The result? Landlords face major downward pressure on rents. As such, they are competing heavily to make the few deals that are out there. This is especially true in the port region and points south. The Meadowlands, where there is less available space, is not experiencing this trend to the same degree.
To illustrate this point, we are running one lease for a major retailer in Middlesex County. The rent is likely to come in under the replacement cost of the building. Within this context, it is difficult to get anyone to think about new land purchases or new development. As such, construction starts are virtually nonexistent, and the investment community has become very quiet.
Another new industrial market phenomenon involves landlords' shifting positions on short-term renewals. Where in the past property owners were hesitant to make these deals, today they are more than willing to sign a tenant on for another two or three years. This way, they can keep their space filled until the market gets better and they can demand higher rents. Because tenants always like shorter term deals, this "wait and see" approach is welcomed by both sides.
The bottom line is that the New Jersey industrial market is fragile and overbuilt. At the same time, many areas throughout the country are experiencing the same. Pennsylvania, which was hot for a while, has cooled, as have Virginia, North Carolina and other states from which the Garden State has faced strong competition in recent years. We can attribute this, at least in part, to the current climate in which companies are reluctant to commit to capital expenditures.
The good news is that a few tenants that have been hanging out in the New Jersey market for an extended period of time are appearing to become more active. While we have sees these potential tenants "tire kicking" in fits and starts, they seem to be more serious now. These six or eight potential transactions could amount to up to 7 million square feet of leases. Each case is unique, but if even a couple of them happen, they quickly will absorb some of the large buildings and sites that have been dragging the market.
On the flip side, if they do not take hold, the market will remain soft. So, like those aforementioned landlords and tenants, the entire industry will join in the "wait and see" – and look forward to a more predicable future once the cycle begins to turn.
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