Three markets in Northern New Jersey are bucking the national trend of rising office vacancies: Jersey City, Hoboken and Newark. Class-A vacancy rates in these markets have remained less than 5%, says Stephen Jenco, client services manager with Grubb & Ellis in Fairfield, N.J. "This is a sign of a very strong Class-A market," says Jenco.
These healthy markets contrast with northern and central New Jersey, where availability rates — including sublease space — jumped from less than 10% at year-end 2000 to 18% at year-end 2001.
Industrial space in submarkets has begun to follow the pattern of established by the office market, Jenco continues. Although the sector is running about 24 months behind the office market, availability rates were beginning to rise at the beginning of 2002.
In the multifamily arena, Jersey City and Hoboken both have delivered an unusually high number of apartment units over the past couple of years, according to Gary Steinfield, vice president of development at the Woodbridge, N.J. office of AvalonBay Communities. "Our figures suggest that this will continue, with about 1,000 apartment units being delivered over the next three years," Steinfield says.
Newark has seen much less multifamily activity, although industry observers agree that CBD redevelopment over the next couple of years may regenerate activity in this sector.
Hotel development has been relatively limited in these two sub-markets. But the arrival of two major hotels will substantially alter the character of the area’s existing accommodations, which are limited mostly to extended stay hotels. In November 2000, The LeFrak Organization opened a 187-room Courtyard by Marriott in Jersey City, while Mack-Cali Corp., a Cranford, N.J.-based REIT, is constructing a 350-room full-service Hyatt Regency on the waterfront in Jersey City.
Office sustains the markets
All in all, the office markets in the area have sustained Jersey City, Hoboken and Newark through the economic recession. But the continuing vitality of these office markets does not stem solely from companies relocating here because of Sept. 11. "9-11 created a short-term surge in demand," says Mitchell E. Hersh, CEO of Mack-Cali Realty and owner of the Harborside Financial Center, a major multi-use development in Jersey City. "Most of that demand, however, was for product that had to be available right away. There wasn’t a lot of that kind of product, although some space was subleased."
In the end, companies displaced from downtown Manhattan generally settled in midtown. "Employees in New York City come from New Jersey, yes, but also from Long Island, the boroughs, the northern suburbs and Connecticut," Jenco says. "As a result, most of the leasing activity after 9-11 was in midtown, which can accommodate employees commuting from the north, east or west."
The secrets of success
Twenty years ago, the region was little more than a worn out northeastern urban core. But today, New York City’s financial executives look at Jersey City as a sixth borough, Hoboken has become a residential area filled with young professionals and the accompanying restaurants and nightlife, and Newark — boasting a recently renovated CBD — stands on the precipice of a major renaissance.
Like so many real estate successes, the cities can trace their current vitality to location. Proximity to New York City is an important advantage, and lower costs make the cities even more attractive. According to Jenco, Class-A office space in the Newark CBD has an average asking rate of about $30 per sq. ft. "Most of the space is below Class-A, however," he says. "In Jersey City and Hoboken, recent deals for Class-A space have been in the middle $30 range, which is easily the highest in northern and central New Jersey."
Jersey City: The sixth borough
Jersey City’s proximity to both downtown and midtown Manhattan has given rise to its designation as the sixth borough. "Jersey City is as close to Manhattan as Brooklyn, Queens and the Bronx," says Edwin H. Cohen, executive director of Cushman & Wakefield of New Jersey Inc.
Two decades ago, the New York financial community discovered Jersey City when Cohen leased 400,000 sq. ft. to Bankers Trust Co. in the new Harborside Financial Center. "Bankers Trust moved their back office operations here from downtown," Cohen says. "They became the first major office tenant to occupy space in Harborside."
Since then, back office operations of New York-based financial service companies have flowed like the Hudson River into Jersey City.
Harborside has changed hands twice since Cohen’s seminal deal, with Mack-Cali purchasing the complex three years ago. Today, Harborside consists of 2.1 million sq. ft. of Class-A office space in four plazas constructed as a single elongated building. The buildings were 100% leased at the beginning of 2002.
Mack-Cali also owns the lion’s share of retail in Jersey City, with a 50,000 sq. ft. glass-enclosed street level arcade along the Hudson River, and is developing two additional buildings in the complex, designated as Plazas 5 and 10. Plaza 5 is a 980,000 sq. ft. office building set for completion in late 2002, while Plaza 10 is a 575,000 sq. ft. building due to open during first-quarter 2002. Plaza 10 has been 100% pre-leased by Charles Schwab, which plans to occupy some of the space and sublease the rest.
