COVER STORY, NOVEMBER 2004

OFFICE NOTES
Experts across the Northeast discuss their local markets.
Compiled by Jaime Lackey

Office brokers in the Northeast are predicting good things for 2005. While not much office development has taken place in the region recently, occupancy numbers are improving and companies are beginning to expand.

Granted, interest rates are expected to increase, but most brokers think that demand for office space will continue to grow despite rising costs.

Suburban Boston

Stevens

Somewhat handicapped by a 21.49 percent office vacancy rate, the suburban Boston office market isn’t seeing much speculative development. Instead, activity in the area is focusing on redevelopment, according to Debra Lee Stevens, principal with Boston-based GVA Thompson Doyle Hennessey & Stevens. The majority of redevelopment involves upgrading existing R&D facilities to life science, office and manufacturing facilities. This redevelopment is occurring in both the inner suburbs and along routes 128, 3, 495 and 93.

Stevens notes, “The inner suburbs and Route 128 both had positive absorption and Routes 495 West and South had minimal negative absorption. Route 495 North recently had some sizable space added to the market, which created a large negative absorption of 246,172 square feet.”

The current low interest rates are affecting office markets across the country. “I believe too many people are chasing too much product, artificially driving up the sale prices of office buildings,” Stevens says.

However, she also notes that software companies are becoming more active again. These companies, as well as defense contractors and financial companies, are looking for quality facilities.

Stevens asserts that “a slow, sure and steady recovery is occurring” in suburban Boston. “We should see vacancies of 17 percent to 19 percent by this time next year,” she predicts. — Jaime Lackey

Delaware

Brown

The Delaware office market has trimmed its sails and is ready to build its base up again as the economy continues to improve. Delaware’s sublease space and shadow space are becoming occupied once again.

The state boasts a low unemployment rate — 3.6 percent, according to the Bureau of Labor Statistics, August 2004. And companies have stopped downsizing, sublease space is shrinking and job growth has rebounded.

Wilmington, in particular, also enjoys a great location. With approximately 11.6 million square feet of office space in Wilmington, it is a second-tier city at best. Still, Wilmington’s location continues to be a major driver for growth. It is strategically located between Philadelphia and Baltimore, and Washington, D.C., and New York City at slightly further distances.

Johnstone

Companies are gravitating toward Wilmington’s CBD, especially in the areas of the historic Christiana River waterfront and the New Castle County Courthouse. New Castle County is pushing developers away from new office buildings in the suburbs and turning its attention towards revitalization of the downtown district.

Along the Christiana River, Commonwealth Development Corporation is currently constructing a $28 million, 150,000-square-foot, six-story office building for AAA Mid-Atlantic. AAA is relocating from Philadelphia’s CBD and will lease 150,000 square feet in Wilmington’s CBD and an additional 70,000 square feet in the city’s suburbs.

ING Direct, the sixth largest savings bank in the nation, is also helping to transform Wilmington’s CBD. ING Direct set up its North American headquarters in one of the first major office developments along the Christiana waterfront in Wilmington in 2000. The company is experiencing major growth in Wilmington, moving into its fourth office building in 4 years. This year, the company effectively leased the entire space at 802 Delaware Avenue, a 241,000-square-foot, Class A office building. ING moved into the space this past spring with 200 employees. They have already added 250 employees since, and plan to add 200 more by year-end 2004 and an additional 500 employees next year. ING’s new space on Delaware Avenue was home to Chase Manhattan Bank (USA) from the mid-1980s through 2001, and then it sat vacant until ING occupied the building. ING is expecting to spend approximately $15 million to renovate the building, which has excellent signage on I-95. HRPT Properties Trust, the landlord of the property, plans to spend several million dollars to improve the building for ING.

The city, county and state governments are extremely pro-business. For ING’s lease at 802 Delaware Avenue, the city created an incentive package based on the number of jobs created and the salary levels that could amount to $1 million. The savings bank could also receive an abatement on the city’s head tax for 5 years. (The city charges a tax of $10 per employee for upkeep of the city’s infrastructure and to provide city services.)

The Renaissance building, directly across from the new courthouse is one of several office projects currently being proposed. The Commonwealth Development Corporation is planning to construct this 160,000-square-foot office building over a parking garage. Other projects moving forward include 500 Delaware Avenue, the former Queen Theater, the Wilmington Savings and Loan building, and 2 Christiana.

