The tale of how New Jersey's office market became overbuilt in the 1980S is still being told by brokers and developers today, mainly because a large overhang of space continues to impact current activity. But the state has been experiencing steady recovery for several years, leading many experts to believe that a happy ending may be just a few years away.

"I think we,re going through a very dynamic time," explains Thomas V. Bermingham, executive director for Edward S. Gordon Co. of New Jersey (ESG/New Jersey). "It remains to be seen how much office space this business sector can support. It may have been overreached in the '80s and now we're looking back and digesting everything. I think we're going to be looking at this type of market for the next two or three years before we see it all in balance."

During the first half of this year, overall leasing activity in most of the state's northern and central submarkets has cooled down, interrupting "what has generally been a very stable and continuing level of activity over the past three to four years," adds Bermingham.

Cushman & Wakefield's statistics paint an even brighter picture. "Conditions are very good. What we've seen through the first six months of this year, in the office market, is a positive absorption of double that of 1994," says the firm's executive director Edwin H. Cohen. Cushman & Wakefield tracks an 11-county market in northern and central New Jersey which translates into 1.3 million sq. ft.

F. Brian Johnson, senior vice president at Koeppel Tener Real Estate Services based in Piscataway, explains the lull in leasing activity saying: "In 1993 and 1994 the bigger deals drove the market. It's the small tenants primarily, that are driving the market today."

Small and mid-sized deals have helped push down the availability rate in 11 of the 20 submarkets tracked by ESG in the state's northern and central tiers. However, in a second quarter survey, ESG pin-pointed the overall office availability rate at 17.04%, up one percentage point over last year because of the amount of space put back on the market.

A number of large single-user buildings are now back on the market leaving certain market segments unbalanced. This is evident in ESG's figures, which reveal a negative net absorption totaling 673,893 sq. ft., as of July 1.

Bermingham identifies several of these single-user buildings, some as large as 600,000 sq. ft.: IBM's building in Franklin Lakes, Prudential's in Parsippany and Prentice Hall's in Englewood Cliffs. He refers to them as "glass slippers" waiting for the right user to come along and take them. This is an even tougher task, considering the average user in the state needs roughly 14,000 to 16,000 sq. ft.

Class-A supply declines

"A continuing trend, however, is that most of the activity that we're viewing is going on in the Class-A space," adds Bermingham. "What we're seeing, in terms of net absorption, is taking place in the areas that have A-quality buildings. Generally, in the newer markets, Class-B and -C space is left behind."

"We see the Class-A market tightening up in all our submarkets. In areas like Montvale, the Waterfront region, Parsippany and Morristown, the availability of A space is below 10%," observes Bermingham. "The object lesson is that tenants are moving out of B- and C-quality buildings and moving into A. The challenge we face in this market is what to do with all the B- and C-quality space."

Cohen agrees that there has been substantial shrinkage in the supply of Class-A space. "In the second quarter, there has been more positive absorption of Class-B space than Class-A because there's less A available." Cohen emphasizes that this is the first time since the 1980s that the vacancy rate for Class,a space, in all markets, has dropped to a little over 15%.

The overall vacancy figure for the second quarter stood at 19.8%, while last year's second quarter rate reached 21.9%. Jose Cruz, manager of Cushman & Wakefield's research services group, points out that this is also the first time since December of 1991 that the overall vacancy rate dropped below 20%.

Ken Merin, president of Kenneth Merin Associates - a commercial real estate brokerage firm, specializing in tenant representation - sees the recovery following "the classic pattern, beginning with tightness in the selection of large blocks of Class-A space, much of which was taken up in lateral movements of a flight to quality to take advantage of the down market."

The tightening of the Class-A market can be seen in a sample tracking by Cushman & Wakefield. Cohen explains, "Let's say you have a Class-A tenant that was looking for a minimum of 50,000 sq. ft. of space anywhere in northern and central New Jersey; believe it or not, there are only 28 Class-A opportunities available to him." Cushman & Wakefield's figures reveal that the Class-A average asking rent is $22.46 per sq. ft.

Local developers, however, are now looking to acquire decent, partially rented Class-B buildings, says Merin. The down side, he continues, is that the prices they find are higher than in 1994. Merin, whose recent activities include several searches to acquire speculative office buildings, reports that "buildings that might have sold for $25-$30 per sq. ft. and in need of work, are now commanding prices of $10 per sq. ft. higher. There is also less willingness on the part of mortgages in possession to take back paper in these deals."

Rental rates stabilize

"Demand has certainly stabilized leasing rates and we're starting to see an uptick," says Cohen. "Landlords are not offering the same tenant packages as before." And while rents haven't skyrocketed, he does see 5% to 10% increases in certain submarkets. "The real difference is that landlords do not have to provide as much in the way of incentives."

