Across all sectors, demand in New Jersey is sufficient to propel real estate markets for the foreseeable future.
Northern New Jersey's investment real estate market continues to maintain a torrid pace of new construction in both the office and industrial sectors matched by strong rates of absorption. Multifamily and retail divisions also exhibit gains in keeping with a vigorous state economy with no downturn in sight.
The state's job creation figures this year should match last year's total of approximately 70,000 - generating demand for all types of commercial facilities. With a jobless rate dropping as low as 3.4% and a median income exceeding $50,000 - compared with a national figure of $40,280 - it's easy to see why New Jersey can sustain a robust real estate industry within the framework of the nation's record 115-month economic expansion.
During the early years of the current growth cycle, office development was concentrated along the Hudson River waterfront and the state's major highway corridors. With demand continuing to outstrip availability in new and existing buildings, new construction has now spread across North Jersey beyond prime commercial centers.
"The office market has seen supply shrink from 32 million sq. ft. of vacant space in 1992-1993 to about 13 million sq. ft. - including both A and B space," observes David T. Houston Jr., president of Teaneck, N.J.-based Colliers Houston & Co. "This recovery cycle is quite different from preceding ones, when excess speculative construction left the market flooded with new space as an economic downturn began in earnest."
Advance commitments for proposed buildings promote a low vacancy and availability rate. Other market factors, including the lack of good sites in some locations, keep the supply relatively tight, resulting in rising rental rates. "Virtually everything under construction along the waterfront has been committed to tenants from New York, with financial services, insurance and publishing the source of demand," notes Houston, a former New Jersey Society of Industrial and Office Realtors (SIOR) president. He finds office space tight in Parsippany, Princeton and Bridgewater, despite new construction, as well as in Monmouth County. "High-technology and pharmaceutical companies dominate demand in these markets."
Unprecedented demand for both office and industrial facilities has created a true landlord's market, according to Donald P. Eisen, executive managing director for the New York area of Cushman & Wakefield of New Jersey (C&W/NJ), East Rutherford. "The continued emergence of dot.-com and telecommunications firms, the growth of hoteling, and a thriving business environment fuel the current real estate boom. Companies are vying for space in regions with substantial labor pools, including Morris, Bergen and Essex counties," explains Eisen. "The velocity of leasing activity throughout the state indicates the market remains tight for all businesses looking to establish or expand their presence here."
From the shore to the suburbs C&W/NJ reports that for the first half of the year, overall office vacancies were 9.9%; leasing activity exceeded 8.7 million sq. ft., resulting in 1.7 million sq. ft. of net absorption; more than 5.4 million sq. ft. was under construction; and Class-A rates averaged more than $29 per sq. ft.
"Tenants see New Jersey's pricing structure as a discount to New York City's rents, often getting new construction in the low $30 to $40 range, along with attractive state incentives," says David Sherman, senior managing director at Insignia/ESG of New Jersey. "Demand still outpaces supply, with developers and financiers continuing to be both conservative and responsible, insisting on tenant preleasing commitments of 30% to 50%, and avoiding speculative construction."
A statistical market overview by Insignia/ESG for the first three quarters finds leasing velocity at 13.6 million sq. ft.; net absorption doubling between May and October to nearly 2.8 million sq. ft.; and overall average rental rates at $24.38 per sq. ft.
SJP Properties of Parsippany, N.J., and Cranford, N.J.-based Mack-Cali Realty Corp., which last year decided to enter into a joint venture for an office development in New Jersey, are separately developing both Hudson River waterfront and upland office projects. Mack-Cali, a REIT, is expanding the 2 million sq. ft. Harborside Financial Center in Jersey City. SJP has launched construction of the mixed-use 1.1 million sq. ft. Waterfront Corporate Center in contiguous Hoboken, where publisher John Wiley & Sons has leased 400,000 sq. ft. in a relocation of its international headquarters from Manhattan.
The Goldman Sachs Group, a major New York financial services firm, is the latest to join the Jersey City expansion move, purchasing the remaining land in Colgate Center opposite the World Trade Center, where it will develop 3.2 million sq. ft. of offices. Work has begun on the first building of 1.3 million sq. ft. Hartz Mountain Industries, which has completed and leased two buildings totaling some 800,000 sq. ft., is marketing its third, a 1.5 million sq. ft. structure. And The Chase Manhattan Bank has signed a 20-year lease for the next two office buildings, totaling 1.1 million sq. ft., at the Lefrak Organization's Newport Center.
