There’s nothing better than looking into a crystal ball and … guessing?
Welcome to our annual look at the commercial real estate industry. We asked more than a dozen industry experts to predict how the sector will play out in 2022.
Here are their thoughts:
Bullish entering the new year
Chair, Real Estate, Development & Land Use Group
Chiesa Shahinian & Giantomasi
The market has adapted to the pandemic by factoring COVID-19 into deal underwriting. Plentiful equity and lenders pursuing acquisition, bridge and construction financing indicate the market will continue at its current pace — at least into the second quarter. On the flip side, the Federal Reserve has been signaling interest rate increases, and there is the specter of when and how a new COVID variant may impact the economy.
Still, the proximity to New York, the ports and our interstate highway system seem to cushion many New Jersey submarkets against negative forces, at least with respect to the industrial and multifamily sectors.
At CSG Law, we picked up in January 2022 where we left off in December — handling a robust pipeline of acquisitions, developments, financings and dispositions across asset classes. We are bullish as we enter 2022 — and remain cautiously optimistic for prospects in the second half.
Renter pool will continue to grow
The COVID-19 pandemic brought a wave of people moving from the higher-density cities into the suburbs, and, with this demographic shift, prices for single-family homes have skyrocketed, leaving renting as the only viable option for some. We believe that, due to these recent market trends, the demand for multifamily is increasing and will continue on a positive trajectory.
The single-family home environment is still up, with double-digit increases in property values, so the renter pool should still be abundant heading into 2022. There is also still a good amount of dry powder out there as it relates to investment capital funding. Money is still flowing and viable for the funding of multifamily ventures for sponsors and developers with proven track records.
Cap rates will continue to drop
Senior managing director
We expect capitalization rates to continue to drop for both industrial and multifamily properties in 2022 — after a year in which we witnessed the lowest yields ever recorded in the state. Cap rates for industrial compressed as low as the high 2s over the past year; multifamily saw returns drop to the low to mid-3s in multiple closed transactions. Rent growth and significant equity were the main drivers behind the lower returns that investors were willing to accept. That trend should continue in 2022.
The second half of 2021 also showed an uptick for retail investments. In 2022, we will see cap rates continue to drop for grocery-anchored retail assets throughout the state. Suburban New Jersey office will continue to offer investors a better return than other product types in 2022, given perceived risks.
Demand for development sites will further increase, as investors search for better yields. Without an unforeseen major negative impact to the economy, it looks to be another strong year for investments.
Perfect time to reposition office
The persistence of COVID-19 continues to cause many employers to find themselves tweaking and refining their work-from-home strategies to strike the magic balance between employee flexibility and productivity. However, with this ongoing uncertainty, most companies will continue their virtual work policies well into 2022. Due to this, I expect New Jersey’s office market to continue to see a temporary reduction in demand, resulting in downward pressure on rents and office values, particularly for older, multitenant office buildings.
However, despite a less than ideal office market, there are opportunities for owners of challenging office buildings to capitalize on strong demand found in other sectors. For example, there are 1 million square feet of multitenant office buildings in the greater Princeton office market that are ready, willing or in the process of being repositioned toward other uses. For office buildings located near major highways, these uses may include industrial warehousing, laboratory space or medical offices. Additionally, New Jersey’s significant housing shortage provides the perfect conditions for the redevelopment of suburban office buildings into single-family homes or multifamily communities.
High-end properties will be in demand
Founder and principal
From a residential perspective, I think real estate developers are going to start switching gears and do more high-end projects. If you look at developments that have maintained the highest occupancy rates, they are the ones that have gone way beyond the norm in terms of finishes, amenities and the ability to be flexible with leasing terms. I think there will be more people in the market looking for these things. That’s the approach we have taken with our communities, especially our super high-end Clarus brand, and it has resulted in some very high occupancy rates.
As for retail, there will be more opportunity for the big box stores, such as Costco, Sam’s Club and BJ’s, to expand in the New Jersey market. I think we will see another down year in supermarket growth because the population is moving out of state — and supermarkets tend to expand where the population is growing. The big box wholesale club stores, on the other hand, may see this as an opportunity to expand and supplement the lack of supermarket growth for consumers.
I think the home improvement stores like Home Depot and Lowe’s will have excellent years, as well. With housing prices continuing to rise at an unprecedented rate, many would-be buyers looking for a larger home will choose to stay put, renovate and expand rather than participate in a bidding war.
Future is bright for multitenant industrial sector
Director of development
New Jersey’s lengthy entitlements process, paired with supply chain issues and rising construction costs, will only mean that the supply of new industrial space will continue to be an issue in 2022.
For larger, deeper-pocketed companies, the leasing environment for well-located, modern industrial spaces in our market, although not ideal, is a necessary expense that they can afford. Unfortunately, larger companies’ ability to pay higher rents has also caused over two-thirds of new industrial space delivered in the last five years to be over 100,000 square feet and geared toward single-tenant usage.
