New Jersey's economic growth -- albeit slowly but steadily -- spurs the parallel recovery of its investment real estate market. Continuing positive net absorption via sales and leases drives the available inventory of office and industrial facilities downward, causing rental rates to inch upward and heighten expectations for more speculative construction.

That prospect is, in turn, being promoted by the increasing incidence of build-to-suit projects necessary to meet the demands of corporate users whose specific requirements cannot be met either through available existing buildings or sublease space thrown on the market through downsizing and consolidations.

"New development is no longer a dream in New Jersey," says Seena Stein, president at Newmark Partners, a Mountainside brokerage firm. "We have many build-to-suits and spec industrial buildings under way or just completed. And the build-to-suit office market is very active."

Developers enthused with office

Stein says that several developers and Hudson waterfront interests insist that they are launching speculative office projects, although no earth has been moved as of yet. "Positive energy exists in New Jersey, and we are finally starting to believe it just might happen teal soon," she says.

Her enthusiasm is not isolated, reflecting the renewed confidence of real estate industry leaders. But now there are only a smattering of build-to-suit projects under way and a few small speculative office and industrial buildings. Indicative of the scarcity of large blocks of Class-A office space was the leasing of Bellemead Development Corp.'s final building in the six unit Somerset Hills Corporate Center near the I-78 interchange in Warren Township.

The five-story, 207,727 sq. ft. structure was off the market only a few months after launching on a spec basis by Roseland-based Bellemead, a Chubb Insurance subsidiary. Hoechst Celanese Corp. took the entire building for its expanded headquarters via a long-term lease arranged by the New Jersey office of Edward S. Gordon Co. (ESG/NJ). Hoechst will relocate from nearby Bridgewater, when its space is ready next April, at the Somerset County complex, whose other buildings were developed and leased during the 1980s. Hoechst will reportedly retain the Bridgewater facility as a research site.

Market statistics provided by ESG/NJ and Cushman & Wakefield of New Jersey (C&W) place the overall office vacancy rate at approximately 14% and nearly 18%, respectively -- the lowest level in the past decade. While numerical differences result from varying yardsticks, the trend is unmistakable: declining availability and rising rental rates -- in the $18 to $22 per sq. ft. range for the most desirable space -- pointing to new construction ahead.

"The New Jersey real estate market is having its best year in a decade, with tenants in many market segments finding a shortage of viable alternatives," says Thomas Bermingham, ESG/NJ executive director.

"Even Bergen County's Route 17 corridor with a history of availability above 30% has peeled eight percentage points off its vacancy rate since the second quarter of last year," Bermingham says. "As the amount of available space continues to drop -- down 3.4 million sq. ft. in two years -- rents have begun to climb in some market segments," he says.

"By 1997 we expect that speculative construction will be viable once again," Bermingham says. "A key impetus will be for rents to reach $30 per sq. ft., an event likely to occur in the coming year for Class-A properties in certain submarkets."

Office gaining

Donald P. Eisen, C&W senior managing director/New York area, attributes strong office demand to the growth of New Jersey-based companies. "The market has amply demonstrated its strength with 25 leases and 10 user purchases greater than 40,000 sq. ft. during the first half of the year," he says.

"Every county in the state showed positive Class-A absorption, says the C&W official. The Central New Jersey market, in particular, has experienced its highest level of growth in occupancy since 1993." At more than 1 million sq. ft., it surpasses 1995's year-end total by 30%.

According to Eisen, Class A rents have shown the largest increase, moving up to $22.61 per sq. ft., a three-year peak. "The Hudson River waterfront, at $22.56 per sq. ft., has one of the highest rental rates in the state," he says, "with similar rents in Parsippany and the Somerset/1-78 corridor." And as the number of available Class-A blocks decline, rental rates move up for units exceeding 100,000 sq. ft.

Sustained demand has forced owners of Class-B and Class-C properties to upgrade from the inside out -- mechanical systems to new lobbies and public spaces -- or redesign for alternative uses.

Industry leaders say the next phase of development will not compare with the '80s, which generated so much excess product as to preclude significant new construction for a half-dozen years. New projects will require substantial preleasing and strong sponsor equity to qualify for financing.

Meanwhile, The Mack Co., a Rochelle Park-based owner/developer of commercial facilities exceeding 20 million sq. ft., concentrates on moving its inventory towards total occupancy. "We have a vacancy rate of less than 3% in our office portfolio," says Jeffrey M. Schotz, Mack's leasing/marketing director.

