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MARKET HIGHLIGHT, OCTOBER 2004
NEW JERSEY MARKETS CONTINUE STRONG
RECOVERY
Across the board, the commercial real estate market in New
Jersey is in recovery — in line with the state’s
overall economic rebound. Vacancy rates in the retail sector
remain very low, thanks in large part to the high barriers
of entry. Developers are showing renewed interest in urban
markets; redevelopment and adaptive reuse of existing properties
is a hot trend.
The office market has shown signs of growth in every region
of the state throughout 2004. Though rental rates have yet
to begin increasing, the market expects to continue its turnaround.
The industrial market in New Jersey is doing well, after it
experienced only a nominal downturn during the past few years.
Vacancy rates are dropping as rental rates steadily rise.
Thanks again to low interest rates, the investment sales market
is moving in the right direction, and the activity is expected
to continue at record levels through the end of 2004.
Retail
New Jersey is the most densely populated state in the country
with one of the highest per capita incomes anywhere. Retailers
are drawn to those two facts. Factoring out the available
secondary and tertiary retail space, the vacancy rate in Northern
and Central New Jersey is approximately 3 percent. This low
vacancy rate and the scarcity of new development opportunities
are the key barriers to entry that make New Jersey so desirable.
Because of the state’s efforts to curb sprawl, urban
sectors such as Asbury Park and Harrison are seeing a renewed
interest from developers. Older urban areas are most in need
of this attention from retailers in order to service existing
residents as well as the influx of those moving into urban
quarters. As demand has increased, and low interest rates
and the economy continue to play a role, rental rates in such
established suburban markets as Paramus have risen, and are
hovering in the mid-$30s to low $40s. Urban retail space owners
will soon begin to demand this same level of rent as well.
With mixed-use development as a key vehicle for urban renewal,
the redevelopment of downtown parcels is on the rise. One
such example is Woodmont Properties’ proposed redevelopment
of the former Epstein’s department store in the center
of Morristown.
In the suburban and rural areas, especially those in Northern
New Jersey, it is becoming increasingly difficult to find
viable sites and/or development-friendly municipalities.
As a remedy for this, we are seeing increased adaptive reuse
of underutilized and outdated industrial facilities being
redeveloped as retail or mixed-use projects. CB Richard Ellis
recently represented an owner of an industrial facility on
Route 1 in Middlesex County in the sale of its property to
a local developer. Planning is underway for a major mixed-use
project at the site, which will include a large retail component.
In addition to industrial, some entertainment venues such
as the Flemington Raceway and the Cherry Hill Race Track are
being redeveloped in the same way.
With limited and/or highly expensive land opportunities and
extremely stringent zoning, developers are also looking to
develop out of Northern New Jersey — taking advantage
of the more development-friendly areas of Central and Southern
New Jersey, where more land is readily available and local
municipalities are more welcoming to new development.
However, with developers such as Short Hills-based Garden
Commercial Properties, National Realty from Westchester and
Long Island-based Kimco remaining active throughout the state,
new product will not dry up. Monmouth and Ocean counties,
as well as Warren County, will prove to be growth markets
— taking advantage of a housing development boom.
— Art Weiss, Vice President, CB Richard Ellis
Industrial
Only slightly affected by the recent downturn, the industrial
market is showing further strength as the economy continues
to recover. The current vacancy rate stands at nearly a full
percentage point better than a year ago and should continue
to gradually decrease over the next 12 months.
The Exit 8A submarket is leading the way in the industrial
sector, encompassing more than 5.5 million square feet of
new development and more than 7.8 million square feet of projects
under construction. Just one exit farther south on the New
Jersey Turnpike, Exit 7A continues to do well. Warehouse space
in these submarkets flourishes due to their proximity to all
points south, Philadelphia and New York City.
There is also steady activity in the Exit 10-12 marketplace,
which offers tenants several advantages, including its accessibility
to a variety of transport needs such as Ports Newark and Elizabeth
and Newark Liberty International Airport. Real estate in close
proximity to these sites will continue to command higher rental
rates.
New Jersey is also witnessing a number of large entrepreneurial
companies relocating into Central New Jersey, thus increasing
employee retention, cutting labor costs and lowering facility
operating costs. Strong product demand has led to the proposed
development of brownfields sites up and down the Turnpike
corridor.
Dominant landlords in New Jersey’s industrial marketplace
include ProLogis, First Industrial Realty Trust, I. Heller,
Hartz Mountain, AMB, ING Clarion and Russo Development, among
others.
Although leasing activity dropped off somewhat during the
second quarter of 2004, the 17 million square feet leased
during the first 6 months of the year was 35 percent ahead
of last year’s pace.
