Vacancies plummet as REITs propel market, abetting booming sales and leasing activity. Sales and leasing activity in New Jersey's investment real estate market are booming. Corporate users scramble to lease available office space while the supply continues to decline. Real estate investment trusts, Wall Street-backed funds and partnership groups compete to buy good properties. Institutional owners pare portfolios. And newslowly increases.
A robust and expanding state economy abets the real estate recovery, with some 60,000 new jobs expected to be generated this year. Unemployment stands at its lowest point in nearly a decade.
"The stabilization of manufacturing employment during the first half of the year is encouraging," says Dr. Joseph J. Seneca, chairman of the New Jersey Council of Economic Advisors.
"And the influx of firms relocating to the state in 1997 and bolstering the economy and job picture should continue at approximately 100 companies as it has for the past two years," says George R. Nagle, director of the Office of Research and Planning of the New Jersey Department of Commerce and Economic.
Office "Total office leasing for the first half of the year exceeded 5.5 million sq. ft., which puts the market on track to surpass 1996's activity by more than 2.5 million sq. ft.," reports Robert Rudin, executive director, Insignia/Edward S. Gordon Co.'s New Jersey office. "One result of the brisk leasing activity is that the market's overall availability rate fell to 11.28% at midyear -- the lowest since the early-1980s."
An Insignia/ESG survey puts the highest asking rent for office space in Morris County's tight market -- 8.39% vacancy -- at $22.53 per sq. ft. The same region, according to statistics compiled by Cushman & Wakefield of New Jersey (C&W/N.J.) has an overall vacancy rate of 11.8%, with asking rentals at $21.95. While the two firms employ varying yardsticks, their numbers indicate that Class-A vacancies are much lower and per sq. ft. asking rentals several dollars higher.
For the market as a whole, says Donald P. Eisen, C&W/N.J. senior managing director, average asking rents for Class-A space reached $24.38 per sq. ft. during the second quarter. "The $1.71 per sq. ft. increase during a 12-month period is the most rapid rate of growth this decade; in addition, landlords are offering little or no concessions and minimal work letters," says Eisen, adding that limited new construction is complemented by the conversion of older facilities into first-class offices. Two examples of this are a 229,000 sq. ft. New Providence building, purchased by a value-added investment group for $7.25 million, is now undergoing a $3.5 million renovation/upgrade and 300 Boulevard East in Weehawken, purchased by Garden City, N.Y.-based Crown Properties through Newmark Partners of Mountainside, is being fully upgraded for multitenant use.
"Buildings are being sold and leased at warp speed," says Newmark president Seena Stein, noting that investment groups are often partnering to snap up multiple properties.
On the heels of that statement, Newmark announced that the firm's New York and New Jersey divisions received the exclusive leasing assignment for the proposed Journal Square Plaza III, a 500,000 sq. ft. office building to be developed in Jersey City by Hartz Mountain Industries.
North and Central Jersey are seeing very limited development of office and industrial buildings -- few purely speculative and most predominantly preleased -- a situation which David T. Houston Jr. of Colliers Houston Co., Teaneck, regards as healthy. "This is, of course, goodfor the market and will prevent the prosperity of the second half of this decade from ending in frenzied new construction which destroys the real estate market," he says. "Rents also will continue to rise, but even at $25 to $30 per sq. ft., a rent level now obtained by a handful of the top buildings, new construction will remain under control."
Gale & Wentworth Inc., Florham Park, expands a portfolio now at 15 million sq. ft. while covering both acquisition and development sectors via financial partnerships with Wall Street's Morgan Stanley and PaineWebber. "Access to the public markets provides options heretofore unavailable to us," explains Mark Yeager, who heads G&W's Commercial Group.
The largest in G&W's series of recentwas the 200-acre IBM office complex of 570,000 sq. ft. in Franklin Lakes, which was a $25 million joint venture transaction with Morgan Stanley.
"Real estate investment trusts continue to have a dominant impact on the marketplace in New Jersey," says Tom Mallaney, first vice president of CB Commercial Real Estate Group's North Jersey office. "Some will undoubtedly move into the development sector to generate still more revenue and profits."
CB Commercial brokered two acquisitions by Reckson Realty Associates Corp., the fast growing Mellville, N.Y.-based REIT. Reckson paid $51.5 million for 101 JFK Parkway in Short Hills, a 308,000 sq. ft., two-building Class-A office complex occupied by AT&T. Short Hills commands the region's highest rents at $30 and higher per sq. ft. Reckson also purchased Three University Plaza -- a first-class, 216,000 sq. ft. office building, 90% leased -- for nearly $20 million.
