Tri-State Review

NY/NJ/Conn. corridor sees strong commercial leasing and sales activity. Relatively strong sales and leasing activity in the tri-state corridor's investment real estate sector is indicative of the continuing market recovery and upturn. The recession of the early '90s is history.

The inventory of office and industrial space declines as rental rates move higher. Most new construction falls in the build-to-suit category, with the few speculative projects demanding substantial preleasing. And the influence of real estate investment trusts (REITs) on the marketplace still grows.

Connecticut Major brokers in the Fairfield County market agree that the office sector turned in a solid performance during 1997, showing strong gains in leasing activity and absorption, higher rents and lower availabilities.

"Fairfield County is enjoying a period of sustained economic growth characterized by low unemployment, business expansions and completion of key infrastructure improvements to its transportation network," says Michael Klein, executive director at the Insignia/Rostenberg-Doern office in Stamford.

Klein notes that 1997 saw leasing activity up 15%, absorption exceed 1 million sq. ft., the average countywide asking rent move from $19.54 to $21.42 per sq. ft., and the vacancy rate slide to 11.2%. Asking rents range from $26.27 per sq. ft. in the Stamford CBD to $19.29 in the Fairfield East submarket.

A shortage of large blocks of space in downtown Stamford has generated renewed interest in office construction, according to Klein, with current planning for some 1.8 million sq. ft. of new space. "With rental rates now exceeding $30 per sq. ft. for Class-A space, speculative office construction, which the market has not seen since the 1980s, may return in 1998," he explains.

Fairfield County's largest transaction last year was the completion of the initial 615,000 sq. ft. phase of the SBC Warburg/Dillon Read & Co. (Swiss Bank Corp.) North American headquarters in Stamford, with an ownership interest acquired by Pitney Bowes Credit Corp. in a sale-leaseback transaction.

According to Newmark & Co. Real Estate Inc., Hewitt Associates plans to break ground soon on a 250,000 sq. ft. office building at the Merritt 7 Corporate Park in Norwalk near its leased facilities.

In the town of Fairfield, the most prominent acquisition at year's end was made by a REIT, as Starwood Capital Group acquired the Class-A, fully leased 411 West Putnam Avenue for $172.50 per sq. ft.

Greenwich, which enjoyed tremendous leasing activity during the first three quarters of '97, was quiet during the fourth quarter, according to a Newmark report. Fairfield County's most expensive and tightest office district posted a slight rise in the vacancy rate from 3.9% to 4.1%, less than 180,000 sq. ft. Yet, rents rose during the quarter to $28.75 per sq. ft., up 14.8% from a year ago.

The Research Services Group at Cushman & Wakefield (C&W) of Stamford,Conn., reports that available office space declined by more than 900,000 sq. ft. in Fairfield County during the past year, cutting the vacancy rate by three percentage points to 11%. C&W puts the total inventory at more than 36.5 million sq. ft. and estimates that leasing activity topped 3.6 million sq. ft., net absorption was at nearly 681,000 sq. ft., and the average asking rent was $21.58 per sq. ft., up from $19.85.

"During the year, REITs and pension funds spent over $700 million to acquire property in Westchester and Fairfield," says the Newmark report. "With these purchases, REITs are now the most significant owners of office properties in the region."

"REITs and pension funds will be the most active buyers as they have been elsewhere in the country because of their easy access to capital," says Kim E. Mowers, senior vice president and district manager of Grubb & Ellis in Connecticut.

The county's industrial property sector is extremely tight, with few available warehouse/distribution and flex buildings available. The vacancy rate is estimated at around 5%. There are few units in the range of 50,000 to 75,000 sq. ft. and only a handful of build-to-suit projects under development.

Westchester County, N.Y. Contiguous Westchester County, N.Y., also benefits from the increasing demand and declining availability of large blocks of Class-A office facilities as well as industrial or flex buildings. According to C&W, the county's total office inventory of more than 31 million sq. ft. has a 14.9% vacancy rate -- down two full percentage points in the past year. Average asking rents have also risen to $24.11 per sq. ft., up from $22.80.

The most significant decrease in the supply of available space occurred in the White Plains CBD, where total net absorption rose to 570,000 sq. ft., reports Newmark & Co. At 26.6%, the White Plains CBD vacancy rate remains the highest in Westchester County.

Westchester's leasing activity for the year totaled approximately 2.1 million sq. ft., down from 3.2 million sq. ft. in 1996, according to an Insignia/Rostenberg-Doern market report. Activity and absorption were strong in eastern Westchester -- the county's largest office market, which includes Harrison, Rye, Purchase and the White Plains environs -- where leasing exceeded 675,000 sq. ft.

