MARKET HIGHLIGHT, JANUARY 2008

NEW JERSEY MARKET HIGHLIGHTS

New Jersey Office/Industrial Market

The industrial and office markets in New Jersey appear to be healthy and stable in a climate that is showing signs of stress. Large lease transactions  in both sectors have given owners and developers optimism despite the media’s attention to the sub-prime meltdown.

The Northern New Jersey industrial market vacancy rates have increased slightly to 8 percent in the third quarter of 2007, compared to 7.8 percent for the first quarter of 2006. There is a strong demand for very large warehouses offering tenants 100,000 square feet of space or more and good access to Port Newark and Elizabeth.  There is evidence of a trend emerging in which developers are buying older industrial buildings ranging from 60,000  to 100,000 square feet and dividing them into smaller units of 5,000 to 10,000 square feet. These smaller units are being marketed as condos for prices as high as $160 to $200 per square foot.

Space near Port Newark and Elizabeth is set at a more premium price. Due to this dearth of vacant land, the majority of new industrial development is occurring south of Exit 8A, primarily at exits 5 through 7A on the New Jersey Turnpike. Developers have brought to market the majority of industrial space that the market can absorb in the 8A industrial market. South of Exit 8A, large blocks of land are being carved up for industrial parks that will contain big boxes of 600,000 square feet and above with 32-foot ceiling heights. Development within this submarket will be delivering product to the marketplace for the next 5 years. AMB Property Corporation is presently one of the most active developers of industrial properties in Northern New Jersey with approximately five active projects totaling 11.1 million square feet in the works.

On the office side, as of the third quarter of 2007, vacancy rates in Northern New Jersey have stabilized at 12.5 percent, which is close to last year’s rate of 12.9 percent. There is evidence of a slight decrease in average leasing rates, which are hovering around $25.62 per square foot down slightly from $26.10 per square foot a year ago. One area to watch in 2008 will be the financial services companies that have been adversely affected by the sub-prime mortgage meltdown and what affect that will have on vacancy rates.

Although there are various indications on how the office real estate market is fairing from region to region across the state, the Morris County market remains a strong draw for major corporations and developers.  Over the last 12 months there has been significant activity in signed office deals in excess of 100,000 square feet in the Parsippany Class A marketplace. Also, this market is a major draw for developers like SJP Properties, one of the most active in the area, who has more than 1 million square feet of proposed projects on the table at the Morris Corporate Center. 

Finally, one cannot overlook Newark. This submarket has a promising future as developments like the new hockey arena and Prudential Center come to fruition. These stimulants, as well as the vigorous effort of the new city government is a proactive approach to attract outside investments and will continue to draw interest from developers and tenants ensuring a bright future.

— Michael G. Walters, SIOR, is the executive director of Corporate Services at NAI James E. Hanson in Hackensack, New Jersey.

New Jersey Multifamily Market

NEW JERSEY MULTIFAMILY REAL ESTATE ATTRACTING MORE OUT-OF-STATE AND FOREIGN BUYERS

It is plain to see that the New Jersey Real Estate industry as we know it is changing. Especially in the multi-family sector, the states is not just a local marketplace anymore. For decades sellers found their buyers within a few miles of their property. Today, buyers can come from another state or even another part of the world. If trading property was truly as easy as trading baseball cards among friends, there would be no reason to change.  However, everyone is in business to maximize their return on capital and, unfortunately, the buyer down the street may not want or be able to pay the most for the seller’s property.  When currency and cap rate arbitrage are considered, the local buyer is usually at a disadvantage to the out-of-state or foreign buyer.

For the last 3 years, New Jersey’s multifamily sector has witnessed substantially more out-of-state and foreign buyers than it has seen in the past. The main driving factor behind this trend is that investors are arbitraging cap rates across the nation and even worldwide. The effect is that the local market is flushed with cash because of these new buyers, which have unprecedented capital to invest.  The result of increased property values overseas, and the weakness of the dollar, has created better buying power for foreign investors in the United States.

