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Speculative development driving industrial real estate projects

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JLL Executive Managing Director Rob Kossar:
JLL Executive Managing Director Rob Kossar: "I think there's an appetite for spec." - ()

As demand from large users continues to swell, speculative development is dominating New Jersey's construction pipeline for industrial space.

That’s according to new research from the real estate services firm JLL, which tracked about 2.3 million square feet of industrial construction activity in the first quarter in northern and central New Jersey. Of that total, 2 million square feet is being built on a speculative basis.

That follows a year in which 8.1 million square feet worth of industrial space was under construction, more than half of which was done on spec, according to JLL. And experts with the brokerage firm expect the trend to continue in response to requirements from tenants in sectors such as such as e-commerce, food and beverage and third-party logistics.

RELATED: The broker: Kossar has JLL doubling down on office and industrial sectors

“I think there’s an appetite for spec because there’s a demand for Class A buildings that is underserved by the existing stock,” said Robert Kossar, JLL’s executive managing director in New Jersey. “And there’s been rent growth because the cost of building (is) not inexpensive, and I think we had to wait … particularly in central New Jersey, I think, for the market to get to the point that it made sense to do a spec building.

“And we’ve certainly gotten to that point.”

Rental rates in northern and central New Jersey averaged $5.70 in Q1, down 0.8 percent from the end of 2014 but up 3.1 percent from the first quarter of last year, JLL found. In Central Jersey, the year-over-year increase for Q1 was 6.3 percent.

JLL highlighted the heavily traveled New Jersey Turnpike corridor as a favorite for industrial developers who have started projects on spec. Through Q1, 75 percent of all projects currently underway were taking place between exits 12 and 8A, researchers found, with the largest being The Morris Cos.’ nearly 700,000-square-foot facility on Talmadge Road in Edison.

The project, which is nearly complete, is under contract to be purchased by Prologis, according to JLL researchers in the firm’s East Rutherford office.

RELATED: Developers: There's still high ceiling for e-commerce

“Most of the markets in the state that are active have spec projects in them,” Kossar said, noting that the statistical pipeline does not even include buildings that are planned but haven’t yet broken ground. He pointed as an example to the Exit 8A submarket, which has more than 1 million square feet worth of planned projects among three developers alone.

It’s a sign of the appetite among tenants, which helped drive the region’s total industrial vacancy down to 7.3 percent in the first quarter, from 7.8 percent in Q4 2014. And that was with a slew of speculative big-box facilities being delivered and quickly absorbed by users.

Kossar, who heads JLL’s New Jersey operations, said that pace of spec development will continue with an important safeguard: The state is not overflowing with developable sites.

“I think the good news for us is we don’t have a lot of available land in New Jersey, so the risk of overbuilding is mitigated by the sheer fact that there aren’t very many sites,” he said. “So I don’t expect us to get too far out over our skis here.”

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