"With the transactions currently being negotiated, that figure should be less than 2% by the end of this year," says Schotz adding that the overall market continues to improve. "And we will be looking for new opportunities in a brightening business climate."

Developers with approved sites ready for construction will ride the next wave of office expansion as the supply of corporate-class space dwindles, according to Douglas H. Haynes, president at The Galbreath Co./Alexander Summer Division in Morristown, a Paramus diversified services firm.

Haynes contends that developers are, in fact, positioning themselves for new construction through advance planning and by tackling the arduous approvals process involving significant projects in Somerset Morris and Hudson counties.

In the interim, brokers and owners are employing greater ingenuity in trying to accommodate potential tenants, says Mark Yeager, president at Gale & Wentworth Inc.'s commercial division. "Among the latest solutions are the redevelopment of warehouse and distribution buildings into office buildings, the creative structuring of leases, and the creative utilization of excess corporate real estate as in subleasing or finding more efficient ways to allocate already-occupied space."

G&W, based in Florham Park, is a services and investment organization which owns or manages more than 14.1 million sq. ft. of commercial and industrial property from its Florham Park headquarters. "The stage is now set for new construction," Yeager says, "which will bring three or four new buildings into the market during the next year."

Developers similar to G&W, which own property with approvals in place and strong financial partners, will have a competitive advantage in delivering buildings more quickly as the demand for Class-A space far outstrips the supply, according to Yeager. The firm is a leader in successfully transforming well located older buildings into prime assets and then profitably selling or leasing them.

Cali Realty Corp., a Cranford-based REIT, continues a portfolio expansion program with the purchase of Class-A office properties in Basking Ridge and Princeton recently and raised $80 million to fund new acquisitions. The two Basking Ridge, Somerset County, buildings total 115,700 sq. ft. and are 100% leased by AT&T and Lucent Technologies . The purchase price of $10.5 million reflects an approximate value of $90.75 per sq. ft.

"With so many strong submarkets in New Jersey, there's an abundance of opportunities right in our own backyard," says Thomas A. Rizk, Cali's president and CEO. "For particular submarkets, we believe Princeton, Short Hills, the Route 78 corridor and the Jersey City waterfront are among the state's strongest," he says.

Construction begins

At midyear, the REIT announced the groundbreaking for two office/flex building totalling more than 47,000 sq. ft. at its Commercenter Business Park in Totowa, where eight existing buildings are fully leased.

Indicative of increasing values were two other Bernards Township Class-A office sales earlier this year, according to Brian Chester, partner at Krauser, Welsh & Cirz, a Morristown appraisal and consulting firm. Westgate Coporate Center I and II, totaling 280,858 sq. ft. and essentially fully leased, sold for a combined price of $59 million or $212.92 per sq. ft. Also, Bernards 78 with 197,349 sq. ft., sold for approximately $27.3 million or $138 per sq. ft.

With Class-A space practically nonexistent at a single digit vacancy rate, the Hudson River waterfront in Jersey City will in all probability see,the construction of the state's largest office projects in the next development cycle. Plans advance for 90 Hudson, the second tower in the 20-acre Colgate Center complex, where the 42-story, 1.2 million sq. ft. 101 Hudson is fully occupied.

The newest structure, a 12-story glass and steel building of 435,000 sq. ft., will be produced by the same team. LCOR Inc. serves as development manager, with design by Brennan Beer Gorman/Architects, and Morse Deisel International as general contractor. Peter T. Gilpatric, LCOR vice president, recently named Koll as leasing agent for the project, which is master planned for 6 million sq. ft. of office space, 1,200 residential units, 300,000 sq. ft. of retail facilities, a 400-room hotel and 100-boat marina.

Planning also moves ahead at the 600-acre Newport mixed-use development, just north of the Colgate property, for Newport Office. The developer is the Lefrak Organization of Rego Park, N.Y. Two completed Newport office towers, mostly leased, comprise 1.5 million sq. ft.

New Jersey's central and southern tier counties experience brisk sales and leasing activity, effectively bringing the overall office vacancy rate down to approximately 14%. The Princeton area saw positive net absorption exceed 600,000 sq. ft. during the first half of this year - compared to some 800,000 sq. ft. for all of 1995, according to a market survey by Fennelly Associates, a Princeton brokerage firm.

