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Six Questions with Richard Marchisio of LEE & Associates discussing the Current State of Real Estate

October 7, 2020: Becker’s Anthony J. Vizzoni interviews Richard Marchisio of LEE & Associates discussing the Current State of Real Estate Affairs in the Logistics Marketplace

Vizzoni: Can you give us a sense of what you are currently seeing in the warehouse logistics market? Specifically, the availability of warehouse space for lease and for sale, and geographically in which parts of New Jersey are you experiencing the greatest demand for such space?

Marchisio: New Jersey is experiencing one of the longest “up” cycles in the industrial warehousing/logistics space in the history of the State. Vacancy rates are at all-time lows, and pricing at all-time highs. The average availability rate in Northern New Jersey is 4.4%, with certain NJ Turnpike markets like Elizabeth and Newark showing availability of less than 2%. This dynamic has caused companies looking for logistics space to broaden their geographic search parameters well beyond the parameters they would have considered just five years ago. Case in point, Piscataway, once considered secondary to the New Jersey Turnpike Exit 10 Edison market, has become a submarket boasting new Class A construction, demanding mid 9 dollar triple net rental rates. Rockefeller Group, Black Creek Group and Adler Development are just three of a number of developers who have built Class A developments there. New construction coming out of the ground in this market is quoting double digit triple net rental rates. Consider LG Electronics build-to-suit transaction in Somerset, another market once considered secondary. Another “once outlier” is Bridge Development’s massive project in Phillipsburg, New Jersey.

Absorption of warehouse space across Northern New Jersey has been approximately 2 million square feet per year for the last several years, and rents have increased over 6% annually for the last 5 years. Keep in mind, rental rates compound annually from year one, so 6% compounded over five years is close to a 34% increase. Companies that consummated leases 5 years ago are faced with the prospect of renewing, or relocating at roughly a 34% increase or better. This makes the typical annual increase of 3% in most of today’s lease agreements seem like a great deal.

As far as the sale market is concerned, the market is still hot, and both users and investors are actively seeking property. Nine months into the Covid-19 pandemic, cash is king. If you don’t need to finance, or have at least 40% equity to put into the deal, you have a shot at purchasing a building. Short of that, financing is difficult, and taking more time than it did 12 months ago. Pricing for older, second generation buildings range from $125 per square foot, to as high as $200 per square foot or more in Northern New Jersey.

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