On-Demand: The State of the NJ Industrial Market

Jeff Hipschman:Thank you Lisa and good afternoon everyone. Okay, so we are going to take a look at the economy here in New Jersey first to give some perspective as to what's happening in our local business environments. And then we're going to drill down more specifically into the industrial markets, I'm going to give some comparison of those industrial markets to the office market and maybe a little bit to the multifamily housing market just to give some perspective on how strong the industrial market is actually performing in comparison to these other sectors.

So let's start off just with a little view of how the economy is doing. This is a compilation of consumer activity since the pandemic occurred back in March. And we can see after a sharp decline in March of 2020, we've seen a steady recovery. Now, this recovery has slowed more recently, starting in December. We've seen some pullback as the case count started to climb back up in December and then through January. However, if you look at some of these lines there is some nice news here.

The pink line which is consumer mortgage applications continues to be strong, nice spike in January. Passenger air traffic, which is in green, has steady return back to some level of normal. And even restaurant traffic, which is in orange down here at the bottom, you can see it recovered, has been bouncing around but has tried to come back. And so we are seeing that overall economic activity trying to come back but more recently slowing in the last two months.

How has this impacted labor and jobs? Well, unfortunately, New Jersey has had more than its fair share of job losses. And you see the gold bars here, this is all New Jersey geographies experiencing job losses in greater levels than other markets throughout the country. However, the news is not all that bad in that we've recovered on average, just to 10% below pre-COVID job levels. And you'll see on the left side of the chart leisure and hospitality leading the charge in terms of job losses as would be expected. If we took that out of this chart, we'd be at about 5%. So we've recovered quite nicely in terms of the labor market here in New Jersey.

Now also on the right side of the chart, warehousing and storage, right, has actually gained jobs since the beginning of the pandemic. That's been part of the discussion we're going to have today in terms of what's driving this remarkable industrial market. All right, for some additional context, here's a comparison of how the multifamily housing market has been performing pre-pandemic to today. And the good news here is if you look at all of the red or orange titles, it's all New Jersey, right?

Monmouth County, Orange County, Middlesex County doing very well in the area of multifamily housing. It seems to be at the expense of New York City where many of these markets in the lower right really have been experiencing stress. And we've all heard about some migration of folks out of cities into the suburbs, which is good for our markets.

Consumer spending and consumer spending behavior, we all know that e-commerce has been on the rise for the past decade, the COVID pandemic has really given it an additional boost, 16% increase since the pandemic in terms of online shopping. Again, another driver of industrial activity and warehousing activity in New Jersey. Now, while this has cooled and that's really partly seasonal after the holidays, we do expect the e-commerce trend will continue on this trajectory.

And it has been somewhat at least in terms of post pandemic, it's been somewhat at the expense of traditional brick-and-mortar retail. So, here you have traditional brick-and-mortar retail in the orange and e-commerce in the blue, you can see e-commerce spikes up as traditional brick-and-mortar declines. So we do expect that those brick-and-mortar stores will come back, they've already started to recover, we're actually seeing pretty good activity on the retail side of the business. However, the e-commerce impact will still remain strong as we go through the coming years.

So, with that background, let's take a look at what the impact is on our commercial real estate markets here in New Jersey. Let's start with a view of our office markets. This is a chart of office leasing velocity, which means basically total leasing activity over the past decade. The trend line is down and this is due to corporate downsizing, corporate relocation, densification of workspaces. All of this has put downward pressure on office leasing activity and the results speak for themselves in a chart like this.

Now, let's compare this to industrial leasing activity. Industrial leasing activity for all the reasons we talked about earlier, has seen a steady increase in overall activity in the marketplace. This chart is encouraging however, it doesn't tell the whole story.

If we look at the comparison of availability now, this is the amount of space that's currently available for lease on the market. If we look at the office market compared to the industrial market, we see the office market has had a slight decline, the industrial market has had a much stronger decline, meaning there's less space available, more of it is being utilized being leased.

The interesting part of this chart in this dynamic is that in the office inventory, the total amount of stock in New Jersey has actually declined. Office buildings have been taken out of service, they've been repositioned, maybe as residential, maybe they've been taken down. Actually some of them we're seeing are being repositioned for industrial. On the other hand, the industrial market has only added inventory over this time. In fact, they almost can't add inventory fast enough to keep up with demand. So the fact that the industrial market is able to reduce its available space while continually adding large amounts of inventory just speaks to the incredible strength of the industrial market here in New Jersey.

If we look at new products, so we said new product keeps coming on the market. And as fast as it comes on the market, it gets consumed. Here is a chart looking at the availability rate of new product over time and you'll see currently we're at about 3%. And so as fast as they're able to build it, that's as fast as it's being leased. And this results in the leasing velocity for newer products showing incredible strength over time. Again, strong demand for new product as it's built. And in fact, I wish I could say as it's built because it's actually being consumed before it's built.

