FEATURE ARTICLE, APRIL 2006

NEW JERSEY: A BROKER VIEWPOINT
Interviews by Nicole Thompson

Northeast Real Estate Business recently talked to several brokers who work in different sectors in New Jersey for an update on commercial real estate in the area. Daniel Loughlin is a managing principal in the Murray Hill, New Jersey, office of Staubach and specializes in tenant representation for pharmaceutical companies; Bob Morford, CCIM, is a principal with the Princeton, New Jersey, office of The Garibaldi Group; and Steven Winters is the director of the retail division of The Schultz Organization in Woodbridge, New Jersey.

NREB: New Jersey is an active area in real estate. What are a few of the trends in your sector over the past year?

Morford: The industrial market has done very well. Our corridor here in Exit 7A of the New Jersey Turnpike running up to Secaucus, New Jersey, is a very dynamic industrial market, and there’s a lot of activity, mostly build-to-suit of bigger boxes. It seems like everything these days is 1 million square feet, which chews up 80 or 100 acres, and we don’t have that much more inventory in New Jersey, so land prices have gone crazy.

Winters: Good things continue to happen in the lifestyle sector of retail in New Jersey. Several lifestyle centers are being developed and built, and there is a lot on the drawing board in different areas. It’s more about convenience. People want to stay away from the malls because they take too long, so the same mall stores are going in lifestyle centers.

Loughlin: Pharmaceutical companies continue to look for quality office space, quality R&D facilities and quality distribution, and they actually have decreased their space requirements. There’s a little bit of consolidation in the big pharma sector, although we have seen growth in the segment of emerging biotechs and mid-cap companies. There are a couple things driving that change in demand. One, the big pharmaceutical companies aren’t growing their marketing and promotional machine like before. From approximately 2000 to 2004, you saw an increase in office space being taken by major pharmaceutical companies who were growing their marketing and trying to develop market share — sending a lot of sales people out in the field to support their marketing objectives. In general, I think they’ve consolidated that practice a little bit.

NREB: What is driving activity in the Northeast?

Winters: I think it’s the consumer spending right now, the density and incomes of the population that now exist. You’re still seeing the residential market very strong in New Jersey because of the low mortgage rates. People are trading up because of the appreciation in the homes that they’ve owned over the last 10 years. Because of the residential growth, retailers want to be positioned better within the residential and they are going into newer centers or redeveloped centers.

NREB: Are there any industries that you expect to show increased demand in New Jersey?

Morford: Healthcare, the biosciences and biotech on the entry level. Venture capital firms are releasing more money into that sector, and the big pharmaceutical companies are still strong companies. Also, there’s healthcare from the standpoint of hospitals. A perfect example: here in Princeton, our municipal hospital, which has been around 80 years, is land-locked. In order to deliver state-of-the-art services, it needs to expand, so it needs to relocate. That will be a big point of ripples for our local market. When the hospital decides where it is going, a lot of office buildings will follow, including radiology centers and surgical centers. That will be a pretty strong market nationwide for the next couple of years as healthcare delivery becomes more techno-centric, if you will. A lot of these dated hospitals need to make big changes, and they basically need to rebuild the old ones.

NREB: What submarkets, corridors or sectors do you think show signs of positive growth through 2006?

Winters: With some of the larger products that are online, such as The Mills’ Xanadu, we’re going to have to wait and see how they play out to understand what is going to happen in that corridor. As you come further into Central New Jersey, where there is a lot of residential growth, we’ll have to see how that residential growth is going to affect the potential new retail markets.

Morford: Something to look at in a longer view, let’s say 5 to 8 years, are some of these armed forces base closings, the BRAC (Base Realignment and Closure) actions. Contingent on the sites, there’s a lot of potential for redevelopment on a mass scale.

Loughlin: A lot of the big pharmaceutical companies are making investments into emerging biotech companies. They’re hedging bets with their own internal research by investing in other people’s technology and research.

NREB: How does the investment market look in New Jersey?

Morford: There’s a lot of money chasing fewer and fewer deals for office space, and the marginal players are more willing to take properties and portfolios with warts on them, so to speak. We really need to see rises in net rents to start to justify some of these purchase prices. You’ve got to come out with a return on your investment, and as the debt side keeps rising, unless rents go up you’ll be upside down on the investment. The real estate investment trusts (REITs) are still very strong and flush with cash.

Winters: Supermarket-anchored centers are the darling of the retail investment world right now. These facilities are selling for high prices because buyers feel that the supermarket has longevity.

NREB: We’ve been seeing corporate sale/leaseback deals lately in the Northeast; have you seen an interest in that from your clients in New Jersey?

Morford: Because of the record-low cap rates, corporations can make the argument now more than ever that it’s a cheap way of raising capital. I think if they can negotiate flexible enough lease terms, they are less resistant to doing sale/leasebacks than they have been in the past. When a big corporation looks at that possibility, they first try to assess what is a core asset and what is a regular building. A core asset might be your headquarters. If you’re a research company like Johnson & Johnson or Bristol-Myers, you’re going to keep your lab space, because it’s expensive space to maintain, and it would be hard to put it into someone else’s hands. But pedestrian office space that you occupy that has been accumulated over the years, it makes a lot of sense to raise the money and get rid of non-core assets. There’s so much hungry money in the capital markets looking for those kinds of deals. Especially with good credit deals, you’re seeing some sub-6, close to 5 percent, cap rates.

NREB: Specific to the office market, what trends are you seeing in New Jersey?

Morford: Construction costs have risen dramatically in the last couple of years, so production cost is high. Steel and concrete are just getting gobbled up by China and India, so it’s made costs rise. The breaking point between buy or build is moving.

NREB: Overall, what do you think will do well in New Jersey this year?

Morford: The industrial is going to continue [to do well]. A lot of that is driven by the consumer confidence in the retail market. The companies that supply retailers like Linens ‘n Things and Wal-Mart are going to continue to do well and you’ll continue to see build-to-suits and warehouse requirements for those users.

Winters: Because of the lack of available land, you’re going to see activity on the development side of New Jersey retail. Major redevelopment plays and repositioning of existing centers is already happening, and because of anti-sprawl initiatives in the state, you’re seeing a lot of urban revitalization.

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