In the near future, expect rental rates to continue to rise
slowly for the next 12 to 18 months and build-to-suit transactions
to pick up. All in all, new development in New Jersey will
persist and demand will remain high as economic growth continues
throughout the state
— Mitch Katz, Vice President, Trammell Crow Company
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Office
In New Jersey, there is confidence, with the overall economic
rebound well on its way, that the commercial real estate
market will continue the turnaround that began earlier
this year.
In nearly every region, the New Jersey office market has
been showing signs of growth. Reflecting upon current
conditions, it is apparent that demand is showing a steady
increase as New Jersey’s economy continues to perform
strongly. In addition, the average deal size has been
steadily increasing as well.
We have also seen the emergence of new firms in the market.
It is very encouraging to see new companies such as Altana,
Biovail and Odyssey Pharmaceuticals either entering the
market for the first time or quickly expanding their presence.
These firms that are now entering the market are playing
a key role in this upward movement, as are firms like
Citigroup, AIG and High Point Insurance. As firms increase
their commitments to New Jersey, the economy will continue
to flourish.
Throughout the first half of 2004, we have seen an increase
of occurrences where several tenants are chasing a single
block of space in prime property. In most markets, the
excess of sublease space continues to drop, although it
remains at levels above historical averages.
Rental rates have not been increasing, though concession
packages are steadily becoming less generous. However,
despite the improving trendline, no major new construction
is foreseen in the near future.
In retrospect, the economy is experiencing a steady growth
pattern and the state has recovered all the jobs lost
during the recession. We have also seen a number of new
companies coming into the market. As companies continue
to invest and cultivate their businesses, the market will
reflect further improvement. This breeds confidence that
these trends will continue and provide a strong market
in years to come, though perhaps not at levels seen prior
to the recession.
— Matthew McDonough, Senior Vice President,
Trammell Crow Company
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New Jersey Investment Sales
All sectors of the investment sales market continued
strong in New Jersey in the first half of 2004 due to
low interest rates and an abundance of quality product.
Several leading indicators are pointing in a positive
direction for the Northern and Central New Jersey markets’
long-awaited recovery. Year-to-date leasing velocity
totaled 5.01 million square feet of space, representing
an increase of more than 790,000 square feet from the
same time last year. Furthermore, absorption in the
second quarter was positive — a significant advancement
when considering that absorption quarter after quarter
has been predominantly negative since 2001, and a momentous
improvement in comparison to last quarter’s negative
absorption of more than 1 million square feet.
According to Torto Wheaton Research reports, there are
several factors driving the improving commercial real
estate market in Northern and Central New Jersey, most
notably office employment and measured economic growth,
continued de-centralization of major corporations relocating
from New York City, and the emergence of New Jersey’s
urban markets and its international trade importance
primarily through Port Newark and Newark International
Airport.
These positive trends have impressive repercussions
on the investment sales market with considerable office
sales activity during the first half of this year. SJP
Properties has sold Waterfront Corporate Center I on
the Hoboken waterfront to JP Morgan Investment Management
for $180.7 million. The joint venture of Investcorp
and Lincoln Equities Group has sold 180 Park Avenue
in Florham Park to Wells Real Estate Funds for $78.4
million. And Advance Realty Group has sold Riverview
Executive Park in Trenton to iStar Financial.
Quality real estate with strong tenancies is highly
sought after as an investment vehicle. Particularly
interesting is the growing attention being given to
New Jersey assets from outside investors who have never
ventured into the market before. We more typically see
outside venture capital interest when selling properties
in major cities. A recent example completed by CB Richard
Ellis is the $30.3 million acquisition of 150 and 200
Meadowland Parkway, a two building, 211,962-square-foot
office property in Secaucus, by Willett Companies, a
first-time buyer in New Jersey. The outside investment
interest we are seeing is an indicator of stronger economic
times to come.
The retail and apartment markets have also appealed
to entrepreneurial investors, pension funds and REITs
looking to take advantage of the low cost of debt. As
we have seen, office product has traded at a vigorous
clip, though caution related to ongoing high vacancies
is resulting in more careful evaluations during due
diligence. Properties with stable, credit tenants continue
to sell for record amounts, while those without sell
for less. The industrial market, especially in Northern
New Jersey, also reflects investors’ desire for
product. To date in 2004, properties throughout the
state and especially areas such as the Meadowlands,
Exit 8A and the Route 80 Corridor have seen record prices
due in part to interest rates remaining low.
For the remainder of 2004, investment sales activity
in all segments should continue at a record level. Rising
interest rates may cool activity somewhat, especially
in the retail and apartment sectors, but savvy investors
will continue to seek out and find opportunities with
potential.
— Jeffrey R. Dunne, Vice Chairman, CB Richard
Ellis
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