Kossar details industrial’s rapid rise: Real estate guru says demand is fueling unprecedented prices

Rob Kossar, vice chairman and head of JLL’s Northeast Industrial Region, doesn’t hold back when discussing the state of industrial real estate in New Jersey and the area.

“We’re at a high-water mark in rents in every major market — and it’s a significant increase in rent, year-over-year, and has been for the past few years,” he said. “It’s just remarkable.” 

Kossar, discussing the recent release of JLL’s Northeast Industrial Outlook for the second quarter of 2021, said the numbers are the result of a basic economic principle.

“It’s driven by the imbalance of supply and demand,” he said. “It’s not like the developers aren’t desperately trying to provide space. They are. And there’s a lot of amazing development projects throughout the region, and a lot more than we’ve ever had before. 

“But there’s so much more demand than there is space.” We’ve never had an imbalance like this; we’ve never had a vacancy rate this low. And that’s driving all the rent growth.”

According to JLL, the asking rent rate in North Jersey is $12.06 and the asking rent rate in Central Jersey is $9.84. In South Jersey, it’s up to $7.93. And this all comes at a time when vacancy is between 1%-4%.

The report said JLL is recording 26.3 million square feet of active requirements statewide, up from 25.5 million square feet at the end of Q1. This demand is why JLL is projecting that 2021 will surpass 2020 as the market’s strongest year of leasing in history.

“With Class A vacancy at record lows and incredibly resilient preleasing rates, developers are in the driver’s seat when it comes to lease negotiations,” the report said. “Thus, tenants looking for Class A product should be prepared to act quickly and pay high-water-mark rents in order to secure new construction availabilities.”

Kossar discussed the report with ROI-NJ. Here’s a bit of the conversation, edited for space and clarity.

ROI-NJ: Industrial has been hot for a while — but it seems even hotter now. Agreed?

Rob Kossar: Absolutely. Every transaction that takes place now — it doesn’t matter if it’s a lease deal or if it’s an investment sale, or it’s a development site being sold — is a high-water mark. It’s gotten to the point where acquisition officers can’t present recent comps to an investment committee and get a deal approved, because everything is a high-water mark.

ROI: Where is the demand coming from?

RK: It’s happening in all sectors of industrial real estate, but it is largely fueled by the changing patterns of retail sales, and more retail sales occurring online. And then, more to the point, consumers wanting their products immediately. More companies are following the lead in terms of being able to provide goods to consumers instantaneously.

ROI: Hot markets are not good for everyone — who is being hurt?

RK: It’s not a great place to be if you’re a tenant with a low lease coming up. Let’s say you’re in the Meadowlands, and you were paying $6 or $7 a foot. Now, the rate is $18-$20 for that same space, even if it’s third-generation space. If you’re running a smaller business, a privately held business, and your margins are thin, that’s a problem. And it may mean you have to move.

ROI: Who is it helping — other than landlords and developers?

RK: The jobs that are being created by e-commerce are high-paying blue-collar jobs that haven’t really existed since we had large-scale manufacturing in this area. It’s great for the economy to be able to take a large segment of your workforce and enable them to earn a sustainable living. We’re not talking about a couple of bucks an hour; we’re talking about real jobs. I think it’s super important. And it’s not talked about enough.

ROI: Industrial, of course, has been hot for a while. How long can it last? Where are we on the curve? If this were a baseball game, what inning would we be in?

RK: We are in the second inning … of the second game of a doubleheader. It sounds like a nice quote and soundbite, but, if you peel back the onion, you can very clearly see that’s where we are. The first game was e-commerce and fulfillment and big box and infrastructure leading the charge. This game is all about speed to the population — last-mile delivery, fulfillment.

ROI: When does it end?

RK: That’s hard to say. We have an undersupply of space. JLL put out a year ago that we were short about a billion square feet in the U.S. industrial real estate (market) to accommodate for the growth of e-commerce just to 2025. The conundrum still exists. We have far more demand than we have supply. In New Jersey, we may need to add 25-30 million square feet in the next five years.

The fundamentals, when you look at them carefully, don’t indicate any slowing down of this phenomenon.