FEATURE ARTICLE, DECEMBER 2005

BROKER ROUNDUP OF 2005
Brokers talk about the market at the close of 2005.
Interviews by Nicole Thompson

Northeast Real Estate Business recently talked to several brokers about commercial real estate activity in their sector and location and found a positive outlook on the market. NREB talked to the following brokers: Frank Doyle, who works in Midtown Manhattan for Jones Lang LaSalle; Barbara Gross of Sheldon Gross Realty in New Jersey; Jonathan Glick, who works in the industrial market in New Jersey for Sheldon Gross Realty; and Debbie Frank, who specializes in Midtown Manhattan leasing for Monday Properties.

NREB: How has the in you area and sector performing so far in 2005?

D. Frank: So far, office is pretty good in Midtown Manhattan. It's now in the fourth quarter, and for the first time in a long time, we're seeing a sub-10 percent vacancy rate, which is indicative of a strong market, neither overly landlord or tenant friendly, but a very tight, strong market.

Doyle: The office market in New York City has performed very well. There was a real push of activity in the first quarter, which is basically follow-up deals from the year before, then it got slow in the summer, and I would say that since Labor Day weekend, I've been busier than I've ever been.

Gross: We've certainly seen a pickup in   the office market, there's no doubt about that. I think there's still some trepidation out there, and I think with the obvious issues like inflation, and rising interest rates, and Katrina and Rita, all those things have people wondering where is that going to shake out for them.

NREB: What factors have been driving activity?

D. Frank: I think the fact that there has been a positive absorption and that large blocks of space have been leased has driven the market. While large blocks of space are coming on the market, they're also being absorbed at a quick pace.

Doyle: I think a lot of people were sitting on the sidelines for a while, waiting, waiting, waiting, and the economy continues to grow. I think people have refused to accept the fact that we're in an expansion mode, with the economy, and people are just growing. You see bigger commercial banks still continuing to hire, for instance, and so there's a lot of activity.

Gross: I think that the sales market continues to stay strong because, despite the rates going up, they're still low relative to where they were 5, 10, 30 years ago. So I think that's still an attractive opportunity to a lot of people, especially users. I think the investor market will slow down a little. While leasing numbers have been softer, rental rates are going up, vacancy rates are going down, and the pendulum is shifting a little bit where the kind of concessions that tenants were getting spoiled by for a few years are starting to tighten up again.

NREB: what industries are you seeing most interested in purchasing these properties or seeking space?

Glick: Overall, I would say anything that caters to the homeowner. Anything from doorknobs to nails used to build homes to fasteners for the construction industry, and then the hard goods themselves. So anything that ends up with a consumer, it seems, comes through New Jersey. We had more raw materials coming through for the manufacturers   20 years ago, but we are definitely a warehouse-driven market now. Every year, the trend is more to warehouse. Our warehouses are turning more into distribution depots for goods that are already made, so really, we only need very few low-skilled laborers, which we have more than enough of in our state. To really manufacture something in this state, would cost you an arm and a leg, with what it would cost for the real estate, as well as the cost to keep the labor going.

Doyle: I'm continuing to see the financial services, especially in the smaller sizes, in particular the high-end space. The good buildings are continuing to lease, so to find much good space, for example, like Park Avenue, Lexington Avenue, Citicorp Center, 320 Park Ave, there's always demand for good space.

Gross: I think you'll almost see that market by market, depending on the activity. Military installations that are shutting down or remaining open will continue to affect those micromarkets.

D. Frank: It's interesting, usually law firms are the one that are leading the pace of activity in Midtown, and from what I've read and what I've seen, it's really financial users that are really gobbling up the largest space. It seems like financial users are pushing quickest in the market.

NREB: Are you seeing more interest in urban or suburban space?

Glick: I definitely think it's more suburban, but I think the smart growth is urban. You even see some of the big players in our business already making investment into the urban settings. With the cost of doing business in New Jersey, the density of the market and all these things going on with energy, I think the good, well-developed cities will be able to offer a lot more. People want an easier life, and I don't think getting into your car every minute to go somewhere is an easier life. I don't know when it will start happening, but I still definitely think there will be a big shift into well-developed city hubs — you just can't keep sprawling.

NREB: What property types are doing well?

