Guggenheim Investments thinks investors should look past the carnage in bonds and gear up for the Federal Reserve to pivot to rate cuts.
While the investment team expects the Fed to leave its policy rate unchanged at a 22-year high of 5.25% to 5.5% over the next several meetings, they also see a recession as likely in the first half of 2024.
That backdrop could spark a quick Fed pivot “to rate cuts, ultimately cutting rates by around 150 basis points next year and more in 2025,” said Matt Bush, U.S. economist at Guggenheim, in a client podcast published Monday.
“We have them taking the fed funds rate down a bit below 3% and pausing balance-sheet runoff in what we think will be a recession, albeit a mild one,” Bush said.
Fed Chairman Jerome Powell last week signaled that the sharp rise in longer-duration Treasury securities recently might be doing some of the central bank’s inflation fighting for it, sparking hopes that there might not be a need for additional rate hikes in this cycle.
In a twist, however, the 10-year Treasury yield BX:TMUBMUSD10Y fell sharply last week from a recent peak of 5%, before rebounding on Monday, mimicking earlier volatility in the $26 trillion Treasury market that has kept the Fed and investors on their toes in 2023.
With that backdrop, the team likes agency mortgage-backed securities returning roughly 6%, structured credit kicking off about 8% to 9% on A-rated debt and segments of BB-rated high-yield offering about 9%, all higher-quality parts of credit markets.
“We’re frankly not getting paid enough to reach further down the capital structure,” said Adam Bloch, a portfolio manager with Guggenheim’s total return team, adding that they are keeping 20%-30% in “dry powder” across most of their strategies to take advantage of any stress ahead.
Parent company Guggenheim Partners has about $218 billion in assets across fixed-income, equity and alternative strategies.
“It’s obviously been very painful to get to the point where we are today in fixed-income markets and across the yield spectrum,” Block said, while adding that “It’s kind of like the famer who stumbles upon a burned-out forest after a wildfire, and all he sees is farmable land.”
“We’re focused on, again, locking in these record-high current yields, and we broadly think that’s what investors should be doing, too.”
The stock market rallied for a sixth straight session on Monday, with the Dow Jones Industrial Average DJIA and the S&P 500 SPX booking their longest streak of gains since June and July, while the Nasdaq Composite COMP scored its seventh consecutive day of gains.
Industrial Realty Group has secured a ground lease for roughly 400 acres at the Atlantic City International Airport where it plans to build a mixed-use logistics project in the southern part of the Garden State.
Based in Los Angeles and billing itself as one of the largest industrial real estate developers in the nation, Industrial Realty said it reached an agreement with the South Jersey Transportation Authority to lease the large parcel on the northwest corner of the airport, which is located in Egg Harbor Township, New Jersey. As part of the deal, Industrial Realty and the authority have agreed to work cooperatively on the new construction, the company said in a statement on Tuesday.
Industrial Realty is “planning to build a mixed-use, industrial development to potentially include air cargo, rail and over-the-road (tri-modal),” a company spokeswoman said in an email to CoStar News on Wednesday. Renderings of the development weren’t available.
“IRG has a wealth of experience in the aviation segment of commercial development,” Stuart Lichter, the developer’s president, said in a statement. “We have already discussed site opportunities with many job-creating tenants. We believe this momentum will continue to grow because of the property’s location and airport proximity.”
For several years now New Jersey has been a hotbed for warehouse development because of its central location within a highly populated area, situated between New York and Philadelphia, and its proximity to major airports and seaports. Meanwhile, the Atlantic City airport has been in the local news recently because of a controversial proposal by the Biden administration to use the site as a place to house immigrants.
Industrial Realty said it has also been working with the Atlantic County Economic Alliance on the agreement, and added that the project “could stimulate tens of millions of dollars in new private investment in the region.”
In July last year, the South Jersey Transportation Authority authorized its executive director, Stephen Dougherty, to enter negotiations and execute an agreement for the development of the northwest quadrant of the airport. The lease is the culmination of efforts stemming from that authorization.
“We could not have found a better partner to make this project a reality,” Dougherty said in a statement.
The proposed industrial development could also help Atlantic County move toward its goal of diversifying and strengthening the economy in the region, moving beyond gambling and tourism, according to local officials. Industrial development has been a key component of regional master planning and the Atlantic City airport for a decade, officials said.
