Class A industrial ready to flood the market — but is the market ready?

The industrial real estate sector in New Jersey faces a significant challenge in 2024. Many new industrial spaces are slated for completion, just as tenant preferences shift because of concerns about a slowing economy that potentially complicates the market landscape.

Currently, 19.2 million square feet (about half the area of Central Park in New York City) of industrial space are under construction in New Jersey. There are 34 new Class A buildings now under construction or are planned to be delivered in 2024.

These new properties are at least 200,000 to approximately 1.2 million square feet.

This influx of new space, particularly concentrated in northern New Jersey, is expected to impact market dynamics negatively. Predictions suggest that the average vacancy rate for industrial spaces could increase to 5.1% in 2024. This would be a notable rise and the first of its kind since 2012.

Middlesex County is at the forefront of this new construction wave, with 4.7 million square feet underway, akin to nearly half the total floor space of the Pentagon. Alarmingly, 90% of this upcoming space has not yet been leased.

This added new industrial real estate for the New Jersey market, creates tremendous opportunities for tenants and purchasers as the formerly “tight markets” start loosening up the developer’s/landlord’s firm grip on pricing any available space.

However, the state of New Jersey’s industrial real estate developers still have a growing preference for developing larger, megasized properties (over 200,000 square feet). These properties, which represent 67% of ongoing construction, have a low prelease rate of just 8%. Unless deal velocities pick up, this situation could lead to increased leasing concessions by developers as more “shell buildings” enter the market.

Tenant preferences are also evolving, with a noticeable trend toward midsized buildings, ranging from 50,000 to 150,000 square feet. This shift is challenging the leasing landscape for larger spaces, potentially leading to long-term vacancies or necessitating a reevaluation of use for these larger, from developers hoping to hit the “home run” with a single tenant rather than having more capital-extensive multitenanted or possibly repurposed developments.

Such changes underscore New Jersey’s industrial real estate market’s dynamic nature and signal a critical adjustment period for developers and property owners until more positive signs of increased demands for space akin to 2020 through the heights of demand for space that went into the first quarter of 2023.

In the face of New Jersey’s industrial real estate evolution, the emergence of new Class A spaces presents an unparalleled opportunity for tenants and buyers to capitalize on more favorable market conditions.

Howard Applebaum is the president of Corporate America Realty and Advisors.