FEATURE ARTICLE, DECEMBER 2006

2007 BROKER OUTLOOK
Brokers from across the Northeast take a look back at 2006 and speculate on what to expect in 2007.

Northeast Real Estate Business asked brokers from across the Northeast region to contribute industry perspectives on the real estate market during the past year and what to expect in 2007. Despite a slight rise in interest rates in 2006 and concerns over the economy, the health of the commercial real estate market continues to thrive as product continues to come online and brokers continue to close transactions.

Brooklyn and Queens

Maltz

For example, the rezoning of an industrial area for residential development can take a property that has a value of $1 million to a value of $8 million. National builders, such as Toll Brothers, have changed their viewpoints and are now coming in to the city ready to build in urban areas where they might not have wanted to build before. Despite the overall slow down in the residential market, there is still a tremendous amount of interest in homes in New York City and the boroughs. As twenty-somethings move into the city and empty nesters are looking to downsize, the Queens and Brooklyn multifamily markets should hold together even if the national market cools.

Once residential development is in place in these once industrial areas, sectors such as retail follow close behind. However, typically retailers cannot compete price wise with residential developers, so retailers have to see the need before they will go into an area. For example, In Long Island City, Queens, along Vernon Boulevard and 2nd Street and 5th Street, where rezoning has taken place, there is approximately 2.5 million square feet to 3 million square feet of planned residential. However, no site has been sold to a shopping center or a supermarket yet. But, now there is a movement to assemble properties specifically for retail development. Once retailers see that there enough mass to support a center, they will begin to develop in the area.

In Brooklyn and Queens, office development is typically driven by the users or by a developer that has a tenant in place. The vacancy rate for Class A office space in these two boroughs generally sits at 5 percent. The United Nations Credit Union is building in Long Island City, Queens, and Citigroup is building in that area as well. In addition, Tishman Speyer is looking to build a 600,000-square-foot office building, but they do not have a tenant yet.

In Brooklyn and Queens, the ambience of an area is important. If an industrial area takes on a residential character than an office building becomes more attractive. The vast price differential between office space in Queens and Midtown Manhattan will also be a catalyst for further development. However, the availability of Downtown office space in Manhattan may slow down the Brooklyn office market. Overall, build-to-suit office development is expected to continue in the boroughs in 2007, but not at the same rate as residential development.

There is still a massive industrial and commercial property base in Queens and Brooklyn. However, the character of that commercial base has been shifting to mostly warehousing. Manufacturing facilities that remain in the areas are predominantly food, textiles and printing. The removal of industrial properties from the market due to residential conversion has rippled through the economy as building and construction supply companies are expanding to meet the needs of this new construction.

This has created a lot of internal demand while at the same time removed quite a bit of industrial availability from the market and pushed demand further east. This movement has caused a rising occupancy rate in the industrial areas of eastern Queens and Brooklyn; thus, demand has picked up and prices have gone up in areas that were once considered lesser industrial destinations. Generally, for industrial properties under 100,000 square feet, the availability rate is 8 percent, which is an historically low rate.

Hotel development sites are the latest entry into the Queens and Brooklyn markets. Hotel developers are finding that it is too expensive to expand in Manhattan, but in Brooklyn or Queens, they are able to find viable sites with  close subway access that are affordable and in demand by tourists.

Flushing/College Point has become one of the most exciting submarkets in Queens. It has been dominated by  firms that have been very dynamic in the marketplace and have been aggressively acquiring real estate. This area is a key example of how markets regenerate as they become affordable to new immigrant groups just entering the market.

In 2007, achievable prices for industrial, commercial and investment properties will begin to plateau as the economy cools as the result of the residential market stabilizing. The commercial real estate industry is also anticipating that mortgage-refinancing dollars will not be as plentiful in 2007. Looking at the past 5 years, excess mortgage money helped drive a great portion of the economy, and while the metro New York real estate market is expected to remain healthy, the number of real estate transactions will slow down.

However, in 2007, the investment sales market will continue to be very energetic because financing will continue to be  creative with different types of mezzanine loan products available to the investor. Lenders are getting more and more sophisticated, and there is still a lot of money out there. In addition, there are few investment choices that can beat inflation. For example, if the inflation rate is running at 5 percent, you have to earn an 8 percent return before taxes just to keep your money from disappearing. Therefore, because of continued depreciation of our currency, real estate will continue to be in demand. Well-located real estate will be the only investment that keeps pace with inflation.