“This agreement is conducive with our efforts to explore the development of an air-cargo-maintenance-and-repair facility that could result in hundreds of short-termconstruction jobs and many more long-term jobs,” Atlantic County Executive Dennis Levinson said in a statement.
Industrial Realty’s forte is the conversion and privatization of federal properties. The company owns and serves as the master developer of three closed military bases, a former NASA manufacturing facility and a closed Veterans Affairs site.
Cushman & Wakefield is no longer handling Brookfield Asset Management’s office and logistics listings in the U.S., according to a report by Bloomberg. The move comes at a tenuous time for C&W and other CRE brokerages as they struggle to maintain revenues until the industry makes an expected recovery in the second half of next year.
Bloomberg said the brokerage was fired after it declined to shift some of its offices to Brookfield’s redeveloped 660 Fifth Ave. from 1290 Avenue of the Americas. The publication cited a source that was familiar with the matter.
GlobeSt.com reached out to C&W and BAM for comment after hours and will update this article with their responses.
Like its counterparts, C&W has had to take several steps to maintain its business in the face of plummeting transactions and an uncertain business environment.
Its third quarter revenue of $2.3 billion was down 9% over the same period in 2022. Property, facilities, and project management were flat while leasing, capital markets, and valuation and other declined 16%, 33%, and 17% respectively. There was a net loss of $33.9 million.
The company has focused on paying down debt to reduce leverage to between 2% and 3%, as well as reducing expenses by a target of $130 million annually. C&W has already realized $98 million year-to-date and is slightly ahead of where they planned to be, according to its CFO.
Losing Brookfield Asset Management as a client was no doubt a blow given the firm’s outsized real estate footprint. It has more than 500 million square feet of commercial real estate.
“While completely surprised by this reaction, we consider disciplined management in the best interest of our firm, employees and shareholders,” C&W spokesperson Mike Boonshoft told Bloomberg.
Brookfield declined to comment to Bloomberg.
Ohio resident Matthew James Collins hauls frozen food around the Midwest — onion rings, ice cream and the like. On a recent October morning, Collins was trucking through a snowstorm in Minnesota.
He wasn’t carrying much. Collins recalled when he ran this route last year, he would regularly move 22 skids of frozen foods (a type of pallet) for four different corporate accounts. Now he’s moving just 12 skids for two clients.
The health of the trucking industry is typically a good gauge for how the U.S. economy at large is faring. That’s not the case right now. Economists remain stunned by how much stuff Americans are buying amid historic inflation and interest rate hikes. At the same time, the trucking industry is embroiled in a meltdown that’s slamming operators large and small.
“It doesn’t even seem like the broader economy even knows we’re in a recession,” said Steve Troyer, president of California Midwest Xpress, a 30-truck fleet. “But we’re in a good one.”
Americans are spending a larger chunk of their income on durable goods than they did before the pandemic, according to Goldman Sachs research. The U.S. economy saw “blockbuster” growth in the third quarter of 2023; it was the biggest surge in nearly two years, and attributed in part to increased consumer spending. Around 72.6% of the nation’s freight by weight is hauled by semi-truck. If Americans are buying so much, why aren’t truckers seeing a boon?
This trucking bloodbath is particularly gory
Trucking is a highly cyclical industry. During good times, manufacturers deliver more equipment to trucking fleets that want to expand and capture that surfeit of business and profits. Individuals open their own trucking fleets too.
The boom time typically lasts for under a year. Inevitably, so much capacity enters the industry and depresses rates again. Whatever trend outside of trucking that was spurring all of that new demand usually runs dry too. That means too many trucks and not enough freight to move.
The federal government tracks the number of trucking authorities created or shut down every month. Authorities are often put out of service after they fail to pay insurance premiums. In typical upcycles, a few hundred net trucking authorities are created, then a few hundred net trucking authorities are destroyed when the market flips less than a year later.
The most recent freight upcycle quashed that pattern. The upcycle began around June 2020, when the federal government approved about 500 net trucking authorities. That reached a fever pitch in the summer of 2021, when around 2,000 net trucking authorities were created in a single month. It wasn’t until June 2022 when the cycle turned and net trucking authorities flipped back to negative.
The pandemic trucking boom lasted twice as long as a typical upswing. And each month created many times more trucking companies than a typical red-hot trucking month.