Doyle: I think everyone in the New York office market is concerned about security, also quality amenities, like concierge-type amenities for tenants. Power is key now to a lot of these groups — hedge funds have high demand for electricity, emergency generators, and the ability to offer that ability to tenants is big.

D. Frank: I think the user type right now is in the 30,000- to 60,000-square-foot market range, and that seems to be going rather quickly.

NREB: Are there any trends across the region that you're seeing in your sector?

Glick: In the industrial market, the trend continues to be bigger boxes and higher ceilings. To maximize efficiencies, the large companies want the biggest building, and it's hard to get a big, big building. I don't know how many there are, but this year, I'm really startled by how many million-square-foot buildings there actually are. There weren't that many 5 years ago. Everyone is pushing the efficiencies of their buildings to the max, whether it be a computer system that's on your forklift for inventory management or what have you. Some companies are realizing that the ceiling height isn't for them, because it takes longer to get their product up and down, so they actually calculate whether or not it pays for them to go that high, and some industries, it's perfect for them. So they're always trying to get that efficiency of their warehouse maximized.

Gross: Southern Jersey, I think we're certainly seeing business booming down there, and a lot of companies looking to expand. I think certainly along the New Jersey Turnpike, from Exit 8A down, you're certainly seeing these big boxes and the distribution centers thriving, and I think that will continue. In terms of the more mature markets, I think you're just seeing continually increasing growth on a more steady basis. Retail is thriving, the office is picking up, the industrial certainly is also, we're seeing nice sales prices, so I can't say that there's a sector that looks soft per se, or one that looks extra strong. At this moment in time, as the economy strengthens, I think each sector can benefit from it.

NREB: Are there any trends in leasing as far as rental rates and tenant improvements?

Glick: I think in the last year to 2 years, industrial leasing in New Jersey has been flat. The rates in my neighborhood are pretty much still the same, but I think the incentives are actually less. I could tell you, 2 years ago, very few landlords were asking for yearly increases over their base rent, and now I think everyone's asking for it. So I would say it's a little firmer.

D. Frank: One of the only trends I see is the fact that a lot of people are doing average rental rates, not necessarily bumps, but just hitting the average, and riding that out for the term.

Doyle: Believe it or not, we're starting to see concession packages start to come down for New York City office. Rents are rising. Typically what you'll see is concession packages tightening, and then the rents rise, but it seems like we're seeing the rents go up simultaneously with concessions tightening, which is a little bit rare in my experience.

NREB: From the owner's viewpoint, what can they do to ensure that their tenants are happy and that they'll renew?

Glick: Service. Service. Service. Take care of your properties, pay attention to them as a tenant. Don't think that just because it's a gross lease, or it's a triple-net lease that they don't have to pay attention to their real estate.

NREB: What sales trends are you seeing?

Glick: As far as industrial sales go, we find that the smaller buildings, using a price range of $1 million to $2.5 million, it's very active. There's many customers for that size purchase. Money is still cheap, interest rates haven't spiked up, they're creeping up, but there's still a lot of money out there that can be had cheaply.

NREB: Are there any submarkets or corridors that people should be keeping an eye on for the near future?

Glick: I think that there are two untapped industrial markets that are second-tier markets, they're not going to be competing with the Turnpike corridor. The corridors that I think have lots of room for development are Monmouth County and I also think that out the 78 corridor, Somerset and Hunterdon counties, is still an area that's going to see growth.

Doyle: It's quality space. On Park Avenue, we're sub-10 percent vacancy, so the quality space is going to continue to lease, and it's going to lease at rates that are on a continuing incline.

Frank: I see within Midtown that the Grand Central submarket and the Lexington Avenue submarket are doing very well.

NREB: For your market, what will be the biggest economic factors that will affect commercial real estate in the coming months?

Doyle: Wall Street performance always has and always will drive the Midtown Manhattan market and the Downtown market.

Gross: I think the energy costs are going to be important, and I certainly think interest rates will have an effect. I think the Katrina and Rita effects are certainly going to influence building costs, because I think as building materials are shipped down there, and we have supply shortages, even on a national basis, I think it is going to start to creep into our markets as well.

D. Frank: Obviously job growth drives the real estate market in terms of demand, and so job growth will be essential in order to spur the 2006 market.


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