New Jersey Industrial Market’s Pricing Velocity Shows No Signs of Slowing
By: James Delmonte, Vice President and Director of Research
The phrase “record-breaking” continues to be apt when describing northern New Jersey’s industrial market. Red-hot demand, limited new construction and sky-high pricing have created a veritable feeding frenzy in the market over the last two years. In this environment, we consistently see both the regional market and individual submarkets set new pricing records only to break them the next quarter.
As we look towards to 2022, many in the industry are now asking – is this current pricing velocity sustainable?
The short answer is yes.
The long answer requires a deeper dive into the key metrics that will determine the long-term future of the market – sustained demand and new construction.
Understanding the demand side
Since the early 2000s, e-commerce has consistently grown as a percentage of overall retail sales in the U.S. According to data provided by the U.S Department of Commerce, national e-commerce sales had seen steady yet predictable increases for much of the period leading up to COVID-19, increasing by just 100 basis points from 9.5 percent in 2Q 2018 to 10.5 percent in 2Q 2019.
However, the emergence of the COVID-19 pandemic in early 2020 added fuel to the fire. Suddenly, consumers were using e-commerce platforms like Amazon more often, and began adopting it for new uses such as grocery shopping, a task that was once predominantly done in-person. This trend is laid bare by looking at the U.S. Department of Commerce’s data once again, where the YOY increase from 2Q 2018 to 2Q 2019 was slight, but the increase from 2Q 2019 to 2Q 2020 was around 550 basis points up to 16 percent of total retail sales. While we have not seen subsequent upticks of the same magnitude yet in 2021, it is clear from the data that many consumers who have grown accustomed to using e-commerce by necessity are now there to stay. While the adoption of e-commerce going forward will most likely return to stability, it is clear that the COVID-19 pandemic significantly accelerated the trend.
Such a sudden uptick in demand has had a multitude of impacts across the economy – from supply chain challenges to inflation – but most germane to our work is its lasting impacts on commercial real estate in northern New Jersey.
As industrial properties are vital for virtually every stage of the e-commerce experience, an increase in e-commerce demand should have a corresponding impact on pricing for industrial properties. Locally, our market’s status as one of the most densely populated and well-connected regions in the nation means that pricing is acutely sensitive to the changing usage of e-commerce services.
The chart below shows just how closely these two data points are tied together in our region. We can see steady demand leading to steady pricing increases beginning right after The Great Recession and continuing up until Q1 2020, only to rapidly increase as the COVID-19 pandemic began to manifest itself in the first and second quarters of 2020.
Although the increases in e-commerce demand should be more stable in the coming years, increasing demand for e-commerce, no matter how dramatic, will only place more pressure on what has become a dwindling supply of available industrial space in the region. Where the density and highway connectivity of the northern New Jersey market makes it highly attractive for industrial developers, that same density is a double edged sword, as it limits the number of available development sites at any given time.
Currently, the northern New Jersey industrial market consists of 686,767,503 square feet of rentable building area. On its face, that number seems large enough to manage the demand placed on it, but a closer look at the numbers tells a different story. The chart below highlights how the increase in national e-commerce sales has led the local vacancy rate down to a historic low of just above two percent. For those looking for space in our market right now, the state might as well have a no vacancy sign hovering above it.
In a world where the construction of industrial buildings can take years, it is easy to see why the sudden demand surge led to a corresponding surge in prices. The expectation would be that new supply coming online over the next several years will eventually help offset the rising demand for space.
As I mentioned earlier though, New Jersey’s density works against it in solving the supply side of the equation with construction sites becoming increasingly difficult to find. That density is then paired with a challenging regulatory environment and rising costs to create a severely constrained construction pipeline. With the increasing demand over the last several years and low vacancy, it would be natural to assume that construction starts would also show a corresponding rise to keep up. However, the chart below shows that is not the case.
We see 2018 as the peak for industrial construction in the market and, since then, the delivery of new space has been inconsistent and has generally failed to meet the absorption needs of the market.
The future of the market
Obviously, New Jersey cannot make new land, and development will only become more difficult as time goes on. With e-commerce usage and the corresponding industrial demand expected to increase, albeit more steadily, in the years to come, it is easy to see why the pricing velocity of northern New Jersey’s industrial market will only continue in the short and long-term.
Looking forward, I fully expect companies will continue to look more aggressively to untapped markets in the south, west and north for industrial development opportunities. We have already seen the explosion of the Turnpike markets, and I foresee a similar situation occurring along Interstates 78 and 80 in the years to come. In addition, e-commerce giants like Amazon are increasingly looking to purchase their buildings outright opposed to leasing them in order to get ahead of what will surely be a challenging pricing environment in the future. The growth of e-commerce firms as industrial buyers is a trend to keep an eye on as it will only increase the amount of capital looking for investments in the market and will have significant impacts on the investment sales market.
While there are still many uncertainties about what this sustained pricing might bring to our market in the future, it will be vital to work with a brokerage team with the data and market knowledge needed to find untapped opportunities and possibilities in a market where both are difficult to see.
Interested in learning more about the regional industrial market and our expertise? Check out our recent 3Q 2021 Northern and Central New Jersey Industrial Report here.