The lack of new construction and sky-high pricing will continue to place the state’s nearly 885,000 small businesses between a rock and a hard place as they look for space in 2022. Many of the small businesses looking at industrial space will either be forced to lease a building not up to their standards or pay rents that are significantly higher than they can afford.
But the shortage of space tailored to small businesses does present a tremendous opportunity for the development of new, multitenant industrial spaces located nearby major population centers in 2022. Unlike multimillion-square-foot logistics centers, these smaller, more adaptable multitenant spaces are ideal for small businesses since they can be adapted to a wide range of uses — perhaps a headquarters for service professionals like plumbers, showroom/storage facilities for retail operators or warehousing and distribution centers for small e-commerce firms.
Follow the money (and the incentives)
While COVID continues to throw a monkey wrench into certain commercial real estate sectors, there have been bright spots in several areas, including continued multifamily and industrial development.
With the influx of monies from the federal Infrastructure Investment and Jobs Act and the state incentive programs taking off in 2022, we will continue to see growth in New Jersey in these areas. New Jersey’s Aspire program will give much-needed assistance to residential and commercial projects in areas where it has been historically difficult to build with consistency.
Other New Jersey incentive programs will roll out in 2022 to help bridge financing gaps and bring important commercial projects to fruition. The cannabis industry will continue its positive impact on real estate development, as well, now that the regulations are here, applications are being submitted and municipalities are getting educated on how cannabis-related businesses can help their communities.
Expect sector to fight — and flourish
Co-chair, Real Estate and Land Use Group
Despite a lot of uncertainties and challenges with the pandemic (and politics for that matter), the New Jersey real estate market continues to weather the storms.
Warehousing, manufacturing and logistics businesses are expected to continue to grow, thanks in large part to the demand created by the pandemic. Multifamily leasing is picking back up, and we are seeing an uptick in land use approvals and building permits. That said, we are also seeing new requirements and restrictions on developments coming out of municipalities and the state, which could pump the brakes on investment. Stay tuned.
In the meantime, the federal infrastructure bill is going to spur some long-stalled and desperately needed projects, including the Gateway Tunnel and many other improvements/developments. The pandemic may be clouding our collective crystal ball, and creating a bumpy road, but I believe our real estate industry is going to continue to fight and flourish.
In office, landlords need to be good partners
Founder and president
The Birch Group
The pandemic continues to have a large impact on the office market, with tenants and landlords alike finding ways to navigate the new normal. For landlords and developers, what will be most important in 2022 is being good partners to tenants and creating the type of workplaces where people want to be. While there’s still some uncertainty around the return to work for many companies, we believe that highly amenitized trophy properties that allow companies and their employees to thrive will be in high demand.
Looking ahead to the new year, we will continue to take a very customized approach to all of our assets throughout New Jersey, as we recognize that a one-size-fits-all mentality does not work.
Class A office is a must to attract top talent
Executive vice president
We will see the return-to-office pick up steam in 2022 — and I am hopeful we will back by the end of the year. What that looks like will be unique to each company, driven by culture in many cases, as employers balance the desire to have their staff in the office between the overall challenge of attracting and retaining employees.
The battle for talent will force companies to consider the concept of hybrid work and drive office leasing activity toward trophy Class A buildings with modern amenities as a tool for employee attraction and retention. Class B/C office buildings will have a hard time competing for tenants, and we will continue to see many antiquated office buildings be redeveloped for either industrial or multifamily use as capital continues to flow into those sectors and development opportunities remain hard to find.
Big impact from state agencies, Legislature
Jennifer Phillips Smith
Co-chair, Real Property Group
Real estate investment in New Jersey in 2022 will be shaped by significant statutory and regulatory changes currently under consideration by state agencies and the Legislature.
The EDA recently specially adopted and concurrently proposed rules to implement the Aspire incentives program, which has the potential to address financing gaps necessary to spur investment. However, the devil will be in the details when it comes to implementation: Will the burdens of additional costs of entry into the program (affordable housing, labor harmony agreements, green infrastructure, prevailing wage, etc.) increase financing gaps and outweigh the financial benefits for the vast majority of projects?
The Department of Environmental Protection currently is developing regulations to implement the state’s Protecting Against Climate Threats initiative. The regulations, which are aimed at making development more resilient and sustainable, will also undoubtedly expand the state’s flood hazard areas and the DEP’s regulatory reach in land-use permitting.
The tail end of the lame duck legislative session also could have a dramatic impact, as A4850 hangs in the balance. The original bill, which was supported by the development community, aimed to create a streamlined, third-party inspections program, reduce construction costs and address looming municipal construction department retirements. The governor conditionally vetoed the bill in November and proposed instead that the Department of Community Affairs first study the program. One hopes that, if the Legislature concurs with the conditional veto, the study would at least be a first step toward greater efficiency and reduced costs.
