Quietly, a Bubble Forms

Nobody spends a lot of time looking at the market for industrial properties. Probably because they lack glamour, are usually grimy and not terribly visible. But the market for industrial property in Northern New Jersey is heating up, and from what I understand from my friends in the business, we may be looking at a bit of a bubble.

Like virtually all real estate, industrial took a hit beginning in 2007. But the market, driven initially by traffic at Port Newark/Port Elizabeth doggedly fought back. Vacancy rates have declined steadily:

And net absorption has increased:

Right now, the probability of leasing a space within 60 months is 100%. That doesn’t sound like a big deal, but it is. Landlords know for certain that their space will lease. They know the market is coming to them.

Not surprisingly, construction starts are up:

Real estate markets are like Rhinoceroses. They are big, dumb beasts that tend to aggressively move in one direction until thwarted by an object larger than themselves. Perhaps a tree or a large rock.

I think economic growth will be strong for the next several years, so the additional square footage will be readily absorbed. But at some point growth will attract newcomers to the market, perhaps those lacking experience. With the out-sized development, vacancy will begin to rise and the rents will start to soften. And loans will go bad.

And the cycle will begin again.

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