A number of positive elements should bolster Westchester's economy and help position the office market for continued growth this year, says Insignia director Klein. "For example, the Cohen Brothers Realty Corp.'s recent announcement of its acquisition of the former Kraft Foods headquarters in White Plains is a sign of the market's fundamental strength," he adds. "Nine West Group's relocation to new headquarters in White Plains and the construction of Swiss Re America's new U.S. headquarters in Armonk are also significant."

Situated on a 39-acre campus just east of downtown White Plains, the Kraft Foods property comprises four interconnected mid-rise buildings totaling more than 600,000 sq. ft.

"Our target will be large triple-A corporate users who need blocks of 50,000 sq. ft. and up," says Cohen Brothers President and CEO Charles Steven Cohen.

"This transaction is a win for the White Plains community," says Robert A. Eckert, Kraft president and CEO.

In Armonk, IBM is completing a new three-story, 280,000 sq. ft. headquarters building near its existing 400,000 sq. ft. facility. Across Route 120 opposite the IBM campus, Swiss Re America's new 300,000 sq. ft. U.S. headquarters takes shape.

Also, Reckson Associates Realty Corp. continues to expand its Westchester portfolio. Last year, the Melville, N.Y.-based REIT acquired the Royal Executive Park, a 540,000 sq. ft. office complex in Rye Brook, with land for an additional 350,000 sq. ft. of new construction and the 205,000 sq. ft. Christiana Building in Tarrytown.

Northern New Jersey Just west of the Hudson River, the 10-county northern New Jersey investment real estate market experienced a year in which the recession became a still-fading memory.

Business confidence is reflected in the demand for office and industrial facilities. The 10-county inventory is estimated as high as 150 million sq. ft. Availabilities in the rental office market continue to decline, and the dropping vacancy rate is not being offset by new construction. C&W of New Jersey reports that 1997 leasing activity exceeded 12 million sq. ft., resulting in net absorption of more than 5 million sq. ft. According to C&W, North Jersey's office vacancy rate stands at 13.1%, down from 16.4% during the past year. A low supply raised average asking rents to $20.27 per sq. ft. compared to $19.50 a year earlier.

CB Commercial's regional office vacancy index stands at 10.4%, with average asking rents at $20 per sq. ft. -- up from $18.72 per sq. ft. since the first quarter of 1997.

Insignia/ESG's New Jersey office puts 1997 office space leasing velocity at nearly 10 million sq. ft., net absorption at some 1.2 million sq. ft. and the current vacancy factor at approximately 11.6%.

"The average asking rent throughout the state climbed nearly $1.35 per sq. ft. from year-end 1996 to $21.41 per sq. ft. Despite this increase, New Jersey still remains a compelling financial alternative for New York City companies," says Thomas Bermingham, executive managing director at Insignia/ESG. "Industrial properties are now becoming the hot ticket."

According to Donald P. Eisen, C&W executive managing director, the strong demand and dwindling supply of Class-A office space and quality warehouse/distribution facilities have prompted owners and tenants to seek alternative opportunities through renovations and conversions of existing space.

"While upgrades of existing buildings have been prevalent for years, the activity we are now seeing goes far beyond the traditional aesthetic retrofits," says Eisen.

Eisen predicts that the upsurge of new office and industrial construction will not dampen retrofit activity for adaptive reuse this year simply because it takes significantly less time to retrofit space than to build new product.

"The state has just modified the Uniform Construction Code Rehabilitation Subcode, allowing retrofits and upgrades while minimizing unnecessary requirements," says Peter Wisniewski, vice president of Chatham-based David Cronheim Co.

"It's just not only prime space that's in demand," says Seena Stein, president of Newmark Partners Inc. in Rutherford. "We've just brokered the sale of several Class-B buildings in Newark, Parsippany and Somerset to investors that ordinarily wouldn't be interested in Class-B property -- and the bidding was very competitive."

Stein was a member of the Newmark team which handled the sale of the 33-story, 650,000 sq. ft. building at 744 Broad Street in downtown Newark to Cogswell Realty Group LLC, a Manhattan-based investor. The 67-year-old structure will undergo a $45 million upgrade. Stein contends that REITs are affecting the market by offering strong bids, even for Class-B buildings, and pushing prices up to a point where most other investors can't compete.

REITs are a major force behind the success of the current real estate market, with plenty of capital and a voracious appetite for acquiring product, according to John J. Garibaldi, executive vice president/director of The Garibaldi Group in Chatham. "Yet it is still premature to determine the overall impact they will have on the industry," he says.

Garibaldi negotiatied the sale of an undeveloped 187-acre portion of Giralda Farms, which straddles Madison and Chatham, to Reckson Associates. The REIT, he says, plans to develop 450,000 sq. ft. of office space.

Prudential Insurance, which is marketing much of its real estate holdings nationwide, sold the Giralda land.

