Real Estate

New Jersey’s Commercial Real Estate Diagnosis is … Alive and Well

Demanding need for industrial space carries on, while office market reports boast lowest availability rate in 10 years.

The U.S. economy continued to expand in 2018 as job growth forged ahead on its rise and more employees entered the workforce. As a direct result, wages experienced their best year-over-year increase in a decade.

As it (directly) relates to the industrial market, manufacturing and construction jobs grew in 2018 by 12 percent and 37 percent, respectively. Simultaneously, consumption and consumer spending also improved (e.g., holiday retail sales were the strongest in six years). All of this spending, accompanied by non-stop e-commerce growth (the industry in the driver’s seat of the industrial property sector), New Jersey’s industrial real estate market once again profited well from consumer demand.

At year’s end, the Garden State’s industrial market posted a strong fourth quarter with 6.5 million square feet of leasing transactions, and topped four million square feet of net absorption. This strong net absorption drove the annual total to 11.6 million square feet.

Total available space fell from roughly 56.9 million square feet to 54.3 million square feet, a decline of 30 basis points (bps) to 6.6 percent. At the same time, the overall vacancy rate is just 3.3 percent, a drop of 20 bps year-over-year.

On the investment sales front, investors were once again active in the fourth quarter, with 43 sales taking place. Notably, larger properties were most desirable to buyers, with 24 of the sales representing buildings equal to or greater than 100,000 square feet. As a result, the total size of all properties that traded exceeded 6.8 million square feet, an increase of nearly 13 percent above the third quarter.

Conversely, New Jersey saw about $2.6 billion in industrial property sales in 2018 as the market for warehouse and distribution facilities flourished in order to meet the demands of e-commerce. According to Colliers International, the mean price for industrial space in the Garden State reached $126.67 per square foot last year, 19 percent higher than the year before.

“The industrial market continued on a hot pace during the fourth quarter, a trend that we don’t see abating any time soon,” says Thomas Monahan, vice chairman, CBRE. “New Jersey benefits not only from its prime location (referring to New Jersey’s proximity to New York City and access to major transportation routes via the Port of New York and New Jersey) in the northeast corridor, but also from the ever-evolving market dynamics and business requirements by the e-commerce industry.”

The market also added seven buildings totaling just over two million square feet in the fourth quarter, increasing base inventory to nearly 825 million square feet. Last year saw a record number of new completions at 10.3 million square feet, and the year ended with 24 buildings under construction, which will add more than 7 million square feet to the market upon completion.

Along the lines of new construction, another interesting trend has reemerged, and continues to present itself as a result of e-commerce driving up demand; that trend is spaces being fully leased prior to or during the construction process.

A showcase example of this was a transaction arranged by CBRE for Capacity LLC, well-known leaders in order fulfillment, e-commerce and electronic data interchange (EDI). Capacity has committed to a 300,000-square-foot lease at 1601 Livingston Avenue in North Brunswick. Currently under construction, and built to suit, the new property is slated for occupancy in February 2020. CBRE Vice President John Maloney represented Capacity LLC in the lease negotiations.

“This site expands Capacity’s footprint in North Brunswick, with optimal transportation options and a centralized labor pool,” Maloney says. “This new Class A development will provide Capacity with 36-to-40+ foot clear ceilings and 10,000 square feet of custom renovated office space serving as its new headquarters. After conducting a highly targeted market analysis, we ascertained that 1601 Livingston Avenue met all of our client’s requirements,” Maloney adds.

“John Maloney and his CBRE team were instrumental in executing this deal, exhibiting deal patience and strategic oversight of our continued expansion in a very challenging real estate market,” says Arlen Fish, chief financial officer at Capacity.

Some other notable industrial transactions included a 544,518-square-foot lease renewal and expansion by Pioneer Commodities at 1665 Jersey Avenue in North Brunswick; a 459,822-square-foot lease by Gucci at 150 Totowa Road in Wayne; and a 382,596-square-foot new commitment by Caravan Food Products at 700 Union Boulevard in Totowa.

On the office front, according to fourth quarter 2018 market reports, the New Jersey office market has posted its lowest availability in 10 years. Fourth quarter leasing activity in New Jersey has continued to increase year-over-year by approximately 113,000 square feet, although annual activity was down by roughly 8 percent compared to 2017. Moreover, with 1.6 million square feet of net absorption, the market recorded its highest annual total since 2005. In fact, absorption was positive in 2018 in three of the four quarters.

