Developers and investors are starting to make big bets on industrial real estate, following signs that consumers may be starting to spend again. Sales of such properties have jumped nearly threefold from last year, according to figures from commercial real estate companies, and the vacancy rate has fallen for three consecutive quarters.
The industrial market is often a leading indicator for commercial real estate, improving before the office market. This is because when companies begin seeing increased demand from consumers their first steps are to increase production and ramp up inventory. “Only then do they hire new employees and look to grow their offices,” said Robert C. Kossar, a managing director and the head of the industrial real estate group for New York and New Jersey at Jones Lang LaSalle.
Signs of the market’s growth are apparent in the New York metro area. On a brownfield site in Edison, N.J., the J. G. Petrucci Company is building a 570,000-square-foot warehouse even though the developer has not lined up a single tenant. It is one of the first industrial properties built on spec in New Jersey since the recession.
“The timing is right because while rents are still low, there are clear signs that the market is tightening,” said James G. Petrucci, the company’s president. “I am confident that there will be any number of companies wanting this space by the time it is completed.”
In the first half of this year, the vacancy rate declined to 9.7 percent, its third quarterly decline and its lowest level since the first quarter of 2009, according to Cushman & Wakefield. During the same period, a total of 70 million square feet traded hands, an increase of nearly 160 percent, the brokerage firm said. And year-to-date, leasing activity has risen more than 27 percent to 205 million square feet, compared with the same period last year, the company’s research showed.
“If you look at the fundamentals over the past six months or so, there is very strong leasing, declining vacancies and positive net absorption,” said Tim Wang, a senior vice president at Clarion Partners, which last month purchased 2.8 million square feet in industrial properties from Prologis Inc. for $118 million and is looking for other acquisitions. In addition, “industrial properties are very simple to operate,” Mr. Wang said. Even large buildings typically have only one or two tenants; they are less capital-intensive because landlords do not offer tenant improvement allowances or other terms common in office leases; and the cash flow from the rent is mostly stable and predictable.
Clarion Partners is one of several companies that have been increasing their industrial properties. Among the biggest buyers is Blackstone, which had meager holdings in the sector before spending $2 billion to acquire 275 industrial buildings earlier this year. Other companies that are buying aggressively include Terreno Realty Corporation, Morgan Stanley, the Cabot Group and CenterPoint Properties, according to Jones Lang LaSalle.
Matrix Development Group, a private company with offices in New Jersey and Pennsylvania, recently joined with Morgan Stanley to acquire a 265,000-square-foot warehouse in Robbinsville, N.J. The company is also constructing a 150,000-square-foot industrial building for the beverage distributor Ritchie & Page, also in Robbinsville.
“We are at the inflection point in the market,” said Alec Taylor, a principal of Matrix Development. “Building values are still low, but rental activity and absorption rates are improving. Now is the time to buy buildings and in six months to a year, lease them up and improve their value.”
Ports also play a role in industrial real estate, and in New Jersey investors are making big bets that port business will increase. This is in part because of a $5.25 billion project to widen the Panama Canal by 2014. The widening will allow large cargo ships that currently anchor in California and use trucks or the railroad to move goods to the East Coast to sail directly to New Jersey.
The widening of the canal could mean big business for Port Newark-Elizabeth, and to prepare for an influx of larger ships the Port Authority of New York and New Jersey plan to raise the Bayonne Bridge by 2016.
“There is a growing need for shipping that is not showing signs of abating anytime soon,” said Dave Adams, the president of Port Newark Container Terminal, one of five major terminals at Port Newark. The terminal is positioning itself to take advantage of the improving market conditions. This summer, it extended its lease with the Port Authority, which owns the port, to 2050 and agreed to invest $500 million in capital improvements.
“Our goal is to be able to double the capacity of our facility from about 650,000 shipping containers a year to 1.2 or 1.3 million,” Mr. Adams said.
But while the market for larger properties, usually 300,000 square feet or more, that cater to the biggest beverage or food distributors or major retailers is showing improvement, the market for spaces of 50,000 square feet and under is still struggling.
“There is a disconnect in the market,” said John Huguenard, a managing director and head of national industrial investment sales at Jones Lang LaSalle. “Entrepreneurial businesses haven’t come back the way big business has.”
In Long Island, for example, where the industrial market mostly serves local businesses, “the vacancy rate is around 6.2 percent, which sounds good,” said Jack O’Connor, a principal and director of the national industrial practice group at Newmark Knight Frank in Long Island. “But that is because none of the firms track buildings under 20,000 square feet. If they looked at the smaller industrial spaces, they would see a vacancy rate of 10 percent to 11 percent.” Prices also have dropped: in 2007, smaller warehouses sold for $125 a square foot, but today the price would be closer to $75 a square foot, Mr. O’Connor said.
Smaller properties are languishing, Mr. O’Connor said, “because banks aren’t lending, and people have no equity in their homes to take out second mortgages to finance new businesses.”
And even the growth in the market for large industrial properties comes with cautions, experts say. “The volatility in the financial markets and the picture of a slow recovery, especially with employment, is having a guarded effect,” Mr. Kossar said. “The signs are trending in the right direction, they are all pointing toward a recovery, but it is a cautious optimism.” (credit, j, satow, nyt)