Construction in New Jersey isn’t what it used to be. In the commercial real estate sector — think strip malls, industrial warehousing, research and development, and office space — new projects aren’t getting built as much as they were just a couple of years ago.
There are a few new projects in the works. The former Nabisco building in Fair Lawn is undergoing demolition and the site will be converted into a warehouse. And earlier this year a new warehouse opened on the Marcal property in Elmwood Park , just off Route 80.
But commercial construction for new projects has seen a marked slowdown.
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Thank interest rates, which the Federal Reserve hiked 11 times between 2022 and 2023 in a bid to tame inflation, which had risen to a 40-year-high in 2022. This month, the Federal Reserve has signaled a possible rate cut in September.
“That’s going to impact construction lending,” said Jim McGuckin, New Jersey’s regional manager in Saddle Brook for the real estate services firm Marcus & Millichap.
The Dodge Momentum Index — a measure of non-residential construction planning — fell 8.6% in March, the largest decrease of the year so far, with decreases being felt in the R&D sectors, and commercial space such as offices and hotels .
Meanwhile the American Institute of Architects warned that spending on commercial construction will slow at least through 2025, after a strong performance last year.
“Nobody’s really going out and building new [retail] strip centers,” McGuckin said.
New construction on warehouses has slowed as the COVID-19 pandemic-sparked online shopping craze — which drove the need for new industrial space — has slowed down, said Dan Kennedy, president of NAIOP New Jersey, a trade group for New Jersey’s commercial real estate sector.
That slowdown on warehousing really kicked off in 2022, according to David Greek, managing partner at Greek Real Estate Partners — the developer behind the Nabisco project.
“Two years ago there were a lot of large requirements in the market for 500,000 square feet or larger,” Greek said in an interview. “The deals that are getting done [now] are significantly smaller.”
Nationwide, new construction on warehouse space fell more than 40% between 2022 and 2023, with 341.9 million square feet of ground broken last year, according to California real estate software firm CommercialEdge .
Global geopolitics has led to higher shipping costs and higher maritime trade insurance rates — which, according to Greek, has meant less construction and less square-footage on warehousing leases.
Slowdown of suburban office parks
Meanwhile, office construction has slowed down, Kennedy said. Only the most high-performing downtown offices are seeing high occupancy, such as M Station in Morristown , or areas with easy access to transit, such as the ON3 campus in Nutley.
On the other hand, swathes of suburban office parks have faltered and ultimately succumbed to the wrecking ball .
“We are on the verge of a crisis in the industry, with very little lending ongoing at the regional level because the banks need the money themselves to offset their exposures,” Alan Hammer, executive committee member at the law firm Brach Eichler, told Commercial Property Executive .
“However, the problem right now is not just higher-for-longer interest rates," Hammer said. "As the interest rates continue to rise, borrowers will not be able to replace their existing debt amounts for reasons including their inability to meet their debt service coverage ratios.”
The real estate services firm Cushman & Wakefield reported in July that in recent months, new leasing and renewals reached their lowest point since the pandemic. Office demolitions and conversions have meanwhile soared, the report added.
What's happening to retail
Old-school malls and big box stores have suffered in the recent past, said Kennedy of NAIOP.
Marcus & Millichap, the real estate firm, reported earlier this week that the supply of new retail space has shrunk in North Jersey, which has in turn pushed down vacancies and brought up rental costs. Those costs ultimately get passed onto the consumer, said McGuckin.
Many existing spaces are simply being converted into new space, like the Monmouth Mall in Eatontown .
In other instances, standalone retail centers like Westfield Garden State Plaza and Bergen Town Center , both in Paramus, are seeing the addition of apartment blocks.
During the COVID-19 pandemic in August 2020, Coresight Research estimated that 25% of the nations’ roughly 1,000 shopping malls would close within the next five years.
Many malls have been revamped, including Ledgewood Commons in Morris County .
In the reimagined shopping center, the indoor concourse of the former 600,000-square-foot mall is gone. What remains is 470,000 square feet of shopping and dining in a main building and additional pod sites.
Renovate, not build, the hotel space
The international hotel chain Marriott International recently unveiled a $15 million overhaul for its Saddle Brook location just off Route 80.
The overhaul comes at a time when chains such as Marriott and IHG have shifted from new construction to the renovation of existing properties amid higher construction costs.
Marriott CEO Tony Capuano told investors last month that — with higher construction costs and the complexities of financing — the company's focus has been on updating existing properties rather than new construction.
“The availability of construction debt is still relatively constricted to where we were in a pre-pandemic situation,” he said during a recent earnings call. “As a result, we're not back to where we were pre-pandemic in terms of shovels in the ground. Trends are going the right direction, but we're just not all the way back yet.”
Daniel Munoz covers business, consumer affairs, labor and the economy for NorthJersey.com and The Record.
Email: munozd@northjersey.com ; Twitter: @danielmunoz100 and Facebook
This article originally appeared on NorthJersey.com: New commercial real estate projects have slowed in NJ thanks to high borrowing rates
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