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ELMWOOD PARK, NJ-Northern New Jersey’s industrial market has softened due to the recession, but its status as an international and domestic shipping and logistics hub has kept it from going completely underwater. So says a midyear industrial report from Marcus & Millichap Real Estate Investment Services.

According to Marcus & Millichap, demand remains strong for properties near the ports, particularly the Hudson Waterfront and Newark submarkets, where vacancy has been stable and rental decreases have been less severe than the overall marketplace. However, demand has “dried up” for spaces of more than 200,000 square feet, and in Middlesex County supply far outpaces demand. There, approximately 2.7 million square feet was delivered last year, with an additional 575,000 square feet due this year. Even though the construction pipeline market-wide has shrunk in comparison to previous years, Marcus & Millichap estimates that as much as three-fourths of the 1.5 million square feet projected to come on line this year will be delivered vacant.

Lack of demand coupled with a more measured number of new construction deliveries will push up vacancies 100 basis points to 13.1% in 2009. That’s on top of a 120 basis point increase in the vacancy rate last year. Yet, because the region is on pace to witness one of the lowest vacancy increases in the US, Northern New Jersey moved up six places to number 10 on Marcus & Millichap’s ranking of 28 industrial markets in the nation.

Asking rents, meanwhile, are projected to fall 3.8% to $5.90 a square foot this year, after dropping 3.3% last year. Investment activity has slowed, although Northern New Jersey’s inventory of flex space has attracted interest from institutional investors. “While the Northern New Jersey market will outperform many major metros, economic uncertainty and a lack of investment capital will keep transaction velocity modestly lower than the levels recorded in the second half of 2008,” says Michael Fasano, regional manager of the firm’s New Jersey office.

The firm projects that cap rates will inflate this year, reflecting increased caution on the part of buyers. Initial yields on flex space are expected to move the least, averaging in the mid- to high-8% range. For solid warehouse properties, cap rates are on track to jump 50 to 75 basis points higher.

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