Lenders are more comfortable financing development of difficult sites; proximity to dense population centers is key
By KEIKO MORRIS
Nov. 22, 2015 9:24 p.m. ET
A decade ago, the real estate mantra “location, location, location” meant little for certain New Jersey industrial properties that were close to New York City but still deemed undesirable. Contaminants from a previous era of heavy manufacturing, among other problems, would send industrial developers walking.
Today, being considered difficult isn’t so bad. For some developers, it is even viewed as good. The properties are now in high demand by companies looking to set up warehouse-distribution sites as close as possible to the area’s dense population centers.
The limited supply of modern warehouses in such locations has made these sites all the more attractive.
“Those conditions allow us to look at opportunities that in prior [real estate] cycles were too expensive to develop,” said Jeff Milanaik, a principal of Bridge Development Partners LLC, which just broke ground on a project to build three industrial buildings on a site in Perth Amboy, N.J., where various metals once were processed. “You can afford more for ground improvements to support buildings. You can afford to pay for demolition.”
Rental and sales prices are on the rise, and vacancy rates are dropping, especially for modern warehouse buildings in the northern and central New Jersey market, brokers and developers said. Competitors for the space include food-and-beverage distributors, e-commerce operations and suppliers of building materials for the construction boom in New York City. Developers have reason to build without first securing a tenant.
“Companies want to be closer to the consumers because they want to deliver just in time,” said Tom Monahan, senior vice president at CBRE Group Inc., who specializes in the New Jersey industrial real-estate market.” You also need to be closer to inner cities where we have good labor availability as well as transportation for employees.”
The trend bodes well for municipalities such as Perth Amboy, where manufacturing sites have long laid fallow. Perth Amboy Mayor Wilda Diaz anticipates 500 to 1,000 jobs could be created once Bridge completes its redevelopment of the 104-acre site and builds on a second, 70-acre site it has a contract to buy.
“This is an area of the city that hasbeen stagnant for over 40 years,” Ms. Diaz said. “…It’s an industrial revival.”
New Jersey’s lower prices for industrial space and, in some cases, state and local tax breaks, have made the state’s northern and central markets appealing to tenants coming from New York City.
But those aren’t the only factors. In addition to improvements in the science of detecting and removing contaminants, changes to the state’s process for cleaning up contaminated sites have added predictability to projects that once took many years.
Under New Jersey’s Site Remediation Reform Act of 2009, private consultants licensed by the state Department of Environmental Protection make sure site cleanups are completed according to state standards within set deadlines. Previously, the system relied on state-employed case managers, according to a department spokesman.
When the law was signed in 2009, the state had about 20,000 open cases of sites requiring cleaning, compared with 14,293 at the endof October, the spokesman said. The system has allowed the department to increase the number of cases it closes annually. In 2011, the department cleared 433 cases. In 2014, 1,295 sites were designated as closed.
“The DEP process has been streamlined and that has made the compliance process much more logical,” said Michael Markey, executive managing director at real estate services firm Colliers International.
Some real-estate companies, such as Viridian Partners, based in Colorado, have developed specialties dealing with contaminated sites. Viridian Partners cleaned up the Perth Amboy site and then with its joint-venture partner Goldman Sachs & Co. sold it to Bridge.
Manhattan’s Sitex Group often works with sellers of industrial sites who need help navigating the cleanup process. In some cases. Sitex has first deducted the estimated expense for cleanup from the purchase price, then done the remediation after it has closed on the sale.
The company has been working with the owner of a former paper mill site in Ridgefield, N.J., and is in contract to buy the property.
“E-commerce [tenants] want modern buildings,” said Sitex principal Brian D. Milberg. “Once these buildings are under construction-forget about near completion-they get leased because so few are going up.”
Increasingly, lenders are more comfortable financing the development of difficult sites, developers and brokers said.
“You never used to be able to borrow money for a dirty site because lenders were
paranoid that if they ever had to repossess, they would become responsible,” said Alex Klatskin, general partner at Forsgate Industrial Partners, a New Jersey developer.
Forsgate is building a 220,000-square-foot warehouse distribution center in Teterboro, N.J., with 40-foot ceiling heights, critical for stacking products-especially fore commerce tenants. From its days as the site of a printing business, the property had a defined area of contaminated soil that hadbeen capped and required annual testing. But the company went further, opting to spend more than $1 million to remove the contaminants entirely.
“We’re getting comfortable with environmental issues and environmental projects as long as we can quantify it,” said Andrew L. Moss, director of leasing and acquisitions at Forsgate.
