Parcels of Potential

by Madeleine Maccar | Mar 26, 2024
Parcels of Potential
Of all the lessons to be learned from the wild ride that the economy, local industry and human emotions have been on since COVID and its lingering havoc became cultural constants, one of the most prevailing has been how intricately all things are interconnected and influence one another, for better or worse.

It’s a reality that Nick Manis, immediate past president of the trade association New Jersey Realtors, is quick to point out—as well as the unusual conditions of the current market.

“It’s an historic 40 years since this type of environment existed. Inflation was at 8.7%—the highest it was—and the Fed reserve had to quickly adjust and get that into control, which then spurred the rate hikes that affect the market,” he explains. “But you need this sometimes, you can’t be at 0% forever. Some argue it should have been done a long time ago, that way you wouldn't have needed 11 hikes in a year. … It’s just very interesting when it comes to the overall macro- and microeconomics and capital markets.”

Robert Powell, CCIM, itemizes additional factors at play, ranging from industry trends to that drawn-out slugfest of navigating persistently high inflation.

“2024 has the potential to be a volatile year for commercial real estate overall,” says the vice president of business development and marketing at Vineland Construction Co. “Some of the biggest challenges for the industry are not exclusive to real estate. The effects of COVID policies are still impacting the economy and driving many of the challenges we face today. Inflation has driven development and construction costs to levels that make some projects prohibitive, hybrid work is impacting office properties, and regulatory processes and approvals for projects are taking much longer than they did prior to COVID. These challenges will likely impact the industry for several more years as businesses continue to adapt and adjust to the higher interest rate environment, tenant space requirements, increased costs and slower timelines for delivery.”

Commercial real estate, like its residential counterpart, is watching the booming demand as well as the sprawling growth that coincided with COVID’s early days recede into the past. The same pandemic that sparked a migration to South Jersey as city-dwellers fled their urban landscape’s tight quarters for homeownership’s comparatively greener pastures and larger properties has yielded the trends now contributing to a less-optimistic outlook for industry segments like office space, which has had to pivot to remain responsive to today’s shifting expectations.

“The embrace of hybrid and remote work models by organizations in 2023 has significantly impacted the office-space aspect of the industry,” says Jason M. Wolf, founder and managing principal of Wolf Commercial Real Estate. “Many employers have adopted flexible arrangements, requiring employees to return to the office only a few days per week. This shift has prompted a transformation in office design, with collaborative work areas gaining prominence. Employers are leasing less space but opting for better buildings, emphasizing quality over quantity. However, 2023 also witnessed challenges for the office-space market, as over-leveraged assets struggled to secure loan extensions or refinancing successfully. This trend is expected to persist in 2024.”

The relationship between residential and commercial can veer toward the inimical when some of its projects start hitting a little too close to home, though.

“If there’s a group of residents in town that don’t want any development no matter what size or what scale, that does become challenging,” says Dan Kennedy, CEO of the National Association for Industrial and Office Parks’ (NAIOP) New Jersey chapter. “If it gets down to the fact of local government being pushed by local residents to reject an application that’s allowed under their codes, that’s where it gets unproductive and a lot of time can be lost with things like court cases.”

But experts do agree that it’s not all tricky conditions, dire outlooks and pushing ahead with caution.

“There has been some uptick in pushback from residents and neighborhood associations, but there are still parcels available where industrial use is clearly the best option for development,” notes Scott Mertz, president of the commercial real estate agency NAI Mertz, adding that additional benefits tend to sweeten the pot. “The jobs and ratables are difficult to turn away, so industrial developers are still largely finding favorable outcomes with township officials and zoning boards.”

Indeed, he adds that while warehouse development has significantly slowed, it’s still among those sectors with promising potential.

“After the prolonged boom period for warehouse demand, a cooling in industrial development was inevitable and we did see that arrive last year,” Mertz continues. “Construction starts had begun to taper off in early 2023 in anticipation of a slowdown, but there was a robust pipeline of projects already coming out of the ground. The steady supply of new, Class ‘A’ inventory provides desirable options for tenants in the market for warehouse space and has resulted in lease rates continuing to rise, even as demand has cooled slightly. With new industrial development adjusting to a more modest pace, there should be a relative equilibrium between supply and demand leading to a right-sizing of the market, rather than any dramatic downturn.”