— John Maltz, SIOR, president, Greiner-Maltz

New York City Office

The 2006 office market in Manhattan, New York City, experienced broad based demand across many lines of business, including the traditional growth engines in New York, such as Wall Street, media and law. These factors pushed the vacancy rate for Class A space down to approximately 6.5 percent while average asking rents are up almost 20 percent year-to-date, exceeding $60 per square foot. 

The only new office tower to come online during the year was 7 World Trade Center, developed by Larry Silverstein, and the first new project to be rebuilt on the former World Trade Center site. This project is approximately 60 percent committed with a number of major firms negotiating for the available space. Moody’s has leased  approximately 600,000 square feet, and other leases by Darby & Darby, a law firm relocating from Midtown in search of lower rent for Class A space, Ameriprise and several single-floor users have been completed. 

In Midtown, three office projects are in development including the new New York Times Building at 620 Eighth Avenue, which is being developed by Bruce Ratner; Bank of America’s future headquarters at One Bryant Park, which is being built by the Durst Family; and Equity Office Properties’ redevelopment of the former Verizon Building at 1095 Avenue of the Americas. 

While these projects will not be online for occupancy until late 2007 at the earliest, 620 Eighth Avenue is substantially committed as of this date to Legg Mason, Seyforth Shaw, Osler Harcourt, as well as The New York Times, which will occupy the entire base of the building. 

One Bryant Park, which only has 150,000 square feet remaining, will be principally occupied by Bank of America and will be the future New York offices of Akin Gump.

At 1095 Avenue of the Americas, which will be renovated by Equity Office, MetLife is in active negotiations to purchase a condominium interest of approximately 600,000 square feet. Goodwin Proctor is in negotiations for approximately 150,000 square feet, and the law firm Deckert has already committed to 250,000 square feet, which in addition to Verizon’s remaining floors, will leave just three base floors remaining.

All of these firms will give up significant blocks when their new offices are ready, but each transaction represents a commitment for more space than they formerly occupied. There is a continued “flight to quality” as prices and occupancy have reached the highest point in Manhattan since 2000. While that market peak was driven in large part by the Internet boom and dropped by the subsequent bust, the current trends indicate growth across all business sectors and therefore suggest more sustainability. Another trend on the horizon is “warehousing space.” Tenants are beginning to commit to more space than they presently need as they foresee a lack of new development until the World Trade Center site is fully rebuilt Downtown, which is not slated for completion until 2012. Tenants are also waiting until the West Side is developed in Midtown, which will take even longer.

As less space is available in the primary business areas of Manhattan, secondary markets, such as Hudson Square, Chelsea and the Flatiron District are also witnessing a rise in rents, a trend that is expected to continue during 2007.

— Jim Frederick, executive managing director, Colliers ABR

New York City Retail

Breslin

With vacancy rates for 2006 in New York City hitting all-time lows, retailers are renewing their leases and holding onto their space. Quality retail space in this city never stays on the market for long, but what little new space becomes available today gets snapped up in the blink of an eye.   

Small to mid-sized tenants make up our bread and butter and are what keeps the retail environment in the city so exhilarating. While big box stores haven’t yet taken over Manhattan, large retailers like Best Buy stores are taking new spaces throughout the city. 

In addition to Best Buy’s expansion and small and mid-sized retail leasing activity keeping the market healthy, national and international retailers also are driving the market. Although New York’s leasing costs are high compared to other major cities in the U.S., dollars earned per square foot more than offset the high rents. International retailers realize the enormous sales potential and are expanding their operations here.   

The cost of merchandise in the U.S. will also play a role in the market for international retailers. The lower cost of goods in the States versus Japan, for example, greatly increases the potential for success in New York, and the rest of the country, if foreigners choose to expand. Next year will bring even more Asian and European retailers to the city.  For example, foreign clothing retailers such as the inexpensive Japanese retailer Uniqlo are moving into the city in a very big way, soon and others will likely follow. 

The sizzling retail market is not unique to Manhattan. New York’s outer boroughs are hotter than ever right now, and looking forward to 2007, that momentum is expected to continue. Brooklyn, the Bronx, Queens, Staten Island — they are all experiencing a flurry of retail leasing activity that shows no signs of slowing.  