This is a chart over time showing the amount of pre-leasing of industrial space. Pre-leasing means space being leased before it's constructed or while it's being constructed. So over the past four years, about 60% of space that's under construction gets leased before it's completed, right? And again, this is just demonstrating the amazing amount of demand for product and how it's being leased before it even is completed.

Now, of course, this is driving pricing. And if you look at the premium between new product and legacy product, there is somewhere around a 50% pricing premium for new product. Again, remember, so 50% pricing premium and it gets leased before it's even built. So that just gives you an example of the amount of demand for new industrial product. And this overall continues to drive rents. This is a chart showing the history, now this is not average rents, this is peak rents, right? The top of the market, of which we're seeing into the $13 range currently and we expect that that's going to continue to escalate 14, 15 even into the $16 range.

So this insatiable demand for industrial space is driving rents to record levels year after year for a good part of the past decade. Now, let's compare this to Office rents. These are peak office rents in New Jersey. And while there's been some escalation, it's nowhere near the level of escalation within the industrial sector. And so you can see clearly why the industrial sector is by far the favored vertical for investment here in New Jersey, it's just performing so well for all the reasons that we talked about earlier in the presentation.

So what does this mean for construction? This is an overview of construction currently underway throughout the state. And you can see there's an enormous amount of new development up and down the 95 corridor. But more interestingly now, as that area becomes more and more challenged in terms of available land, the development trend is pushing, it's pushing to the west. You can see out here in Phillipsburg there was a large development done by Bridge Development. It's pushing to the south, a lot more projects in Southern New Jersey, central and southern New Jersey. It's pushing to the north into the Hudson Valley. And believe it or not, it's actually pushing to the east out to Long Island. So there's a new project coming out there from Hearts that's going to be announced.

So the amount of development is quite intense. However, the challenge of finding developable land is still a challenge for developers throughout Northern and Central New Jersey. And this drives the push to the south, to the west, to the north and to the east.

And before we wrap up, I just thought we'd take a look at employee occupancy of space. This is the amount of employees, the percentage of employees who are showing up in the workplace. And we know since the pandemic within the office sector, most folks working from home. Currently, we saw a drastic reduction, we were doing pretty well into September, 25% on the office side, that's been reduced back to 15% as the case count climbed toward the end of the year. However, look at industrial. 85% of employees showing up to the workplace as we go through even these most challenging times with the pandemic. And a lot of that is driven just by the demand of e-commerce and the fact that these employees are needed within the warehouses to get product out the door. So with that, I will turn it back to Eric for our panel discussion.

Eric Diamond:Thank you Jeff, that was fantastic. Included some interesting trend analysis affecting industrial sector in New Jersey and I know our panelists are going to expand further on some of those topics you've covered. So really set the tone for the discussion today. So thank you again for participating and that was really extremely beneficial for all of us.

So good afternoon everyone, I'm Eric Diamond, partner at EisnerAmper. Our national real estate audit services leader and co-chair of our New Jersey real estate practice. I personally work with a wide variety of clients in the real estate industry and today's focus is going to be on industrial in New Jersey. As Lexi mentioned, I do want to reiterate that there is a spot down below for you to include any questions, so please feel free to submit those questions throughout the panel discussion. And we'll do our best to leave some time at the end to respond.

So I'm very excited, it's my pleasure to introduce today's panel which really brings together some extensive knowledge and experience across various areas in New Jersey's industrial sector. So joining us today are David Greek, acquisitions' director at Greek development. Peter Polt, executive vice president of J.G Petrucci Company and Lior Zamir, chief investment officer of Pacer Partners. So David, Peter and Lior thank you again for joining us today. We really appreciate your time and looking forward to hearing your insights. So to get right started, I think it'd be beneficial for the audience if each of you can just provide a brief introduction about yourself, your company and your current portfolio of industrial in New Jersey. David, would you like to start?

David Greek:Absolutely, thank you Eric. And thank you for having me today. I'm with Greek Development, we're a family-owned industrial development firm based out of East Brunswick, New Jersey. We're on our third generation, my grandfather started the firm back in 1934. We've always focused on New Jersey and Eastern Pennsylvania as our home markets, ground up development and redevelopment is what we specialize in. And our niches has been for quite some time in the industrial space. We are a fully vertically integrated firm and self-performer on general contracting on our developments, as well as to the asset and property management on the back end, makes us a little unique.

Eric Diamond:All right, great. Thank you so much David. Peter?

