MARKET HIGHLIGHT, OCTOBER/NOVEMBER 2009

NEW JERSEY MARKET HIGHLIGHTS

New Jersey Office Market

Pharmaceutical and bio-pharma companies have always had a large presence in New Jersey, but recent mergers and acquisitions have taken away jobs and left more office space on the market. However, Frank Gunsberg of the Parsippany, New Jersey office of FirstService Williams notes, the bio-pharma community will continue to have a presence in the state because the market is still an attractive place for small to mid-size incubator bio-pharma companies. “They benefit from New Jersey’s highly educated population, many universities and an excellent highway system,” he says. “And even more important are the companies that are already here. The drug business in particular thrives on one company producing a product and another company marketing that product. When you have close contact with those kinds of companies, it is very meaningful.”

Despite the economic uncertainties plaguing the marketplace, Gunsberg notes that New Jersey is an excellent market for tenants right now. In some areas of New Jersey, rental rates for Class A space range from the middle to high $20s per square foot, while in other submarkets, rental rates are $35 to $40 per square foot.

Gunsberg says that many office tenants in New Jersey are asking for short-term lease renewals and extensions. For example, tenants are asking for 1 or 2 years whereas office leases would range from 5 to 10 years under typical market conditions. “These tenants are just not sure what is going to happen with the economy,” he explains. “People are reluctant to [sign leases] even though this is probably one of the best times to jump. Landlords are willing to make concessions they would not normally make. If you have a good balance sheet, you are an extremely desirable tenant.”

Gunsberg also encourages companies to look at sublease space in today’s distressed market. “If you are going to try to take advantage of the market at its best, you want to look at sublease opportunities,” he says.

Owners are being creative in order to sell or lease their buildings. According to Gunsberg, in Franklin Township, the owner of a 135,000-square-foot facility is willing to lease, sell as condo space or sell the entire building. The expandable facility is located on 17 acres and has state-of-the-art lab facilities. “Any operations person that has seen this building has said that it has one of the finest lab facilities that they have ever seen. They then recommend the building to management, but the sale or lease still has to pass the board of directors,” Gunsberg remarks. “That is very interesting and should tell you something about the state of the market.”

— Stephanie M. Specht

New Jersey Industrial Market

While New Jersey’s industrial market has strong fundamentals, the down economy has taken its toll. Many industrial development projects have been put on hold until the market works through absorption of existing product. Current available inventory in the North/Central New Jersey market is running just over 66 million square feet. This is an increase of 24 percent since this time last year, when 53 million square feet of space was available.

Total inventory for the North/Central New Jersey industrial market as of the second quarter 2009 amounted to 818.23 million square feet across 15,334 buildings, according to CoStar. This includes 3,028 owner-occupied buildings accounting for 201.07 million square feet of space.

The leasing market has seen a slowdown in the last 12 months, consistent with most of the country. The decline in retail sales (which drive much of the inventory along the New Jersey Turnpike) has reduced the need for warehouse capacity. Big-box activity (particularly at Exit 8A) has been very limited, and the deals that are closing are at rents indicative of the late 1990s. The average quoted rental rate for industrial space in second quarter 2009 was $6.04 per square foot, down 1.6 percent from the prior quarter. The credit turmoil has brought tenant indecisiveness along with it. As leases expire, many tenants are extending their leases for short terms until the economy and their confidence both pick up.

In first quarter 2009, 37 industrial sales transactions closed. These transactions totaled 2.04 million square feet with the average sale price of $69.42 per square foot. At the same time in 2008, 65 transactions had closed with an average price tag of $75.20 per square foot. The sales market for users has flattened somewhat from the irrational exuberance of just 2 years ago when many tenants sought to purchase their own warehouse facility and financing was flowing from the water tap. Many banks are flush with cash and are still willing to lend but now have much tighter underwriting standards.

In the investment sales market, we are seeing an uptick in sale-leasebacks. With the credit markets virtually frozen, this financing strategy allows companies to unlock equity in their buildings through the monetization of their real estate. Cash proceeds are being used to pay off credit lines and/or retire existing debt, acquire a competitor, purchase another piece of real estate or buy new equipment. This off-balance sheet method of financing works particularly well with the industrial sector since investors can purchase true net leases with minimal landlord responsibilities. Sellers can receive 100 percent financing (versus 60 to 70 percent financing with a bank) and construct a lease that is in sync with their long-term business plan. Typical lease periods are 15 to 20 years.

Future growth areas in New Jersey’s industrial market include further redevelopment of approximately 20 million square feet of brownfield sites and continued growth of the ports — including Jersey City, Newark, Elizabeth, Carteret and Woodbridge  — over next 10 years. Ongoing legislation to increase the tolls on the New Jersey Turnpike will likely drive certain tenants closer to industrial buildings near the ports and benefit owners in these areas. This growth trajectory, fueled by the completion of the Panama Canal dredging in 2014, is due to increase cargo shipments more than 30 percent.

— Doug Richter, managing director with the Iselin, New Jersey, office of Sperry Van Ness

New Jersey Retail Market

Retail leasing in Class A shopping centers in New Jersey has been quite strong over the last 2 to 3 months, especially with mom-and-pop stores,” says John Azarian, principal and owner of Midland Park, New Jersey-based The Azarian Group LLC, which owns and manages more than 1 million square feet of space in New Jersey and New York.

He adds, “The economy is beginning to improve, entrepreneurs are gaining confidence and they are ready to start new businesses or open new stores.”

“Vacancy rates in quality shopping centers have improved dramatically in northern New Jersey compared with last year, and tenants are not pushing too much for lower rents,” he notes. “Rental rates in the neighborhood centers that we manage range from $15 to $25 per square foot, and are approaching the levels where they peaked at the end of 2008.”

While there are positive indicators in the retail market in New Jersey, the sales of retail properties remain slow. According to Azarian, “Most sellers are still looking for premium prices, while buyers are waiting to see if prices drop further.”

Financing is also still an issue for sales, but investors with equity can find opportunities. For example, The Azarian Group invested significant equity recently during the purchase of the 220,000-square-foot Neptune Plaza Shopping Center in Neptune, New Jersey, from JP Morgan Chase. “As a small development, management and brokerage company, we saw a wonderful opportunity to purchase a fully-rented property occupied by three strong credit tenants, and we negotiated a very aggressive, attractive deal,” Azarian says. ShopRite, Marshalls and HomeGoods occupy 83 percent of the property.

The company is also renovating its Allendale Town Center in Allendale, New Jersey. The $2.8 million project will include a new façade, new signage, a resurfaced parking lot and new sidewalks as well as a 5,000-square-foot expansion, which will be available for lease this year.

In the spring, The Azarian Group will renovate its 75,000-square-foot Raritan Center in Sayreville, New Jersey. The renovation will also include a new pad site for a 10,000-square-foot The Learning Center.

As for the future of the market, Azarian believes sales will pick up as vacancy rates continue to improve and as financing becomes more readily available. However, he believes sellers will have to be more realistic about prices as they won’t reach former peak levels for at least 2 years.

— Jaime Lackey

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