Logistics issues will impact leasing
Alfred Sanzari Enterprises
As we look toward the new year, I expect the office market to remain resilient as tenants look to return to the office. However, supply chain concerns and rising construction costs will play a larger role in leasing negotiations across all asset classes, particularly in offices, that will pose new challenges for landlords and tenants alike in 2022.
In 2021, more than 90% of builders reported shortages of materials. With these shortages set to continue in the new year, landlords and tenants must expect to see continued price increases and lengthier-than-expected construction timelines for their spaces. Landlords looking to complete capital improvements or provide adaptable, built-to-suit spaces for their tenants will need to be proactive in efforts to obtain appliances and supplies in advance of closing to shorten the construction process and allow the tenant to move in as soon as possible.
For tenants looking to redesign their spaces or lease new space in 2022, conversations with a landlord regarding design and construction must take place earlier than ever before in lease negotiations. Additionally, careful consideration must be given to rising material costs and possible construction delays as tenants plan for occupying a new or redesigned space.
Four things to watch in office
Co-founder and co-managing partner
The pandemic has dramatically changed the psyche of how office space will be used in the future. Here are four key elements of the office of the future:
Communication between real estate owners and tenants will be ongoing and themed to creating safe environments in the facilities they want to occupy.
The physical office will play a greater role in corporate culture and overall branding. Curating a desirable atmosphere will matter now more than ever in history. Companies will seek buildings and spaces that are more purposeful, and encourage dynamic in-person interactions like collaborations and mentoring.
Demand for Class A office will be a high priority for companies to attract and retain the most important resource: talent. Site selection will be a big factor, with companies looking for office complexes that offer an interactive community experience that is more like a hotel, which will include food, fitness and entertainment.
Facilities need to be ready for quick conversion to support the latest technologies — 5G and edge computing capabilities will be major discussion points for all tenants.
New amenities required in multifamily
BNE Real Estate Group
With many continuing to work remotely in 2022, residents at multifamily properties are seeking the right amenities to make living and working at home sustainable, but also looking for a level of flexibility for when they return to work. Properties that offer the best of both worlds — amenities for those working from home, while still offering convenience and connectivity to accommodate the shift back to work — will outperform others in the market.
Emphasis on the environment
Daniel & Brian Sudler
Industrial and logistics owners and developers will increasingly be confronted by requirements and expectations of municipalities and tenants who are rapidly adopting standards for Environmental, Social & Governance.
Reduction of carbon footprints in 2022 may also impact existing facilities as practices and technologies become more commonplace and social pressure overcomes reluctance to incur the sometimes-high expenses associated with being clean. Implementation of solar and other renewables will be of particular focus for logistical development construction not only in New Jersey, but also nationwide.
Industrial parking lots will be hot
NAI James E. Hanson
As the e-commerce demand increases and delivery fleets grow, industrial parking has suddenly emerged as one of the most in-demand asset classes in the state. According to data from the U.S. Department of Commerce, national e-commerce sales increased by 5.5%, to make up 16% of total retail sales between the second quarter of 2019 and 2Q 2020 — an increase of nearly five times the rate from the year prior. In a region as dense as New Jersey, the need to suddenly fill five times as many online orders, whether it’s groceries, durable goods or other products, in a timely fashion has flooded our streets with sprinter vans, box trucks and 18-wheelers. The explosive growth of e-commerce fleets has placed a tremendous strain on the already-limited supply of industrial parking across northern New Jersey.
Our team has firsthand knowledge of the growth of this asset class throughout 2021. Seven months ago, for example, we had worked with a parking lot owner in the Meadowlands that was receiving $22,000 an acre in monthly industrial parking rents. As we enter 2022, they are now looking at $33,000 an acre in monthly rents. On the sales side, the record demand is even driving pricing growth for parking lots beyond the pricing seen for raw developable land. We had seen a well-located lot receive $2.5 million an acre just three years ago, and it is now trading for north of $7 million an acre.
Since we cannot make new land in markets like the Meadowlands or the ports, it is clear that industrial parking’s pricing velocity will only continue with the growing usage of e-commerce platforms. In 2022, owners of parking lots or land suitable for conversion are poised to see unparalleled opportunities to capitalize on this trend and create value from their properties.
It’s time to ‘make land’
Chair, Real Estate Practice Group
Sills Cummis & Gross
Supply of new industrial space will tighten even more as efforts to preserve farmland intensify. Ultimately, municipalities will realize that warehouses are the only viable tax ratable for many sites and come to a practical compromise on the usual issues.
In the port district, supply constraints and land prices will finally motivate redevelopers and cities to do the harder work of assembling and reimagining disparate clusters of contaminated and underutilized parcels — in other words, making land.