During the fourth quarter of 2018, the New Jersey market posted an availability rate of 20.4 percent, while the average asking lease rate ended the year at $26.45 per square foot. This was the second highest average rate recorded since the first quarter of 2002.

“The year ended on a high note with many encouraging signs for the New Jersey economy and office market, including the lowest unemployment rate since 2001,” says Rémy P. deVarenne Jr., senior vice president, CBRE. “Although we have seen positive momentum during the past few years, we are cautiously optimistic about the future,” he adds.

Another trend in today’s office market is that as leases come due, some tenants stay in place, while others may move to a new building in what is usually a flight to quality. In turn, property owners are being proactive in putting together extensive capital improvement packages. Commercial building owners/investors, brokers and construction professionals are all in agreement that the emphasis today is clearly focused on “repositioning” the existing inventory by renovation, accomplished by reinvention achieved through major fit-outs (i.e., capital improvements).

In this case, a stellar example of the aforementioned renovated properties is 2 Gatehall, the newly-renovated Class A office property in Parsippany. Electronics industry giant Ricoh USA has leased 55,893 square feet at 2 Gatehall. The new location will house back-office operations for the production print products, services and solutions firm.

Cushman & Wakefield’s William O’Keefe, Charles P. Parmelli, Curtis Foster, and Jerry Shifrin represented landlord Silverman Realty Group Inc., of White Plains, New York, in brokering the long-term lease. Drew W. Persson of Newmark Knight Frank served as broker for Ricoh USA, which will relocate to 2 Gatehall from West Caldwell.

A recently completed, multi-million-dollar renovation at the Class A office property was key in securing the Ricoh USA commitment. “Silverman Realty Group orchestrated a comprehensive improvement program to elevate 2 Gatehall’s position as a go-to address,” O’Keefe says. “This effort to attract high-end companies and build on an already impressive tenant roster is proving out,” he adds.

“The redesigned, three-story atrium lobby serves as a central common area and access point to 2 Gatehall’s offices and amenities and features a new skylight installation, an innovative, multi-purpose furniture plan and modern finishes,” Parmelli says. This space is large enough to host town hall-style meetings and includes a technology package and workspaces, while also serving as a social gathering area with lounge-style seating and a fireplace. A new full-service café provides breakfast and lunch, offering hot and cold stations as well as catering options for meetings and events. The main dining area for the café is located off the central atrium with additional outdoor courtyard seating. Tenants also enjoy an espresso bar serving hot drinks and grab-and-go food options.

Other major Garden State leases in the fourth quarter included Phillips-Van Heusen’s 224,000-square-foot renewal at 1001 Frontier Road in Bridgewater; Sumitomo Mitsui Banking’s 74,000-square-foot renewal and 36,000-square-foot expansion at Harborside Plaza 2; and First Data Corp.’s renewal for more than 48,000 square feet and addition of nearly 32,000 square feet at 101 Hudson Street, both owned by Mack-Cali.

Another key industry that continues to play a major role and have a direct effect on the New Jersey commercial real estate market is that of the life sciences sector, where limited supply coupled with increasing demand is driving up real estate purchase costs and leasing prices.

“New Jersey historically has been a life science hub, and the industry continues to play a major role in the state’s economy,” says Cushman & Wakefield’s Jason Price, director, Tri-State Suburbs Research. “The Garden State is in an ideal location for many life science companies due to its proximity to New York City and central location in the heart of the nation’s Northeast Corridor, connecting Boston and Washington, D.C. via I-95.

“Additionally, many mid-sized and large-sized pharmaceutical firms occupy office space in New Jersey as either global headquarters or regional offices,” Price adds.

While currently home to 13 of the top 20 biopharma companies, New Jersey has experienced a slight decline in the number of big-pharma companies since the recession due to both mergers and acquisitions and some firms migrating out of state. However, since 2014, the number of life science operations has risen to over 3,280. New lab projects announced in 2018 include Quest Laboratories’ 250,000-square-foot development at Prism Capital Partners’ ON3 in Clifton, and Celgene’s 107,710-square-foot expansion at Powderhorn Associates’ 7 Powder Horn Road in Warren.

One thing is for certain: New Jersey’s desirability along with its robust economy and access to a multitude of various types of commercial real estate options to accommodate and house nearly any size and type of business in both the office and industrial sectors will keep our state’s commercial real estate business flourishing.

“If the world stops spinning on its axis, for whatever reasons, I still think real estate is somewhat insulated [because] in general, businesses need a place to house their workers,” adds Andrew Judd, managing principal, New Jersey market leader, Cushman & Wakefield.

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