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On a rainy April morning, executives from Dermody Properties and Logan Township officials huddled inside an empty warehouse in South Jersey, a short walk from where the company was building a 172,000-square-foot speculative storage facility.

The groundbreaking for the building had been delayed by the unusually harsh New Jersey winter, and now, because of the still-threatening weather, most of the ceremony would take place inside the nearby warehouse, not in the tent closer to the construction, as planned.

At this point, the four concrete walls of the new warehouse were already up, enclosing 32 feet of clear height over a muddy plot of ground that would soon see a concrete floor pad, 106 car parking spaces, 39 trailer spaces and, hopefully, a customer to use it all.

But Doug Kiersey, president of Dermody, was not concerned. “We've found there's a lot of demand for class A industrial space in Logan Township,” said Kiersey. “We're meeting that demand by constructing this building.”

By this article's press time in early July, Dermody partner Eugene Preston, who manages the firm's properties in the region, was willing to say there was a tenant lined up for the property, but the company was not ready to make a formal announcement.

At the other end of the state, in early June, the Hampshire Cos. sold a 230,000-square-foot industrial asset at 200 Milik St. in Carteret to TIAA-CREF for $49.5 million. Hampshire had begun construction of the 230,000-square-foot building on a speculative basis and fully leased it to FedEx Ground before it was finished.

“With available land sites near the port dwindling, we identified Exit 12 of the New Jersey Turnpike as a market well situated to capture demand from the expansion of the Port of Newark/Elizabeth and the rapidly expanding e-commerce market,” says Todd Anderson, principal for The Hampshire Companies. “FedEx's decision to sign a long-term lease prior to completion of the building, followed by the sale less than three years after its development, is a testament to Hampshire's vision.”

The property, which contains 232,134 square feet of warehouse/distribution space, was constructed in 2012 to modern specifications including 36-foot clear, 52-by-50-foot column spacing, ESFR sprinkler and up to 40 loading docks. Since 2007, more than 4.7 million square feet have been developed or are close to being completed in the market, representing a 24% increase in inventory.

Radical changes in how companies organize their supply chains, especially as they accommodate the rise of e-commerce, are transforming industrial into one of the hottest property types in the New Jersey commercial real estate market.

“Everything is being built today for e-commerce,” says Jeff Feurey of Transwestern. “So people are building big boxes, the million square-footers, and only time will tell, with heavy power, with heavy parking for employees and for trailers.”

There will always be strong demand to place distribution and logistics properties in Northern New Jersey, Feurey says, because people in the New Jersey/New York metropolitan area need to eat, buy clothing and other essentials. But an increasing proportion of the interest in the Meadowlands and the other submarkets above Exit 8A comes from changes in the retailing marketplace, as even big-box retailers shift their inventories away from the stock room to the distribution center.

It's common today to see shoppers in upscale department stores using their smartphones to order out-of-stock items from the store's website for direct home delivery after examining goods in the store. To compete with e-commerce retailers, most brick-and-mortar stores offer free return shipping, or accept returns in the store. In some stores, sales clerks even encourage shoppers to order different sizes of a dress or shoes, try them on at home, and return the ones that don't fit.

“A lot of what we see in the market on the logistics and distribution side of things is coming from e-commerce and e-retailers that are increasingly promising overnight delivery of their products, and as a result need to locate close to population centers,” says Lauren Gilchrist, vice president and director of research for JLL.

Despite the rapidly shrinking pool of property in the northern part of the state, companies seeking distribution center properties are still obsessed with finding a location near the Port of New York.

“Real estate cost is about 4% to 7% of your cost in your warehousing, but transportation is 70% of the cost,” says Transwestern's Feurey. “The population base is New York, so people want to be close because they cut their transportation costs. Tolls, fuel costs, all these things, that is what is driving why people are still focused on the north.”

Feurey acknowledges that some developers are looking for space as far south as Exit 6, and says prices have gotten surprisingly high as you move further north along the recently widened Turnpike.

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One tenant that took its operations pretty far south into New Jersey is Junior's Cheesecake, which just moved its bakery from Maspeth in Queens, NY to Burlington, in Burlington County, where it was able to find 100,000 square feet of space—five times as large as its New York plant, with more refrigeration and freezers. That's an essential feature for a company that claims to sell a million cheesecakes a year.

“They're going down south because you don't have the land, everything has been more or less bought up at exit 8, or exit 7,” Feurey says. “Where you do find land at Exit 8A, people are spending ridiculous amounts of money. I've heard pricing in the $50 a square foot range under the building. That's more than for office. People want to get close to the ports, and that's the huge thing.”

The rising land prices may start factoring into the siting equation, at least for third-party logistics companies, or 3PLs. “With increasing land prices, you'll need increasing rents,” says Matt Dolly, Transwestern's research director. “That's a bit of a concern for the 3PLs, because in order to run their businesses, they can't have rents that high.”

Rising costs in North and Central NJ may drive some tenants to South Jersey and southeastern Pennsylvania, northern Delaware, and west into the Lehigh Valley, says JLL's Gilchrist. She says lower labor costs in South Jersey may start to make shippers look more closely at this option.

“There is good availability of labor that's a lot less expensive than what you find in Northern New Jersey, that's making this an attractive location for 3PLs companies as well as e-commerce retailers,” she says.

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“North Jersey has basically been built out. It's impossible to find a site to put a million square foot warehouse,” Bill Hankowsky of Liberty Property Trust told the Philadelphia chapter of CREW at its May meeting. “We've seen them come down the Turnpike to Exit 7, and all the way to Exit 6 now that it's been widened, but that's almost all built out, so basically what they did is they went west. Pennsylvania was not big in this market 20 years ago, but it is big now.” Industrial vacancy rates in the Lehigh Valley are now around 2%, Hankowsky says.

Warehouse space in the Lehigh Valley is extremely tight, Transwestern's Feurey says. “I've heard numbers that four, six, 10 million square feet is being built out there and coming on line,” he says. “But people have requirements right now, and they cannot fulfill them.”

He tells of a furniture company that could not find space meeting its requirements in the Lehigh Valley, and eventually had to locate at Exit 7 of the New Jersey Turnpike to get a building that met its needs. “Our land costs are getting so high, and you have to knock down the old stuff and put up the new,” he says.

Labor cost is going to be an increasingly important factor, Feurey agrees. One property in northwestern New Jersey, 78 LogistiCenter, attracted a great deal of interest, but tenants expecting to pay minimum-wage rates backed out when they realized they would have to pay as much as $10 an hour for labor, he says.

Rising global wages may also play a role in the location decision for at least some industrial tenants.

“We've seen manufacturing overseas become increasingly less attractive from a labor cost perspective and a quality perspective, to the point where people are saying, 'Well, we're starting to pay Chinese workers as much as we would pay for labor in the US, so why are we making our products over there, especially when that delays the time it takes to get goods to market?'” says Gilchrist. “When you combine that with being close to the largest population centers in the country, you start seeing a pretty significant increase in the industrial market.”