Then with an eye on the future, Reckson acquired from Prudential Insurance the 188-acre undeveloped portion of the 310-acre Giralda Farms office park straddling Madison Borough and Chatham Township. The $8.7 million deal will allow Reckson to develop approximately 800,000 sq. ft. of offices on the property.
Another REIT, Wellsford Real Properties (WRP), is partnering with Whitehall Street Real Estate Limited Partnership VII -- the $1.3 billion real estate investment fund affiliate of Goldman, Sachs & Co. -- in a new private company, Wellsford Commercial Property Trust (WCPT), to acquire vacant or underperforming properties to create higher values via redevelopment or development.
The new Wellsford Commercial Property Trust has invested $150 million for nine properties totaling some 9 million sq. ft. in New Jersey and Washington, D.C., according to Jeffrey H. Lynford, chairman of the REIT and the new firm. WCPT intends to invest an additional $100 million for more acquisitions.
"Price levels for substantially occupied office buildings continue to increase," reports Brian A. Chester, partner in Morristown-based Krauser, Welsh & Cirz. Some second-tier properties have sold in the $65 to $90 per sq. ft. range, Chester notes. "But Class-A buildings have changed hands in the range of $147 to $167 per sq. ft. and higher," he adds.
The tightening market has resulted in large office tenants opting for longer lease terms to secure desirable facilities.
While REITs and Wall Street-funded investment groups increase their presence in the real estate market, two New Jersey-based insurance giants -- The Chubb Corp. and Prudential Insurance -- are making their exit. A joint-venture, limited partnership formed by PaineWebber, Morgan Stanley, Dean Witter and Discover & Co. contracted to purchase some 85% of the commercial properties held by The Bellemead Development Corp., Chubb's real estate subsidiary, for $758 million in cash and assumed debt. Many of the office properties are located in New Jersey, as well as Maryland, Illinois and Michigan.
Prudential likewise is unloading lots of real estate, plenty of it in New Jersey, where major holdings already have been sold.
Large blocks of Class-A office space in the Greater Princeton market are virtually unavailable, with single-digit vacancy rates recorded for Class-B facilities as well, says J. Douglas Petrozzini, senior vice president at Grubb & Ellis Co. "There are only five possible sites for a tenant requiring 25,000 to 75,000 sq. ft.," he says, "and none for anything larger."
Petrozzini describes a typical lease deal as $23 per sq. ft., no free rent and a workletter from $10 per sq. ft. "There's considerable pressure for potential build-to-suit opportunities and speculative development," he adds.
Carnegie Center, the mixed-use complex straddling Route 1, is 100% leased, says Roger M. Steinhardt, leasing director of the center. Under construction is a 234,000 sq. ft. build-to-suit office building for Raytheon Engineering and "we'll be doing a spec building of 116,000 sq. ft.," says Steinhardt. "We're going for final planning board approvals for a construction launch late this year or early next spring depending on the variables." Carnegie Center is getting around $26.50 per sq. ft for existing space.
Princeton Forrestal Center, the 1,750-acre diversified business complex, has announced approvals in hand for 650 College Road East, a 170,000 sq. ft. speculative office building, whose developer currently seeks an anchor tenant in order to launch construction. Nearing completion at Forrestal is the first phase of The Windrows, the area's newest retirement community with nursing, assisted living, medical center and independent living components.
Credit Suisse First Boston's Praedium Opportunity Fund II, has entered the New Jersey investment market with two acquisitions: Princeton Forrestal Village, a 420,000 sq. ft. office and retail development on the west side of Route 1, and the 168,000 Class-A office building at 45 Eisenhower Drive in Paramus.
The South Jersey region's office sector mirrors the recovery of the state's central and northern tiers, with activity centered in the Delaware River Valley in Burlington, Camden and Gloucester counties. Vacancies are an estimated 15% and asking rents are approximately $18 per sq. ft. for Class-A office facilities.IndustrialLarge box warehouse/distribution and light man ufacturing/assembly operations dominate this region's real estate picture. Developers and investors include Liberty Property Trust, Center Square, Trammell Crow NE and Reynolds Metals. Vacancies run around 5%, and rental rates range from $3.75 to $4.75 per sq. ft. triple net for the best space, according to Jeffrey A. Licht of the Mertz Corp. of Mount Laurel.
Typical is the owner/developer project of Alliant Foodservice of Deerfield, Ill., which has contracted for a 200,000 sq. ft., $15 million distribution center at the Commodore Interstate 295 Business Center in Gloucester County. The site, nearly 23 acres, was purchased from Liberty Property Trust.