— Leigh Johnstone is a senior vice president and Charles Brown is a vice president with Northbrook, Illinois-based Grubb & Ellis. Both are based in Wilmington, Delaware.

Springfield, Massachusetts

Office development in Springfield, Massachusetts, has been soft for 2 to 3 years, says William Low, vice president and partner with Springfield-based NAI Samuel D. Plotkin & Associates. “The area has a lot of Class A space in the central business district coming to market over the next 2 years and we’re not seeing much interest from outside the area.”

Greater Springfield’s Class A office space has a vacancy rate of 8 percent to 10 percent. Overall, the office vacancy rate is 14 percent. Low adds that the current low interest rates have driven users to buy facilities rather than lease them.

Mass Mutual has acquired the Phoenix Insurance building in Enfield Court and will move from its offices in Hartford, Connecticut. Low notes that this move will improve the health of the Springfield market.

He predicts, “Insurance and financial services will continue to absorb most of the space.”

Job growth has long been a problem for Springfield, according to Low. He says, “Unemployment in western Massachusetts is up a tenth of a point but has generally been stagnant for several years.”

— Jaime Lackey

Pittsburgh

Dudley

The central business district of Pittsburgh has had no new office development in the past 24 months. The majority of the new development within the city of Pittsburgh is taking place in the greater Downtown submarket. With exciting new mixed-use development taking place on riverfront sites in both the north and south sides of Pittsburgh, the focus of office tenants is shifting from office towers to mixed-use developments which offer more and newer amenities, lower overall occupancy costs (parking), and yet maintain an urban streetscape environment.

There is approximately 1 million square feet of office space under construction at the present time. The Soffer Organization is developing Southside Works on the southern shore of the Monongahela River in Pittsburgh. The project is a true mixed-use answer to pent-up growth and congestion in the Oakland University/medical area and to the technology market demand. Continental Development is developing North Shore, which is located between PNC Park (home to MLB’s Pittsburgh Pirates) and Heinz Field (home to the NFL’s Pittsburgh Steelers). This project is an extension of the traditional central business district triangle.

These mixed-use projects are doing well because of tenant interest in non-traditional, mixed-use developments that offer sleek new contemporary designs, an interesting mix of retail tenants, trendy restaurants and lower parking costs.

Future development is expected to be concentrated in the North Pittsburgh submarket and Southpointe II (Washington County) because of improved infrastructure (roadways/ interchanges) and population shifts.

Among the business types that have shown recent growth, title and mortgage services top the list. Western Pennsylvania has developed a significant industry cluster in this segment with several large employers providing services on a national scale from their western Pennsylvania base.

Tenants moving into large blocks of space in 2004 include OSI Collection Services moving into 43,632 square feet at Penn Center West V and Family Pathways moving into 41,338 square feet at 100 Brugh Avenue. The largest lease signings occurring in 2004 include the 178,200-square-foot lease signed by Del Monte Foods on North Shore Drive; the 113,054-square-foot deal signed by Fiserv at 912 Duquesne Boulevard; and the 72,809-square-foot lease signed by Aetna at Foster Plaza VIII.

Notable 2004 deliveries include Dick’s Sporting Goods’ headquarters, a 150,000-square-foot facility, and Penn Center West V, a 147,120-square-foot building.

— Gerry Dudley, president of CB Richard Ellis/Pittsburgh

Maine

Moulton

“Maine is the land of small businesses,” says Thomas Moulton, partner with Portland, Maine-based NAI The Dunham Group. “Many small businesses are growing at faster rates than larger ones. [Maine is experiencing a] steady, stable, moderate-to-low growth business environment.”

Moulton notes that many small businesses are expanding in Maine, including law firms, advertising firms, insurance companies, consulting firms and marketing firms.

According to Moulton, “Bangor, the largest city in northern Maine, is doing well. Lewiston, in central Maine, is on the rise.”

Portland, Maine, is seeing steady growth in its office market. As Moulton says, the area is seeing many build-to-suit projects and developments by owner/users. Portland currently has an office vacancy rate of 7 percent, with sublease availability at 1 percent to 2 percent.

CORE Inc., a disability insurance company, has consolidated into a 140,000-square-foot office building in Westbrook, Maine.

CORE Inc., a disability insurance company, has moved from multiple downtown and suburban locations into a 140,000-square-foot office building in Westbrook, Maine. The five-story, Class A project also features a 650-space parking garage. The project was completed in May 2004. Developer Tim Flannery, the city of Westbrook and NAI The Dunham Group put this build-to-suit package together as an economic development effort. Moulton notes that the spaces Core Inc. vacated are filling up slowly but steadily.

