From the WSJ:
Peter Sudler didn’t make the decision to demolish one of his top-end suburban office buildings lightly. But he knew better than to fight the market.
“Rather than sit there with an empty office building I am repositioning it to warehouse distribution,” the developer said.
Sudler Cos. is tearing down a 25-year-old, 500,000-square-foot office building in Cranbury, N.J., to clear the way for 800,000 square feet of industrial space.
Not so long ago, replacing an office building with a warehouse wouldn’t have crossed the minds of many developers. Office space, after all, costs more to build and usually generates higher rents.
A red-hot warehouse market driven by the rise of e-commerce has changed that. Though the numbers are small, several suburban office properties in or near New Jersey and Long Island industrial neighborhoods have been redeveloped as warehouses.
“It was always the reverse, and we used to convert from industrial to office,” said Thomas DiMicelli, an executive vice president with brokerage firm JLL who works in the Long Island market. “Industrial values have gone up enough, it can make converting office buildings worthwhile.”
The sites also were in office markets that have been soft, brokers said. The vacancy rate for Long Island stood at 14.3% in the third quarter; New Jersey’s vacancy rate was 24%, according to JLL.
By comparison, the vacancy rates for Industrial space are 1.8% on Long Island and 4.6% in northern and central New Jersey.
Prices for industrial space are soaring. The average sale price on Long Island is $96.80 a square foot, compared with $62.50 three years ago. In New Jersey, warehouses are going for an average of for $74.84 a square foot, compared with $63.78 in 2013.