Southern New Jersey industrial overview: "What a long strange trip its been!"

"What a long strange trip it's been!"-The Grateful Dead We're now experiencing a slight uptick in activity, indicating the bumpy ride may be ending-however, one never knows. As an optimist, I tend to see the glass half full, and believe that we are on the road to recovery. In order to predict where we are headed, we need to look at the recent past, where we are today, and what the emerging trends seem to be. Recent Past We see industrial vacancy rates for the tri-county southern New Jersey region ranging from approximately 5% to 10% over the last decade. If we use the Dow Jones Index (DJI) to measure economic stress points, we clearly see that vacancy rates reach their apex about 12 months after the peak of the economic stress point, and then begin a recovery that mimics the performance of the overall economy. This correlation of vacancy rates and the DJI provides a pretty clear picture of the dynamics within the industrial sector-but it is also important to look at the impact property supply has on vacancy rates. Historically, the growth of property inventory has had minimal impact on vacancy rates. New development tends to be added slowly, even in good times, and is quickly halted at the onset of economic stress. The average increase has been about 1 million s/f per year in the region-approximately 1.1% growth-significantly less than the rate at which overall regional economy expands. Present These are interesting times. This economic crisis has been an unprecedented experience for most of us. But it could be worse. Today's 10% vacancy rate is near the top of the historic range but, most importantly, 12 months removed from the last significant flex point of the DJI. We are seeing good activity from buyers in the under $2 million range, but leasing activity remains sluggish. Imperial data suggests that sale prices have returned back to 2005/2006-roughly down 10% from their high point in 2007/2008. Low leasing rates and concession packages are providing attractive deals for tenants. Typically, face rates on industrial leases are down 10 to 15% and concessions packages (mainly in the form of free rent) are lowering the net effective rate by an additional 5 to 10%. In some instances landlords are offering increased free rent to tenants who fund their own fit-out. Investment sales activity has been virtually non-existent. As the economy bottomed, optimistic buyers were looking for deals at cap rates well in excess of 10%-and sellers were unwilling to trade at those prices. Investment sale activity has increased for institutional grade assets (class A assets, superior tenant credit, minimal to no lease exposure, in prime locations). On a national basis we are seeing cap rates in the low 7% to low 8% range for this type of product, but southern New Jersey has very little of this type of product available, and no deals have been reported locally. Investment sales of "bread and butter" type assets are being kept on the sidelines due to lack of liquidity. Once the banks start lending to investors, business should return to normal, albeit at pricing that reflects 2005/2006 cap rates. Future All signs indicate a brighter tomorrow (after all, this is a glass-half-full perspective). Barring a dreaded W pattern recovery-the industrial sector is likely to be far more robust than others. This is because (a) the new inventory pipeline was cut off quickly and effectively in the earliest moments of economic stress and (b) the largest economic driver in the South Jersey industrial base is the distribution of consumer products. With the likelihood that gas prices will rise, the reconfiguration of supply chains - favoring smaller market area distribution centers over regional mega-centers-is likely to accelerate. Traditionally, these types of operations have strongly favored south Jersey. Improving trends may take another quarter or two to get rolling but, clearly, we are in position to get back to equilibrium by first quarter 2012-with continuing growth trailing overall economic recovery trends by about 12 months. Paul Wierzel is the vice president, industrial division at NAI Mertz, Mt. Laurel, N.J.