By Jason Price, Director, Tri-State Suburbs Research
Cushman & Wakefield
East Rutherford, N.J.
The New Jersey warehouse market is barreling into the final months of the year fueled by continued eCommerce growth and the backdrop of strong port activity, historically high consumer confidence and a healthy economy. In short, the sector is on a history-making trajectory in 2018 - in terms of vacancy, leasing, net absorption and new construction.
Consider these facts and figures.
New Jersey's warehouse vacancy rate today sits at 3.4 percent, a 50 basis-point drop year-over-year. This comes despite some significant third quarter dispositions - including the 1.4 million-square-foot former Toys "R" Us distribution center in Flanders and the 1.0 million-square foot former Bristol Myers Squibb R&D campus in Hopewell - and the delivery of 1.3 million square feet of speculative construction. Exit 8A, the strongest performing submarket in the state, now boasts a 0.4 percent vacancy rate - its lowest vacancy rate on record.
Despite a lack of available product, warehouse leasing has remained brisk, driven largely by big-box distribution deals. Third quarter activity for warehouse product totaled 8.3 million square feet (another recent historic high), bringing the year-to-date total to 18.9 million square feet. Much of the state's demand came within Class A warehouses, fueled by tenants' drive toward efficiency. Of the 28 third quarter deals involving 100,000 square feet or greater, 75.0 percent occurred at Class A facilities.
The industrial asking rental rate for direct space is up 14.4 percent over one year ago. At $8.76 per square foot, this rate represents another all-time high. At $8.47, the warehouse per-square-foot rate has swelled by 17.0 percent year-over-year and 41.9 percent over three years. The Meadowlands boasts the highest asking rental rate for warehouse space, at $10.22 per square foot.
New developments continue to come online at a feverish pace, with 9.1 million square feet of industrial space deliveries through the end of the third quarter (led by new product in the Exit 8A and Upper 287 submarkets). 2018 is on pace for the largest annual new development total this century, which will recreate back-to-back record years. And the construction pipeline remains healthy, with 5.6 million square feet currently being built, and more than 2.0 million square feet anticipated to break ground during the fourth quarter. As tenant demand for modern warehouse persists despite limited options, developers remain confident in building Class A facilities on a speculative basis.
At the same time, the New Jersey industrial market is in no short-term danger of becoming overbuilt. Of the product delivered so far in 2018, 82.0 percent has received commitments. Overall industrial space absorption in New Jersey has surged to 13.6 million square feet to date in 2018 - the highest point on record at this time of the year and already surpassing 2017's annual total. Further, since 2014, more than 33.0 million square feet of Class A industrial product has been added to the market inventory - a 7.0 percent increase; absorption has outpaced these new deliveries by 51.5 percent. This expansion cycle is like no other; New Jersey will record its eighth straight year of positive absorption in 2018.
Looking ahead, we anticipate steady demand along much of the NJ Turnpike corridor and increased tenant activity in some of the state's secondary industrial markets. Some users are beginning to look west as rents continue to rise and the available labor pool has tightened along the Turnpike. Developer and tenant activity in the Upper 287 Corridor over the past couple of years provides a case in point. Currently, we are seeing this westward migration benefiting regions like Morris County, which recently has seen an uptick in demand, and some parts of Passaic County. This trending will likely gain momentum in the coming year.
In short, it is all good news for New Jersey industrial, which continues to hit new highs and new lows to secure its position as one of the strongest markets in the country.
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