Winter 2016 Issue

Terrence McKenna, Dover, NJ
 
They are prime locations – thousands of acres in close proximity to the largest port on the East Coast, freight rail and a major airport. But these former industrial sites have largely remained an untapped resource.

Some 10,000 containers flow through the Port of New York and New Jersey each day and more cargo comes through Newark Liberty International Airport and nearby rail terminals. Many of these goods move by truck to processing centers and then back out to consumers and retailers.  It takes careful choreography of people and equipment, conducted on a massive scale.

 Having warehouses and distribution centers closer to the port could save time and money – but repurposing the contaminated former industrial sites, known has brownfields, has been a tough sell.
 
In the 1980s and 1990s, when the first pioneering efforts to reclaim brownfields commenced, developers faced high hurdles – costs and technical complications involving cleaning-up the sites, delays and uncertainties in complying with environmental regulations and unknown legal liabilities relating to often dangerous contamination. All that made obtaining financing and insurance for redevelopment projects difficult. 

Instead, developers turned to the vast available property about 40 miles south, from exit 7a to exit 8a on the New Jersey Turnpike, where land was cheap, municipalities were welcoming and complications to building were few. Since the 1990s, behemoth warehouses and distribution centers – some spanning more than one million square feet – have been built on former farmland and forests and development in these communities continues.

Developers are still lured by the advantages of building closer to the port – including the ability to make more truck “turns” to and from the port each day. But land without significant contamination, like the established warehouses districts in the nearby Meadowlands, is expensive and hemmed in by dense housing and other development. To encourage developers to take on the extra burdens of brownfield sites, government at all levels has offered financial incentives and sought to streamline regulations. Public officials recognize the potential redevelopment has in creating jobs in urban areas and reducing the traffic and pollution caused by trucking goods to far-off processing centers.  Yet the properties remain shunned by many in the industrial real estate sector.  

Risk but profit


Bill Wittkop
Old industrial building in Newark near brownfield sitesNevertheless, a few hardy developers have made a specialty of overcoming the hurdles associated with brownfield sites and have created a number of warehouse facilities scattered throughout the port district.  “The easy picking sites, got picked very quickly,” says said James Mack, an environmental consultant, who oversees brownfields cleanups.

The harder sites often remain off the market.  Mack said some owners, particularly large corporations, would “prefer to have them in limbo forever.”   

"They have very strong risk aversion,” he said.  “Token environmental work they do on the properties is just enough to keep regulators at bay.”

While the payoff of successful brownfield redevelopment can be great, vicissitudes of the real estate market don't always oblige. With onset of the Great Recession, vacancy rates at giant facilities down the turnpike at Exit 7a climbed to almost 30 percent and lease rates fell accordingly. That undercut the ability of warehouse owners to command premium rates for close-in locations. 

In Cartaret, four miles from the port off Exit 12, warehouses built in 2007 on a 70-acre former landfill at great expense – requiring thousands of pilings to stabilize the ground – sat mostly empty for years. After a temporary three-year lease to a supermarket company, Amazon recently took over the largest warehouse at the site to establish a state-of-the-art fulfillment center – but at much less than the original premium lease rates.  It was a cautionary tale. 

Still, the arrival of Amazon and other companies engaged in ecommerce in the warehouse market is one of several factors recently bolstering demand for space and spurring new interest in brownfield ventures at close-in locations.

Real estate trusts move in

Perhaps the most visible sign of progress is the growing presence in the region of Prologis, the multi-billion dollar industrial real estate investment trust (REIT).  In October, it acquired the properties of Morris Companies, one of the pioneering brownfields developers in the port district.  One of the properties was a package processing facility created for and leased to FedEx Corp. in 2006. It was built on the 13-acre site of a former drum cleaning operation that sat empty for more than 20 years. The cleanup required removing soil contaminated by heavy metals such as lead and arsenic and creating a drainage system to keep rainwater from leaching away contaminants still at the site.  Today, FedEx employs 150 workers there.

Another property acquired by Prologis is a warehouse Morris Companies built on the site of a former Sherman-Williams paint plant in Newark along the Passaic River.  A sign out front offers the 750,000-square-foot facility for lease.  Already leased are two giant warehouses built by Prologis on a 47-acre former landfill in the shadow of the Pulaski Skyway in Jersey City.

In its latest venture, Prologis is redeveloping 72 acres just south of the port on the site of the former Allied Chemical Corporation, which left behind a stew of contaminants. Some originated from industrial accidents, such as the 1981 safety valve rupture that released a caustic cloud of sulfur trioxide, injuring 70 people and wafting to Staten Island. 
Warehouses on such reclaimed properties immediately adjacent to the port are now well positioned for future port growth.  Volumes at the port have continued to climb since the Great Recession, increasing about 30 percent from 2009 to 2014. When the project to raise the Bayonne Bridge is completed in 2019, larger ships will begin arriving, carrying three times the container capacity of current ships or more.  