According to Cushman and Wakefield, the state's overall industrial market continues its positive momentum, with the estimated vacancy rate at 8.1% at the end of the second quarter.
Cranbury-based Matrix Development Group has formed a joint venture with the Reckson Associates to develop Matrix's 553-acre Northeast Business Park in Washington Township, where activity is already under way. The first project is a 265,000 sq. ft. build-to-suit office/distribution center for the Hann & DePalmer marketing organization.
Further south at Bishops Gate Business Center in Mount Laurel, Matrix is developing a 434,000 sq. ft. office and operations facility for Okidata.
Hospitality In Atlantic City, a new convention center has opened with 500,000 sq. ft. of contiguous exhibition space, the nation's 10th largest such facility, and fully booked for the next eight years. And a mind-boggling array of new casino hotels is being planned or promoted, with Steve Wynn of Mirage Resorts at center stage with a $750 million, 2,000-room project; Circus Circus with a $600 million, 2,000-room casino hotel; and the Stardust with a $500 million, 1,000-room resort casino. MGM Grand plans a $700 million, 2,500-room casino complex, and Sun International wants to build a $700 million, 2,000-room casino resort.
Standard hotels also are sprouting in other parts of the state. Officially opened last summer was the Wyndham Garden Hotel -- a $14 million, full-service property with 141 rooms and some meeting facilities -- at the International Trade Center (ITC) in Mount Olive. The 670-acre business park, a development of The Rockefeller Group of New York, has a roster of more that two dozen companies, whose executives and employees will utilize the hotel.
Fairfield, N.J.-based Prime Hospitality Corp. is developing two AmeriSuites hotels in the state, where it owns or operates 24 hotels. York Hunter of Newark is constructing the 159-unit, all-suites project for Prime in Secaucus and the 128-unit AmeriSuites Princeton /Carnegie Center West in West Windsor. Construction proceeds on a 134-room inn by Extended Stay America at the Raritan Business Center in Raritan.
Ground was broken last summer by Hartz Mountain Industries and Garden State Development on the Club Hotel by Doubletree, a 13-story, 200-room all-suite hotel in Jersey City, scheduled to open in mid-1998.
Multifamily "The waterfront is at its healthiest," comments Peter Gilpatric, LCOR vice president. "Over the past 18 months, more than 1,000 residential units were absorbed, and another 1,000 are under construction."
Actually, more than twice that number of rental units are in various stages of planning, under construction or recently completed along the waterfront from Jersey City north.
The Applied Cos. of Hoboken completed a second residential highrise, the 26-story Tower East at Portside, comprising 295 upscale units with an abundance of on-site luxury amenities and panoramic views of Manhattan and New York harbor. Monthly rents start at $1,550 for one-bedroom units, $1,905 for two bedrooms and $2,275 for three bedrooms. The first tower of 19 stories and 230 units is fully rented.
Nearby at the Newport mixed-use complex, Lefrak Organization of Rego Park, N.Y., has begun construction of a 35-story, 446-unit rental project. Studio to two-bedroom apartments from 620 sq. ft. to 1,180 sq. ft. will rent from $950 to $2,800 monthly.
Retail In the retail sector, expansions and renovations of existing shopping centers of all sizes dominates activity. Work progresses in stages on the region's largest project, the New Jersey Metromall on a 200-acre tract, a former landfill off New Jersey Turnpike interchange 13A in Elizabeth. Plans call for a 1.2 million sq. ft. manufacturers' outlet fashion center with other specialty stores to create a 2 million sq. ft. retail complex plus recreation facilities and a hotel.
Prudential Realty Group and TrizecHahn, owners of the 900,000 sq. ft. Bridgewater Commons, have reached an agreement with Bridgewater officials for the multistaged expansion of the retail complex to create the Bridgewater Commons Regional Center at the confluence of I-287, Routes 202/206 and Route 22. The first element of the $70 million program includes the addition of 250,000 sq. ft. of specialty retail space, two free-standing restaurants, plus expansion of the cinema complex.
Target Greatland, the largest division of Dayton-Hudson Corp., has opened the discount chain's first New Jersey store in Menlo Park, with 130,000 sq. ft. of home merchandise.
New Jersey's robust economy should keep its real estate picture sharp and focused for continued growth in the coming months and well into 1998.
Dillon Karsian is a Hackensack, N.J.-based writer and a former president of the National Association of Real Estate Editors.