Ther’s still a massive excess of trucking authorities, according to federal data. In January 2020, there were around 255,000 authorities. Now there are around 363,000 authorities. Most of these businesses are small fleets with fewer than 10 drivers.
Tens of thousands of those new carriers have already shut down. According to a FreightWaves analysis of federal data, an estimated 35,000 new trucking companies shuttered in the fiscal year ending Sept. 30. For the 10 years before that, the average number of out-of-service orders was 15,585.
Average per-mile spot rates for trucking fleets have hit $1.54, down 11.6% from 2022 and 34.4% from 2021, according to the FreightWaves National Truckload Index. At the same time, the costs of fuel, replacement parts, insurance and other key inputs have soared.
Brian Carle, a New Mexico truck driver who has his own authority, said jobs are so scarce and poorly paid right now that he has to save up just to get an oil change. His gross earnings this year will be about 33% less than they were in 2021 — but the cost of everything, like repairs, diesel and routine maintenance, has soared.
“Everything I’m paying for, I’m not getting paid more for,” Carle said. “Something’s gonna break.”
Reflecting that, trucking carriers are only rejecting some 3.5% of contract loads, according to the FreightWaves Outbound Tender Reject Index. That’s even lower than 2019 and 2022, two challenging years for truckers.
“We’re going to have to see trucks leave the market for rates to come back down,” said Collins, the Ohio truck driver. “We also need a stronger economy for rates to come back up.”
American consumers are buying stuff again. Woo-hoo!
The U.S. economy grew faster than expected in the third quarter of 2023. At 4.9%, it was the biggest uptick since the fourth quarter of 2021. Much of that boost came from increased purchases of durable goods; new orders for durable goods are up 4.4% so far this year compared to 2022.
For this increase, thank the slowdown of inflation — and the relentless American urge to go on a shopping spree.
“When the economic history of the early 21st century comes to be written, the opening sentence in a bold font should be ‘never go short the hedonism of the US consumer,’” wrote Paul Donovan, UBS global chief economist, in a note last Friday. “Middle-income consumers have lower inflation than consumer price data implies, giving them more spending power.”
Americans are still buying a lot of stuff, despite the Federal Reserve’s attempts to curb spending and corporate zeal to increase the price of everything. Joseph Politano, author of the financial newsletter Apricitas Economics, said continued strong spending reflects the strong labor market.
“The vast majority of people spend a fixed portion, which is the majority of their income, on things,” Politano said. “Over the last year, you have 3.2 million new jobs and employment rates at a very high level. It shouldn’t be too surprising that spending is remaining strong under those conditions.”
Spendy American consumers are’t saving trucking
No one expected the 2020 to 2021 spending spree to last.
“You had like those insane months where there was a million new jobs and spending growth was 9%,” Politano said. “Obviously, no one ever expected that to [last] forever.”
However, that didn’t stop more than 100,000 truck drivers from opening up their own trucking companies. And while it’s easy enough for the American consumer to scale up or scale down their spending, truck drivers can’t turn on or off their level of capacity as seamlessly.
The only level of freight demand that could support that “excess” trucking capacity is one that matches the Great Shopping Spree of 2021. That level of consumerism — where more than 100 container ships are waiting to unload at the ports of Los Angeles and Long Beach, full of stuff purchased with stimulus checks — was likely a once-in-a-lifetime event.
Analysts believe that the trucking industry will only become healthy again when a significant chunk of those authorities are cleared out. That likely means the collapse of tens of thousands of trucking businesses, even beyond the tens of thousands that have already shut down.
For his part, Carle, the New Mexico truck driver, isn’t keen on closing down his business. “I don’t want to give up what I’ve worked so hard for.”
U.S. logistics market data is sending mixed messages as certain industry segments respond to near-term uncertainty while continuing to prioritize supply chain optimization for the long-term. Here are three important trends to know about logistics real estate.
- Activity levels correspond with growth in logistics real estate demand. Our Industrial Business Indicator (IBI™) remained steady in October at 57.3, in line with the Q3 average, reflecting continued strength in consumer spending and growth in the flow of goods.
- Logistics real estate dynamics remain tight in most markets. The national vacancy rate remains very low, 4.8% vs. a historical expansionary average of 6.1%, even as the pace of new deliveries quickened and added 70 bps to market vacancies.