Peter Polt:Great, thanks for having me Eric. My name is Peter Polt, I'm an executive vice president with J.G Petrucci. I've been with the firm for about 14 years. We're in our 34th year in business. We are a design, build, developer really focusing on especially industrial and manufacturing in New Jersey and Eastern Pennsylvania. We own probably north of 5 million square feet and our portfolio have developed over 650 projects and are actively developing about 2 million square feet in the New Jersey market.

Eric Diamond:All right, great. Thanks Peter. Lior?

Lior Zamir:Thanks Eric and thanks for having me. This is Lior Zamir, I oversee investments for Pacer Partners. We're a privately held real estate investment firm, focused on single tenant, industrial and offset businesses nationwide. We founded the company about five years ago. Prior to that I was at TPG Capital and goods event specialists. Our portfolio is about 4 million square feet, roughly 50/50 between industrial and office. We have invested in a number of different markets from Long Island, Memphis, Greensboro, Boston, Chicago, Tampa, Orlando, Nashville, St. Louis.

We have existing joint ventures with private equity investors and target value add returns, opportunities is 20% and I'm based in Ridgewood, New Jersey grew up in Fairlawn. And we've pursued a number of deals in New Jersey on the industrial side. But I think what I bring to the panel is maybe a little bit of a national perspective on overseeing industrial opportunities that are sitting outside of New Jersey as well.

Eric Diamond:All right, great. Thank you so much Lior. So, to say that this past year was a different type of year would clearly be an understatement, the pandemic affected all sectors of real estate really very differently. And as Jeff showed us, industrial fared pretty well, especially in New Jersey. So if each of you could just share with the audience some of your experiences the past year, if you had to change any strategy or how you handled tenant relations and collections or vacancies or really anything that you'd like to share. And we'll keep this from a higher level perspective, because we'll start digging down into the details as we move on. Peter, how about we start with you?

Peter Polt:Sure. I remember vividly having a conversation with one of our capital market partners who had taken a four site JV portfolio to the market in early March or earlier than that, but we were selecting a partner in early March. And I remember asking him saying, "Well, what do you think about this COVID virus that we're hearing about in China?" And he said, "Well, I don't think it's going to have much of an impact here in the United States." And I guess it was just starting to come out in Oregon and things like that, but is amazing fast forwarding it maybe two or three weeks later, where here we are shutting down our offices, had to put our portfolio on hold because the capital markets had really seized at that point in time. And everybody was scrambling trying to figure out what was happening. And we have about 80 to 85 tenants.

So we were very concerned, because a lot of them were smaller size tenants in the 20 to 50,000 square foot range. And we weren't sure what was going to happen here in March, spanning into April and June. And we also had about 12 projects in construction, both in New Jersey and PA. So I'd say the first three to four months was really scramble mode, not much was getting done other than focusing on what was on your plate. What did you actively had deployed in your pipeline? And how were you going to mitigate some of the risk? Luckily, we came out of it very strong. And that's probably what we saw on the market.

For industrial, we had very few tenants that had problems outside maybe a month or two where we were helping them negotiate rent concessions just to get through that first month or two, and we're able to get everything back up and running. Construction wise, luckily in New Jersey, warehouse distribution was considered an essential asset. So we did not have to shut down any of our projects in New Jersey, we had some problems in PA where we were shut down for a month or six weeks. And then we had to redeploy our joint ventures in the foresight portfolio that we had, we had split things up. We did see that The one in New Jersey that we had in Phillipsburg was a very sought after project and we were able to get that up and running relatively quickly. And we're halfway through construction now and have a lot of activity on the site. And the other portfolio, we waited to the fall to bring back to market and it had a partner on board and we're moving forward. So, the market has definitely rebounded in the industrial side of New Jersey seems to be unbelievably constrained with a ton of user demand outpacing supply. And you can't build it fast enough.

Eric Diamond:All right, thank you Peter. Well at least it's a very positive note. And I think that's going to be the whole trend throughout today is that you can't build it fast enough in New Jersey. Lior, would you like to give us your perspective?

Lior Zamir:Sure. I think I would echo a lot of those points in terms of the initial confusion when the pandemic set in and not knowing how everything was going to play out, especially for us since half of our portfolio is office and half is industrial. I'd say coming out of it now looking in reverse, there hasn't especially on the industrial side, there hasn't been really any impact the fundamentals in terms of collections from our tenants or leasing. I'd say where we've been most impacted is on the new acquisition front, we've seen a lot of investors that were in different property types, whether it's office, retail and hospitality pushed into industrial because seems like the safe choice right now. So that's driven down cap rates, it's made it frankly, more challenging to acquire new deals.

And it feels like a little bit like the spread between riskier and much risky deals is collapsing a bit given the amount of capital that's chasing these deals. So as a result of that, I'd say our strategy change has been, we've been more actively selling than buying and we probably do something like 10 to 20 deals a week on the industrial side and are selectively looking for value out to it. But I would echo the strength of the market on the capital market side too.

