Industrial real estate insiders say the warehouses near the Port of New York and New Jersey are in record-high demand, thanks to e-commerce companies such as Amazon and the need to store an increasing volume of imported goods.
There has been an increase of about 12.5 percent in industrial Z sector leasing rates during the last two years and 25 percent decline in overall vacancy rates, according to NAI James E. Hanson Vice President Russell Verducci.
“With such a high level of economic activity, companies utilizing the port have a significant need for warehousing and distribution facilities that enable them to quickly get products off ships and into the hands of consumers via rail or truck,” Verducci said. “With the development of post-Panamax ships (a term for the size limits for vessels travelling through the Panama Canal), more tonnage can be delivered at any one time than previously before, and with that comes an even greater need for large, high capacity warehousing and distribution facilities.
“However, anyone who has taken a trip down to the area immediately surrounding the ports knows that it is already one of the most densely packed areas of the state, so what we now are seeing is a supply-and-demand situation with high demand for industrial product but a restricted supply of existing buildings and a development pipeline confined by a lack of available land.”
In Colliers International’s recently released Industrial U.S. Seaport Outlook, cited are improvements to bridges linking New Jersey and New York, among other factors contributing to the surge in demand for industrial real estate.
“Supply chains have changed significantly because of e-commerce,” said James Breeze, national director of industrial research at Colliers, a global real estate company. “Right now it’s about getting things to as many people as quickly as possible. The Port of New York and New Jersey services the largest population in the country and that makes the port extremely important.”
The 2017 raising of the Bayonne Bridge — an arch bridge spanning the Kill Van Kull strait connecting Bayonne with Staten Island — has helped to accommodate larger ships coming into the port. The port encompasses the New York-New Jersey Harbor Estuary waterways and is the busiest container port on the East Coast and third-largest container port in the U.S.
More than 61 million people live within 250 miles of the port — the highest population within that radius for any port in the U.S. — with the New York-Newark-Jersey City Metropolitan Statistical Area ranking first in the nation in gross domestic product.
“With e-commerce, you need more industrial buildings, higher ceilings, three times more people and more amenities,” Breeze said. “In 2018, we are seeing record highs in truck driving, courier and warehouse workers and it is definitely helping the construction industry. Older warehouses are still being occupied but we are seeing a lot of new development.”
Chris Cervelli of North Bergen-based Cervelli Real Estate & Property Management points to Amazon and the possibility of marijuana legalization as major contributors to the booming industrial real estate market.
“We have seen a resurgence in the industrial/warehouse market largely due to Amazon,” Cervelli said. “Many developers were looking at these sites for residential development, but products that have a bigger footprint or high ceiling have become too costly for developers to now compete. There really isn’t enough inventory now, which is why prices have been on the rise, especially near the ports. That will soften, however, as developers are bringing more of this space online now, and we expect that trend to continue.”
Anthony Scocco of Van Brunt Logistics, an Elizabeth-based storage and distribution warehouse situated near the port, said he has noticed a shift in recent years.
“Volume is very steady compared to prior years where we experienced more severe seasonal swings,” Scocco said. “Amazon and other internet retailers buying up buildings around NYC in an effort to make same day deliveries has choked local real estate markets in this area.”
Verducci said the port is a “vital driver” of the economy in New Jersey and nationwide and a catalyst for the creation of thousands of jobs and the generation of billions of dollars in annual economic activity.
He also noted the many projects that have lease commitments in place prior to completion, with tenant demand driving down availability rates even as new product continues to come rapidly online.
“Much of this demand and many of the more profile deals are coming from e-commerce and food delivery operators, like Amazon and HelloFresh, who require large Class-A industrial spaces that are tailor made to the needs of highly sophisticated, modern logistics operations,” Verducci said. “Obviously, the expansion of the Panama Canal and improvements to the infrastructure around the ports have had a great impact on the demand for industrial space around the ports.”
But the high cost of industrial space is driving some smaller industrial operators away from the Gold Coast area in search of more affordable options.
“While being as close to the ports of New York and New Jersey as possible is ideal from a transportation cost perspective, demand for space in all of the New Jersey markets remains directly related to the imports coming in from the ports and the need to get products to consumers as quickly and efficiently as possible,” Colliers’ Breeze said, citing the area around Exit 8A off the New Jersey Turnpike and parts of Central Jersey as popular industrial markets due to available land and competitive rates.
Redevelopment of once-obsolete warehouse space is also on the rise.
“The extremely high rents for Class A buildings in Northern Jersey is a main reason we are seeing obsolete office buildings being redeveloped into warehouse space in Northern New Jersey submarkets like Meadowlands,” Breeze said.
As for the industrial real estate market forecast? Verducci said developers are already looking for the next big thing.
“Recognizing this trend and the high cost of development in many of the hot markets, industrial developers are searching for the next hot market,” he said. “We saw this a few years ago with the rise of the turnpike submarkets but even those markets are now pricing out a significant number of developers and tenants. So we have seen the start of development projects in less traditional submarkets.”
Verducci noted the industry may eventually migrate west to places like Somerset, Hunterdon, Warren and Sussex counties and further north into New York.
“We have already seen serious creep by industrial tenants into the 287 corridor and I think we are going to see a similar activation of the Interstate 78 and 80 markets in the next few years as developers look for areas with lower land costs but high levels of interstate north-south or east-west access to create projects,” he said. “I expect that this trend will only increase as tenants continue to migrate west in search of affordable space for their businesses. We will also start seeing developers looking upwards as well to solve the need for space in denser markets in New Jersey,” he said, noting several multistory developments underway in the Bronx and Brooklyn.
Breeze said despite the fear of a possible trade war with China, cargo volumes at the port are expected to remain strong and heighten demand for warehousing.
“The U.S. and New Jersey industrial real estate markets continued its positive momentum in the first quarter and fundamentals are expected to stay strong with record low vacancies, record high asking rents and robust activity in the coming quarters,” Breeze said. “Look for redevelopments of older manufacturing, warehouse, retail and office buildings to increase, especially in infill locations like Northern New Jersey.”