NORTHEAST SNAPSHOT, JUNE 2008

Northern and Central New Jersey Office Market

Today’s commercial real estate marketplace is built around cost reduction/cost containment, and as such, the New Jersey office market — mirroring other markets nationwide — is beginning to show signs of strain from the softening economy. Overall, vacancy rates rose slightly in Northern New Jersey during fourth quarter 2007 to 15.7 percent — a 0.3 percentage-point increase since third quarter, but still down from the 16.5 percent registered at the end of 2006. In Central New Jersey, overall vacancy rates remained stable at year-end, registering at 18.1 percent as compared to 17.9 percent at the end of the third quarter and 18.5 percent at year-end 2006.

In the suburbs of Northern New Jersey’s submarkets, vacancy rates are rising. Suburban Parsippany’s overall office vacancy rate ended 2007 at 16.9 percent; whereas, the Hudson Waterfront and Newark — both urban centers — ended the year at 9.6 percent and 13 percent, respectively. Class A availability ending 2007 was 16.4 percent in Parsippany, 6.4 percent in Newark and 10.1 percent in the Hudson Waterfront submarket.

The Northern and Central New Jersey office market continues to field demand from insurance, engineering and legal firms, and while spotty, activity among life sciences tenants is also driving the market. Most of the region’s tenants are seeking Class A space in areas with strong labor pools. They are focused on attracting the best employees by offering reasonable commutes and quality accommodations. Transportation access also has emerged among the top priorities for tenants. Properties — both urban and suburban — with access to mass transit are doing well.

To our benefit, a few Manhattan-based companies are finding opportunities to achieve significant savings in the Garden State. The AXA commitment for 244,000 square feet at 525 Washington Boulevard in Jersey City is a prime example. However, the bulk of the office activity is ultimately being driven by lease expirations. Within that context, a majority of tenants are renewing and recasting existing leases reflecting the uncertainty in the economy.

Despite any uncertainty from prospective tenants, the low vacancy rates in urban centers noted above, bodes well for new construction coming online in those areas. Companies want to operate in full-service markets with superior transportation infrastructure; thus, transit village projects have increased in popularity in many of New Jersey’s submarkets and developers are looking to Jersey City (both on the waterfront and in Journal Square), New Brunswick and Newark as major focal points for future projects. The state is also aiding the transit village trend by offering developers a new tax credit in hopes of getting people off its roads and revitalizing its inner major cities, which also include Hoboken, Paterson, Trenton and Camden.

In downtown Newark, Tucker Development is set to commence construction on its new multi-use development once it is able to secure a major tenant. Situated on 3.5 acres at 422 Broad Street adjacent to the Broad Street rail station and an off-ramp of Interstate 280, the 400,000-square-foot project will feature approximately 200,000 square feet of prime office space, which is incidentally the first new Class A office building in Newark in more than 15 years. The $150 million facility will also include a 200-room hotel, 50,000 square feet of retail space on the first two floors and a 25,000-square-foot health spa. The project will also be the first to utilize New Jersey’s new Urban Transit Hub Tax Credit Program.

Along the waterfront in Hoboken, SJP Properties is poised to commence construction on Waterfront Corporate Plaza, a 550,000-square-foot Class A office development, and in MetroPark, Atlantic Realty and Development is set to begin construction on its 253,000-square-foot Metrotop II. In addition, Gale Real Estate and Hampshire Co. are expected to be complete their 100,000-square-foot building at the center of Morris County by September. Several risk avoidance, build-to-suit projects are underway in the New Jersey market as well. A 250,000-square-foot facility is being built for Wyndham Worldwide in Parsippany, a 187,000-square-foot building is underway in Berkely Heights for L’Oreal, and the New York Jets Football league is gearing up to occupy a 120,000-square-foot development in Florham Park.

While some speculative development is still in the works, it is not expected to become the norm here until the market exhibits a distinct recovery. This will keep the market in check until vacancy rates reach a level that supports new construction. In addition, green practices continue to gain momentum in New Jersey. Developers are incorporating environmentally friendly and energy-efficient designs, materials and systems in both new construction projects and redevelopments. While green buildings may be more expensive to build, they generally are less expensive to operate than a traditional building. Additionally, tenants are seeking opportunities to reflect a culture of environmental consciousness — a strong selling point today for recruiting and retaining employees.

Well-located, Class A assets continue to attract the attention of the investment community. Credit is the king in this market, and stabilized properties are among the most sought-after. At the same time, money is still out there for value-add opportunities in the state’s primary submarkets. As a general observation, the overall health of the investment market in New Jersey is in uncharted waters as changing yields are tied to the risk/reward conditions of the current market. As such, pricing properties appropriately for sale is a key to success in this climate.

Additionally, several international companies have been acquiring operating divisions of U.S. companies. As a result, in the mergers and acquisitions arena, there has been a plethora of activity coming from overseas, which is impacting major New Jersey tenants such as TD Banknorth, MedPoint Pharmaceuticals and Datascope. Mergers always impact real estate as the new entities look for cost control and greater efficiencies by integrating operations and eliminating duplication of labor.

There certainly have been many predictions made about the market improving in the second half of 2008, but in our opinion, it is impossible to see the light at the end of the tunnel — yet. The fact remains that our economy is on shaky ground. Moving forward, we expect to see some spotty areas of activity, but until the smoke clears, the market will remain flat. Many companies will look to restructure its space needs or worse sit on the sidelines until we ultimately get through the credit crisis and the fall elections. In short, it is too early in the year to make a prediction about its outcome.

The good news is that, unlike in the last real estate market downturn, New Jersey is not overbuilt. Additionally, most of the money behind today’s development projects involves institutional money that can weather the storm. As such, significant commercial mortgage defaults are not anticipated. New Jersey is a resilient market, with a strategic location, dense population and a high per-capita income, which will help soften this downturn.

— James Frank and David Stifelman are executive directors in Cushman & Wakefield’s East Rutherford, New Jersey, office

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