3rd Quarter 2020 - blauberg

Industrial Trends

The numbers have remained steady however the increase in health risks are expected to escalate in the fall and winter months. Expectations for a vaccine are promising; we are hopeful progress will be made 4Q20 through 1Q21: https://www.cdc.gov/coronavirus/2019-ncov/index.html

A surge of inbound volumes through the Port of New York and New Jersey sets record for total volume of TEUs with 5,382,422 TEUs which is a 7.1% increase due to e-commerce. The Port reported total volume of 720,969 TEUs (399,803 containers) for September 2020, which was a 15.4% increase from the September 2019 totals.
The seaport’s recovery was the lone bright spot in the overall financial performance of The Port Authority of New York and New Jersey, which reported last month continuing declines in revenue primarily due to low passenger volumes at the agency’s major airports, low ridership, etc.
Prologis has stated a 28.4% year-over-year increase.
Amazon occupies more than 23MSF of space across the metropolitan area. They recently signed a 900,022 SF lease in Edison and a 188,343 SF newly constructed facility in Bayonne.
TSG Cabinets also inked a direct lease for over 300,000 SF at Weston Canal Road off the I-287 corridor.
Ecommerce tenants were responsible for +20% of the industrial leasing NJ recently enacted legislation to raise its minimum wage to $15 PSF an hour by 2024. Tenants that require cheaper labor could be drawn to the Lehigh Valley where minimum wage is $7.25 an hour. There is a trade off between labor availability wages though – Lower wages tend to have a lower population density and a smaller labor pool.

The recorded losses in many sectors for real estate due to CoVid-19 have been dramatic however the industrial sector has been remarkably resilient. E-commerce, third-party logistic, food and beverage and cold storage companies have all performed well throughout the pandemic. Net absorption this quarter (8.3MSF) outpaced deliverers (5MSF), vacancy rates decreased (3.9%), and rental rates growth has risen exponentially (almost 30% increase in the last three years alone).
The pandemic has enhanced the importance of the logistics industry, consumers spent nearly 212B through ecommerce – online purchases accounted for 16.1% of all retail sales accelerating online appetite by consumers due to the pandemic has triggered the ecommerce footprint to expand.
A surge in new construction this quarter pushed it to its highest number in recent years up to 18.7MSF for the Garden State.

With more people working from home these days and the economy remaining soft, as leases came due it was evident the availability rate was going to increase. Certain regions, however, such as Short Hills, continue to fair well due to Manhattan companies’ ongoing search for space in the Garden State.
With just shy of 30 million square feet of givebacks across the US Markets, the largest in USA history. The sublease market now larger than during the dot com bubble, is rapidly approaching an unprecedented 150 million square feet of availability. Subleases now make up over 50 percent of all the activity within the office market.
Lease terms are shorting with most firms signing 3 to 5-year terms as they jettison space and favor employees working from home especially in the tech and legal markets. Suburban space is more attractive with self-parking than urban locations with mass transit and valet parking being liabilities. Social distancing in a building over four stories where people may be willing to walk their stairs rather than take an elevator, would render any office building over 5 stories even more difficult to operate for the landlord and exist in for tenants.
It appears that 2021 is the time for what the three-story suburban office campus with parking and outdoor space has been training for all its life.

Many landlords have given significant rent breaks and incentives as retail continued to tumble in the 3Q2020; although the speed of the descent has slowed slightly since 2Q2020 but is bleak compared to 3Q2019. With over 30 national brands seeking bankruptcy protection and or closing their doors. Adaptive reuse will be the name of the game for landlords to help get through the next 24 months, along with partnering with their tenant in any way they can. The tenants and landlords are both in the same lifeboat and need to row together to a safe harbor.
Adaptive reuse of retail can come in many forms – last mile delivery, warehousing, conversion to medical space, even tearing down a part of a retail building with location location location and putting up residential.
Retail sales were down 57% in the last year and will continue to slide well into the 2nd quarter of 2021.
The silver lining in all this that retailers looking to expand can take advantage of spaces that have a tremendous amount of Cap X in place – specifically in the restaurant sector of retail. Allowing start up and regionals to grow, if they have found the secret sauce in delivery and pick. Food uses will get smaller as less space is less rent and easier to manage in the world of takeout and delivery. Fast Casual will continue to hemorrhage as 5,000-8,000-SF brands will find operating at 25 to 50 percent harder, and liquor sales will be an ever-smaller portion of their profits.

The middle-market and the affordable housing market is active and will continue to do well through the end of 2020. Class B and C apartments are the “blue-chip stocks” of today. Many Class A projects have stalled as developers struggle to substantiate pro formas with little rent growth and lower vacancy odds.
Spreads have widened significantly since the beginning of the year. Sellers are looking to sell at pre-COVID valuations and buyers are looking for discounted deals. The market will likely meet somewhere in the middle. Sellers will have to come down from previous valuations that may have overvalued certain markets and buyers will see prices remain more constant than they anticipated.

The national unemployment rate ending September 2020, declined by 0.5 percentage point to 7.9% and New Jersey’s unemployment rate fell by 4.4 percentage points to 6.7% according to the Bureau of Labor Statistics.