Eric Diamond:All right, great. David, anything in addition?

David Greek:Yeah, I think, all great points from the previous two guys and I agree with everything they said. I just like to relate a little anecdote. From the beginning of the pandemic we were, we have a project in Logan, New Jersey and had signed to build the suits two very good credit tenants, Target in one of them. And we were ready to launch our debt memo to the market at the beginning of March. We'd been preparing for this for quite some time, as you'd expect. And of course, we launched the debt memo the exact same day that Governor Murphy launched his stay at home orders. So it was about the worst timing you could possibly imagine.

And as Peter and Lior said, there was a scramble at the beginning of this crisis, despite industrial coming out looking very strong. Nobody was really sure what was going to happen at the beginning of the crisis. And the result of that was that the banks really locked down liquidity very, very tightly for the first several weeks of the crisis. So while we expected somewhere between 30 and 40, banks and lenders to show up and bid aggressively on both these very good credit build to suits opportunities real marketing. We heard crickets for about four weeks after that launch. And despite the best efforts of our debt brokers and everyone in the developer calling every lending relationship they'd ever had, no one was willing to step up for quite some time.

We were able to you mostly by leaning on relationships honestly, able to convince some lenders to step up and ultimately, we got a little a less in proceeds and a little higher rate than what we were anticipating. But we did end up locking the financing in and since then, I think the debt markets especially have gone through tremendous recovery. We're about to go out and test them once again on both build a suit and spec financing. And the reactions we're getting preliminarily are very, very different this time around than what we were experiencing last year.

Other than on the capital market side, I'd say our tendencies share a lot in common with J.G Petrucci and Peter Polt's group in terms of the fact that we a lot of the legacy portfolio of the Greek family is smaller, flexi spaces. And by nature of that some of our tenants have more retail aspects to them. A gym or a daycare facility is not uncommon to be co-located with an industrial facility. So while we saw very strong continued strength from our traditional industrial tenants, we did get a significant amount of rent relief requests, especially from that more retail focused side of our portfolio.

Ultimately, we granted quite a bit of rent deferrals and almost all of the businesses that we granted those to have survived and recovered fully. There's probably two or three examples of ones that did not and those were those retail type operations. We had a small crossfit operator go out of business and a childcare facility go out of business. But other than that our small tenants seem to have weathered the storm generally speaking very well and in some cases come out even stronger on the back end.

Eric Diamond:All right, that's great. Great David. Now let me ask you as far as those tenants that you previously issued some concessions to, are they fully back on track now for the most part?

David Greek:Yeah, I just checked in with our accounting team on this a couple days ago and everyone is caught up. We granted probably close to 20 to 25 rent deferrals anywhere from a month to three or four months. And as of last week, we have no outstanding balances from those. So it's a really good results from what we anticipated could have been a very scary moment. We know our tenants were very scared, we were worried for them. And ultimately, I think the way that we went about this process is very similar to how a lot of big institutions went about, we made our tenants justify the need for the relief, which many of them did and those that could prove that they were able to survive through this pandemic, we worked with them very openly and were very generous. But if the tenant could not prove that they had a plan to make it through this or it was clear that they were simply asking for relief based on an opportunity to ask for a relief, we did not grant it. And overall, that strategy has worked very, very well for us as evidenced by our tenants surviving and making it through it.

Eric Diamond:All right, that's great. Well, a lot of positive comments so far. So we'll keep that as the trend for today. So talking about the growth of industrial, I think we need to start with e-commerce. Jeff really touched upon it and e-commerce has been growing at significant rates the past several years, even before the pandemic. But as a result of the pandemic, the growth of online shopping and e-commerce has really accelerated that much faster. But e-commerce is not the only area impacting growth in industrial New Jersey. So if you could each share with us your thoughts on e-commerce, but what are the other areas that have helped contribute to this growth? Lior, would you like to start?

Lior Zamir:Sure. So I say e-commerce is certainly the largest driver, just taking as an anecdote. Amazon has announced that it plan to add 10 times the distribution space they have right now in the next couple of years. So that speaks to the growth that is happening in that area and they've been quite the largest component of leasing activity nationwide. And I say COVID has been a catalyst for that trend, that was already happening and that just brought it forward a few years probably.

Another trend that we're seeing throughout the country, is just in case inventory. So previously, companies were more focused on just in time inventory to make sure that they get good customers' in a timely manner. What happened with COVID is a lot of folks that were importing from overseas, their supply chains got disrupted and they couldn't get inventory. And so a lot of people revisited their supply chains and how much inventory they hold. That's another big source of demand. Prologis came out and said they think across the board tenants will or users will need about 10% more inventory for that just in case inventory.

