Industrial Real Estate Is 'Doubling Down' As New Jersey Runs Out Of Room

Industrial continues to be the hottest sector of real estate in New Jersey thanks to its proximity to New York, but that could one day prove to be a severely limiting factor. 

Demand for distribution centers has not abated, according to the assembled panelists at Bisnow's State of New Jersey Industrial event at the Liberty House Restaurant in Jersey City, but meeting that demand is getting more tricky by the month.

“The challenge of finding sites is nothing new, and it’s just getting harder and harder,” Russo Development Chief Operating Officer Mike Pembroke said. 

Pembroke noted that sites where Russo decided against developing years ago have now been snapped up by competitors more willing to take risks on sites that either have less geographic advantage or more environmental cleanup work needed.

“You also have the problem that existing buildings are worth too much to take down and redevelop,” Pembroke said.

Unlike in office and retail real estate, where major tenants, in most cases, need to be on board before construction can begin, industrial developers have become quite comfortable building on speculation in New Jersey, confident that users will come knocking soon after ground is broken. So far, they have been proven right.

Bridge Development Partners Northeast Partner Jeff Milanaik said that his company only builds warehouses on spec. He noted that while some e-commerce tenants ask for unique specifications, Bridge has found leasing success by building "80 to 90% of what a tenant's needs would be."

“We do look at some of the specialized e-commerce requirements, and the biggest challenge with them is getting the building to where we can reposition it later and retain flexibility, rather than hitting every specific need," Milanaik said. "But we know that if we build it, they will come.”

Demand has reached such a fever pitch that there is not even a meaningful spread between build-to-suit projects and speculative ones, The Rockefeller Group Regional Director Heath Abramsohn said.

“There is construction financing for spec building today, and it is achievable," HFF Senior Managing Director Jose Cruz said. "You can compare your stabilized asset, your build-to-suit or your spec projects, and you don’t see that in other product types.” 

Although the consensus among panelists was that bigger footprints for distribution centers are better, the scarcity of available land has led both developers and financiers to lower their standards in that regard.

“No deal on the land side seems to be too small for industrial,” Cruz said.

The combination of scarcity and demand is changing the threshold of acceptable risk in development, with mitigating factors like land availability, environmental distress and less-than-ideal proximity being less persuasive than they ever have been before.

“We’re taking more risk and going into areas we hadn’t necessarily focused on," Abramsohn said. "We’re going to more infill and urban locations, as well as west into the Lehigh Valley, where we’ve been for some time ... You can get substantial value [from distressed environmental sites], even if it takes a bit longer.” 

One restricting factor that is growing more urgent without any near-term workaround is labor. Staffing warehouses and trucks has been growing more difficult for years as wages in those areas have lost ground to traditionally less stable work like food service, Romark Logistics President Marc Lebovitz said.

“It has been, continues to be and will continue to be, the greatest challenge finding people to jump in [to warehouse work] at all wage levels,” Lebovitz said. “All industries are competing for labor, and truck drivers and warehouse workers are in short supply.”

Automation is the first word on everyone's tongue when labor is raised as an issue, and although all panelists involved in operations admitted to some automation in their warehouses, all similarly agreed that fully autonomous warehouses and vehicles are years away — too far to plan a development strategy around.

“Autonomous vehicles are a long way off, and we have to prepare for the here and now before betting that we’ll have autonomous anything in the next 12 to 24 months,” Lebovitz said.

Despite the short-term focus of the industry and the continued pushing into areas once considered bad bets, no one had any concerns about a future when distribution space would be in less demand, leaving those suboptimal properties to become losses for landlords. The rise of e-commerce and its role in retail means that companies will be changing their supply chains for years to come, and requiring buildings to change with them, Prologis Market Officer Mark Shearer said.

“Industrial is the new retail," Shearer said. "We used to never have products go from our warehouses direct to consumers; they would have to go to a store first. But we’re now finding more and more that we’re the last touch of a product before it goes to a consumer.”

Shearer estimates that 15% of Prologis' portfolio is dedicated to e-commerce, a number that is sure to grow substantially since nearly all of its newest tenants have at least some involvement in the area.

"It's a fun time to be an industrial landlord," Shearer said.

Among retailers, competition is so fierce for online delivery times that companies are trying to find every angle possible for improvement. The goal, or the "holy grail of logistics," as Seagis Property Group partner Omer Mir Ahmed put it, is same-day delivery across New York. But the reason he applied such a mythical descriptor is both because of the value of such an achievement and the steep challenge involved.

“We have severe, unheard-of constraints in supply," Milanaik said. "And that may not be true when you go to Central Pennsylvania, Maryland or parts of South Jersey, but that’s really not where value is created.”

There may be a point at which all that chasing of efficiency in logistics, and all the spending involved, could result in an over-invested industry collapsing on itself. But for now, no one can envision how or when such a thing can happen.

“I think there’s probably a healthy apprehension over how far it can go, but for the next two to three years, we’re doubling down,” Milanaik said.