- Significant rental rate increases upon lease expiration will remain the norm, even as market rent growth normalizes from its blistering pace of 2021/2022. U.S. rent growth totaled 85% from 2019-Q3 2023, which will continue to produce steep rental rate increases for customers upon lease expiration.
DEEPER DIVE:
As macro factors intensified, timelines for decision making extended. As interest rates climbed, customers increased scrutiny of CapEx spend and inventory carry. This slowed the pace of leasing, pulling down realized net absorption to 42 million square feet (MSF) in Q3 from 49 MSF in Q2, even as the volume of requirements in the market remained elevated compared to historical trends.3 However, October’s IBI Activity Index reading of 57.3 corresponds with an annual demand run rate of 175 MSF, indicating the ongoing need for network expansion.
A rapidly emptying construction pipeline opened leasing opportunities in select markets and submarkets. New logistics space deliveries totaled 121 MSF in Q3, reflecting the large number of projects started in 2022. Market vacancies rose to 4.8% in Prologis’s U.S. markets, up 70 bps since the previous quarter but still well below historical averages in most markets. Increased availabilities will be concentrated in specific size segments and locations, given that more than half of the pipeline is in just eight markets.
We expect the window to act on the increased availabilities will be short, as speculative construction starts declined to the lowest level since Q2 2020. Replacement cost rents (or the rent needed to justify the cost and risk of development) increased in Q3 as materials and labor costs remained high, capital costs increased, and construction lending conditions tightened. As a result, Q3 speculative starts were down 65% from peak levels and continue to fall. Given this pattern, customers could face renewed scarcity in H2 2024 and beyond. Market rent growth outpaced inflation in aggregate, with divergence by market. We expect approximately 7% growth in 2023, as rents in many markets are on pace to increase by 10% or more in 2023; however, there are a handful of sizeable markets with flat or declining rents, including Southern California, Houston and Indianapolis. Logistics real estate occupiers should face a steep rental rate increase upon lease expiration over the next 12 months as U.S. rent growth totaled 85% from 2019 to Q3 2023, with wide variation by market. Vacancies are poised to peak at a historically low level in mid-2024. Our forecast calls for 195 MSF of demand in 2023 compared to 490 MSF of new supply, pushing the vacancy rate up to 5.4% at year-end. Looking ahead, the sharp decline in starts in 2023 will translate to a low level of deliveries beginning in H2 2024 and continuing into 2025, which should put renewed downward pressure on the vacancy rate.
CONCLUSION
The U.S. logistics real estate market is under-going a “mini cycle” that reflects a balance between short-term cyclical uncertainty and long-term adaptation to the future of retailing and supply chain demands. Customers are still expanding their real estate footprints, albeit at a normalized pace compared to the frenzy of 2021 and 2022. Some leasing activity is being delayed until 2024, and next year’s deliveries are poised to fall sharply, which should re-introduce scarcity to many markets. As a result, we recommend that customers act quickly to take advantage of increased availabilities.
Companies struggled with operating ratios in Q3 amid sluggish demand, according to earnings reports.
Knight-Swift Transportation Holdings, P.A.M. Transportation Services and Marten Transport experienced truckload difficulties in the metric, following bountiful demand last year, as the market put further sequential strain on carriers.
“Our earnings this quarter were significantly pressured by the industry-wide weak demand, cumulative impact of reduced freight rates with the resulting freight network disruption, and inflationary operating costs within the current freight market recession,” Marten Executive Chairman Randolph Marten said in an Oct. 18 earnings release.
Truckload operating ratios for Knight-Swift and P.A.M. as well as Marten’s overall business remained above 90%. Companies are striving to lower these rates to make better use of capital, and Knight-Swift is aiming to achieve that reduction by 2026 given its acquisition of U.S. Xpress Enterprises.
Carriers’ operating ratios remain high
Quarterly metrics since 2022, focusing on truckload.
Even when Knight-Swift excluded U.S. Xpress, its truckload operating ratio was 91.5%, CEO and President Dave Jackson noted in an Oct. 19 earnings call.
“We are just simply not comfortable with an OR that starts with a nine and our people are working with urgency to do all that we can,” Jackson said.
In other segments for Knight-Swift, adjusted operating ratios were mixed. The metric was 93.3% in logistics, 104.5% in intermodal and 84.9% in LTL, per an earnings presentation.
