Real Estate Indicators from Senior Managing Director Jose Cruz in HFF's New Jersey office.
From an equity markets perspective, demand for industrial product continues to be strong with institutions and private funds that are underweight in northeast industrial properties. The reason we are not seeing more activity is because there has been – and continues to be – a lack of quality offerings in the most sought after markets from the Meadowlands down along the Interstate 95/Turnpike Corridor to Exits 8A/7A. As owners who are hesitant to part ways with their assets see the value in taking some “chips off the table” and capitalizing these assets, we expect to see more industrial recapitalizations in the coming year.
Institutional capital is aggressively pursuing core deals in the New Jersey market for industrial product, and there remains a significant amount of private capital also chasing industrial properties throughout the state. While the institutions seek the Class A bulk distribution buildings, private capital is looking for higher yields through renovating existing buildings or looking at industrial buildings with higher office finishes.
Tenant demand for functional, high-quality space remains extremely strong in the market. Proximity to Manhattan and other major population centers continues to be one of the main drivers for the high absorption rates and rent growth seen in recent years. Traditional industrial tenants have been priced out of some of the core markets within New Jersey, so they sought more cost-efficient space to the south and west. As the tenants have started to migrate to these markets, so has the capital looking for opportunities to build new and renovate existing facilities.
We are beginning to see more redevelopment and repositioning of outdated office buildings and non-functional retail into industrial buildings. As we anticipated, industrial rents continue to rise, combined with a lack of leasing activity for secondary office locations. With the apartment construction market still very healthy, many investors are now seeing industrial redevelopment as the better play for some of these well-located sites where land for industrial development is nonexistent.
As far as the debt markets are concerned, banks and insurance companies are ready to lend on the industrial asset class at an average of four percent with three years with interest only and 65 to 70 percent loan to value (LTV). Construction financing remains strong for industrial speculative development as well, despite the pullback in construction lending in the last year. This is particularly true for strong sponsors with a good track record of industrial development.
The fundamentals in the industrial market continue to remain strong. We are seeing positive absorption in the Northern and Central New Jersey industrial market despite significant new construction. It doesn’t matter if it’s e-commerce or traditional distribution, industrial leasing has continued to remain active, and we do not foresee this changing in the short term.
Senior Managing Director Jose Cruz is Co-Head of HFF’s New Jersey office and a member of the firm’s Leadership Committee. He specializes in investment sales throughout New Jersey, New York and Connecticut and also oversees the day-to-day operations of the firm’s New Jersey office. During the course of his more than 25-year commercial real estate career, Mr. Cruz has been involved in more than $25 billion of office, industrial, retail, multi-housing and land sales. Mr. Cruz joined the firm in March 2010.
This article originally appeared in Real Estate New Jersey's July issue.