And then in general, last year is a record year for leasing velocity, highest on record. And the scope of leases is much more than just Amazon's. Other large tenants like Lowe's, Home Depot, Walmart, Target, other retailers we're seeing throughout the country, we're also seeing a lot of 3PL demands in different markets. So, I'd say Amazon's definitely a component of it and that e-commerce component is a huge part of it but it's pretty broad demand base across the board.

Eric Diamond:All right, great. Thank you. David?

David Greek:Yeah, Amazon, it really is the 800 pound gorilla in the room. If you look at the leasing over the course of the last year during COVID especially, and you look at who was occupying space, especially in New Jersey, the bulk of that list is Amazon. And it's hard to ignore that when they're taking the majority of space being delivered. So they over the last couple of years, certainly increase their leverage over the developers, they have fantastic credit and they tend to pay a premium over market, at least what we've been seeing recently in Northern New Jersey is that they're willing to pay a somewhat significant premium over to where market is at the moment. So they're very attractive tenant.

It was somewhat concerning to us that most of the leasing velocity that occurred during the pandemic was from Amazon. And we've seen a slight shift in that over the last say, four months where other tenants, e-commerce and outside of the e-commerce sphere have reared their heads back up, their requirements have come back to life and they're actively pursuing leases again. So I think that's a very good sign for the overall market.

And one trend that we've seen accelerate because of COVID and I can't point to a specific reason why but I think this is plays into a larger trend that's been happening for a long time is the demand for cold storage and freezer buildings has continued to increase during COVID. Both the demand on the tenancy side and especially the demand from the investor side, certainly been a sea change in the way that institutional investors view the cold storage and freezer storage marketplaces and they seem to view them more as viable long term assets now than they did say five years ago. So we've seen a spike in that demand and I'm actually going to be speaking on a panel tomorrow about the need for increased cold storage in healthcare as well. So I think we're going to continue to see that trend grow its legs even longer.

And a lot of people have been talking about the rise of grocery delivery, and certainly that's been a huge trend that's come out of this pandemic. But I just want to be clear and how that translates to industrial for a second because there's a lot of misconceptions that these shoppers are shopping through a warehouse and delivering straight to home. That's really not the case. What's been most successful for most grocery chains has been to use their existing retail footprints, their superstores as basically a distribution point for consumers. And we've seen that trend grow enormously. I know in my household, we're regular users of whole foods delivery service and I know others are too. But especially among the older population, the use of online grocery shopping has increased substantially and we think that's very sticky. In other words, it's not going to go away once this virus goes away, it's going to stay. However, we're not quite sure exactly how that translates into demand for industrial space yet.

Eric Diamond:All right, great. Thank you David. Peter, are you seeing the same areas, any other areas of growth?

Peter Polt:Yeah, I think David and Lior hit on most of the big items. I can tell you, we are seeing a little bit of indoor growing facilities, we just did a deal with a, like a leafy greens group to produce and grow lettuce indoors. So we're seeing a little bit of that in the food market. I think what we're also seeing is we're starting to see a relocation of tenants from the Northern and Central New Jersey markets. One, either because they've outgrown their space and there's no space available. Or two, if they don't need to be on the 95 corridor in Northern or Central New Jersey, they can get a lot of rent relief moving either south along the 95 to 95 corridor or coming out west 78 into the Lehigh Valley.

So we are seeing a lot of smaller tenants. And quite frankly, manufacturing still is very strong. We probably completed over 700,000 square feet of manufacturing deals last year in our portfolio alone mostly in the Eastern Pennsylvania market. But I do think that you'll continue to see manufacturing stay strong, I think you will see a lot of companies, either that are overseas, either nearshoring to the United States or having second secondary locations here to help with some of the supply chain interruptions that quite frankly, we're still seeing.

Eric Diamond:All right, that's a perfect segue because Jeff highlighted a little bit of bad news, showed us the map in terms of the changing geographic areas. David, do you mind talking a little bit about the supply and demand and how the current supply and demand in New Jersey and the surrounding areas is really changing the map of where industrial is looking to be developed in New Jersey?

David Greek:Sure, you heard it from Jeff Hipschman, you heard it from Peter Polt. We really can't build it fast enough. New Jersey has been a spec market for quite some time but what has changed over the last five or six years has been what Jeff highlighted in his introduction, which is that pre-leasing velocity has absolutely skyrocketed. And the results of this is basically an imbalance in supply and demand, especially in North Jersey where land scarcity is becoming an increased problem.

If you take a step back and look at this over a 30-year trend rather than in the last five years, the size of industrial buildings has been growing exponentially. So the amount of land you need to take down to build a class A facility today is a lot bigger than it was 20, 30 years ago. So finding land, as you've heard from everyone on this call has become very, very hard for developers. And that's forced us as developers to look at a wider geography and we've benefited from that, as you've heard from Peter, as you've heard from Jeff, because tenants either are looking for a cheaper option as rents grow very quickly along those traditional corridors or simply they cannot find a space.

