COVER STORY, MAY 2012

INDUSTRIAL RECOVERY
Experts see continued growth in the industrial sector.
By Liz Burlingame

Powered by a rebound in consumer spending, growing port activity and the resurgence of U.S. trade volume, the Northeast industrial real estate market is gradually on the mend.

The leasing activity for industrial properties exceeded 417 million square feet nationwide last year, according to a year-end 2011 Industrial Snapshot report by Cushman & Wakefield. This was 20.5 percent higher than the 345.8 million square feet leased in 2010 and represented the highest level of activity since 2007.

At the same time, industrial vacancy rates have fallen below 10 percent in several Northeast markets, including Northern and Central New Jersey, Philadelphia and the PA I-81/I-78 Distribution Corridor — still historically high, but offering another promising sign.

"Vacancy rates are going down, leasing activity is up and that means there is significant improvement in the sector," says Jim Dieter, executive vice president for U.S. industrial brokerage at Cushman & Wakefield.

Dieter isn't alone in his view of today's industrial real estate market. While experts argue the primary industrial real estate sector in the Northeast isn't as strong as it was before the Great Recession, many believe it is in recovery mode.

Northeast Real Estate Business recently spoke with experts in the industrial real estate field to find out how Northeast markets are faring and what trends we can expect this year.

Transactions on the Rise

Indications of a market turnaround were apparent in Central and Northern New Jersey last year. The market is one of the largest in the nation with more than 800 million square feet.

The volume of new leasing transactions in this region totaled 23.3 million square feet in 2011, making it the highest annual volume since pre-

recession levels, according to Cushman & Wakefield’s Northern and Central New Jersey Industrial Marketbeat fourth quarter report. The resurgence in activity exceeds the 2010 total by 83.2 percent.

Some of the most significant lease deals occurred during the first half of 2011. For instance, I/O Data Center executed an 831,427-square-foot lease at 3003 Woodbridge Ave., in the former New York Times printing facility in Edison, New Jersey. The lease represented the data center provider's third location and the nation's largest data center. In Carteret, New Jersey, Wakefern Food Corporation inked a 1 million-square-foot lease for a warehouse and distribution center at 8001 Industrial Ave.

Dieter says the leasing landscape is improving nationally, following a rise in international trade. "For far too long now, companies have had to sit on the sidelines with regard to their expansion and consolidation needs," he says. "They are now witnessing increased demand, not only in the U.S. but from across the world. If we look at manufacturing output in the U.S. over the past 24 to 30 months, it has grown month over month."

Consumer goods companies and third-party logistics firms have been driving growth in the industrial real estate sector, as have firms in the food and beverage sector.

Part of the 2011 story was also the growing importance of e-commerce, such as Amazon.com. "It accounts for a significant percentage of absorption in the big distribution buildings that we have around North America," says Dieter. Some retailers have also been using large-sized distribution centers to both ship orders and stock the shelves of their stores.

As consumer spending improves, companies will generate more revenue and have more options to expand, he adds. In 2011, retail sales totaled a record $4.7 trillion, a gain of 7.9 percent over 2010.

Speculative Construction

Rob Kossar, managing director in the Hasbrouck Heights, New Jersey, office of Jones Lang LaSalle, expects strong demand for quality, big-box space in key logistics hubs, particularly in New Jersey, the Inland Empire and Southern California.

Liberty Property Trust is developing a 1.2 million-square-foot, $62 million speculative industrial property on a former brownfield site at Lehigh Valley Industrial Park in Bethlehem, Pennsylvania.

The Lehigh Valley market in Pennsylvania also showed improvement last year. The overall vacancy rate declined sharply in 2011 to 7.6 percent, a drop of more than 5 full percentage points from year-end 2010, according to Cushman & Wakefield’s PA I-81 & I-78 Distribution Industrial Marketbeat fourth quarter report.

One of the largest new deals in 2011 included Pratt Industries signing a 337,500-square-foot lease at 7533 Seagis Parkway in Lower Macungie, Pennsylvania.

Healthy tenant demand in the market combined with the lowest vacancy rate experienced in the Lehigh Valley since 2006 helped spur new speculative construction. For the first time since 2009, two speculative warehouse and distribution facilities broke ground in the Lehigh Valley area last year.

Both are located in the Lehigh Valley Industrial Park in Bethlehem, Pennsylvania. The 1.2 million-square-foot building at 2785 Commerce Center Boulevard and the 228,000-square-foot building at 4275 Fritch Drive are expected to deliver this summer.

