Economic slowdown is big test for NJ industrial market.

Following a dramatic burst in leasing velocity that led to more than 4.2 million square feet being absorbed during the first quarter of 2006, the Northern and Central New Jersey industrial market downshifted by mid year, as less than 73,000 s/f of positive net absorption was recorded in the wake of moderating demand.

However, this deceleration was short-lived, as a resurgence in demand provided the additional horsepower that produced more than 3.7 million square feet of positive absorption during the second half of the year.

Nearly 8 million square feet was absorbed in the Northern and Central New Jersey industrial market in 2006. This was in sharp contrast to 2005, when more than 2.4 million square feet of negative net absorption occurred.

Despite more than 950,000 s/f being absorbed during the fourth quarter of 2006 alone, the Northern and Central New Jersey overall industrial availability rate increased from 8.5% in the third quarter to 8.7% by yearend.

The rising availability rate can be attributed to a surge in new construction completions. More than 2.6 million square feet out of the nearly 6 million square feet developed during 2006 was completed in the fourth quarter. Furthermore, more than 80% of the 2.6 million square feet completed involved speculative endeavors. During the fourth quarter, IDI completed a 1.35 million-square-foot big-box warehouse in South Brunswick, which represented the largest industrial facility constructed in the state during 2006. In addition, Rockefeller Group Development Corporation completed construction on a 680,750 s/f warehouse at 324 Cranbury Half Acre Road in Cranbury. The addition of large blocks of vacant space to the inventory base ultimately exerted upward pressures on the availability rate. After ranging above the Central New Jersey overall industrial availability rate from yearend 2003 through mid 2005, the Northern New Jersey availability rate remained below the Central New Jersey availability rate through yearend 2006.

The Northern New Jersey overall industrial availability rate retreated to 7.6% at year-end compared to 8.6% a year ago, while the Central New Jersey overall industrial availability rate was fluctuating near the 10% mark during this timeframe.

New construction was a prevalent theme of the Central New Jersey industrial market during the past year and was helping to maintain the current availability rate. Nearly 4 million square feet was speculatively completed in Central New Jersey during 2006. This was in addition to 4.8 million square feet completed in 2005. The Central New Jersey overall industrial availability rate is expected to remain near its current level until sustained demand can absorb the new product being added to the inventory base.

The surge in demand occurring in the Northern and Central New Jersey industrial market during the past year is anticipated to unleash the next wave of new construction.

After nearly 7 million square feet was completed in 2005, less than 6 million square feet was developed in 2006, as the construction pipeline emptied in response to the sluggish leasing velocity recorded in 2005. At year-end 2006, nearly 3.6 million square feet was under construction, with additional projects poised to break ground later in the year.

Central New Jersey will likely provide the setting for a large portion of the new construction activity, where the product of choice consists of big-box warehouses with ceiling heights greater than 32 feet, ESFR sprinklers, cross-loading docks and abundant trailer parking. Furthermore, escalating construction costs may prompt developers to lock in current prices and begin their endeavors, rather than risking even higher future prices for construction materials.

The growing appetite for large blocks of space witnessed in the Northern and Central New Jersey industrial market during the past year could be tested in 2007 against the backdrop of slower U.S. economic growth.

In late 2006, the slumping housing market was showing signs of impacting the broader economy. U.S. Gross Domestic Product (GDP) grew at 2% in the third quarter compared to a 6% growth rate during the first quarter.

After raising interest rates 17 consecutive times since mid 2004, the Federal Reserve has cited the cooling housing market for its decision to leave rates unchanged since August. Furthermore, consumer spending levels will need to be carefully monitored in 2007. During the past several years, consumers maintained their prolific spending patterns due in part to their ability to borrow a seemingly limitless supply of financial capital based on skyrocketing home equity values.

A prolonged downturn in the housing market could also have a trickle down effect on the overall direction of the industrial market. Diminished consumer spending would not only impact retail sales, but could also lead to moderating demand for distribution facilities utilized by retailers for their operations.

By Stephen Jenco,

Client Services Manager

Grubb & Ellis Company