So, all of these trends have coalesced into what I call a collapsing of sub markets. We see where a tenant might have been very, very location sensitive three or four years ago. They understand today that they can't afford to be so location sensitive. So where a geographic search might have been 10 or 20 mile radius around a single point. Today, that radius has grown to maybe 50 to 100 miles for some tenants and they're looking at a price gamut anywhere between $6 rental rate in way south New Jersey or into Pennsylvania, all the way up to the mid teens in North Jersey.

And we've seen requirements look at all of the options, especially when they have a large requirement, something over six, 700,000 square feet. They will look at every option available in the market, regardless of price point, regardless of geography because they know they have such limited options. And that's been really beneficial for property owners that own slightly off the beaten path product or slightly pioneering developments.

When we bought that land in Logan that I mentioned in the earlier answer, a lot of people thought we were crazy. Not Peter though, because he bought all the land across the street from us. But I think as we've developed that land, the market has proved that that Southern New Jersey market is becoming much more institutionalized, much more attractive to your traditional credit tenants because it is one of the few sub markets that can deliver large blocks of space and it is still affordable for tenants to locate there.

Eric Diamond:All right, that's great. Lior, you mentioned you have a little bit more of also, in addition to New Jersey, a national perspective, can you share your thoughts on what you're seeing of any of the shift going on from a national perspective?

Lior Zamir:Sure, I think in terms of focusing on supply and demand, it's obviously a good point, it's something that we're focused on each market that we invest in. I'd say, investing in industrial across the country, the biggest risk right now is part of oversupply. And so far demand has kept up with supply. Although nationally, you're seeing a slight uptick in vacancy. But I think it's really market by market for us and investing in supply constrained markets were provided this counter[replacement boxes 00:42:13]  was what we try to focus on.

And I think in terms of generating value added returns, groups are really needing to develop products in order to accomplish that. I think New Jersey to the previous points made, it's the largest MSA, we live in the largest MSA in the country and it's one of the top three industrial markets in the country. So, from a supply demand standpoint, I think it's very attractive relative to the rest of the country. It's store for rent growth the last five years, so it's been something like 7%. So I think New Jersey's super attractive, just very competitive.

Eric Diamond:Right, great. So a lot of what we used to see in New Jersey, obviously, the industrial and more the North Jersey area being next to the city and the ports, clearly there was advantages, but with shifting down to more southern parts or even western parts. Peter, I'd love to get your thoughts on are there any challenges that those companies are now going to have to deal with moving a little bit farther away, more into some of the what we'd consider rural areas?

Peter Polt:Sure, I think if companies are port centric, obviously their drainage costs continues to go up, the further they have to move away. I think maybe not as much down in Southern New Jersey, but as you move away from these big more urban and densely suburban areas, is labor. Labor continue to be an issue for everyone everywhere. It's I think most of the top industrial markets are labor constrained and maybe Lior can touch on that as well, because he's seeing him more nationally, but certainly New Jersey and Eastern PA labor continues to be of a big concern. With that, I think also infrastructure, just depending on where the new developments are being developed but certainly as you move along the 78 West corridor, it's hard to develop out here because of highland restrictions and more rural roads and just tougher infrastructure for trucks to get back to the major arteries. So, I think those are our biggest concerns.

Eric Diamond:Okay, great. Jeff was talking a lot about e-commerce, the increase of online shopping. I think each of you just we're talking a little bit, Lior or about either just in case and having more inventory on hand. Do you feel that this is going to be the new norm? So once things level out, do you think that the man for the online shopping in the e-commerce is going to continue to increase or do you feel that that might level out or even decrease a little bit given the whole supply and chain distribution? David, do you want to start with that one?

David Greek:Yeah, sure. I think there's going to be winners and losers. I think if you look at the consumer spending trends over the last year, there's been some clear standouts that might be sticky and some that will revert back to the norm. So for example, saw a huge burst in office supplies spending, believe it or not during the first couple months of the pandemic. Why is that? Nobody's going to the office. Well, everyone needed to get their home office set up and buy monitors and keyboards and mice. And so you saw a huge spike in the online ordering of those types of goods, I don't expect that it's going to continue into 2021. I think everyone that needed an office setup at home has pretty much got it set up and those goods would revert back to the norm.

But as I said earlier, there are other trends that have been growing in the background prior to COVID that COVID simply accelerated the growth in those spaces. And I think the most obvious one is in online grocery delivery. We saw that trend creeping very steadily for a couple years but it had some serious barriers, mostly on the consumer side to getting it really off the ground and running. And this pandemic forced people to try it. And I think that was one of the biggest barriers for it to start working was simply getting people to try it, especially older shoppers that prefer the hands on experience especially when buying produce per se. Very important to touch and smell and feel the produce that you're buying, there was not a level of trust between the consumer and the seller there.

