Now that the state of New Jersey legalized cannabis, the change will impact the already busy warehouses across the state that could start growing the product. There is great demand for climate-controlled warehouses across the state, as part of the industrial real estate boom brought on by the pandemic.
Thomas Walsh is the Managing Director of Investment Sales at Walker & Dunlop. He sees the spike in demand for these temperature and climate-controlled warehouses as a burgeoning trend bound to grow in the coming years. More vertical farms — like AeroFarms, whom they work with — and grocery firms are growing in-warehouse greens for the increased demand of grocery delivery apps. Climate-controlled warehouses can help store live-saving vaccines and pharmaceuticals, too, especially with the clogged ports and shipping delays that have been brought on by the pandemic. According to the 2020 Global Cold Chain Alliance Global Cold Storage Capacity Report, the cold storage market was valued at $89 billion in 2018 and is projected to reach $218 billion by 2026.
Walsh chatted with Lev about climate-controlled warehouses and what trends he sees coming for industrial real estate and offices in 2022 and beyond.
What is your role at Walker & Dunlop in relation to industrial real estate?
I sell commercial real estate and I assist in financing commercial real estate and structuring joint ventures and partnerships to develop CRE.
How is industrial real estate going to change in 2022?
I believe that — and in a NJ and NY metro-centric view — because I’m based in NJ, we’re one of the largest warehouse distribution industrial submarkets in the country. We’re focused on the lack of middle market industrial space, 100,000 square feet plus or minus.
For users, the demand is going through the roof. Amazon took eight million square feet in our region, but that’s the main driver in the market, but what it is doing to the market is they’re revamping older and antiquated facilities with new cross-dock facilities geared towards your more credit tenants to occupy. The mom-and-pop distribution centers have limited options. Ultimately this impact of same-day delivery, supply chain issues, it’s really forcing everyone to pay up more for their space. IRE (industrial real estate) is becoming more expensive.
How do you keep up with the demand?
Over the past year, some interesting deals we’ve worked on, we’ve sold a 70,000 square foot vertical farm, which was in an industrial building in Newark. It’s the largest vertical farm in the world. They produce around 20M pounds of green vegetables. What we’re seeing in the urban markets is the industrial markets are being used for a variety of reasons, more than just port-related things, but people trying to fix supply chain issues, like if you remember looking for lettuce on the shelves because it was all gone. We’re seeing cap rates on the yield for the acquisitions that we’re selling as low as 3% cap rates, and we’re seeing rent growth that is going from 10% to 15% and in some cases, up to 20% of growth on the user side.
What is driving this?
The main driver right now in the industrial market is the ability to also accommodate trailer parking and more trucks. Because of the backups of the supply chain, there’s a need to constantly flow product in and out, same day delivery. During tight-fit industrial buildings, while I still think there is a market for them, institutional buyers want things with excess land. They don’t want the coverage ratio of the building to be the entire envelope of the property. They want to move as many 18-wheelers carrying TEUs (twenty-foot equivalent units), because companies want to be moving as many products as possible. Excess land and trailer parking drives value just as much as anything else on the market today.
Where is this happening the most?
The typical area where this can be accommodated is the port of Newark, the Meadowlands. Even down to Exit 8A we’re seeing this expand further down to Philadelphia. People are expanding their industrial footprints up even to upstate New York, like Rockland County, Orange County and even seeping into Westchester and Connecticut.
So long as there’s access to the I-95 or the New York State Thruway, you can service 40% of the country’s population on a one-day drive from this location. We are seeing them spread out.
Are climate-controlled warehouses going to become more popular?
100%. I think that is a direct response to everything we’ve seen with the pandemic, people having groceries delivered. The need for climate control has gone through the roof. Whether it’s freezer or refrigerated, it all goes back to the supply chain issues we’ve been experiencing since early 2020. The spike in demand for same-day delivery, whether it’s companies like Fresh Direct or the grocery stores packing it and delivering it to you, people need to have their food closer to them. We’ve seen a spike in demand there.
What’s the deal with cannabis real estate, considering the legalization is coming up for New Jersey?
Up until recently, legally, nobody could grow cannabis. In NJ, we’re still waiting. This month is when cannabis can legally be sold. We haven’t seen the impact of the legalization in the sales, but I can almost guarantee you there have been a lot of sales planned for the future centered around cannabis.
We have seen standard demand for products coming in off the port, especially since they increased the amount of cargo that can come through the port, every year, over the past three years, the port of Newark has seen a huge amount of increase of cargo, especially the number of Panamax ships coming from China. The food needs to be stored and shipped, so we’ve seen the demand for refrigerated warehouse demand go through the roof.
The rents of these spaces have increased by one-third. Leases are anywhere between five to 20 years. The cost associated in building these projects? It’s much better to lock in the term, if you can.
What CRE trends do you see spiking in 2022?
Class A office tenancy will spike in demand, and we will have an uptick in the rental rates charged. That’s trophy, trophy, trophy. I think that class B space is going to essentially sit in a level of purgatory until we understand tech firms, startups, those who can work from home, if they do come back. Everyone’s hope is that over the next two years NYC is back at 100%. When it does, I think you’re going to see a shift where younger populations are moving back to the city, as people have moved out. There’s demand for class B and C office space, but it’s still going to take two years.