Corner locations are a particularly hot property type in the boroughs.  Banks in particular want to grab up as much prime corner space as they can in every part of the city and they are willing to pay $100 per square foot more than any other retailer. That kind of demand and tenants who are willing to pay top dollar for prime space will continue to put upward pressure on rents in the outer boroughs. 

To get any hotter in 2007, new space must hit the market. Luckily, there are exciting projects under construction that will create new retail space for the national and international tenants who want to establish or increase their presence in the five boroughs.

Urban areas are very strong with projects such as Bruce Ratner’s on 116th Street and the FDR Drive in Manhattan, which will serve as a convenient place for local residents to shop.  Atlas Park, known as New York’s first lifestyle retail center, is transforming the Glendale neighborhood in Queens as a mix of shops and restaurants are opening their doors there.

National service and apparel chains are growing at an unbelievable pace, international retailers are entering the country with locations in New York, and projects are going up all over the city to increase the retail options for its residents — that’s what we’ve seen in 2006 and can expect to see more of in the New Year. The New York City retail market is a highly competitive, exciting market to watch and in the shopping capital of the world, one thing is for certain:  the retail market can’t go anywhere but up. 

— Patrick Breslin, president of global retail, GVA Williams

Boston Office

Lucas

Overall, office market fundamentals are strengthening in Boston. Vacancy rates have plummeted 330 basis points metro-wide to a current rate of 14.9 percent. Effective rental rates have increased 3 percent on a year-over-year basis to $25.52 per square foot.

One of the largest office buildings currently underway in Boston is the Center for Life Science Boston. Lyme Properties, LLC began construction on the 703,000-square foot project in June. Slated for delivery in 2007, the property is located in the thriving Longwood medical and academic area. With Beth Israel Deaconess as its anchor (leasing 360,000 square feet), this project demonstrates that this area continues to be a hot spot for health research.

As for highest-profile sales, 125 High Street marks one of the biggest transactions of the second quarter. The approximately1.5 million-square-foot office tower, located just a block away from the heart of Boston’s financial district, was acquired by Tishman Speyer from Jamestown.

Boston’s office leasing market continues to make strides. By year-end, positive net absorption of 968,000 square feet is anticipated in the metro area. The professional, scientific and technical services sector accounts for a significant share, 28 percent, of the office-using employment base in Boston. New office-job creation will depend on this sector, which will create 35.8 percent of the new jobs in the city. This sector includes law firms, which have been actively leasing space, particularly in the downtown market . At the end of the second quarter of 2005, vacancy stood at 18.2 percent, but plummeted 330 basis points to 14.9 percent at the end of second quarter 2006.

On a year-over-year basis, the median sales price per square foot for office product in Boston increased 4.9 percent to $160.70 per square foot. Currently, there is a mix of active buyers vying for Boston office properties. Nearly 24 percent of these buyers are institutional investors, while 22 percent are private, out-of-state buyers and 16 percent of the buyers are foreign entities. Private investors from Massachusetts are actively selling off properties. In fact, private investors based in Massachusetts sold 34 percent of the assets on the market between second quarter 2005 and second quarter 2006.

The national economy slowed during the second quarter, with real GDP growth coming in at a 2.5 percent. While this slowdown was anticipated by economists, it was also accompanied by inflationary growth, which will impact every city in the United States, including Boston.

Job growth is also a significant factor contributing to the health of the office market in Boston. From June 2005 through June 2006, there were 24,500 new jobs created in Boston, a job growth rate of 0.8 percent. This marks an improvement over last year of just 0.1 percent, but is significantly better than the 5-year average from 2001 to 2005, which saw a drop in employment of 1 percent. Improvement in job growth will have a slight but positive impact on office market conditions in Boston, especially in the downtown market.

Law firms have been actively leasing space and in some cases, expanding their presence in the CBD. Conditions are expected to improve in the CBD as we move into 2007, but with employment skewed towards high value-add functions requiring fewer workers, the rebound will not be dramatic.

— Gary R. Lucas, regional manager and managing director, Marcus & Millichap

New Jersey Multifamily

Holland

Interest rates are probably the most important factor in keeping the investment real estate market hot. Due to the lower rates and the strength of the market, many longtime owners are selling for the first time and exchanging into triple net lease properties. Often, owners complete 1031 exchanges on properties that require less ownership and management responsibilities.

