Executive Summary
- Northern New Jersey represents a core market for investors in logistics commercial real estate due to high demand drivers and limited availability of new supply.
- The area surrounding Exit 10 on I- 95/the New Jersey Turnpike exemplifies this supply-demand dynamic. This research article explores the submarket characteristics, including location and supply constraints, that enhance this compelling dynamic.
- The strong fundamentals identified in Elion’s analysis continue to support this submarket as a strategic market for investment.
Exit 10: A Strong Submarket for Industrial Real Estate
Real estate investors aiming to expand their portfolios are typically attracted to markets where demand growth exceeds supply increases. This is especially true when the market is essential for tenant operations, which Elion identifies as a situation with a high likelihood of robust rent increases. Northern New Jersey is a prime example of such a market. Within this region, specific submarkets like the area around Exit 10, significantly bolster the overall market strength, exhibiting historically low vacancy rates that persisted even before the industrial real estate boom triggered by the COVID-19 pandemic, as depicted in Figure 2.
Elion employs a data-driven methodology to estimate each property’s utility and market rent. This approach enables Elion to dissect the drivers of demand and market rent into various contributing factors, including location, to identify the characteristics that facilitate its outperformance.
Factors Influencing Logistics Real Estate Demand Near Exit 10
Demand for logistics real estate in Northern New Jersey is driven by two key factors:
- Access to the seaports and airports of New York and New Jersey
- Distribution access to the population of New York City and the surrounding region
Logistics real estate in locations that confer advantages with respect to these factors typically offers higher utility to tenants, resulting in higher demand and rent. Elion assesses a location’s demand strength by calculating optimal yet practical trucking routes and analyzing consumer strength within the distribution service areas of each property in the area. Subsequently, Elion’s comprehensive lease comparison database uses spatiotemporal statistical methods to correlate these drivers with demand and observed rents. Figure 3 shows one of these indicators - the trucking distance from Port Newark - against Elion’s proprietary Logistics Location Premium Index for various locations within Northern New Jersey. The Logistics Location Premium Index is a quantitative measurement of the average rent premium based only on location factors, removing the effects of building specs and market conditions.
As depicted in Figure 3, the Exit 10 submarket is overlayed on a map alongside a marker for Port Newark. Elion’s analysis shows that most properties within this submarket fall within the 25th to 50th percentiles for both proximity to Port Newark and rental rates, with a segment of properties ranking in the 50th to 75th percentiles for both criteria. Strategically located at the interchange of I-95 and I-287 near both FedEx and UPS shipping hubs, the submarket facilitates efficient regional distribution north-to-south and westward. These characteristics make this submarket particularly suitable for tenants seeking to optimize their inbound port operations while maintaining effective distribution capabilities throughout the Northeastern U.S. without incurring the highest rental costs associated with areas immediately surrounding Port Newark. For tenants willing to pay slightly higher rents, the Exit 10 submarket offers options that provide the advantages of reduced travel times for drayage operations. This is also bolstered by the building quality in Exit 10, where the average warehouse is 9 years younger compared to the submarkets directly surrounding the port as seen in Figure 4.
Exploring the Drivers of Supply Dynamics
Elion believes that pressure for new supply is closely linked to existing supply and demand, noting that low vacancy rates in high-demand markets typically spur increased construction activity over time. As illustrated in Figure 2, this submarket exhibits exceptionally low vacancy rates, suggesting that there should be significant pressure to alleviate it through new construction. However, contrary to expectations, Figure 5 reveals that within Elion’s core competitive asset size range of 50,000 to 500,000 square feet with 18’+ clear heights, this specific submarket has seen very little supply growth since 2020. The only development — a project of about 90,000 square feet — was initiated and completed in 2023. This lack of growth is particularly notable when contrasted with the broader U.S. market, which experienced a substantial increase in new supply from 2020 to 2024.
This trend underscores a key trait of the markets Elion targets: the markets generally do not produce supply in quantities that align with escalating demand, particularly in the short term within a burgeoning market, due to supply constraints that hinder the initiation and completion of new projects. The factors leading to these supply constraints can be broadly categorized as follows:
- Geographic Boundaries: water, swamps, mountains, etc.
- Political Resistance: for example, “Not in my back yard” (NIMBY) municipal policies, etc.
- Zoning Restrictions: a lack of building sites that are properly zoned for industrial real estate, etc.
In the case of the Exit 10 submarket, political resistance and zoning restrictions are the main drivers of supply constraints in the future.
Political Resistance
The direct impact of political resistance on development is difficult to quantify. However, to illustrate the concept, consider a policy adopted by the NJ State Planning Commission in September 2022 concerning warehouse siting guidance. This policy acknowledges the critical role of these developments in New Jersey’s economy while advocating for more rigorous planning of such sites. Although the policy serves as non-binding guidance for municipalities, its existence indicates increasing concerns within the state regarding the expansion of logistics real estate development. Additionally, the recommendations outlined will likely introduce further bureaucratic hurdles, complicating and potentially impeding the delivery of new supply.
Zoning Restrictions
A major constraint on new supply in this submarket is the scarcity of available land with appropriate zoning. Elion tracks individual parcels and zoning regulations through its research platform, Elion Intelligence (“E.I.”). Utilizing these data, Figure 6 highlights the parcels within the submarket that are zoned for warehouse use. The highlighted zones represent approximately 11.6% of the total parcel area in the submarket, amounting to roughly 6520 acres across 996 parcels.
The significant impact of zoning on new supply is clearly demonstrated when analyzing the parcels in detail. Initially, Elion recognizes that new developments in this zone are permitted to cover a maximum of 50% of a parcel’s area. Consequently, to construct a 100,000-square-foot building, a parcel must be at least 200,000 square feet or about 4.6 acres. Applying this size criterion reduces the list of suitable parcels from 996 to 275 - a striking reduction of nearly 75%. Furthermore, assuming only vacant parcels are viable for development, the list further narrows to only 37 potential options unless a covered land play is considered.
This outcome emerges from a preliminary analysis and does not account for several critical factors. For example, Elion has not considered the highest and best use of each parcel, buildability issues, requirements for larger building footprints, the feasibility of acquiring these parcels, or the reality that land categorized as “vacant” for industrial purposes is often already utilized for storage. Clearly, developers are interested in adding supply to the Exit 10 area, but locating an appropriate development site proves to be exceedingly difficult, significantly constraining the introduction of new product.
Conclusion
Elion’s investment strategy targets high-demand markets that face substantial constraints on new supply, as these conditions are believed to offer the highest likelihood of sustained and superior rent growth compared to the broader U.S. Elion believes Northern New Jersey exemplifies these themes, with the above analysis of the Exit 10 submarket offering further insights into the drivers of demand and supply constraints that render investments in both the submarket and the broader market highly compelling.
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