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By Joshua Burd
New construction is outpacing leasing volume in New Jersey’s industrial real estate market, but a new report suggests that could change as development becomes increasingly difficult.
The research by JLL found that vacancy continued to tick up in the third quarter, to 4 percent, thanks to 8.1 million square feet of newly completed space. That represents the market’s second-largest quarter of deliveries on record, the firm said, while leasing activity in the state declined slightly in the summer to 6.4 million square feet, which is 21.3 percent lower than the trailing four-quarter average.
It all points to continued near-term growth in the supply of available warehouse and logistics space, but JLL noted that construction starts have leveled off as developers face increasingly fierce local opposition to their projects. That pushback and rising interest rates “have deterred and paused many projects,” the report said, noting that owners broke ground on just 1.8 million square feet of industrial space in Q3.
That’s 62.2 percent less than the quarterly average from the start of 2019 to mid-2023.
“We expect rents to plateau in the coming quarters as the recent wave of deliveries will need to lease up before landlords (and) developers push rents again,” JLL’s Vince Melchiorre, a research analyst, wrote in the report. “However, given the slowdown in groundbreakings, we expect rents to rise over the longer term due to the normalization in construction.”
In the meantime, the market has entered the fourth quarter after a period of subdued leasing activity, JLL said. And while vacancy remains below long-term historic trends, tenants have preleased just 30.5 percent all new space completed this year, well below the mark of 88.3 percent when the industrial sector was at its peak around two years ago.
Roughly 19.1 million square feet of industrial space was under construction heading into Q4.
“The state recorded just one new lease over 300,000 (square feet), dipping below the average of 3.25 seen over the trailing eight quarters,” JLL wrote. “The slowdown in big-box leasing comes as users have become increasingly judicious with capital expenditure, as the uncertain macroeconomic environment has occupiers looking closely at rent, as well as the total cost of outfitting and operating a new facility.”
The report also pointed to notable bankruptcies by Bed Bath & Beyond and Yellow Trucking and tenants that are consolidating and moving south or west to lower-cost markets. That has contributed to 3.2 million square feet of negative absorption, or a net decline in overall occupied space, in northern New Jersey year to date, while central and southern New Jersey have benefited with 3.5 million square feet in net absorption year to date.
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