According to one industry analyst, while the ships will not necessarily increase the annual freight volume, "they will bring cargo in greater 'slugs.'" And this will increase the need for efficiency and throughput in port operations.  To prepare, one major operator, North Elizabeth Container Terminal, is clearing away on-port warehouses to provide added space for container handling.  The warehousing operations, including breaking down overweight containers, which cannot travel regional highways, will have to shift to nearby sites.  

Privatizing oversight

While market forces are spurring new interest in brownfield freight projects, a game changer has come through an innovation in state regulation of clean ups.  Modeled after a program established in Massachusetts in 1993, New Jersey enacted the Site Remediation Reform Act, a 2009 law that privatized oversight of brownfield clean-ups. 

Prior to that law, Steve Kehayes, a manager at environmental consulting firm J.M. Sorgie, said brownfields developers often got caught up in a “review and response cycle” with the state Department of Environmental Protection because technical reports had to be approved at each stage of the clean-up. Kehayes, a former NJDEP employee, said the process could “add months, sometimes years” to projects.

The reviews are now conducted by state-licensed site remediation professionals (LSRPs). NJDEP maintains legal authority over site permitting, but leaves the day-to-day oversight to LSRPs, who can sign-off on site investigations, remediation work and the installation and maintenance of “engineering and institutional controls” (such as drainage systems) needed to address ongoing contamination.  

 “There were a lot of people at the outset pretty nervous about how the cases would be handled,” said James Clabby, one of 600 LSRPs in the state.  But he said “it’s been very well administered by NJDEP.  It really has resulted in expediting a lot of these sites and getting them back into use. “  

By one estimate, the number of contaminated sites – many of them small, like former gas stations – has been cut in half to 7,000 since the law’s implementation.

 “What we’re finding out is that LSRPs, instead of being too liberal [in granting environmental approvals], are actually being more conservative because they’re trying to protect their licenses,” Kehayes said, adding that the 2009 law included a strict code of ethics.

Experience Counts

The growing number of successful clean-ups and redevelopment projects has laid the groundwork for further progress.  Lending institutions were once “very leery” of brownfields, but “now they’re way more comfortable with lending to contaminated properties,” said Mack, who is also an LSRP and oversees 50 sites. 

One reason is the lessons learned in conducting clean ups.  “The suite of available technologies is pretty much the same [as years ago], but the people using them have become a lot more skilled at predictability,” Mack said. 

For example, Mack said thermal treatment has become “much more reliable.” The treatment involves using electrodes or other methods to heat the soil. The “cooking” can destroy or turn contaminants into gases which can then be collected through wells or with vacuum devices. 

Methods once considered innovative are in common use. For example, one bioremediation strategy involves injecting oil underground to promote the growth of bacteria that converts dangerous hexavalent chromium – the contaminant at the center of the Erin Brockovich movie – into the less threatening trivalent chromium.

Controls to contain and prevent human exposure to contamination are also widely used, particularly on warehouses and other industrial facilities. There are engineering controls, like using pavement or buildings to cover residual contamination and systems to collect and treat groundwater. And there are institutional controls, like deed-restricting a property to prevent residential development, which requires more stringent clean-up standards.
But these controls can also be the source of dispute. Residents near clean-up sites sometimes question their effectiveness, accusing companies of taking a “pave and wave” approach, leaving them exposed to chemicals. 

Such conflicts may become more common as residences encroach on areas that now seem forbidding for anything but warehouse, trucking or industrial operations, said Colette Santiari, who heads the EPA-funded brownfields assistance center at the New Jersey Institute of Technology.  She points to the expensive condos and retail developments along the Hudson River waterfront, many of them built on brownfields.  

“In the 1960s, no one would ever have imagined that the waterfront would look like it looks today … never, say never,” she said.

In the more immediate future, there are other challenges to brownfield redevelopment. Clabby said Superstorm Sandy exposed the extent of flooding vulnerability of low lying areas, like much of the Meadowlands and areas along other waterways where many brownfields are located.  Without new effective flood controls, which are being investigated in the Meadowlands but could be years off, “developers now coming in will have to significantly raise the elevation of their buildings,” he said.  That could be a substantial added cost and “create other types of flood concerns with other lower lying properties,” Clabby added.

And in one of those vicissitudes of the market, the falling price of diesel fuel – which dropped 30 percent to $2.34 a gallon in 2015 – has lessened one of the key cost advantages of close-in warehouse locations; trucking goods down the Turnpike or other far-off warehouse locations has become much less of a burden.

It is complications that these that prompted one industry analyst to call the market for brownfield sites near the port a “mix bag.” But one day other factors – a continued rising tide of goods into the region, innovations in ecommerce distribution or even commitments by companies to achieve more sustainable freight movement – could push the market to a tipping point, allowing the sites to finally realize their full economic potential.

Mark Solof is director, public affairs and communications, at the NJTPA.