This pandemic forced people into that trust relationship. And while the pandemic hasn't ended, we've only seen those online shopping numbers continue to increase. Probably the sub sector I'm most concerned about is apparel. That was one of the largest sub sectors of the e-commerce space prior to COVID and it's really felt nothing but pain since the beginning of it. Eric, you mentioned you couldn't even find your jacket at the beginning of this call. That's a good example of why the apparel sector is suffering, right? Because we're all wearing sweat pants at home and not buying suits and not going to the dry cleaner and not ordering apparel like it was. So, I do not know where that trend goes, I wish I did. But it's one of the sub sectors that we continue to be somewhat concerned about within the industrial space.

Eric Diamond:All right, great. Hey, I'd like to go back to Peter, something you had mentioned earlier just in terms about the workforce and the labor force when you're moving a geographic areas because Jeff had a slide up there where industrial was the one area where there was still a lot of people being employed. But as you move to other areas and there could be some constraints, one of the things you hear about now is robotics, right? So the increase use of technology and robotics in an industrial. And Peter, are you seeing any of that in the new development projects?

Peter Polt:Sure, I think as developer, you have to plan for that, whether it's here today or 10 or 20 years from now. So, clear eyed is obviously important. I'd say anything over 500,000 square feet, you're doing a 40 foot clear building. That doesn't include cold storage. I think David could discuss that at length, but cold storage facilities you're seeing clear heights significantly more than that. Whether it's 60 feet, you see sometimes 100 feet requirements. But I do think that automation is going to continue to advance. I think the problem is that some of the facilities can't necessarily handle that, whether their floor slab design wasn't thought about for more a pick and pack type of automation. I also think power becomes significant issue now. More and more, we're running into power constraints to power companies. So, I do think automation will continue to advance and take over for labor, but it's going to be in very select areas, because they're just certain areas of our region that just can't support heavy power requirements.

Lior Zamir:Yeah, and-

Eric Diamond:Oh, go ahead. Go ahead.

Lior Zamir:I was going to add peter brought up a really good point earlier regarding labor that just wanted to touch on which is, reduce see that as being one of the more important aspects for tenant demand. So everyone's focused on rental costs, and Seabury did a really interesting study where they looked at the percentage of logistics spend across different areas. And rent is, on average about 5% of logistics spend. Labor could be something like 20%, transportation costs are 50%, inventory 16% and a variety of other costs are something like 10%.

So when we're looking in different markets, a lot of times what will drive tenant to be in that location is access to labor and other logistic reasons. For example, to have suppliers nearby that the transportation distances is easier to get to that facility. So I think rent is obviously important but it's sometimes focused on too much and in the labor side I'd say it's super important and at positions we look at.

Eric Diamond:Now, Lior, with your side just looking at it more from a national and investment perspective. I know one of the things you always look at besides location is really those dynamics with the tenant, right? So really getting involved with them and taking a look. Are there other areas of those relationships that you take a look at with the tenant?

Lior Zamir:Yes, for sure. So, for us it's because we're buying large single tenant facilities, we will oftentimes do a really deep dive on why that tenant is there. And a lot of times, the things we hear or some of the things I mentioned before, which is we're right now buying a half million square foot facility leased to a publishing company and a lot of their printers are nearby. Transporting the heavy paper and stuff is expensive. So, access to those printers nearby is important. And then they labor pools, pretty cheap labor pools within close proximity for north and south of them. So, that's a big driver. So oftentimes, we will speak with former employees and we do a lot of work around why the tenants there and the rental costs. You can often push that number if there's other factors driving the tenant to be there.

Eric Diamond:All right, great. So, sticking with tenants for a minute. David, you mentioned your tenant makes and you do have a good percentage of smaller tenants. But as Jeff was talking about the rental rates are as high as they've ever been. And while that might be fine for an Amazon taking on more or Walmart, what kind of impact does that have for the average tenant, some of your tenants with the increase in rental rates.

David Greek:We've had to have a lot of hard discussions with a lot of long-term relationships over the past couple of years about increasing their rents to bring them to market. It's never an easy discussion. Being a family-owned firm, we have very close relationships with a lot of our long-term tenants and they feel loyalty to us and we feel loyalty to them. So it's never easy. But as Lior aptly pointed out, traditionally, rent has been a relatively small percentage of the overall cost of operating an industrial facility, somewhere between three and 6%, depending on what area of the state you're in.

