the staff of the Ridghewood blog
Ridgewood NJ, the landscape of commercial real estate construction in New Jersey is undergoing a significant transformation. Unlike the boom years of the past, new commercial projects—ranging from strip malls to industrial warehouses and office spaces—are not being built at the same pace as they were just a few years ago. The reasons for this shift are complex, involving economic factors, evolving market demands, and global challenges.
One of the few new projects moving forward is the transformation of the former Nabisco building in Fair Lawn into a warehouse. Similarly, a new warehouse recently opened on the Marcal property in Elmwood Park, just off Route 80. However, these projects are exceptions in what has become a marked slowdown in commercial construction.
The primary driver behind this slowdown is the increase in interest rates. Between 2022 and 2023, the Federal Reserve hiked rates 11 times to curb inflation, which had soared to a 40-year high in 2022. This month, there’s speculation that the Fed might cut rates in September, but the impact on construction lending has already been significant.
“That’s going to impact construction lending,” said Jim McGuckin, New Jersey’s regional manager for the real estate services firm Marcus & Millichap, based in Saddle Brook. The effects are already evident. The Dodge Momentum Index—a key indicator of non-residential construction planning—dropped 8.6% in March, the largest decrease so far this year. Sectors like R&D, office spaces, and hotels are feeling the brunt of these declines.
The American Institute of Architects has also forecasted a slowdown in commercial construction spending at least through 2025, following a robust performance last year. According to McGuckin, “Nobody’s really going out and building new [retail] strip centers.”
The warehousing sector, which had been booming during the COVID-19 pandemic due to a surge in online shopping, has also slowed. “Two years ago, there were a lot of large requirements in the market for 500,000 square feet or larger,” said David Greek, managing partner at Greek Real Estate Partners and the developer behind the Nabisco project. “The deals that are getting done [now] are significantly smaller.” Nationwide, new warehouse construction fell by more than 40% between 2022 and 2023, according to CommercialEdge, a California-based real estate software firm.
Global geopolitical issues have further complicated matters, leading to higher shipping costs and increased maritime trade insurance rates. These factors have contributed to less construction and smaller warehousing leases, according to Greek.
The Decline of Suburban Office Parks
Office construction has also seen a significant slowdown. Only high-performing downtown offices, like M Station in Morristown, or those with easy access to transit, such as the ON3 campus in Nutley, are maintaining high occupancy rates. In contrast, many suburban office parks are faltering, with some even facing demolition.
“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,” said Alan Hammer, a member of the executive committee at the law firm Brach Eichler, in an interview with Commercial Property Executive.
Hammer pointed out that the issue isn’t just about higher interest rates. “As the interest rates continue to rise, borrowers will not be able to replace their existing debt amounts due to their inability to meet debt service coverage ratios.”
The real estate services firm Cushman & Wakefield reported in July that new leasing and renewals have reached their lowest point since the pandemic, while office demolitions and conversions are on the rise.
Retail and Hotel Spaces: Renovation Over New Construction
The retail sector has also been impacted, particularly old-school malls and big box stores. The supply of new retail space in North Jersey has shrunk, driving down vacancies and pushing up rental costs. As McGuckin noted, these costs eventually trickle down to consumers.
In many cases, existing retail spaces are being repurposed. The Monmouth Mall in Eatontown, for example, has seen significant transformations, as have standalone retail centers like Westfield Garden State Plaza and Bergen Town Center in Paramus, which are now adding apartment blocks.
During the COVID-19 pandemic, Coresight Research estimated that 25% of the nation’s roughly 1,000 shopping malls would close within five years. Some malls, like Ledgewood Commons in Morris County, have been revamped rather than shuttered. The Ledgewood Commons, for instance, has transformed from a 600,000-square-foot indoor mall into a 470,000-square-foot shopping and dining center.
The hotel industry is also feeling the pinch, with chains like Marriott International shifting their focus from new construction to renovating existing properties. Marriott recently unveiled a $15 million overhaul of its Saddle Brook location, just off Route 80.
Marriott CEO Tony Capuano explained that higher construction costs and financing complexities have made renovations more attractive. “The availability of construction debt is still relatively constricted compared to pre-pandemic levels,” he said during a recent earnings call. “Trends are going in the right direction, but we’re just not all the way back yet.”
As New Jersey’s commercial real estate sector navigates these challenges, the focus seems to be shifting from expansion to adaptation, with renovation and repurposing taking center stage in a landscape that continues to evolve.