If rates rise substantially, it will definitely affect the amount of sales activity and prices of properties. The rules of supply and demand directly affect prices, and right now inventories are high. In order for housing in New Jersey to improve, the market needs to absorb some of what has been built. Once inventory shrinks, prices will firm up.

If interest rates continue to stay where they are, 2007 should be similar to 2006. Properties in a good location will still trade at premium prices while marginal properties may have to offer better returns in order to sell. However, the demand for multifamily properties is anticipated to continue in 2007. There has been a record amount of development in 2006, but moving into 2007, condo development may slow due to slow sales and the rise in inventory, which may force some condo developers to rent out units if sales continue to slow. Investment sales will continue at a brisk pace, but as the stock market increases, investment properties may have to offer better returns. We have seen 5 to 6 percent cap rates, but as rates rise, returns on investments may also have to be better, perhaps 7 percent or higher.

The continued activity in New York City is helping drive the multifamily market in New Jersey. Population and job growth keep the New York City market strong, and the New Jersey region along the Hudson continues to experience the same growth as New York City. Hudson County appears to be one of the fastest growing submarkets in New Jersey as more and more multifamily properties are being constructed along the waterfront. These developments offer an alternative to high prices in New York City, but still allow residents to enjoy convenience and close proximity to New York City.

— Robert Holland, senior vice president and co-managing director, The Kislak Company

New Jersey Retail

Lanyard

National retailers are still aggressively seeking locations in New Jersey, limiting available retail store space. Vacancy rates have remained low as vacant space fills up with new retailers looking to enter the market or other retailers looking to expand their presence.

Many new players and concepts are entering the New Jersey market, while others continue to expand. For example ,Wegmans, Whole Foods, Wild Oats, Raymour & Flanigan, Loehman's Shoes, Golfsmith, Golf Galaxy, Red Robin, Applebee’s, Fuddruckers, UPS stores, Destination Maternity, H&R Block and many banks are seeking locations. Urban retail has also sparked leasing activity, especially in Newark, East Orange, Trenton and Paterson. Certain big box stores such as Office Max and Treasure Island announced closings this past year, which created a flurry of activity for their spaces. Treasure Island closed its chain of 16 stores, putting more than 350,000 square feet of space on the market, and Office Max closed 10 locations, putting more than 200,000 square feet on the market.

However, once space becomes available, it's quickly absorbed by a new tenant. Major retailers such as Wal-Mart, Lowe's, The Home Depot, TJ Maxx, Marshalls, Century 21 Department Store, Kohl’s, Target, Christmas Tree Shops, PetSmart, LAFitness, Bob’s Discount Furniture, Homegoods, Staples, Golfsmith and Golf Galaxy have all recently leased space in New Jersey.

There are also several retail projects ranging from 30,000 to 200,000 square feet that are either under construction or have recently opened. These developments are taking place in Riverdale, Clifton, Secaucus, Old Bridge, Paterson, Paramus, East Rutherford, Newark, North Brunswick, Bridgewater, East Brunswick, Trenton, Freehold, Holmdel, Brick, Toms River and Manahawkin.

Paramus continues to be one of the best retail markets in the country owing to its location at the crossroads of several New Jersey highways, its commuter traffic to and from Manhattan along with its high household incomes. Paramus annually records more than $5 billion in retail sales.

Route 23 running from Wayne through Butler is another growing submarket because of its close proximity to Interstate 287 and several new housing developments. Wal-Mart, Sports Authority, Linens ‘N Things, Borders, Pier 1, Chili’s, Target and New York Sports have either opened or are slated to open in this corridor.

Another burgeoning submarket in New Jersey is along Route 3 in Clifton, which has great demographics and 7- day-a-week traffic that lures Bergen County customers where stores are closed on Sundays by law. Bed Bath & Beyond, Michaels, Uno Restaurants, Pier 1, Rockaway Bedding, Vitamin Shoppe, Panera Bread and Five Below are slated to open in Riverfront Center, which is located directly across from Clifton Commons Shopping Center. Nearby, a new lifestyle center is being planned adjacent to the T.G.I. Friday’s.

Supermarket anchored/neighborhood centers continue to be one of the most popular and most profitable property types in New Jersey retail. Supermarkets throughout New Jersey have been taking a “fresh” approach on shopping. Organic markets such as Whole Foods continue to expand while Wild Oats, which has stores in south Jersey, is looking to penetrate the northern and central part of the state. Specialty stores such as Trader Joes, Garden of Eden, The Market Basket and many independents have been thriving in New Jersey during the past few years.