"The market will experience a shortage of space at current activity levels," says J. Douglas Petrozzini, senior vice president at the Princeton office of Grubb & Ellis Co. "This may result in the first speculative development in the area during the 1990s. Although rental rates, while strong, do not yet support the cost of speculative development of an office building, build-to-suit projects may be in demand."

A single transaction, the largest this year in Mercer County, was responsible for shaving Metro Princeton's Class-A vacancy level. Bristol-Myers Squibb leased 163,000 sq. ft. at the 220,000 sq. ft. Nassau Park in West Windsor. C&W represented the property owner, a Connecticut-based company, in the transaction.

Development of retirement and health care facilities dominates activity at the sprawling 1,750-acre Princeton Forrestal Center (PFC), Princeton University's mixed-use development straddling U.S. Route 1. Construction has begun on The Windows at Princeton Forrestal, a full -- service retirement community, says David H. Knights, PFC's marketing director.

"The first phase of this project includes a 180-bed skilled-care nursing facility, a community medical center, and 83 assisted-living units," says Knights, adding that construction of a 10,500 sq. ft. child-care facility is under way on a 2.5-acre parcel purchased from PFC by Prodigy/Children's Discovery Centers.

Consolidations slow industrial

New Jersey's industrial market of more than 700 million sq. ft., one of the nation's largest, experienced its third consecutive quarter of rising vacancies, now at more than 60 million sq. ft. or 8.5%, through midyear, says C&W's Eisen.

Slower demand was indicated in the lower I-287 corridor and the North Jersey meadowlands, which traditionally lead the market, according to a C&W report.

"In a continuing trend, companies are consolidating into modem facilities which meet today's demands for efficiency and productivity, thus returning older space to the market," Eisen says. He cites a declining supply of high-quality buildings more than 100,000 sq. ft. as fueling a decade high 3.6 million sq. ft. new construction.

Industrial asking rents have continued to rise, increasing each quarter since mid-1994 to their current level of $4.64 per sq. ft., the highest level of the decade, according to C&W. The highest gains were recorded in Bergen, Hudson and Somerset counties.

Steven L. Fleming, senior vice president/managing officer at CB Commercial's Iselin office, characterizes the industrial market as "spongy," with vacancies up. "Economic activity is just not strong enough to counterbalance continued corporate rightsizing and the gradual migration of manufacturing from New Jersey," Fleming says.

Southern Jersey industrial picks up

However, relatively brisk industrial sector sales and leases are reported in South Jersey's Delaware Valley region, which covers Burlington, Camden and Gloucester counties, according to Malcolm A. Schreibman, vice president, Mertz Corp./New America Network in Mount Laurel. He says that a shortage of buildings 100,000 sq. ft. and larger has prompted recent speculative construction totaling more than 890,000 sq. ft. in Gloucester County, with a recently built unit of 208,000 sq. ft. in Burlinton county now being marketed for lease.

"Increased demand and a lower availability of first-class units with ceiling heights in excess of 24' clear have boosted rental rates, with asking prices from $4 to $4.50 per sq. ft. triple net, reports Schreibman. Buildings include up to 5% in office space."

Sale prices also have increased 10% to 20% in the past two years, he says, citing transactions in the range of $28 to $33 per sq. ft. Mertz recently brokered the sale of a modem 70,000 sq. ft. warehouse in Mount Laurel featuring 24' clear ceiling, multiple tailgate and drive-in loading doors, fully sprinklered, 40 by 40 column spacing, heavy power, 9,500 sq. ft. of office, and parking for 250 cars. The property went for $2.15 million, or $30.71 per sq. ft.

According to Schreibman, sales of industrial development sites in the Delaware Valley region have increased slightly over the past year with asking prices from $30,000 to $100,000 per acre.

A healthy leasing pace has depleted the space inventory at the 3,000-acre Pureland Industrial Park at interchange #10 of I-295 in Bridgeport, Burlington County, reports Charles Walters, vice president.

"We've been sort of a victim of our own success, 100% occupied for the past six months, almost 9.5 million sq. ft. in about 82 buildings," says Walters. "In the prior 18 months, we built eight new buildings, and now we are starting to do some speculative construction."

Demand has caused rental rates to re bound significantly from a low of $3.25 per sq. ft. during the past recession and presently stand at $4.25 per sq. ft., not quite as high as the historical peak of $4.50 per sq. ft. experienced during the torrid 1980s, says Walters, adding that site prices at Pureland are running from $75,000 to $85.000 per acre.