The majority of development is taking place in Portland’s suburbs, according to Moulton. He says, “In general, the suburbs are doing better than the downtowns due to parking costs and constraints.”

Moulton predicts that Portland suburbs Westbrook and Scarborough will see the most development in the near future. “There is plenty of land and a pro-business environment with town and city governments,” he explains. He adds that office, flex and medical properties are the hottest markets.

— Jaime Lackey

Northern & Central New Jersey

Kinum

Very little office development is taking place in New Jersey. However, low interest rates have driven the investment sales market for office product. During the first three quarters of 2004, an impressive $1.7 billion worth of office investment sales took place in Northern and Central New Jersey.

Currently, only 13,000 square feet of office construction is underway in Northern and Central New Jersey. This activity, recently completed projects and those set to launch in the near future involve exclusively build-to-suit opportunities. This is due to the fact that the available financing for speculative development is extremely limited, if not non-existent. However, developers aggressively continue to pursue sites for future development.

The most significant office project planned for Northern and Central New Jersey is the mixed-use Xanadu endeavor in the Meadowlands submarket. This entertainment, retail and office development has a potential price tag of $10 billion. All approvals are in place for the hybrid mall/office/theme park project — which even includes an indoor mountain for skiing. Although still facing a lawsuit, Virginia-based The Mills Corporation and New Jersey-based Mack-Cali Realty plan to break ground this fall.

Also of note, Hartz Mountain Industries recently completed construction of Goldman Sachs’ 1.36 million-square-foot, build-to-suit office building in Jersey City. The 42-story tower is the tallest building in New Jersey.

Leasing activity has remained fairly flat in Northern and Central New Jersey in 2004, registering just under 7.3 million square feet through the end of the third quarter. While no one area is doing particularly well, the Princeton and Monmouth County submarkets have maintained the lowest vacancy rates in the state — hovering in the 12 percent to 13 percent range. At the other end of the spectrum, the I-287 corridor through Somerset and Middlesex counties has seen recent vacancy rates as high as 30 percent to 40 percent.

The overall vacancy rate in the 10 counties of Northern and Central New Jersey rested at 19.3 percent at the end of the third quarter of 2004. Sublease space comprises 24 percent of the total available product in Central New Jersey and 29 percent of the total available product in Northern New Jersey. The Hudson waterfront (specifically Jersey City and Weehawken) has a current vacancy rate of 15.9 percent, with 2.3 million square feet of available sublease space. The Newark submarket, which has a 16.5 percent vacancy rate, has 175,000 square feet of sublease availabilities. The Princeton market, which has a 15.7 percent vacancy rate, has 500,000 square feet of available sublease space.

Northern and Central New Jersey derive much of their economic vigor from two sources: the pharmaceutical/biotechnology industry and the residual growth caused by New York City’s robust financial sector. In addition to pharmaceutical and biotech companies, legal, accounting and other service firms represent the main sectors driving tenant activity in Northern and Central New Jersey. Cushman & Wakefield of New Jersey expects this trend to continue in the coming months, creating the most significant, positive impact on the Interstate 78 corridor in Somerset County; the Interstate 287 corridor in Morris, Somerset and Middlesex counties; and the Princeton market.

With a continued up-tick in the economy, New Jersey is positioned to enjoy stepped-up activity in the office market throughout the state. With improvement in the economy, the Hudson waterfront can accommodate an additional 10 million square feet of office space. The Monmouth County marketplace is also poised to grow, when the timing is appropriate. On the investment sales side, though, rising prices and interest rates will have a negative impact on sales volume.

— Christopher Kinum is an executive managing director with Cushman & Wakefield of New Jersey. Kinum is based in the company’s East Rutherford, New Jersey, office.

Hartford, Connecticut

Hartford, Connecticut is seeing new development — but it isn’t office development. The office market is stagnant, according to Thomas (Tim) Lescalleet, senior vice president of Griffin Land, a division of New York-based Griffin Land & Nurseries, Inc.

Lescalleet, who is based in Bloomfield, Connecticut, says, “There are no new office developments and there is little — if any — positive absorption [of office space].”

He notes that three or four suburban office projects of less than 100,000 square feet were started in 2002 and still have vacant space.

