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C&W: 2nd Quarter NJ Office Market Rebound Sets Stage for Rest of 2016

Following a brief stall in the first quarter, the Northern and Central New Jersey office market picked up steam in the second quarter of 2016, with increases in leasing activity and positive net absorption, according to new research from Cushman & Wakefield. Healthy demand is likely to continue through the remainder of the year, particularly for Class A space, with several notable deals in the immediate pipeline.

“After a lull in leasing activity, demand for office space picked up steam during the last three months as more than 2.3 million square feet of new transactions closed,” said Andrew Judd, Cushman & Wakefield’s New Jersey Market Leader, who noted that almost 70 percent of the 2Q deal volume was concentrated within Class A assets. “Barring unforeseen circumstances, we expect demand to remain healthy through the end of 2016 as the economy’s current direction continues. The market is poised to have annual absorption finish in the black at year-end for the second straight year.”

“Both submarkets of New Jersey finished out strong this quarter,” said Jason Price, research director, tri-state suburbs. “Northern New Jersey accounted for 58 percent of the 2Q leasing activity total with Parsippany, the Meadowlands, Hudson Waterfront and the I-280 Corridor all experiencing healthy leasing. In Central New Jersey, the I-78 Corridor and Monmouth County led the way in deal activity.” Price noted that, while deals in excess of 100,000 square feet continued to fuel activity, mid-sized leases (between 25,000 and 75,000 square feet) represented 34.5 percent of the total volume during 2Q.

Fueled by momentum in some key market segments – particularly in Bergen County, the I-280 Corridor, the Meadowlands, and the I-78 Corridor – the overall 2Q vacancy rate for Northern and Central New Jersey declined 60 basis points (bps) to 18.2 percent in 2Q, down from 18.8 percent in the previous quarter and its lowest rate in more than seven years.

Class A space saw close to 600,000 square feet of net absorption during 2Q, with the I-78 Corridor, Monmouth County and the Meadowlands comprising the bulk of the net occupancy gains. No market segments recorded substantial occupancy losses during that time. Year-to-date, the Northern and Central New Jersey office market has absorbed 747,400 square feet of space, which is well behind the torrid pace set at this time in 2015.

The improvement in overall occupancy was driven mostly by Class A leasing activity, with the Class A vacancy rate (19.6 percent) having dropped 60 bps since 1Q and 140 bps year-over-year. The removal of Mack-Cali’s vacant 1 Lake Street (472,000 square feet) from the statistical inventory was a notable contributor to this decrease. The campus, formerly occupied by Pearson Education, is slated to be redeveloped into luxury townhouses with a moderate income housing component.

Driven mainly by ascending rents within Class A assets, asking rents in both Northern and Central New Jersey were recorded higher in the second quarter of 2016. The Class A direct rental rate exceeded $30.00 per square foot for the first time since 3Q 2014. At $30.04 per square foot, the Class A rate rose by almost $0.30 per square foot since 1Q, and has risen 1.2 percent since this time in 2015. Class B rents have remained stable throughout 2Q.

The top deals rounding our 2Q include:

  • Daiichi Sankyo signed a 302,000 sf lease at 211 Mount Airy Road in Basking Ridge. The pharmaceutical company will consolidate its Metropark and Parsippany locations once it assumes occupancy.
  • Crum & Forster inked a short term 130,740-sf lease for swing space at 260 Cherry Hill Road in Parsippany. The insurance agency also recently purchased 305 Madison Avenue in Morristown (275,000 sf), a building it has occupied for almost 10 years.
  • Quest Diagnostics will relocate its headquarters to 500 Plaza Drive in Secaucus. The 130,000-sf lease included more than $18 million in Grow NJ incentives, allowing the company to vacate space in both nearby Lyndhurst and Madison.
  • Over 110,000 square feet of leases have been signed at the Bell Works complex in Holmdel. The campus has become a hotbed for technology-related companies, including WorkWave LLC who took 72,000 sf.

Other notable transactions included:

  • A 388,207-sf renewal and expansion by Bank of America in Jersey City
  • Connell Foley’s 75,000-sf lease at 56 Livingston Avenue in Roseland
  • Hackensack University Health Network/Meridian Health Systems’ 61,068 sf transaction in Metropark
  • A 59,848-sf lease by Tangoe at 169 Lackawanna Avenue in Parsippany.

With several notable deals in the immediate pipeline in key market segments such as the Waterfront and I-78 Corridor, Cushman & Wakefield anticipates steady activity through the remainder of 2016. However, there are numerous blocks of space coming online in the Garden State that could keep the overall market’s occupancy levels from further improving substantially. This includes Bristol Myers’ 650,000 square foot space at 777 Scudders Mill Road in Princeton which they will vacate at the end of 2016, Daiichi Sankyo relocation in late 2016 which will leave behind large blocks of spaces in Parsippany and Metropark, and additional mid-sized blocks of space slated to come online in the next few quarters in the Waterfront, Princeton, and Parsippany.

“While these spaces will have an impact, we foresee most key submarkets remaining stable or experiencing slight declines in vacancy over the second half of 2016,” added Price. Landlords of prestigious assets in ideal locations should continue to demand premiums over the remainder of the market and Class A rents should tick slightly higher in the coming months as a whole.

Looking towards 2017 in Northern and Central New Jersey, there is currently over 3.4 million square feet of office space available for lease that has yet to be vacated, including some of the aforementioned blocks of space. Many of these spaces are expected to become vacant over the course of 2017 and the introduction of this space would bring the state’s availability rate to 20.0 percent at 2Q. The largest of these blocks of space not currently reflected in vacancy statistics is Warren Corporate Center, where over 661,000 square feet are potentially available for lease, despite currently being leased and not fully occupied by Citigroup.

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