Operating ratios by trucking companies showed that this year, Knight-Swift’s truckload segment and Marten continue to worsen from Q1 onward, reaching their worst rates in Q3.
In contrast, P.A.M.’s worst operating ratio for truckload this year was in Q1 at 99.3%, and its best quarter for the metric was in Q2 at 92.7%.
“The third quarter of 2022 was one of the best in our company’s history while the third quarter this year was faced with an unprecedented unfavorable truckload market,” P.A.M. President and CEO Joe Vitiritto said in an Oct. 18 earnings release.
Despite the results, Vitiritto said in the statement that the company saw improvement in factors that the business believes will benefit the company when the market changes.
The persistent drag was in contrast to booming quarters last year. Knight-Swift dropped under 80% for its adjusted operating ratio in truckload last year for quarters in H1, and Marten reported its best operating ratios as a publicly traded company during that time.
By David Taube
Multistory warehouses have gained popularity in the U.S. over the past five years, catering to the evolving demands of the market. Today, let’s explore the reasons behind their appeal and the impact they have on urban logistics.
First and foremost, warehouses have long been attractive to landlords due to their versatility. Like traditional big-box warehouses, multistory warehouses offer the advantage of accommodating multiple tenants across various industries. But unlike traditional big-box warehouses, they offer landlords the ability to maximize the use of available land by constructing vertically, providing multiple levels for tenants.
In particular, the resurgence of people moving to urban areas–like downtown Buffalo, NY–has created a need for multistory warehouses. The rise of e-commerce and the need for faster delivery times have fueled the demand for well-located, urban warehouses. Multistory warehouses, many of which are strategically positioned near urban centers, provide a solution that can meet these evolving needs while minimizing the impact on surrounding infrastructure.
But these warehouse-type buildings are not limited to serving logistics needs. For example, with downtown apartments–and therefore less storage space–becoming increasingly popular, self-storage facilities have become a viable solution for apartment-dwellers. Additionally, as more people move to these downtown apartments, there has become a need for grocery stores nearby. Multistory warehouses, with their vertical design and efficient use of space, provide an ideal solution for meeting each of these demands.
This year marks the 5-year anniversary of multistory warehouse development in the U.S., a subset of buildings within the Urban Logistics inventory. These buildings differ from traditional big-box warehouses and have emerged to meet the growing demand and changing consumer behavior.
Recent data showing a dramatic decline in warehouse construction starts has some in the sector worrying about a lack of first-generation industrial space due to limited development activity.
Indeed, the slowdown is noticeable. Total space under construction peaked at 638 million square feet in mid-2023 before falling 17% to 546 million square feet during the third quarter. Completions are projected to peak during the fourth quarter at 180 million square feet, but are forecast to decline by an astounding 71% by the final quarter of 2024 to only 53 million square feet.
However, this will not be bearish for the booming sector’s prospects. On the contrary, the pause in development expected in 2024 is likely just what the doctor ordered.
The drop in construction starts is indicative of a healthy market responding quickly and appropriately to slowing demand and higher costs of capital. While vacancy is climbing due to record new supply hitting the market this year and next, it’s forecast to climb to only 6.5% by 2024. That is considered a functional and balanced vacancy rate where industrial users have multiple options to choose from yet the market isn’t oversupplied.
Demand for industrial space isn’t expected to return to the frenzied pace of 2021 or 2022. But it is forecast to remain robust when compared to historical cycles. This is due to continued growth of e-commerce, third-party logistics provider requirements, manufacturing onshoring, cold storage expansion and data center needs.
Typically, this imbalance between supply and demand would be cause for concern throughout the industrial sector, but a quickly contracting construction pipeline combined with a bullish forecast for demand suggests any imbalance will be short-lived and may even be good news for industrial occupiers.
In the near term, the influx of new construction product will provide industrial occupiers with more options to occupy than they have had since before the pandemic. If industrial construction were to continue unabated, some markets and submarkets would see skyrocketing vacancy rates as supply outstripped demand. Instead, balance is likely to return quickly and vacancy rates will stabilize at functionally healthy levels before beginning to fall again.
As the construction pipeline contracts over the coming 18 months, developers will be able to gauge demand for the new product being delivered and determine the best timing to begin the next wave of industrial development.