“[Office leasing] activity is low and spread evenly across downtown and the suburbs,” Lescalleet says. He adds, “Lease rates are trending downward.”

The current lack of job growth is not helping the Hartford office market. “Any [job] growth is being offset by continued consolidation of insurance and financial services [companies],” Lescalleet says.

However, development in other sectors is sparking hope for the office market. Lescalleet notes that residential and retail development activity is high in the northeast suburbs of Hartford, and he predicts office development will follow in the Manchester/Vernon area.

Downtown Hartford is also seeing new development in the form of a new convention center and new hotels as well as new apartments and residential condos. The retail component of the Hartford Civic Center, currently under redevelopment, will also have a limited amount of office space for lease in 2006.

“Hartford is taking major steps to position itself as the next Charlotte, North Carolina,” Lescalleet says. In addition to the residential and hotel developments taking place, the area is also seeing a new terminal at Bradley International Airport and is upgrading highways, electrical power and telecommunications.

Further, Lescalleet says, “The area is becoming an increasingly strategic location to northeastern markets. Industrial growth has been high, as companies that once located in the southeastern Massachusetts area are now seeing that markets can be better reached from Hartford.”

— Jaime Lackey

New York City

“The New York City office market is alive and well,” says Benjamin Friedland, senior associate with Los Angeles-based CB Richard Ellis. Friedland is based in the company’s New York City office.

The area is seeing several very large office developments and leasing activity has recently increased significantly.

Lindner

Peter Lindner, associate with NAI DG Hart, the Manhattan member office of NAI, says, “New York City’s office market is poised for a recovery. We have already seen a flurry of large leasing activity [since late second quarter 2004]. This early indicator gives us reason to believe that 2005 will have lower vacancy levels and slightly higher asking rents than we have seen in 2004.”

Law firms, financial service firms and big-name clothing manufacturers have taken a great deal of office space in 2004, and Lindner expects more of the same in 2005. He notes, “As the economy improves we expect financial service firms to shape the market, both acquiring and disposing of large blocks of space in 2005.”

Friedland adds, “Hedge funds have been the story of 2004. Top executives at many of the larger financial services firms split off to form their own companies. Thus far in 2004, these hedge funds have taken significant amounts of space, often in the city’s top buildings. However, hedge funds have come under some legal scrutiny lately, and the forecast for their growth is unclear at this point.”

The average vacancy rate for office buildings in New York City is currently 9.7 percent, according to Lindner. The total available sublease space in New York City is approximately 14 million square feet.

Friedland

Friedland notes that the percentage of available sublease space relative to the overall available space reached an all-time high 3 years ago. “However,” he says, “a significant portion of this sublease space has been spoken for since that time. The remaining sublease space, particularly space situated in the more desirable areas, is not of top quality.”

In the aftermath of 9/11, many people expected New York-based companies to decentralize their space needs. Companies were expected to divide operations into various locations and to move into space outside of New York City. According to Friedland, “It quickly became apparent that in order to retain top employees, as well as acquire new talent, it was essential to be within New York City. As a result, the number of companies that have relocated outside of the city has been far fewer than initially expected.”

Midtown New York City has been performing well in the office leasing market for the past two quarters. Lindner says that five of the six largest office deals this quarter have been in Midtown with an aggregate size of 471,380 square feet. Friedland notes that Park Avenue is extremely active, with relatively few alternatives still available.

In Midtown South, August was an active month, according to Friedland, who notes that 611,000 square feet of space was leased in August.

Downtown, the redevelopment of the World Trade Center buildings and government incentives are causing firms to consider the area again. For example, Goldman Sachs is planning a 2 million-square-foot Battery Park City building. The building, which will house Goldman Sachs’ headquarters, will be the newest addition to the submarket in 16 years, Lindner says.

He adds, “Perhaps the most significant office development scheduled for delivery to the New York City office market is the Bank of America tower at One Bryant Park.” The Durst Organization is developing the 2.1 million-square-foot building, which will deliver in 2008. Bank of America will occupy 1.1 million square feet and Durst will lease out the remaining 1 million square feet. As Friedland notes, One Bryant Park will incorporate many new technological advances, including a rooftop rain collection area and the significant use of solar energy.

The New York Times Building, located at 42nd Street and Eighth Avenue, is another significant development in New York City. According to Friedland, architect Renzo Piano has designed the 52-story building to be “transparent in look and feel. The exterior of the building will be comprised of clear glass combined with a pattern of thin ceramic cylinders placed on a steel framework. This curtain wall will permit a high degree of energy efficiency in heating and cooling the building — and the building’s color will [change] according to the current weather conditions.”