My research reflects that private, out-of-state buyers account for 25 percent of the acquisition volume in New Jersey, which is up significantly from 16 percent in 2004. Foreign buyers accounted for 7 percent in 2007, up greatly from 1 percent in 2004. This is not to say that in-state buyers are not active — they still account for one-third of all trading activity in the state.  As an example, I have hosted investors from Ireland and India in our offices and recently spent 30 minutes discussing a deal in East Orange with an investor in China and another from Italy. There has been a huge number of foreign buyers interested in deals and significant percentage of out-of-state buyers who have outbid local buyers in recent deals.

That being said, most brokerage firms in New Jersey that work with multifamily investors will agree that while these new foreign and out-of-state buyers are indeed critical to gaining maximum value for an asset being sold, the need for local market knowledge and local buyers still remain at a premium.

— Dean Marchi is first vice president with CB Richard Ellis’ Private Client Group.

New Jersey Industrial Market

The New Jersey industrial market is living up to its reputation as being one of the strongest industrial markets in the nation. New Jersey is the third largest industrial market in the country due primarily to the age old real estate adage — location, location, location. New Jersey is in the heart of the most affluent consumer market in the world and offers the most extensive highway and rail infrastructure in the region. 

However, it is the growth of its ports that is having the most impact today.  Containerized cargo volumes in the Port of New York and New Jersey rose nearly 8 percent in 2006 to a new record high, led by continued growth in trade with the Far East, North Europe and Southeast Asia. The dollar value of all cargo moving through the port in 2006 exceeded $149 billion for the first time, up 13 percent from 2005. 

In the next 10 years, nearly $2 billion in infrastructure upgrades are planned for marine terminal facilities and for off-port roads and railways to improve the flow of cargo including a 50-foot harbor deepening project.  Projections for the future show the port growing consistently at 10 percent per annum for many years to come.

While the growth of the port affects the market as a whole, it has had a dramatic effect on the markets in closest proximity to the Port which are undergoing a tremendous development boon.  There is more than 20 million square feet of new distribution space in the development pipeline in the Port North/South region.

In Port North (immediate proximity to Port/Newark Elizabeth) development includes ING’s 360,000-square-foot project on Kapkowski Road in Elizabeth and AMB Property Corporation’s 190,000-square-foot project on McClellan Street in Newark. Asking rents for these new buildings are in the $9.00 per square foot range.  Larger bulk distribution projects from AMB, Prologis, Morris Companies and Summit Associates have an expected delivery date from 2008 to 2010.  Port North’s vacancy rate is 5.52 percent and the availability rate is 7.31 percent, which makes this market the strongest in the state.

The Port South region, located just 8 to 10 miles to the south of the port, is where many of the bulk distribution centers are being developed. Panattoni Development recently completed a 1.2 million-square-foot building at Exit 12 on the New Jersey Turnpike in Carteret. Prologis is developing multiple buildings totaling 3.5 million square feet down the road in Port Reading.  Asking and taking rents in Port South are 10 to 15 percent less than Port North. The vacancy rate in the submarket is 5.25 percent, but the availability rate is 13.43 percent.

Although the port markets are experiencing the most growth and change, the Meadowlands remains the most consistently strong market in state.  Since 2004, the market has boasted a vacancy rate of the less than 8 percent.  Today, only 6 million square feet in this mature market of 80 million square feet remain unoccupied. The Meadowlands is driven by its close proximity to New York City. 

New Jersey’s most prominent regional distribution market is Exit 8a, named after the exit on the Turnpike.  This 60 million-square-foot market is home for most of the large modern distribution centers that exist in the state. Exit 8a is softer than the markets to the north with an availability rate approaching 19 percent. However, that number can be deceiving. With the size of the buildings available in the market, a hand full of newly signed leases could reduce availability dramatically.

The New Jersey industrial market will continue to thrive with new development and high demand in 2008.  New Jersey’s location, ports and infrastructure will continue to drive the industrial real estate market in the state for many years to come.

— Robert C. Kossar, SIOR,  is an executive vice president at Jones Lang LaSalle.

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