Moving forward

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A panel of experts on real estate development, management and construction in New Jersey outlined the strengths in the market and the challenges facing the industry. NJBIZ Editor Jeffrey Kanige, who moderated the May 25 virtual discussion, began by asking how some of the regulatory changes enacted in the state would affect development.

Kate Gibbs, deputy director of business development for the Engineers Labor-Employer Cooperative, raised concerns about what is still unknown about some new laws, especially dealing with environmental justice, because implementing rules are still being hashed out.

Under Senate Bill 232, signed into law by Gov. Phil Murphy in September 2020, applicants for projects like gas-powered refineries and power plants, sewage plants, landfills, incinerators and other waste disposal sites will have to consider their effects on marginalized communities, submitting a statement on the project’s potential environmental and public health impacts and holding a public hearing for residents.

Gibbs said it could pose some issues for construction, but said the practical impact will come down to how the law is implemented, whether it’s workable and whether the business community and the development community determines that a particular site “is a place worth investing in.”

“The only thing that businesses find more difficult than dealing with high cost is uncertainty, because that could lead to more costs and more delays, which are costs,” she said. “So I think our challenge is, we in the private community working with our policymakers, to make sure that connection between the intention and perhaps unintended results may be able to proceed and prevent the kind of uncertainty that chases dollars away from this market,” she said.

Michael Leondi, vice president design and construction at The Rockefeller Group said he believes the law is well-intentioned and that is provoking an important dialogue. But he stressed the need to be cautious with its aggressive implementation, stating the importance of a clear path.

The panelists then moved on to a discussion of New Jersey’s energy master plan and the importance of renewable energy projects. James Thaon, branch manager at Bohler, said many towns are requiring electric vehicle charging stations on sites and such considerations must be accommodated for in the design stage. “For industrial developments that request came from one town — to ensure that there were trailer parking spaces such that … accommodate electric vehicles,” Thaon said.

“Trucks, tractor-trailers [need] to be charged on site nowadays, which we haven’t heard about in the past. So this is definitely something that we’re seeing coming down the line and it’s going to be important to design around those facets making sure that there’s proper coordination with utility companies and ensuring that you have the appropriate power in that area to service something like electric vehicle charging stations and make that feasible for your site,” he said.

Leondi concurred and confirmed that truck traffic is always a sticking point in reviews. “There’s this perception of all these large tractor-trailers on the road polluting and causing all kinds of congestion, not just traffic-wise but environmentally as well, so that that’s something I’m excited to see how that sort of pans out in regard to solar and, specifically, as it relates to our asset class,” Leondi added.

He also said The Rockefeller Group takes a proactive approach and makes all of its warehouses solar-ready, as the solar industry has advanced over the last five years.

Kanige then turned to Steve Hittman, founder and chief executive officer of Crossroads Cos., on the question of dealing with local officials. Hittman said in general, municipalities have a good working relationship with the private sector, but admitted that every town is different.

As municipalities represent their constituents, developers must put together a team to meet with members of the community – such as key stakeholders or the planning board – and come to an agreement on how to proceed in the best interest of all parties. “You have to listen to them because it’s very expensive, as you know. In a short period of time, you can run up hundreds of thousands of dollars and be no closer to an answer and have to spend seven figures before you get an answer,” Hittman said “So it’s a delicate process you have to do your homework, you have to communicate, you have to get feedback and listen to the feedback.”

Hittman emphasized the importance of collaboration between the public and private industry and cautioned developers not to “kill the goose that lays the golden egg … whether it’s legislation or income taxes, everybody who puts on their shoes and goes to work every day, they’re spending your time and capital and make money and feed a family at the end of the day.”

Financing and the economy

The panelists also discussed some of the constraints on the market, including significantly higher prices on commodities such as lumber and steel. Gibbs said that higher costs creates downward pressure on labor. “[We] make sure that we do everything we can. We want to make sure that projects are economically viable, but the people that construct our projects can be made to bear all of the downward pressure so that’s just something I would caution [against],” she said.

“This one tugs at the heartstrings for me, I mean, some people are into the cryptocurrency these days I watch the lumber futures like there’s no tomorrow,” Leondi said. “But the good news is, I think the worst of the lumber pricing issue is behind us.”

Steel prices have also increased in the last six months, and Leondi said would like to see that stabilize toward the end of the summer. However, the lead times have him worried. He said it would ordinarily 12 weeks to get a building filled with steel from approved shop drawings but today it takes 12 months.

“That’s taken a real huge toll on how we underwrite and look at these deals and effectively the amount of risk that we have to put into it, because a lot of these fabricators are looking for 15% of your total cost nonrefundable, twelve months in advance, before you have steel on site. I think that pressure will ease a little bit, but that’s where we are today and that has limited our abilities,” he said.

Thaon suggested that it makes sense to bring in the development and consulting team when prices are higher than anticipated. “We looked at [one] project through a different lens with that developer, and actually figured out a way to change the sizing so it mitigated the requirements on the lumber and the steel side of the project,” he said.

There’s always someone else willing to step in the ring and come up with a different idea or disrupting idea that creates a whole new business. We have to adapt to change, and that is what we do, we adapt to change.
– Steve Hittman, founder and chief executive officer of Crossroads Cos.

Hittman agreed that higher costs represent a significant issue. “Every time you move to realign, you have a delay and every time you change the interior design of the store, it often requires a significant expense. If we provide the tenant with the design at one point … and prices are still going up almost every week and you can’t budget for that. From an owner/developer point of view, it’s a big problem.”

Despite the effects of the pandemic and the growth of e-commerce, Hittman said retailers are recovering. “The retail markets are very healthy, from my perspective, there’s a lot of demand. There’s more leasing activity over the last 12 months than there was over the last two years, even in the middle of a pandemic. I think those who have survived are stronger.”

Hittman also said consumers have learned to adapt in regard to the internet and digital media, and now e-commerce is a permanent part of retail.

“I think that for every retailer who may have failed there’s a new retailer willing to step in. Our country so unique, we create and destroy businesses and wealth every single day and one person’s failures are another person’s opportunity,” he said. “It sounds cruel, but that’s kind of way the world works, nobody wants anyone to fail. There’s always someone else willing to step in the ring and come up with a different idea or disrupting idea that creates a whole new business. We have to adapt to change, and that is what we do, we adapt to change. The person who grabs the golden ring finds a solution to that problem and is able to visualize and then bring it from start to finish, to make it a reality and I’m sure that’s true for everybody in this battle, no matter what they do.”