— Jaime Lackey

Greater Philadelphia

Dickson

The Philadelphia regional office market has turned the corner. Vacancy rates are decreasing and absorption, while low, has increased. Colliers Lanard & Axilbund is anticipating a slow recovery with minimal prospects for rent increases over the next year. Sublease and phantom space are no longer having a negative impact. It is still a tenants’ market, but the tenants have better credit and are looking for 5-year deals.

Residual caution about the economy has led developers (and lenders) to require lead tenants or significant pre-leasing before beginning new buildings. However, there are currently more projects moving beyond the planning stages, which is an indication that developers are becoming more optimistic about market conditions and are positioning themselves to be ready to “pull the trigger.”

There is also more urban office development and redevelopment than in the past decade. Cira Center in Philadelphia and the AAA project in downtown Wilmington, Delaware, are two notable examples. Cira Center, being developed by Brandywine Realty Trust, is a 727,725-square-foot office building at Amtrak’s 30th Street Station. This project represents a bridge between the traditional CBD core and the thriving University City market. It has, however, been controversial because of its tax-free status.

Gola

Olympus USA has chosen the Stabler Corporate Center in Upper Saucon Township, near Allentown, for its new headquarters. The complex will include an office and a distribution component and is being developed by Poag & McEwen. This project will bring approximately 800 new jobs to Lehigh County.

Redevelopments in former industrial or other infill locations are becoming more prevalent. These projects involve the conversion of industrial properties to office space; projects include the former Dial facility in Bristol, The Wharf at Riverton in Chester and 111 Woodcrest in Cherry Hill, New Jersey, as well as large-scale multi-use projects such as the Cherry Hill Race Track site that will have an office component along with retail and residential space.

The majority of current development is in downtown Philadelphia and Wilmington and has largely been driven by tax incentives for anchor tenants. Burlington County, New Jersey, is another active area. Prior to the new buildings being developed by Opus East, Brandywine Realty Trust and Liberty Property Trust, this market had a sub-10 percent vacancy rate and it has had significant population growth.

Pharmaceutical companies have shown the most significant demand. Companies with back office requirements, such as data centers, have also been active. In addition, institutions that offer specialized technical degrees or degrees for working adults have been leasing space in both the CBD and suburban markets. However, Colliers Lanard & Axilbund does not foresee significant expansion by any tenants in 2005.

The next areas for development are likely to be farther removed from the traditional suburban markets. This will be partly because of traffic congestion and lack of sites in the inner suburban markets and the sprawl of the region’s population. As the workforce extends further from the established core markets, companies will follow. In Pennsylvania, Colliers Lanard & Axilbund expects to see more development in markets along the Route 202 and Pennsylvania Turnpike Northeast Extension in Bucks and Montgomery counties as well as further south and west along Route 202 and Route 30 in Chester County. In New Jersey, northern Burlington, southern Camden and Gloucester County are likely to be growth areas. However, Colliers Lanard & Axilbund does not expect widespread speculative development for the next few years as existing supply is absorbed.

Historically low (although rising) interest rates continue to fuel investor demand. There were two significant user sales during the first half of 2004 that would have potentially been leases if interest rates were higher. Local investors are cashing out; new investors are coming into the market and larger investors are increasing their holdings. Investment sales have been limited by a lack of product and weak underlying fundamentals (vacancy and tenant credit). Many institutional sellers are holding property off the market due to high vacancy. As the leasing market improves and tenant stability increases, there may be more properties available. Therefore, Colliers Lanard & Axilbund predicts that further interest rate hikes over the next year are not likely to have a big impact because of pent-up investor demand and improving fundamentals.

As for leasing activity, results are mixed in the Greater Philadelphia market. There have been several significant leases signed in CBD Philadelphia; however, these represent resident companies moving within the market and, in many cases, downsizing. The suburban markets are still slow in terms of signed deals, but they have begun to recover. The Philadelphia area has finally recovered from the impact of the dot-com implosion. Sublease space has dried up and phantom space is no longer having a negative impact. While rental concessions are still prevalent and rents are lower than at the height of the market in 2000, the tenant base is more stable and credit-worthy.

— David Dickson, senior vice president, and Michael Gola, vice president, of Philadelphia-based Colliers Lanard & Axilbund.


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