So while rent has increased and very meaningfully in all across the state, the other costs of these operators have increased as well. Labor costs have gone up, especially in markets where large e-commerce companies occupy like Amazon, they tend to suck all of the labor out of a market and increase prices for everyone else. Transportation costs have increased, their is shortage of truckers has been an ongoing problem within the industry for many, many years. And frankly, we can't get self-driving trucks fast enough because we don't have enough truckers to carry these goods.

Looking at the holistic picture, while rents have increased, I think it's important to pay attention to the other operating costs of these tenants. All across the board, their operating costs have increased and some of them are struggling because of it. But I'd say the majority are adapting to it. And one of the great things about Amazon being such a large part of the industrial market is that a lot of people aren't aware of this, but about 50% of Amazon's sales come from third parties not from Amazon itself.

So the spin off business that Amazon creates through its Amazon Marketplace is enormous. And it drives a lot of demand, especially in that smaller tenant size of basically startup distributors, that type of company that basically rides off Amazon's coattails uses their marketplace as a forum to set up their business. And we've seen some of our smaller tenants that traditionally were in the distribution space jump into e-commerce through that method and been very successful in doing so.

And I think, I'm not positive about the statistic but if you look at what drove Amazon's record sales over the last eight months, a lot of that came from those third party marketplace sellers. A lot of the growth within Amazon came from actually outside of Amazon, at least from their distribution perspective. So, some tenants are struggling, but I'd say most of them are adapting very well and taking advantage of the new way that we consume.

Eric Diamond:All right, great. So we have a few minutes left. I do want to get to actually one of the questions that came in which talks about a little bit of the difficulty and the struggles say retail or some malls have had. And actually Jeff touched upon this in terms of multifamily. Do any of you see or expect to see maybe some repurposing of these buildings, a retail, shopping center or a mall getting repurposed for industrial at all?

David Greek:Sure, it's been talked about for many years. One misconception around it is that a lot of people think you can take a big box retail space and simply throw some rocks into it and create a warehouse. And that's not really the case. In most cases, what we see when people are looking at retail assets is more of a scrape and rebuild, rather than try and reuse any of the existing asset.

Just one example of why retail building can't be used as industrial's floor load, they're not designed to handle the same loading capacity that an industrial floor should, so racking those spaces can be close to impossible. But I would expect as malls continue to decline in relevancy that we see more of them being knocked down. And in New Jersey, it's especially relevant, we've been an over retailed market for quite some time. So there needs to be some clearing of the bush, so to speak.

Eric Diamond:All right, great. So I want to be mindful of everyone's time. So maybe if we can just, if everyone can give a minute or two just your perspective of what you think 2021 and beyond is going to be for New Jersey industrial. Peter, we'll start with you.

Peter Polt:Sure. I think it's more of the same, at least for this year. I don't have a crystal ball and I don't know where industrial will go from here. But when you look at just basic macroeconomics of supply and demand, we do have a surge of new projects coming online here probably in 2021 and 2022. That will be the next test to see if we can absorb all of that demand. But I also feel that we're in this massive socio economic shift on how we buy, consume and goods. So I just think that we're in a great geographic region really sitting between two very large MSA markets, between the New York metropolitan and suburban Philadelphia markets with one of the largest ports in the country and a couple other smaller ports. So I expect it to continue, at least in the short term. I wouldn't be surprised if it continues for several more years.

Eric Diamond:All right, great. Lior, your final words.

Lior Zamir:Yeah, look, I think I agree with everything Peter just said. This is one of the best industrial markets in the country in a very good industrial environment. So I think if you're seeking outsize returns, I think it might be difficult, but I think it's going to be a very good place to invest for the foreseeable future.

Eric Diamond:All right, great. All right David, anything else said you got to keep it on a positive note now.

David Greek:I know, I don't want to be the skunk at the party. I do think it's generally speaking good news for New Jersey industry going forward. The fundamentals of the marketplace are as strong as they've ever been. I say that with just a little bit of reluctance because every time someone says the fundamentals are bulletproof, something proves us wrong. So, I agree with Peter that we are going through a real shift in how we consume and that is only going to benefit industrial.

The only thing that concerns me is Amazon being the gorilla in the room and the potentials for them to create leverage over landlords et cetera. Also the potential of them, the federal government interfering and breaking them up in some way that impacts the industrial market. But if you really just look at the fundamentals and don't spend time going down political rabbit holes like I do, there's nothing really cloudy on the horizon for New Jersey industrial. For developers like myself and as Lior aptly stated, it's tough to find really good deals these days. But that just means there's a lot of investor interest in the space, which is a good thing.

Eric Diamond:All right, great. Look David, Peter, Lior and Jeff truly appreciate each of you taking the time to share your experiences and insights. I know I personally found it very informative and beneficial as I know our audience did as well. So thank you again, I will turn it over to Lexi to wrap things up.

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