A hotel/casino boom

Across the state in Atlantic City, a construction boom is in the making with at least a half-dozen new casino/hotels being planned, and many of the 12 existing gambling meccas are planning to expand. Casino/hotel expansions have added 4,400 additional rooms this year and another 4,900 will become available by year's end. Gearing up for a grand opening is the $460 million, 2,000-room New York-New York casino hotel. Investments in new gaming palaces plus support facilities and infrastructure could exceed $10 billion.

Lawrence Alper, president at Alper Commercial Realtors/New America Network, Atlantic City, says the area lacks any quality office space. Class-C units command $15 to $18 per sq. ft. But Alper reports that the advent of more casinos bolsters land sales for commercial development and, depending on zoning, per-acre asking prices range between $50,000 and $ 100,000. Warehouse/distribution space in an active market leases from $3.50 to $5 per sq. ft.

Retail's on the move

New Jersey's retail development is booming. Newspaper headlines label it "Mall Mania," as regional shopping centers expand, new ones are announced, and smaller power and strip centers are in the wings.

Paramus and Bergen County retain their hold as the state's retailing headquarters, where upwards of 5 million sq. ft. of stores of all variety fan out from the confluence of routes 4 and 17. The newly expanded Garden State Plaza, now at 2 million sq. ft. and 10,000 parking spaces, overlooks the intersection.

The $240 million expansion added 800,000 sq. ft. comprising two new anchors -- Neiman Marcus and Lord & Taylor to complement Macy's, JCPenney and Nordstrom -- plus scores of smaller shops.

Just more than a stone's throw east on Route 4 in Hackensack, the 630,000 sq. ft. Riverside Square mall has taken on a sparkling new image via an award-winning $12 million renovation.

Just proposed for the meadowlands in East Rutherford by The Mills Corp. of Arlington, Va., is Meadowlands Mills, a 2.1 million sq. ft. retail complex, plus future development of 2.2 million sq. ft. of offices, a 1,000-room hotel, restaurants, theaters and some industrial buildings. The project has no price tag.

The Hahn Co. and The Prudential Realty Group, owners of the 900 ,000 sq. ft. Bridgewater Commons at 1-278, Routes 202-206 and Route 22 in Bridgewater, have announced plans to add 250,000 sq. ft. of retail space. The mall's anchors are Macy's, Lord & Taylor and Stern's.

Chatham-based Fidelity Development Corp. adds impetus to the retail scene with approximately 1 million sq. ft. of new projects in various stages of development. The firm, headed by Salvatore A. Davino, owns and manages some 2 million sq. ft. of shopping facilities throughout the state. Currently in the approval process are the proposed Watchung Square, a 750,000 sq. ft. center on Route 22 in Watchung, and Town Center Plaza with 200,000 sq. ft. on Route 130 in East Windsor.

New projects for hotel market

The hotel scene also experiences increased activity via several new projects. Prime Hospitality Corp., Fairfield, will construct the state's first AmerSuites, a midpriced hotel catering to the business traveler, on Route 1 in West Windsor in the Princeton area. The $25 million structure will include 125 rooms on five levels and a conference facility.

At the International Trade Center (ITC) in Mount Olive, construction has been launched on a five-story, 141-room, full-service Wyndham Garden Hotel at an estimated cost of $14 million. The structure, scheduled for completion next summer, will be owned by ITC and managed by Wyndham Hotels and Resorts of Dallas.

Multifamily varies

Peter Weidhorn, president of the New Jersey Apartment Association, says that the state's multifamily housing industry functions under widely varying regional market differences. "The New York dominated sector -- Bergen and Hudson counties -- for example, has a high occupancy level, up to 98%, and a low rate of turnover such as 25% or 30%."

Weidhorn, who heads WNY Management Corp., Freehold, which owns and/or manages about 6,500 apartment units, further explains, "In contrast, the Philadelphia-dominated employment market -- Burlington, Camden and Gloucester counties -- may have a vacancy rate of 8% to 10% and a turnover rate of 50% to 55%."

Weidhorn continues: "Rent dollars have been flat to negative in the weaker markets over the past four years. Concessions granted in South Jersey and softer markets negated any rent increases. In contrast, in New Jersey -- Bergen and Hudson -- you are seeing your regular 4% to 5% rent increases."