.8% in the first quarter from 3.5% a year ago, and is expected to rise further in the next 12 months amid a “noticeable” decline in construction starts, Cushman & Wakefield said. Ta.