By Michael Nachamkin, HFF
Developers and investors are back in the industrial development game throughout the United States.
User demand is high in most markets, and speculative development is gaining momentum, with eCommerce as a big driver of development in most markets. Competition appears to be getting aggressive to acquire key land sites in the major and secondary markets, and we are starting to witness price inflation, especially in those markets that are land constrained, specifically coastal markets.
New Jersey is a prime example of ever increasing land pricing. For instance, land that traded in the New Jersey Meadowlands submarket in 2005 for a spec 350,000 s/f distribution center at $24.00 per SF of FAR. This was a high water market for land at the time and translates into approximately $500,000 per acre.
Fast forward to 2015, and land in the Meadowlands market will trade for close to $1,000,000 per acre or $55+ psf of FAR. The costs to develop have increased as well, so a building in 2004 would have cost $75-$80 psf to build, including the fact that the land could be double the price.
Furthermore, land prices at Exit 8A – Cranbury/South Brunswick, New Jersey, where there is a large institutional presence, peaked around $21 psf of FAR in 2006, and it appears that prices may be rising close to $26 psf.
Have rental rates kept pace with increase in development costs? Not really
Over the past 15 years and possibly longer, rents are still the same in markets like Exit 8A where rents peaked at $5.00-$5.25 psf Net for a very short period. Transactions are still below those numbers.
In Northern New Jersey, rents for new product have fully recovered and are trending higher. It is not unusual to see net rents of $10.00 psf+.
At the same time, demand from institutional investors has pushed cap rates lower for high quality core assets, so initial returns are lower ( 5-6 percent cap initial cap rates and 6 percent unlevered returns over 10 years). As returns compress, this puts upward pressure on land prices as well.
Equity Capital is abundant for development projects in New Jersey and most of the other major and secondary markets around the United States. We have not reached peak development starts from 2006 and, with a good performing economy, industrial development will continue on its upward path.