Reckson also purchased a pair of Class-A office buildings totaling 308,000 sq. ft. in Short Hills -- fully occupied by AT&T -- for more than $51 million. The REIT also is partnering with Cranbury-based Matrix Development Group in industrial and office projects in central and south Jersey.

Mack-Cali Realty is by far the largest locally based REIT, created when Cali Realty joined with the Rochelle Park-based Mack Co. Cranford-based Mack-Cali controls some 8% of New Jersey's office space, including about 20% of all Class-A facilities, and continues acquiring properties. It also reports plans to develop more than 5 million sq. ft. of office buildings on the Jersey City waterfront.

Among other REITs operating here are Vornado Realty Trust of Saddle Brook, First Industrial Realty Trust of Chicago and Security Capital Industrial Trust of Aurora, Colo. Security Capital is developing the 95-acre Cranbury Business Park, comprising 2 million sq. ft. of warehouse space.

With a vacancy rate of 7.4%, according to Fennelly Associates, the Princeton area is one of the tightest and hottest office markets, where lack of product demands new construction. Some of that need may be satisfied by converting mixed-use buildings into office space.

At the 2,200-acre Princeton Forrestal Center straddling U.S. Route 1, David H. Knights, marketing director, reports activity on several fronts at the mixed-use complex.

Needham, Mass.-based CareMatrix's construction of a full-service retirement community progresses, with two of five components completed. Under way is a 153-room Courtyard by Marriott targeted for September completion. Knights also reports that Princeton Forrestal Village, the center's commercial component owned by Starwood, will expand the 300-room hotel by an additional 100 rooms.

Scheduled for an early spring construction start is a speculative 170,000 sq. ft. office building sponsored by 650 College Road Associates L.P., a partnership of Aegis Property Group and Berwind Property Group Inc. The 12-acre site adjoins the 250,000 sq. ft. structure at 600 College Road, which is already owned by Aegis.

In Bridgewater, Prudential Insurance and TrizecHahn Centers, owners of the multi-use Bridgewater Commons regional center, have reached an agreement with Marriott Hotels to build an eight-story, 320-room hotel/conference center on an eight-acre site opposite the 900,000 sq. ft. Bridgewater Commons shopping mall. The $45 million project will begin in the spring, with hotel development paralleling the initial phase of retail expansion.

Courtyard by Marriott hotels also are planned in South Brunswick, West Orange and East Rutherford. Under construction is a 13-story, 200-room Club Hotel by Doubletree near the Hudson River waterfront in Jersey City. Fairfield-based Prime Hospitality Corp. is completing two AmeriSuite hotels: a 124-room property on Route 1 in Princeton and another with 159 rooms in the Secaucus Meadowlands.

More than 1 million sq. ft. of office space is under construction across the region, although only three projects are purely speculative. Eagle Rock III, a 115,000 sq. ft. building, rises on Eagle Rock Avenue in East Hanover, sponsored by Sym Heller Associates and G. Heller Enterprises.

Connell Realty & Development Co. is moving ahead on the first of three buildings to total 800,000 sq. ft. at its 70-acre Connell Corporate Park, off Interstate 78 in Berkeley Heights. The eight-story, 285,000 sq. ft. structure is being financed entirely by the developer, a wholly owned subsidiary of The Connell Co.

A late spring groundbreaking is scheduled for another speculative office development by Hartz Mountain Industries on a one-acre site at Colgate Center on Jersey City's Hudson River waterfront. Hartz paid $10 million for the property, where a 12-story, 400,000 sq. ft. building will rise. Hartz also is a partner in the nearby Doubletree hotel project.

North Jersey's industrial sector matched the office market, registering an estimated vacancy rate of 7.2% at year end, nearly two percentage points below a year earlier. According to C&W's Research Services Group, availabilities decreased by 13 million sq. ft. Leasing activity during 1997 totaled nearly 25 million sq. ft., 2.8 million sq. ft. higher than at the endof 1996. Asking rents run around $4.50 per sq. ft.

C&W predicts that the industrial market's vacancy rate will fall below 2.5%. Construction levels are expected to remain steady and renovations of obsolete buildings in prime locations will increase.

The size of the New Jersey industrial market inventory approximates three-quarters of a billion sq. ft. Last year's sales exceeded more than 8 million sq. ft. of all types of buildings.

The region's multifamily housing market remains tight. New contruction takes place in downtowns undergoing revitalization. The next phase of New Brunswick's redevelopment sector, for example, will include 82 rental apartments and seven three-level townhouses expected to be priced from $180,000 to $225,000. A previously completed five-story, 117-unit rental project offering apartments from 700 to 1,000 sq. ft., commands monthly rents of $875 to $1,400.

Local industry pundits see another good year ahead, considering the healthy state and national economies and still-rising business confidence.

Dillon Karsian is a Hackensack, N.J.-based writer and a former president of the National association of Real Estate Editors.

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