Several large new construction projects also broke ground in the Northern New Jersey market in the third quarter of last year, according to Jones Lang LaSalle. While the majority were build-to-suit projects, more than 500,000 square feet of new construction is being developed on a speculative basis.

Development Trends

Howard Carr, president of Albany, N.Y.-based The Howard Group/TCN Worldwide, says another factor driving new development is that many industrial properties in the Northeast are considered functionally obsolete or outdated. It might be the result of a building's location, the inability to subdivide space or marginal clear height.

Buyers and tenants are also drawn to newer or updated buildings with sustainable design and construction. Green features might include building automation controls and energy-efficient lighting with occupancy sensors, says Avi Avidan, managing member of Avidan Management, a family-owned real estate company with roots in Northern New Jersey.

"People have become more aware of green and being energy efficient," says Avidan. "It also has to do with the bottom line. The cost of utilities has increased and there is uncertainty about where they are going. One way to stabilize at least part of your overall costs is to manage the energy costs."

Last year, the company completed one of the nation's largest roof-mounted solar panel systems for a distribution building in Edison, New Jersey. The system includes 17,745 high-performance solar panels atop a 17-acre roof. "We are undertaking our second solar installation in New Jersey to a building that's fully occupied," says Josh Avidan, a member of Avidan Management's senior leadership team. "In an uncertain economy and uncertain future, we believe in solar."

By Sea And By Land

The Panama Canal expansion is expected to be completed by 2014 and is described as a game-changer for U.S. seaports. The canal will be able to handle more and larger container ships, which could mean big business for Atlantic port areas. The expansion would permit large ships from Asia to travel directly to East Coast destinations instead of offloading their goods on the West Coast and shipping them across the country by rail and road.

"Some freighters will sit for a substantial amount of time waiting to get through the canal and when the capacity is doubled, it will substantially change everything," says Carr. The Panama Canal Authority projects cargo volume transiting the canal will grow at an average of 3 percent per year — doubling the tonnage in 2005 by the year 2025 — which will create a need for additional space for container shipping berthing and container processing in the region.

The expansion is also expected to create demand for ports able to handle larger ships. Several ports from New York to Miami are in the midst of expansion projects.

As the cost of fuel continues to climb, Kossar says more companies are aiming to locate closer to port areas. Last year, a toll hike for the bridges and tunnels in to New York City by the Port Authority of New York and New Jersey also took effect, pushing some tolls 50 percent higher, according to a third-quarter 2011 New Jersey Industrial Outlook report by Jones Lang LaSalle report.

The major impact is heavily on commuters to New York City, however, there is expected to be a significant burden on the shipping and trucking industries.

Businesses have been evaluating more efficient ways to transport goods. As fuel costs rise, the economies of rail transport over trucks is growing, says Dieter.

Kossar notes that Central Pennsylvania will continue to perform well this year due to its proximity to intermodal rail. And while Exit 8A and 7A off of the New Jersey turnpike have shown major growth in the past few years thanks to its great road connections and available land, railway might be its "Achilles heel," he states.

"If folks are bringing stuff in by rail, it's a disadvantage to 8A and 7A. If they're bringing products in by truck, 8A and 7A would have a significant advantage over Central Pennsylvania and Lehigh Valley," says Kossar.

Investment Continues

Real estate investment trusts (REITs) and institutional investors were the most active players last year and will continue to dominate in 2012, say industry experts.

Kossar notes that New Jersey has an incentive program in place for companies and investors. The Urban Transit Hub Tax Credit is helping to grow the industrial real estate sector. Companies that make a certain capital investment in New Jersey and who retain or create 100 full-time jobs can earn up to $5,000 to $8,000 per job over a 10-year period.

Also this year, Governor Chris Christie signed a bill creating the Grow New Jersey Assistance program, a measure that will set aside at least $200 million in incentives to help economic development in areas beyond the state's nine Urban Transit Hubs.

"With those incentives out there, it's almost impossible for neighboring states to compete. It's just a question of when these programs will go away. That's going through the legislature right now," says Kossar. "But this administration has been the best I've seen in my 24 years [in the real estate industry] in terms of its willingness to talk to prospective companies that want to move into the state and providing incentive programs that are meaningful and easy to apply for."

While the Northeast industrial market is beginning to experience positive growth, Dieter states that it still remains vulnerable to a variety of geopolitical factors.

"We often hear the phrase 'cautious optimism.' That's the mood everyone is in because geopolitical issues anywhere in the world could trump all of the positive news," says Dieter. "We are positive, the industry is busy, corporations are healthy and we believe this will continue, with one caution, and that's the bigger global picture."

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