The industrial market in New Jersey keeps surging, but at least one veteran logistics developer is expressing caution about e-commerce giant Amazon being such a major driver of demand now and questioning if the sector is being overbuilt.
Alex Klatskin, a general partner at Forsgate Industrial Partners, offered his take on the distribution-warehouse market alongside some of his peers Tuesday.
“I think Amazon, while they may or may not be tenants in a few of our buildings, they are part of the driver of the reconfiguration of the consumer-supply chain,” Klatskin said during NAIOP NJ’s Mid-Year Economic & Markets Outlook panel. “But what’s happening with them is also a little bit dangerous, when they’re taking 30[%] to 60% of the space in any particular marketplace, they don’t have to stop or go in reverse. They just have to take their foot off the accelerator a little bit, and it’ll have a massive effect on the supply-demand equilibrium.”
Klatskin, whose business is based in Teterboro, New Jersey, and has been building warehouses for 50 years, suggested Amazon’s influence may be inflating the demand for logistics space.
“I don’t know what their business plan is,” he said during the Zoom seminar. “Obviously, what we’re seeing in the industrial market is to put the pedal to the metal and go forever, but I think it’s certainly an artificial demand.”
CoStar News reached out to Amazon for a comment but did not immediately hear back.
The NAIOP panel, moderated by Jeffrey Dunne, a CBRE capital markets vice chair, discussed the state of all the commercial real estate sectors, including office and retail, a year after the pandemic started. But a good portion of the conversation centered on the industrial market in New Jersey, where rents, occupancy and prices have hit record levels amid the growth of online shopping, especially during the COVID-19 outbreak.
Bathtubs in Short Supply
Despite the skyrocketing cost of construction materials, not only Klatskin but Jonathan Kushner, president of Kushner Real Estate Group, and Gus Milano, president of Hartz Mountain Industries in Secaucus, New Jersey, remained bullish on the sector and were continuing with projects.
“Costs are up: From a year ago to today we’re at 35% higher than where we were,” Kushner said. “People like to talk about lumber. Lumber is only one of every product in the construction of a building. Materials are harder to get. The home-renovation business has never been stronger, so a lot of the materials that we would buy for small renovations like at a Home Depot or at a Lowe’s are almost impossible to get. You have to wait for bathtubs. ... There’s a run on drywall. Copper’s gone up [by a multiple of three]. Plumbing materials have gone up [threefold].”
Kushner Real Estate Group is about to break ground on a 200,000-square-foot warehouse in North Jersey, and its cost is up 20% from what was originally projected, according to Kushner.
“But as Alex will tell you, rents are up with them,” he said. “So you don’t feel good about the costs going up, but you feel good at least about a business decision. ... In all cases with our company, we’re biting the bullet and going ahead.”
At that point Klatksin chimed in and said, “By the way, the rents are up 35%,” prompting laughter from the panel.
Steel for a 400,000-square-foot warehouse project that Hartz would have paid $5.2 million for is now “more like $9.8 million,” Milano said.
The industrial sector can’t continue its unprecedented growth, according to Klatskin.
“Rents are outpacing my wildest dreams at this point, to the point where we’re seeing them spike in what I would think is an unsustainable way, because while demand has certainly increased it hasn’t increased to the rate of what we’re seeing rents,” he said. “So I think it’s unsustainable. Rents will come down. Maybe construction prices going up are a good thing, because it moderates the supply side a little bit.”
The corridor along Interstate 295 in South Jersey is approaching a “massive” overbuild, according to Klatskin.
“We all know as developers that you have the ability, and we always do, to overbuild a market,” he said. “So I think we’re heading toward that at this point. Hopefully, construction prices will hold that back.”
Kushner disagreed, essentially saying the industrial sector has more runway because of the trending upward of online shopping and the need for the quick delivery of products, which is here to stay. That’s especially true for the logistics market in densely populated New Jersey, where much of the existing warehouse stock is outdated, Kushner said.
Milano and Klatskin talked about how there is now pushback in some Garden State municipalities against warehouse construction. That’s the result of some developers building distribution centers near residential areas where truck traffic will disturb homeowners, rather than locating them near major transportation arteries, according to both executives.
Klatskin also voiced his opposition to a New Jersey bill that aims to curb so-called warehouse sprawl, legislation that he called “flawed from its core” and NAIOP is lobbying against. That bill offers a kind of regional planning approach to warehouses. If New Jersey were to institute regional planning, it should be for all property types, not just industrial, Klatskin said.
The panel also discussed the office market, how they had fared in terms of rent collections and when they expected employees to be back at work.
Kushner said across all its property assets, his company collected more than 90% of its rent from tenants during the pandemic last year.
The tenants that didn’t pay were either companies that went under “and then you had a really small percentage of creeps that were taking advantage of ... the laws that were put in place abruptly to not having to pay rent, not having to be evicted.”
Lauren Holden, managing director and head of retail asset management at Clarion Partners, said her company expects most of its employees to return to the office in mid-July. And Clarion will probably do some kind of hybrid model, allowing workers to work from the office and from home, according to Holden.
One of the ways to prompt New York metropolitan area residents to start commuting to their offices again is for the Port Authority of New York and New Jersey and NJ Transit to offer them free rides for 30 days, Kushner suggested.
“Landlords can cover part of the cost to get everyone moving again. … I think we’ll need some sort of public-private incentive to get people going,” Kushner said.