SJP and Mack-Cali will develop 645,000 sq. ft. of offices on a 47-acre tract purchased for $16 million at the Morris Corporate Center off Interstate 80 in Parsippany. SJP, headed by Steven J. Pozycki, one of the state's largest developers, already has completed 1.7 million sq. ft. of Class-A space at the Morris County complex. Other current SJP projects include a 620,000 sq. ft. build-to-suit under way for the North American headquarters of Aventis Pharmaceuticals in Bridgewater; 300,000 sq. ft. of offices on the Jersey City waterfront leased entirely to Merrill Lynch; and a recently completed 427,000 sq. ft. office facility in Woodbridge for Prudential Insurance.
The strong Princeton market, which straddles U.S. Route 1, has seen more than half of its office transactions in the first half of 2000 through technology-driven companies, according to Gerard Fennelly, president of Hamilton, N.J.-based NAI Fennelly. "These include the bio-pharmaceutical group, Internet/software, telecommunications/optics, and business/financial/legal," he explains. "Annual net absorption has exceeded 1 million sq. ft. for the past four years."
Adding to market growth are three build-to-suit developments: the 1.5 million sq. ft. RCN in Lawrenceville; the 90,000 sq. ft. Elementis in East Windsor; and the 40,000 sq. ft. Caxton in West Windsor. Fennelly, who estimates an overall greater Princeton vacancy rate of 6.68%, says that over 90% of the more than 800,000 sq. ft. of new office space completed in the first six months of this year was absorbed. Rents ranged from $26 to $32 per sq. ft.
Insignia/ESG reports Princeton's rents average nearly $25 per sq. ft.
"Demand for Princeton office space has maintained record levels and shows no signs of letting up," says Vincent Marano, COO of National Business Parks, which manages the 850,000 sq. ft. College Park at Princeton Forrestal Center. "Of the more than 800,000 sq. ft. coming on stream next year, the lion's share will be leased, as absorption is at about 1 million sq. ft. net this year." Declining availability exerts upward pressure on rents.
"Average rental rates are in the upper $20s per sq. ft., and expected to go to the $30s by the end of next year," adds Marano. "Ten-year leases are the norm for larger spaces, and work letters are at a modest $7 to $20. At College Park, rents have hit the $30 mark."
Betting on continued demand for new Princeton office and R&D facilities, National Business Parks will begin development this year - on a build-to-suit basis - for the first phase of Princeton Business Parks, a 185,000 sq. ft. building. The complex will ultimately comprise 350,000 sq. ft. of low-rise structures designed as research and development facilities, plus two four-story office buildings.
In contrast to the area's generally smaller low-rise buildings averaging 100,000 sq. ft., Melville, N.Y.-based Reckson Associates Realty Corp. has begun work on University Square, a five-story, 316,000 sq. ft. speculative office building at Route 1 and Alexander Road. The developer, a REIT, will self-fund the $45 million project, which will target larger space users, according to Jeffrey Schotz, senior vice president and managing director for the New Jersey region. Reckson also plans a 436,000 sq. ft. build-to-suit office complex at its prestigious Giralda Farms in Morris County.
With the success of Dallas-based Trammell Crow Co.'s initial spec Princeton office building, with 140,000 sq. ft. completed late last year and now largely leased, the firm launched a 72,000 sq. ft. unit expected to be finished in December. Other developers also have spec projects under way or soon to start totaling 750,000 sq. ft.
Florham Park-based Gale & Wentworth (G&W), one of New Jersey's largest real estate organizations, continues to develop high-profile corporate office complexes. Mountain View Corporate Center at the Interstate 78 interchange in Bernards Township will include 821,000 sq. ft. in six Class-A buildings ranging from 58,000 to 212,000 sq. ft. Availability begins next spring.
Mark Yeager, president of Gale & Wentworth Commercial Group, finds the market generally healthy in terms of supply, demand and absorption. "We believe the ongoing scrutiny applied by the capital markets has been positive, providing the proper checks and balances on speculative construction," he says. "The telecommunications and technology industries continue to show healthy growth, while we are keeping a watchful eye on recent consolidation within the financial, pharmaceutical and consumer products industries to determine their long-term effect on space needs."
Another current G&W project, The Center of Morris County, off interstates 80 and 287 in Parsippany, will total 850,000 sq. ft. in four buildings ranging from 100,000 to 410,000 sq. ft., with delivery to begin in the second quarter of 2001.
Houston-based Hines reports the purchase of a 20-acre site at the juncture of I-287 and Routes 22 and 202-206 in Bridgewater from The Rouse Co., Columbia, Md. Planned is Bridgewater Crossing, a campus-style office complex composed of two eight-story buildings totaling more than 500,000 sq. ft.
Newark, the state's largest city, continues its revitalization, abetted by a growing number of corporate tenants for the many Class-B office buildings undergoing upgrades and repositioning in the market. Adding to the draw for office space are the new New Jersey Performing Arts Center and a minor-league baseball stadium. And there's talk of building a downtown sports arena. These developments add up to a robust commercial real estate market where older buildings command higher rents after their transformation into highly functional office space in an area where supply is no problem.