The more familiar New Jersey supermarkets such as Shop Rite, Stop & Shop and Pathmark continue to look for bigger stores to replace their smaller locations. A&P is focusing on two concepts. They are updating and converting stores to their new A&P Fresh Market concept in middle to upscale income areas while the new Basics stores are targeted to the lower income consumer. Other food markets looking to enter or expand in the state include The Fresh Market, which is based in the Southeast, and Aldi Markets, which caters to the middle to lower income consumer.

Lifestyle centers are another hot property type in the New Jersey market as shoppers have begun to prefer shopping at high-end quality stores in their neighborhood rather than traditional malls. Stanbery Development is slated to deliver three new lifestyle centers in Old Bridge, North Brunswick and Flemington in late 2007 or early 2008. Other proposed centers are under consideration in Clifton, Freehold, Manalapan, Mahwah and Metuchen.

Restaurant sites continue to be extremely competitive due to the new concepts coming into New Jersey and the continued expansion of existing restaurateurs. For example, Red Robin, Cheeseburger in Paradise, Pizzeria Uno, Famous Daves, Fuddruckers and Applebees are all expanding.

Three projects currently under development will significantly impact the market. Vornado Realty Trust is completing a multi million-dollar redevelopment of the Bergen Mall in Paramus. The repositioned mall, now named Bergen Town Center, will be anchored by Whole Foods, Target and Century 21 Department Store, which has already opened.

Xanadu, a bold new concept in retail and entertainment in Secaucus, has been in the news as of late because of the financial condition of the Mills Corporation and their inability to bring the project to fruition. Now that Colony Capital has stepped in, the future looks clearer. With great highway accessibility, proximity to New York City and strong demographics, this project has the capability of being a major draw.

An area that was once the site of the late 1960s Newark riots is now the home of the Home Depot Shopping Center on Springfield Avenue in Newark. Resurgence in the area and the development of new housing has resulted in the need for retail development. The Home Depot, Applebee’s and Wendy’s have recently opened at the site and are experiencing very strong sales. A 20,000-square-foot addition will be the final stage of this center. The project has sparked numerous other developments in Newark and the recent change in city government will only add to the strong support for more developments in the city.

Overall, the retail outlook for New Jersey looks brighter than ever.

— Chuck Lanyard, principal and director of brokerage services, The Goldstein Group

Central New Jersey Industrial

As of the third quarter 2006, the net absorption for industrial properties in central New Jersey was approximately 1.09 million square feet, which is 966,286 square feet of net absorption year-to-date. Leasing activity is moderate with several major tenants moving into the central New Jersey area.

G3 Garments, which moved from Secaucus in northern New Jersey, signed a 5-year lease for 300,000 square feet of space off of Exit 8A of the New Jersey Turnpike. Cal Cartage, a California-based import trucking, warehousing, deconsolidation and distribution company, which opened a new location in New Jersey off of Exit 12 of the New Jersey Turnpike, signed a 5-year lease for 267,000 square feet. Parlux moved from Monmouth County, New Jersey, to Woodbridge, signing a 5-year lease for 198,000 square feet.

In addition, several companies already in the central New Jersey area expanded into new spaces in 2006. Synnex signed a 5-year lease and doubled its size taking 228,000 square feet. New Egg tripled its space this year with a 5-year lease term for 374,000 square feet. Williams Sonoma also expanded with a 5-year lease term for 418,300 square feet.

The majority of the new industrial space on the market in central New Jersey is from new construction deliveries. The area off Exit 8A of the New Jersey Turnpike is a submarket that has expanded significantly because of the more than 2.28 million square feet of new construction delivered to the market so far this year. Plus, there is an additional 11.6 million square feet of construction being proposed for the area. IDI is building a 1.35 million-square-foot distribution building in the Exit 8A submarket at Middlesex Center Boulevard at Davidson Mill Road in South Brunswick. This property is currently up for lease and delivery is anticipated for March 2007.

The area surrounding Exit 12 of the New Jersey Turnpike is another viable industrial submarket. In 2006, 341,500 square feet of new construction was delivered to the area. There is also more than 1.26 million square feet presently under construction. In the Exit 12 submarket, Panattoni is developing a 1.06 million-square-foot warehouse building at Industrial Avenue at Salt Meadow Road in Carteret. The building is slated for completion in August 2007 and is currently on the market for lease.

