Real Estate

A Mixed-BagEconomy is Impacting Commercial Real Estate

Deals are getting done, and there is hope that interest rates will stabilize, and recessionary fears will subside.

Despite economic red flags such as high interest rates, inflationary pressures and overall market uncertainty, New Jersey’s commercial real estate industry still shows healthy signs – albeit with a cooling of the red-hot industrial sector and an ongoing need to repurpose lower-quality office space.

“The (industrial) market is still good,’’ says James Delmonte, vice president and director of research for NAI James E. Hanson, citing low vacancy rates in the state’s northern and central regions.

Delmonte notes the phenomenal demand for industrial space in recent years is leveling off, with expectations for “just a normal kind of demand and normal kind of rent growth,’’ moving ahead in the post-pandemic era.

“There are still question marks over the economy, but if you look at indicators – inflation is starting to come down – although it’s still a concern,’’ Delmonte explains. “Interest rates are still going up. However, the job market remains resilient. So, it’s kind of a mixed bag. … It’s hard to predict anything with the economy right now.’’

Dennis Waggner, executive managing director of Colliers, agrees: “There are some challenges going on in the commercial real-estate field,’’ including a glut of office space, sluggish retail, and the troubling economic indicators.

However, he says New Jersey’s strategic location, high-level workforce, quality-of-life amenities, strong infrastructure and government business incentives fuel his overriding optimism.

“We’ve been through this before,’’ Waggner says. “The commercial real estate industry (has) always proven to be resilient. … It always bounces back.’’

For Jeff Hipschman, CBRE’s senior managing director, the biggest issue right now is economic uncertainty.

“Businesses don’t like uncertainty. So, they either slow down or stop decision-making,’’ Hipschman says. “And the more uncertainty there is in the marketplace, the more you see resistance to making large capital decisions.’’

Growth, however, has been robust at the Port of New York and New Jersey, once again the nation’s busiest port – outpacing California’s top ports with a record number of containers handled in 2022.

“In the industrial sector, if we look at demand, there has been sustained growth and activity at or around the port, driving market activity in New Jersey,” explains Hipschman, noting that thriving third-party logistics (3PLs) companies were responsible for nearly 50% of the Garden State’s market activity in Q1 2023.

Even so, 3PLs “don’t like to make huge commitments’’ and municipal resistance to warehousing continues to increase, resulting in the bulk of activity now involving projects with less than 250,000 square feet, according to Hipschman.

“New developments will need to accommodate newer technologies, including robotics and AI for fulfillment, and then also larger and larger parking requirements for expansion and delivery,’’ he adds.

The pandemic-era’s exponential growth in remote work – with high levels of hybrid office-home work situations continuing – has taken its toll on some sectors of the state’s office market.

“There is a flight to quality,’’ says Waggner of Colliers, noting that tenants increasingly want buildings with top-notch amenities. “They’re looking for nice space and that means Class A buildings,” he says.

Class A, and so-called trophy office space, which are rich in amenities and geographically desirable, remain strong as employers seek to entice employees back to the workplace, say industry experts.

Office space availability in New Jersey is significantly high at a rate of nearly 25%, with a flood of sublet space, as many employers look to reduce their office footprint – even as they seek more desirable space given the proclivity of employees to continue working from home.

“Offices are no longer competing with other office buildings, they’re competing with the home environment,’’ says Carolina Gutierrez, manager of leasing and marketing at Alfred Sanzari Enterprises, which owns and manages Teaneck’s Glenpointe, a 1.2 million-square-foot mixed-use, high-amenity complex of office, hotel, restaurant, and fitness space. “A lot of people are like, ‘Ah, there’s got to be a compelling reason for me to commute now,’’’ she says.

Gutierrez describes office complexes loaded with these amenities and centrally located in attractive areas as “destination buildings.’’

Demand for quality office space is extremely robust in pockets of New Jersey, such as in-demand places like Morristown, the Garden State Parkway corridor, Paramus, and the redeveloped Hackensack downtown, say Gutierrez and other industry followers.

Lesser quality Class B and Class C office spaces are paying the price – facing the need to significantly upgrade or be repurposed to other uses, says Hipschman of CBRE.

“The Jersey market will continue to see the removal of these obsolete office buildings, which is good,’’ says Hipschman. “Clearly, the better buildings are going to win out in terms of demand.”

Conversions of office space to residential or industrial uses are enormously challenging and often not cost efficient, at times leading to teardowns and/or other uses in fields like healthcare and life sciences.

Onyx, for example, took over a former Merck pharmaceutical campus in Kenilworth earlier this year. In early May, it leased a 46-acre campus in Summit to Johnson & Johnson spinoff Kenvue for its new global headquarters.

In late May, Onyx announced plans for the Northeast Science and Technology (NEST) Center at the Kenilworth location. The more than 2-million-square-foot purpose-built research and development campus will consist of 1.4 million square feet of laboratory buildings; offer 30 acres of redevelopment opportunities specifically zoned for research, laboratories and manufacturing facilities; have 500,000 square feet of Class-A professional office space; and have state-of-the-art amenities to create a vibrant campus culture, including a heliport, fitness center, conference centers, and green space.

Meanwhile, New Jersey’s multi-family housing sector also has been a bright spot, particularly the trend toward Transit-Oriented Developments (TODs) that seek to develop residences around train stations and vibrant downtown areas.

“We still think New Jersey is a good place to be,’’ says Steven Lidster, director of development for Denholtz Properties, which focuses on smaller multi-tenant warehouses and multi-family rental dwellings – particularly TODs.

“You’re starting to see a pretty significant gap between the mortgage payments vs. rental rates,’’ Lidster says. “On the multi-family (rental) side, that helps you out quite a bit.’’

Denholtz last year opened The Rail at Red Bank, a 57-unit luxury residential apartment complex at the downtown train station. The company also is building The Rail at Bound Brook with 143 units and, by year’s end, hopes to begin construction on The Rail at Asbury Park with 125 units planned.

Looking ahead, Waggner of Colliers is forecasting a strong second half of 2023 for New Jersey’s commercial real-estate market, saying he anticipates both stabilizing interest rates and subsiding recessionary fears.

Colliers’ recent $46 million industrial investment sale of 187 Davidson Avenue in Somerset is boosting his optimism.

“That speaks volumes about the strength of not only industrial, but capital markets,’’ Waggner says. “As deals like that continue to get done, it’s going to solidify the belief that we’re headed in the right direction.’’

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