Office Market Sees Pre-Recession Level of Demand

On Nov 21, 2016

Year-to-date, quarterly demand in New Jersey’s office market reflects activity volumes that haven’t been seen since before the recession, according to CBRE Group Inc.’s Q3 2016 New Jersey Office MarketView Report.

Q3 2016 marked the strongest quarter of leasing velocity since 2007, with 2.78 million sq. ft. of new leasing that resulted from an anomalous volume of large deals. The market recorded twelve new lease transactions greater than 50,000 sq. ft., totaling 1.90 million sq. ft. and representing 68.2% of total quarterly velocity. Three submarkets surpassed the 450,000-sq.-ft. velocity mark this quarter: The Waterfront (563,472 sq. ft.), Morristown (510,886 sq. ft.) and Route 287/78 Interchange (451,300 sq. ft.).

“The most recent economic downturn forced transformational change in New Jersey’s office market and created a “new normal” for quarterly leasing velocity that had lasted until recently,” said Leo Paytas, senior vice president at CBRE. “That has officially changed in 2016, as the market recorded historically healthy activity with pre-recession levels of demand for office product.”

Demand for Class A space drove much of the activity recorded in the third quarter. Class A properties captured 85.0% of new leases completed during the quarter; notable given that Class A properties account for only 55.5% of total officeinventory. Allergan committed to 5 Giralda Farms in Madison (465,000 sq. ft.), iCIMS signed a lease for a substantial portion of the available space at Bell Works/101 Crawford’s Corner Road in Holmdel (342,375 sq. ft.), and Mallinckrodt Pharmaceuticals will build out a new campus at 1405-1425 Route 206 in Bedminster (232,998 sq. ft.).

As the result of strong leasing activity, New Jersey recorded 268,107 sq. ft. of absorption—marking the second consecutive quarter of positive growth. While historically healthy leasing should have generated a stronger absorption figure, new available supply limited the positive momentum seen during Q3 2016. Most notably, Valeant Pharmaceuticals added 310,000 sq. ft. of sublet space onto the market at 300 Somerset Corporate Blvd. in Bridgewater.

The state’s average asking lease rate is $25.40 per sq. ft., $0.16 less than that of the previous quarter but just $0.41 below its peak rate set in 2007. The Waterfront submarket, however, recorded a historic $2.50 rent increase this quarter. Chatham/Millburn/Short Hills, at $31.52 per sq. ft., and Montvale/Woodcliff Lake, at $27.15 per sq. ft., also topped the list of the state’s most expensive submarkets.

“While New Jersey maintains a steady average asking lease rate, the market witnessed a slight fall this quarter due to the onset of available sublet space and the removal of 5 Giralda Farms,” said Nicholas Hilton, senior vice president at CBRE. “However, submarkets with an abundance of top-quality product, such as the Waterfront, did experience significant rent growth.”

The Grow NJ Assistance Program continued to stimulate market activity this quarter. In Q3 2016, tax incentives were awarded to 68.8% of transactions over 50,000 sq. ft., equating to 1.65 million sq. ft. With this incentive program sun setting in July 2019, occupiers will be increasingly pressured to evaluate their real estate strategy prior to the eligibility end date.

CBRE is currently tracking more than 4.80 million sq. ft. of active requirements.

Nicholas Hilton added: “As 2016 winds down, leasing velocity is poised to maintain momentum and will likely break the 8 million-sq.-ft. mark—a level of leasing that has not been recorded since 2007.”

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