Understanding where we are today means recalling what we’ve recently been through. Over the past two years, warehouse and distribution sites were built at a pace the market could not have fathomed before COVID. Behind this activity was unprecedented demand for industrial space from occupiers like e-commerce giant Amazon, mega-retailers including Target, Lowe’s, Best Buy, The Home Depot and Kroger, as well as third-party logistics providers supporting numerous clients reorganizing their supply chain strategies and online sales approaches in response to the pandemic.
Demand was so impressive that net absorption – a demand indicator that measures the net change in occupancy – totaled 598 million square feet nationwide in 2021, more than twice the previous record of 290 million square feet recorded during a particularly strong year in 2016. Last year wasn’t far behind with an annual total of 493 million square feet.
As a result, vacancy in industrial buildings plummeted to all-time lows, dipping as low as 3.5% nationwide during the second quarter of 2022. In some key industrial markets like the Inland Empire, the industrial vacancy rate dropped below 1%, resulting in practically no options for industrial tenants to lease.
Industrial developers responded quickly by acquiring land and building warehouses and distribution facilities on a speculative basis as quickly as they could. Supply chain disruptions for construction materials complicated the process, forcing developers to get creative to get the project done. Pre-leasing of speculative projects — sometimes before construction had even begun — became common, even in markets that had never really witnessed pre-leasing in the past. Demand was still more frothy than ever for modern industrial space and tenants were leasing it more quickly than it could be built.
Higher interest rates and economic uncertainty are a couple of factors behind demand normalizing through the first three quarters of 2023. Net absorption has retreated from its record highs, averaging 60 million square feet per quarter so far in 2023 — in line with what the market witnessed prior to 2020. Developers are still as busy as ever, however, delivering the record amount of construction activity started in 2022. Vacancy is climbing in nearly all markets throughout the U.S. as a result, for the first time in years.
This disconnect between supply and demand will continue through the first half of 2024, as record construction completions outpace how quickly tenants can lease the space. The U.S. industrial vacancy rate is forecast to climb from its all-time low of 3.5% in mid-2022 to the 6.5% forecast during the second half of 2024. While the industrial market is being temporarily overbuilt, the good news is that it won’t last.
Russo Development and River Development are nearing the completion of more than 211,000 square feet of new logistics space just off Interstate 280 in Kearny.
The firms on Monday said the project, located at 1100 Harrison Ave., will bring new life to a former manufacturing site that was contaminated but has since been cleaned up. They’re now on track to deliver the speculative industrial building during the fourth quarter, seeking to capitalize on a location that is less than six miles from Newark Liberty International Airport, nine miles from Port Newark-Elizabeth and just under 11 miles from Midtown Manhattan.
They added that the single-story, 211,287-square-foot distribution center will have 38-foot clear ceiling heights, 41 loading docks and parking for 251 cars and 64 trailers, along with office space built to the tenants’ specifications.
“The most critical factor in logistics is project location. At Russo, we strategically select our locations to maximize efficiency and transportation costs for our tenants and that is exactly what 1100 Harrison Avenue’s location will provide, located less than a mile from the New Jersey Turnpike,” said Michael Pembroke, chief operating officer at Russo Development. “The connectivity that this development offers to New Jersey will be invaluable for our future tenant.”
River Development sourced the property in an off-market deal, according to a news release. Working closely with the multigenerational business owners, the firm advised and executed preclosing environmental remediation across local, state and federal agencies, while working with Russo and local officials in Kearny to lay the groundwork for the redevelopment.
NAI James E. Hanson’s Tom Vetter and Jeff DeMagistris lead the leasing team for the property.
“Russo Development was the partner of choice for us as much for their integrity as their bandwidth,” said Warren Waters, a principal and partner with River Development. “We interact with a wide cross-section of the company and its not a coincidence that we are developing multiple projects together.”
The firms noted that 1100 Harrison Ave. will have excess parking in a supply-constrained market and is minutes from other major highways including the New Jersey Turnpike and interstates 80 and 78. In addition, there is a workforce of more than 4.8 million within a 15-mile radius of the development and some 50 million consumers within a day’s drive.
Additionally, the site is within Kearny’s Urban Enterprise Zone, making it eligible for incentives such as a 50 percent reduction in sales tax for retail customers, corporate employee tax credits and priority financial assistance in accordance with state programs, the news release said.
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.