There are several factors that have been driving the market’s current activity. So far in 2006, more than 3.82 million square feet of new construction has been delivered, and approximately 2.51 million square feet of industrial space is presently under construction. In addition, another 17.94 million square feet of new construction has been proposed. Growth in the retail sector throughout all of New Jersey is another factor driving market activity. The expansion of the ports and increased importing into Port Elizabeth/Newark have also had a positive impact on industrial activity in central New Jersey.

In order for the industrial sector to improve, the vacant product already on the market needs to be absorbed before more new product is developed. Vacancy rates have been stable, causing rents to remain flat, and continued development has created many viable opportunities for central New Jersey tenants. Due to the current moderate leasing activity, rising construction costs and the increased cost of land in New Jersey, developers will have to be cautious in building on speculation. As a result, a significant amount of activity is predicted on the built-to-suit front in 2007.

 — Jonathan B. Tesser, SIOR, senior vice  president and manager, Colliers Houston & Co.

Northern New Jersey Office

The office market in Morris County, New Jersey, has exhibited slow,  progress in 2006. Net absorption has wavered between a negative and positive 1 to 2 percent during the last year or more. However, reports from landlords’ agents suggest that the third and fourth quarters of 2006 will likely show marked improvement.

Leasing activity in Morris County continues to remain strong. Travelport, a spin off of the former Cendant Corporation, signed a 110,000-square-foot lease at Morris Corporate Center III, located at 400 Interpace Parkway in Parsippany.

Edwards Angell Palmer & Dodge LLP signed a long-term lease for 35,000 square feet at 1 Giralda Farms in Madison. Starting at $37 per square foot gross, this represents one of the highest rental rates and one of the finest quality opportunities in the area. In addition, after years of eliminating jobs, industry sources suggest that the BASF Corporation has confirmed that they will be moving more employees into Morris County as a result of the recent acquisition of Engelhard.

Blocks of 30,000 square feet or more of Class A space are becoming rare along the 287 corridor, and tenants are eagerly awaiting imminent deliveries of new construction and renovation projects in major submarkets of northern New Jersey. The Gale Company is constructing 175,000 square feet at the Center of Morris County in Parsippany, and Advance is renovating 320,000 square feet of 445 South Street near Morristown.

Florham Park

The overall Florham Park office market consists of more than 4 million square feet of Class A and B space. The vacancy rate has averaged about 14 percent during the past year. This fact reflects quarterly net absorption rates of less than 3 percent positive or negative throughout the period. The Florham Park market for Class A and B office space can be divided into two distinct geographical segments. 

One market group, which is considered to be the more interior of the two, is comprised of several office properties near Downtown Florham Park and those to the east, near the border of Livingston. Columbia Turnpike, Vreeland Road, and Hanover Road are among the addresses included in this group. There are several properties that are currently about 50 percent vacant in this area, and three large properties that are completely vacant, including 140,000 square feet at 12 Vreeland Road,  133,000 square feet at 15 Vreeland Road , and 55,000 square feet at 83 Hanover Road. 

A second portion consists of several properties along Park Avenue near Route 24. Situated close to the borders of Morris Township and Madison Boro, properties in this area are closely associated with these markets. The overall amount of space is just under 2.25 million square feet, of which, only about 200,000 square feet is vacant, two-thirds of which is being offered for sublease. Due to its desirability, many units are currently subject to active negotiations.

Parsippany

Strategically located at the intersection of Interstates 80 and 287, Parsippany is one of the largest suburban office markets in New Jersey, offering more than 12 million square feet of existing Class A and B office space. Suffering from vacancy rates hovering around 20 percent at the beginning of 2002, the market has improved very slowly over the past 4 years. The current vacancy rate stands at around 15 percent; however, much of the occupied space is being actively marketed as many leases are approaching the end of their term. As a result, the amount of available space is still nearly 20 percent of the market, at about 2.4 million square feet.

As indicated, absorption in this market has been relatively mild during the past 2 years, with a few quarters of negative net absorption offsetting positive quarters. A large portion of the Class A office space in Parsippany is located on the Mack-Cali Business Campus, which is bordered by I-287, U.S. Highway 202 and New Jersey Route 10. Overall, Mack-Cali controls about 2 million square feet in Parsippany alone. A second concentration of Class A space is located on Cherry Hill Road and along Interpace Parkway, between I-80 and U.S. Highway 46. Prominent owners here are Ohio State Teachers Retirement, Reckson Associates and TIAA.

