By: Mark Mahasky, Director, Acquisitions & Capital Transactions, Denholtz Properties
To say New Jersey’s industrial market is red hot somehow still massively understates the trajectory of the market. According to data from commercial real estate advisory firm CBRE, the fourth quarter of 2021 saw the average asking rate for all industrial space in New Jersey reach yet another record high – standing at $10.21 per square foot, representing a 37 percent increase year over year. For Class A in central New Jersey specifically, average rents were $16.04, representing a staggering 84 percent increase from Q4 2020. Concurrently, the availability rate stands at 4.57 percent in the fourth quarter of this year. The rapid pricing increases and unavailability of space are increasing pressure on both ends of the supply and demand curve.
On one hand, demand for industrial space from a wide range of businesses hoping to position their distribution, manufacturing, fulfillment and service locations closer to skilled labor pools, populations, and major highways has made New Jersey a highly attractive industrial destination. However, on the other hand, land scarcity and lengthy entitlement processes along with COVID-19-related material and labor disruptions continue to cause a significant supply lag that cannot keep up with demand. In a market this competitive and tight, it is difficult to find untapped opportunities for value creation. However, with our experience in the market, we know opportunities do exist. All it takes is a flexible approach.
Finding Opportunity in the Market
With such steady and sustained pricing increases, capital from institutional investors has continued to aggressively flow into development opportunities that will secure the highest possible price per square foot. Their investment appetite tends to be in warehouses over 200,000 square feet leased long-term to a single credit-grade tenant such as Amazon. Institutional investments such as these have caused the already limited supply of newly constructed space to skew heavily towards large, big-box properties, resulting in an extreme imbalance.
In northern and central New Jersey, of the approximately 50 million square feet of industrial delivered since 2017, 78 percent has been in a building 200,000 square feet or larger, according to CoStar. Of the remaining 22 percent, many of the new sub-100,000-square-foot buildings have been dedicated to owner/users. As a result, most sub-100,000-square-foot industrial properties buildings on the market are at least 30 years old and lack the features modern businesses need to make effective use of industrial space such as higher ceiling heights and efficient loading.
While the current supply situation works for a large company that can occupy a massive warehouse and pay a premium rent, it has serious consequences for the nearly 885,000 small businesses employing 1.8 million people in New Jersey who may need industrial space but cannot find it. The cost trajectory and supply situation has forced an increasing number of these businesses to either lease spaces far too old, small, and ill-suited to their needs. We recognize that the current undersupply situation presents a tremendous untapped opportunity within the industrial market to construct light industrial space geared to these tenants.
These niche industrial buildings go by a variety of names – flex, light industrial, small bay–and are ideally suited to the needs of small-to-medium-sized tenants. Typically, around 100,000 square feet, light industrial buildings are geared to multitenant usage with a high number of loading docks and tailgates as well as easily divisible spaces and separate entrances. Instead of being forced to lease 100,000 square feet of space, a tenant can take just 10,000 square feet to better accommodate their needs.
For decades, the inherent flexibility of this asset class has led our team to consistently look for strategic acquisition and development opportunities to expand our light industrial portfolio. Today, our light industrial portfolio spans over 2.5 million square feet and is leased to a variety of tenants representing a broad cross-section of small, medium and even large businesses. While the asset class has always been stable and strong for the reasons outlined above, we know that the heavy supply and demand imbalance facing the market today presents an ideal opportunity to aggressively grow our portfolio through strategic development in New Jersey.
Capitalizing on the Market
It is this deep imbalance in supply and demand that inspired our team to launch our Light Industrial Development Portfolio in 2021. Currently available for investment, Denholtz Properties’ Light Industrial Development Portfolio is a programmatic three-property flex/light industrial development portfolio totaling 173,763 square feet across in-demand infill markets in central New Jersey.
The portfolio represents a unique opportunity for accredited investors hoping to access New Jersey’s high barrier to entry industrial market through investment in the development of best-in-class, multitenant flex properties. Amidst ever-tightening industrial vacancy and increasing rental rates, each of the three development projects in the portfolio will help fill the niche demand in the New Jersey market for newly built, highly efficient light industrial product.
Leveraging our decades of flex/industrial construction and leasing experience, the buildings will each be developed to the highest standards of modern Class A flex construction. Geared towards occupancy from a diverse blend of smaller tenants, each building will feature a welcoming and contemporary combination of glass, stucco and panel façade on the front of the buildings paired with tilt-up concrete construction, 24′-28′ clear ceiling and a flexible blend of loading docks and drive-ins.
Proposed to stand at 101,116 square feet, 264 Willow Brook in Freehold, NJ will be the largest project making up the portfolio. Located just off Routes 33 and 35 in Monmouth County, the property offers easy access to Interstate 95 and the Garden State Parkway and is equidistant to both Philadelphia and New York City. Denholtz Properties plans to construct approximately 13 units with 18 tailboards to suit a variety of tenants’ warehousing and distribution needs.
Situated in the rapidly growing Route 195 and Exit 7A corridor submarket, 1110 Negron Drive is in Denholtz Properties’ Hamilton, NJ “Horizon Center” portfolio consisting of five office/flex buildings, totaling 236,284 square feet. 1110 Negron Drive will feature approximately 15 units with dedicated drive-in loading doors for each unit.
Less than three miles from 1110 Negron Drive, 110 North Gold Drive in Robbinsville, NJ is projected to span 32,148 square feet with two units, eight tailboard docks and one drive-in ramp.
Our Light Industrial Development Portfolio is emblematic of our time-tested approach to value-creation through opportunistic real estate investments. By recognizing untapped opportunities in markets such as light industrial and then executing visionary development projects, we have consistently been able to deliver superior risk-adjusted returns to our investors across the world. Through the construction of these three buildings, we look forward to once again bringing investors an unmatched opportunity to create value from strategic real estate investment.