And there certainly are industry sectors that have integrated themselves into municipalities’ more residential areas with considerable success, whether it’s mixed-used properties combining the comforts of home with the convenience of close-by lifestyle services or standalone locations bringing in-demand options even closer.

“One notable trend is the continued influx of retailers into suburban areas, which has remained robust in terms of activity,” Wolfe says. “Contrary to initial expectations, brick-and-mortar stores were not as adversely affected, particularly in sectors offering experiential services like nail salons, med spas, fitness centers and healthy fast-food alternatives. The personal health category, including activities like pickleball and trampoline parks, witnessed a noticeable uptick towards the end of 2023, signaling a continuing trend in the retail sector for 2024. This increased retail activity has maintained competitive rates and spurred new developments.”

Another bright spot remains the geographic advantages South Jersey boasts. In particular, while North Jersey is near-capacity in terms of the commercial projects it can sustain, its neighbor to the south has comparatively more space for those sprawling projects to occupy, even when there are myriad obstacles to best.

“Warehouse development continues throughout South Jersey; while demand has slowed, it remains solid for new product,” Powell confirms. “South Jersey’s location, work force, land costs and drive-times to most areas throughout the [Northeast] corridor are a prime reason for the growth we’ve experienced in the industrial sector over the past few years. These key factors aren’t changing anytime soon, but pushbacks and delays due to zoning are slowing development, along with increased interest rates and other factors. These industrial projects have created hundreds of millions in construction activity for South Jersey and will provide tax revenue for many municipalities for decades to come. As a developer, it’s key to work with municipalities and community stakeholders to design projects that provide economic benefits such as jobs and revenue, but also societal benefits such as trails, parks and key infrastructure to the area.”

Indeed, experts say that community buy-in and a genuine willingness to be part of the conversation with concerned residents and local governments alike are key in effectively correcting erroneous perceptions about the impacts of commercial projects.

“It requires commercial real estate developers to invest in really good community engagement to understand the attitudes of residents toward any particular development and then present an application that does their best to address those concerns,” says Kennedy. “NAIOP doesn’t feel that all opposition to a project is NIMBYism: We’re always willing to work on making the project fit better with the community, including setbacks and landscaping and other sort of aesthetic improvements and how the traffic impacts local communities.”

And as Manis notes how “residential and commercial go hand in hand,” he adds that changing lifestyles and newly realized priorities will have their own noticeable impact on local communities.

“Everything is consumer-driven so if less people are driving to an office, then that affects the retail around that office building, right? So I think any time you do have some sort of change in consumer behavior, it will have some wider effects than that specific change,” he notes, adding that changes and challenges are just inevitabilities a good professional knows to anticipate and contextualize. ”COVID was a wake-up call for everyone to say ‘What’s our lifestyle like here?’ and a lot of people realized they would take a pay cut in order to have more free time. … In any market good or bad, there’s going to be bumps in the road, so I always like to have a positive outlook. I think that’s the way you navigate better.”

That optimism, while cautiously ventured for many taking what Kennedy calls a “wait and see approach” given the market’s potential for volatility, is, however, driving the infrastructural programs that showcase what kind of a regional boon thoughtfully executed and locally supported projects can become.

“There’s potential in South Jersey for all asset classes: Central and South Jersey still remain stronger than North Jersey, and the data shows very clearly there are these new commercial real estate development opportunities around e-commerce and logistics,” Kennedy affirms. “It’s very challenging to increase capacity for warehousing in North Jersey so you’re starting to see some port cargo being stored and shipped to Central Jersey and then further down the turnpike corridor to South Jersey—and I think that’s a great example of infrastructure working, the turnpike expansion that took place. That’s the type of transformative project that, frankly, makes a difference, and it’s a great example of how investing in infrastructure creates really dynamite opportunities for the entire state of New Jersey because, at the end of the day, it’s all interconnected.”

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Published (and copyrighted) in South Jersey Biz, Volume 14, Issue 2 (February 2024).

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Author: Madeleine Maccar


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