"Newark, which seemed like the last stronghold, experiences tremendous demand as companies shift space searches from Jersey City - where available space is all but gone - and take advantage of the high-quality buildings and proximity to the best transportation system in the state," reports Seena Stein, president of Newmark & Co. Real Estate of New Jersey.
"No matter what happens on Wall Street," adds Stein, former state SIOR president, "New Jersey's real estate market will continue to see diminishing availabilities for the next several years. There is little doubt that new development is needed throughout the state to meet the space needs of companies searching the New Jersey market."
Newark's resurgence draws world-class investors and developers who are snapping up remaining opportunities, according to Douglas B. Haynes, president of Alexander Summer LLC of Paramus, which has repositioned 550 Broad Street, a landmark 280,000 sq. ft. building, after its purchase by an out-of-state investor group. "We have seen leasing activity by local companies as well as several from New York City for our lower rents and good workplace access," Haynes says.
New York-based Sonnenblick-Goldman Co. recently arranged the sale of the fully leased Three Gateway Center, a 19-story, 478,000 sq. ft. tower in downtown Newark for its owner, a partnership led by Gale & Wentworth and Morgan Stanley Real Estate Fund III. The partnership retains control of One and Four Gateway Center. Tahl-Propp Equities of New York purchased the property, which includes an adjacent surface parking lot. Built in 1984, the building is part of the mixed Gateway Center complex of four high-rise office buildings totaling 2 million sq. ft. and a 253-room Hilton Hotel.
Industrial: can't go wrong New Jersey's industrial market benefits from the economic boom and demand that exceeds available space, says Houston of Colliers. "Dominating the demand for industrial and flex space are third-party logistic and high-technology companies, with almost all of the new space rising in the New Jersey Turnpike exit 8A region, and a handful of buildings in and around the Meadowlands opposite Manhattan," Houston says.
C&W/NJ's Eisen reports the availability of industrial facilities dropped 33% from 55 million sq. ft. to 36.8 million sq. ft. over the past 12 months, indicative of heavy absorption. "The explosive growth of telecommunications, Web hosting and e-commerce companies is rapidly changing the industrial landscape across the nation and New Jersey," maintains Eisen.
Areas of Jersey City and the Meadowlands, and to a lesser degree Newark, are being promoted as new technology centers due to their location and abundance of older industrial buildings. According to C&W/NJ, the mid-year inventory of industrial space totaled approximately 750 million sq. ft.; the vacancy rate registered 5.1%; six-month leasing activity exceeded 13 million sq. ft.; 5.6 million sq. ft. of new space was under construction; and overall rents averaged $5.80 per sq. ft.
"Tenants seeking industrial space are beyond looking down the street, and are stretching their search to a 100-mile radius," says Benjamin Katz, senior managing director of Insignia/ESG. "Lots of tenants are marking time, taking temporary quarters until market conditions cool. Options have been further narrowed by product lost to telco hotel and other telecommunications/high-tech users."
Luxury dominates multifamily New multifamily construction is dominated by luxury high-rise projects featuring a host of amenities. Fort Lee-based Barrett Cos.' Half Moon Harbor on the Hudson River waterfront in North Bergen is typical of such projects. Half Moon Harbor will include 507 residences in two 12-story buildings featuring one-, two- and three-bedroom apartments 740 sq. ft. to 1,536 sq. ft., rents starting at $1,652 per month.
At the Portofino, a 26-story tower on the Jersey City waterfront, more than 90% of the 283 units have been leased since April through The Marketing Directors Inc. of Manhattan for the developer, Roseland Property Co. Studio apartments of 650 sq. ft. rent from $1,950 to $2,140 monthly; one bedroom, 745 sq. ft. to 781 sq. ft., from $2,100 to $3,000; two bedrooms, 1,019 sq. ft. to 1,301 sq. ft., from $2,560 to $3,920; and the three-bedroom penthouses with 1,495 sq. ft. that rent for $5,400 per month.
Florham Park, N.J.-based Kushner Cos. last month purchased the WNY Group, a privately held REIT headquartered in Freehold, N.J., for approximately $280 million. Kushner acquired WNY's entire apartment portfolio of 42 properties with more than 8,000 units in New Jersey, Delaware, Pennsylvania and Maryland. As a result, Kushner now owns more than 20,000 apartment units.
In the retail arena, New Jersey provides fertile ground for national, regional and local retailers, with stronger firms absorbing space vacated by weak competitors. Kohl's has invaded the state, as has Lowe's. Target is increasing its presence, while Home Depot continues to expand.
With no visible obstacles to deter it, the state's investment real estate market is expected to exhibit plenty of vigor during the months ahead.