NJ Commercial Real Estate Continues Struggle Toward Recovery

31 Jan, 2011, East Rutherford, NJ

As the New Jersey economy finds its way to recovery, the commercial real estate market continues to face challenges, according to Cushman & Wakefield, Inc. in East Rutherford. Yet the commercial real estate services firm's year-end 2010 research findings show that signs of stabilization are present, particularly in historically strong office submarkets such as Morris County, the Hudson Waterfront, Princeton/Route 1 and I-78; and in desirable industrial pockets found in the state's central submarkets.

"Our state's economic health appears to be on a positive trajectory - private sector employment has grown 10,700 jobs since the beginning of the year, and the unemployment rate is trending downward," said Gualberto "Gil" Medina, Cushman & Wakefield's New Jersey executive managing director. "Real estate performance is so closely tied to this activity that we can expect to see true improvement in 2011. At the same time, our industry is a trailing indicator, so our recovery likely will lag. A very positive trend is the commitment of our Governor and legislative leadership to dramatically improve the state's business climate."

OFFICE OVERVIEW

Continued weakened fundamentals were most notable in the Northern New Jersey office market through the fourth quarter of 2010. Despite a relatively strong second half of the year, overall leasing activity, totaling 4.4 million square feet, came in just under 2009. One of the year's largest Northern New Jersey leases closed during the final months of the year, when Atlantic Health Systems leased 190,000 square feet at 435 South Street in Morristown.

"Three blocks of more than 100,000 square feet were added in the northern counties in 2010," Medina said. "At the same time, six new office transactions in excess of 100,000 square feet were completed. These two facts illustrate the type of good-news/bad-news juxtapose we are seeing."

Northern New Jersey's overall office vacancy rate, 17.3 percent, represents a year-over-year increase of 0.4 percentage points. On a positive note, overall average weighted asking rents in Northern New Jersey, currently $25.75 per square foot, saw a quarterly increase of $0.12 per square foot - the first quarterly increase since before 2008.

The state's central counties showed stronger stability through 2010. Office leasing totaled 2.7 million square feet, a 23.6 percent increase over 2009. Notable fourth quarter deals included pharmaceutical firm Ikaria leasing 117,000 square feet at 53 Frontage Road in Perryville.

Central New Jersey's overall office vacancy rate decreased to 21.2 percent after two quarters at 21.8 percent. Overall asking rents are flat compared with last quarter and leasing activity is improving.

"Central New Jersey appears to be strengthening," Medina said. "However, an excess of available space remains in the region. We expect that tenants will continue to take advantage of the lower rental rates and good market opportunities in 2011, which should result in stepped-up leasing."

Investment sales rose markedly statewide in 2010. Northern New Jersey office sales activity posted totals 93.3 percent higher than in 2009, with more than 4.3 million square feet of closed transactions. Central New Jersey recorded nearly 3.1 million square feet of transactions - a 36.9 percent increase from totals recorded in 2009.

"Capital markets investment sales have reawakened with force," noted Andrew Merin, a Cushman & Wakefield vice chairman and head of its Metropolitan Area Capital Markets Group in East Rutherford. "Several factors are contributing to this improvement. Principal among them is the need for alternative investments. People are leery of equity markets and feel that real estate is a sound alternative - provided that it is well leased and located, and ideally if the acquisition can be made at or below replacement cost."

Fourth quarter activity was bolstered by Northwestern Mutual Life Insurance Company's 817,972-square-foot purchase of Warren Corporate Center, a 170-acre campus originally built for AT&T in Warren Twp. In Englewood Cliffs, LG Electronics purchased 111 Sylvan Avenue, a 410,000-square-foot asset from Piedmont Office Realty Trust.

INDUSTRIAL RECAP

The pulse of the New Jersey industrial sector continues to beat slowly but steadily. The market experienced an uptick in leasing activity during the first half of the year, and remained steady for the second half. Year-over-year, leasing totals declined slightly, totaling 12.7 million square feet as compared to 13.5 million square feet in 2009.

However, eight new industrial transactions over 100,000 square feet closed during the fourth quarter, including kitchen cabinet manufacturer The Shekia Group LLC's 267,448-square-foot commitment at 1100-1130 King Georges Post Road in Edison.

Overall available industrial space for Northern and Central New Jersey combined remained fairly flat with a minimal year-over-year increase; primarily due to the positive absorption of several large blocks of space. The fourth quarter direct triple net weighted average asking rental rate averaged $5.79 per square foot, representing a $0.33 per square foot decline from fourth quarter 2009.

"The market certainly is seeing increased demand - there are more users in the market than there have been over the last two or three years," noted industrial specialist Stan Danzig, a Cushman & Wakefield executive director. "Deals are getting done, but rents are not yet reflecting this activity."

"We anticipate that supply will decrease by a couple of percentage points in 2011," he added. "Landlords are likely to firm up rents and become more aggressive as vacancies decrease. This will yield a more balanced market."

Industrial construction activity continues to be off pace, with just more than 1 million square feet underway in build-to-suits for Dupont Fabros Technology, Credit Suisse and Coca Cola.

Sales activity surpassed the 2009 total, with nearly 8.3 million square feet of industrial transactions recorded in 2010 compared to 5.7 million square feet. During the fourth quarter, imprinted apparel distributor SanMar Corporation acquired a vacant, 800,311-square-foot building at 141 West Manor Way for $29.5 million.

"While the industrial market had yet to regain significant statistical momentum, core properties with leases are trading well, and demand is improving," Merin said. "2010 sales pace was well ahead of 2009, and we expect that trend to continue in 2011."

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