Avison Young: N.J. industrial sector vacancy achieves 20-year low

Despite steady leasing activity, the industrial sector did not reach pre-COVID levels in the fourth quarter due to lack of supply. That’s according to Avison Young‘s newly released fourth quarter 2021 Industrial Insights Report for New Jersey, which revealed that underlying market fundamentals remained strong.

Absorption in New Jersey totaled roughly 14.5 million square feet, reaching a 20-year high as a result of the heightened demand for industrial properties. Vacancy rates also achieved record levels, recording a 20-year low of 2.3% in the fourth quarter.

“Industrial leasing activity remained steady in 2021, but did not reach pre-COVID levels due to the lack of available supply,” said Jeffrey Heller, principal and managing director of Avison Young New Jersey. “As a result, we’re continuing to see a trend of antiquated office buildings being repositioned as industrial assets in an effort to satisfy the surging demand in the New Jersey market.”

Base rents in the New Jersey industrial sector increased by 17% since the start of 2021 as free rent concession and tenant improvement allowances decreased by 24.8%. The market’s high rents and low vacancies continue to attract investors, leading to higher valuations that increased by 13.8% since the start of 2020.

“Investment activity in the New Jersey industrial market has surged to over $5.7 billion since 2020 as strong sector fundamentals that largely benefited from the COVID environment continue to attract investors,” said Matthew Turse, a New Jersey-based senior vice president at Avison Young who specializes in the industrial sector. “We anticipate that, in 2022, investors will look to capitalize on rising rents via shorter deal terms in the five-to-seven-year range that allow them to reset rents on a more frequent pace.”

Here’s what we can expect looking forward:

  • Shorter deal terms are becoming more appealing for landlords as they can reset rents on a more frequent pace. This is being seen through 5- to 7-year deals, as opposed to 10-year deals.
  • The lease term on value-add sale-leaseback transactions should shorten as investors look to upgrade their properties and capitalize on rising rental rates.
  • Sales volumes are likely to rise in 2022 in both the New Jersey and Philadelphia markets.
  • There is an unprecedented amount of activity in the sector due to post-COVID industrial demand.
  • Even with the significant scale of projects in the development pipeline, demand is expected to continue to outstrip supply.
  • There is a major shift underway for antiquated office buildings being redeveloped into industrial projects as the market for industrial space continues to develop.