In order for the market to improve further in 2007, the state needs to shed its image as an environment that is uninviting to business. The new governor has begun the rhetorical process, but tangible changes in the taxation and  the regulatory climate are required for further change. In addition, interest rates may top out in 2007, which will help reduce uncertainty and lift consumer confidence.

In 2007, the market will begin to see more capital improvement programs that include a greater proportion of green building systems. High energy costs, increased operating expenses and sustained government subsidies for these programs will remain in place to encourage this activity.

Also in 2007, firms will begin to seek expense-side improvements in their bottom line as office population density continues to increase. This trend will eventually bring about a disparity among standard parking ratios at suburban office buildings, tenant’s parking requirements and local land use regulations.

— Robert D. Rencarge, senior advisor, CRESA Partners

Philadelphia Office

Walters

Philadelphia is not experiencing significant inbound business from corporations outside the marketplace, but substantial growth and improvement within the region exists. As the market improves, there is a flight to quality as companies take advantage of the tenant’s market. They are moving into higher class, primarily Class A and AA buildings, with more amenities and services — all with attractive rental rates.

This brisk leasing activity, coupled with existing market tenants growing, predict a beginning 2007-vacancy rate drop to the 10 to 11 percent range. The 2007 absorption rate Downtown should range between 800,000 to 1 million square feet net absorption.

This, in tandem with a positive net absorption rate for Philadelphia in 2006, allows for a reasonable rent growth cycle.

Previous concerns over the magnitude of the new 1.2 million-square-foot Comcast office tower have abated to some degree. Worries of negatively affecting the vacancy rates and occupancy levels of other area office buildings are offset by the significant growth and expansion of the Comcast Corporation. 

The construction of the Cira Centre at 2929 Arch Street is effectively linking University City and Center City. During the next 3 to 5 years, office building construction  around the Cira Centre will be added and further strengthen the link between the two areas. Already a vibrant sub-market in Philadelphia, the continued development at Cira Centre promises to increase the growth of the surrounding universities and hospitals in University City.

Recognizing the fact that rental rates in University City are compressed due to the tightening market, companies in University City are taking a closer look at the market rents in Center City. This kind of movement is unprecedented in Philadelphia. At the same time, continued growth and expansion from University Center firms and the construction of new buildings will ensure that the demand will continue in University City. This market promises to remain strong with significant rent growth and sustained competition for available space.

Overall, the Downtown market is on an upswing from previous years and continued growth is anticipated with positive results during the next several years.

Philadelphia’s current market continues to be driven by capital. As cap rates remain aggressive, all four sectors of commercial real estate continue to experience excellent play with properties coming on the market with multiple offers from qualified purchasers. In 2007, a noticeable increase in rental rates are anticipated as the cost of construction continues to impact the market in Philadelphia and throughout the country. To combat rising costs, tenants may begin to share in the cost of office space build outs.

— Bob Walters, senior managing director, CB Richard Ellis, Philadelphia

Northeast Retail Investment Perspective

Golub

The retail market remains tight here in the Northeast as population growth, low unemployment and moderate wage increases help fuel the economy. High barriers to entry and increased construction costs have continued to hinder new development, forcing investors to look elsewhere in the country. The local Westchester County, New York, market has been a strong performer and is still underserved; however, we may expect to see a rise in vacancy in 2007. Factors such as increased energy prices, inflation, technological advances and below-market lease expirations will have an impact on 2007’s occupancy levels. A noteworthy example of this is Barnes & Noble’s notice last month that it will not be renewing its 16,200-square-foot lease on Central Avenue in Hartsdale, New York, the primary retail corridor in Westchester County. 

Wal-Mart opened a 179,731-square-foot new urban platform in White Plains, New York.

With the Dow Jones Industrial Average at an all-time high, investors may look to position equity in other businesses outside of real estate, since the hype of appreciation may be something of the past and lenders tighten on debt placement. Cap rates may rise slightly in 2007 and price per square foot levels are expected to flatten. However, the Northeast will remain one of the most attractive real estate investments in the country.

— Neil Golub, associate, Sperry Van Ness

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