The LeFrak Organization, the second major developer of the Jersey City waterfront, owns a 600-acre master planned mixed-use community. Called Newport, the development runs from just north of the Harborside development to the southern boundary of Hoboken, and offers a total of 1,504 high-rise apartments, a 443-unit condominium building, the Newport Centre Mall, four office buildings, parks and playgrounds, a marina and parking for 13,000 vehicles. Currently under construction is a 336-unit residential tower, expected to open during spring 2002.
LeFrak also is constructing three new office buildings. Newport Office Center V will span 780,000 sq. ft. and Newport Office Center VI 345,000 sq. ft. JP Morgan Chase and Co. has pre-leased these properties. Newport Office Center VII will open with 1.1 million sq. ft. in December. UBS PaineWebber has leased the entire building.
But much space remains to be developed on the Jersey City waterfront. New York-based investment banking firm Goldman Sachs recently purchased a large block of property between Newport and Harborside for a three-building campus, the first of which is currently under construction. "LeFrak can probably build another 2.5 million sq. ft.," says Cohen of Cushman & Wakefield. "And Harborside can probably build another 3 million sq. ft."
While there is much more to come, the recession appears to have stalled new development for the present. Take Hartz Mountain Industries, for example. The Secaucus, N.J.-based developer recently acquired permits to develop an office property at 77 Hudson Street. "We think this is the best site left on the waterfront," says Emanuel Stern, the company’s president. "But we’re not going to spec that building. We’re going to wait until we have a rational amount of pre-leasing."
Hoboken goes commercial
Largely residential in character, Hoboken has recently attracted some office development to the market north of Jersey City, Hoboken has. SJP Properties of Parsippany, N.J., has purchased a site on Hoboken’s southern waterfront and begun erecting the Waterfront Corporate Center, a 1.1 million sq. ft., 14-story office building with 50,000 sq. ft. of retail on the ground floor.
"John Wiley & Sons (a New York-based publishing firm) has pre-leased a large block of space in the complex," says Richard Charles, managing director with Insignia/ESG of Saddlebrook, N.J. Insignia/ESG represented both sides in the deal.
The renewal of Newark
The largest city in New Jersey, Newark began to rebuild in the early 1980s at the same time that Prudential Insurance Co. of America committed to maintaining its corporate headquarters there and redeveloped the Gateway Complex. "Prudential developed several million sq. ft. in Gateway," says Cohen. "They have subsequently sold the complex, but lease back a lot of space." In 1989, the Newark Legal and Communications Center opened its doors. A 420,000 sq. ft. office building adjacent to Penn Station, the Legal Center is owned by the Port Authority of New York and New Jersey.
Hartz Mountain Industries also developed a number of 300,000 to 500,000 sq. ft. office properties in Newark during the 1980s, Cohen says. "But when the recession (of the early 1990s) began, the resurgence stopped dead."
During the mid-1990s, the city and state initiated a new round of redevelopment by building the $200 million New Jersey Performing Arts Center (NJPAC) near Military Park. "It’s important to recognize what NJPAC has done," says Richard Johnson, executive vice president and partner at Matrix Development Group of Cranbury, N.J. "That cultural investment became a catalyst for private investment."
In fact, Matrix recently purchased the leasehold interest in the Legal and Communications Center. "This leasehold has an investment value of $204 million and ranks as one of the largest single private investments in Newark in a long time," Johnson says.
Today, Newark is humming, especially in several submarkets, according to Tom Giannone, senior vice president at the Edison, N.J. office of Julian J. Studley Inc. "These submarkets include the areas around Penn Station, Broad Street and Military Park and the NJPAC."
The Gateway Complex and the Legal Center anchor the Penn Station area. Not far away on Raymond Boulevard, Cogswell Realty Group LLC is converting a vacant office building to residential housing for Seton Hall University and constructing 185 market-rate apartments on the top floors. When complete, the facility will house 315 law students and graduate students. "This will be the first project of its type in Newark," says Arthur Stern, president of Cogswell Realty.
The Military Park area, thanks to the NJPAC, also is attracting development interest. Last year, the New Newark Foundation awarded Parkside Associates of Philadelphia the rights to develop an eight-block area surrounding the park. Called New Newark, the development includes 190,000 sq. ft. of retail and over 500 apartments. The project will kick off with a renovation of the former Hahnes Department Store, a 400,000 sq. ft. building that has been vacant since the late 1970s.
With the influx of New York-based companies, Newark is beginning to tap into the New York market. "I think the biggest change in the Newark market is that it has become an acceptable location for both suburban companies looking to relocate closer to Manhattan and for Manhattan companies looking for an alternative," says Stern.