Bermingham adds that, although the region has not seen any effective increase in rental rates, they have not deteriorated either since 1992. "The major the same." ESG reports that the statewide weighted average rental per square feet stands at $19.13, slipping 10 cents over last year, mainly because of the role played by the less expensive Class-B and -C space, as Class-A continues to diminish.

Koeppel Tener's Johnson agrees that, "although face rents remain stable, free rent has been eliminated. Therefore, the true effective rent that a landlord receives has increased, and in some markets the actual asking rents have increased as well."

One of the bigger transactions negotiated this year by ESG was a $20 million 15-year lease signed by Western World Insurance for nearly 62,000 sq.. ft. at 400 Parsons Pond Road in the Franklin Lake Corporate Park. This was the first deal made at the former IBM building after two years of marketing the site. The building is part of a 673,650 sq. ft. office complex in northern Bergen County.

ESG also reports brisk leasing activity at the Fort Lee Executive Park in Bergen County where they negotiated over 150,000 sq. ft. in the last 12 months. The 600,000 sq. ft. office park still has 100,000 sq. ft. available for lease.

Tenants seek flex-space

One North Jersey developer has been very successful in luring tenants who are seeking smaller quarters. George Kessel Associates of Bergenfield has more than 1 million sq. ft. of multitenant, high-tech commercial projects in Bergen, Passaic and Essex counties. The firm has been filling a niche, supplying flex-space for the 5,000 sq. ft., 10,000 sq. ft., and 15,000 sq. ft. office/warehouse users who want "a good looking building and need access to storage and a loading door," says Jeffrey Kessel, a partner.

"The bulk of the activity we see is in multitenant flex-space office/warehouse units ranging from 2,700 sq. ft. up to 25,000 sq. ft." Kessel says. "We've seen interest in all of those size ranges. I've got a couple of leases and proposals out and I have offers sitting on my desk. So we've seen a nice amount of activity in the last three or four months."

At Kessel's Commercenter/Totowa complex, two buildings were put up last winter on speculation. Leasing on 140 and 120 Commerce Way "went exceptionally well," says Kessel. 140 Commerce Way, a26,940 sq. ft. building, was divisible as small as 2,700 sq. ft. and "that range is where we saw the tremendous amount of activity that we had."

"This entire Commercenter/Totowa project, which is nine buildings totaling 400,000 sq. ft., with the exception of one, were built on spec," says Kessel proudly.

The park's flexible design has also led to some unique tenants an uses. For example, 120 Commerce Way attracted an adult day care facility. Deerfield Adult Day Services, a division of Maryland-based Deerfield Health Care, took the entire 9,240 sq. ft. building and is currently looking at four other sites in the state, says Kessel.

At 140 Commerce Way, one unit remains "of which I have an offer sitting on my desk," says Kessel. Tenants in that building include Phillips Consumer Electronics, Image Systems and Universal Hospital Services.

Since 1987, George Kessel Associates has been consistently building, putting up 350,000 sq. ft. of spec space. "We've always had a new building of at least 30,000 sq. ft. to 50,000 sq. ft. coming on line. We have intentionally slowed down to get existing inventory leased up," Kessel says.

Not surprisingly, Kessel predicts that 1996 will be a good one for his firm. "We're decreasing whatever vacancy factors we have by virtue of the fact that we're not bringing any new buildings on line. By the first of the year our vacancy rate could be around 5%."

Morris County turns around

In nearby Morris County, Cushman & Wakefield has seen a pickup in leasing activity. For a long time, that market was described as "very sluggish," says Cohen. "In and around the Parsippany area there was a dearth of space available. That market has turned around quite substantially in the past year." In fact, by midyear, Cushman & Wakefield negotiated more than 61,000 sq. ft. in lease transactions in Morris County.

According to Cruz, "Morris County had 713,000 sq. ft. of net absorption reported year-to-date, which sets Morris up for its highest growth rate since 1988." That second quarter figure includes overall space. Class-A absorption was 244,000 sq. ft.

Merin observes that "the lack of new speculative inventory to meet larger requirements is being satisfied by the coming to market of surplus corporate-owned properties. Both Prudential and Crum and Foster insurance companies have placed larger office buildings on the market in Morris County," an area which is clearly "heating up."

S-A-P America, a German-owned computer software company, decided to make Morris County its home earlier this year when it announced plans to establish its northeast regional headquarters in Parsippany. The company leased 27,000 sq. ft. in the Morris Corporate Center.

Some of the larger deals that Koeppel Tener has been involved in include Class-A and -B office space at the Meadowlands, Woodbridge Center and Parsippany. The firm is actively appraising five buildings that comprise 1.1 million sq. ft. in those markets.

In August, Lincoln Equities, Garden City, N.Y., purchased the 570,000 sq. ft. Class-B Meadows Office Complex and the 250,000 sq. ft. Class-A Rockaway 80 building from Public Service Electric & Gas for $54 million, according to Koeppel Tener. The two-building Meadows complex is 88% occupied while Rockaway 80 is 94% occupied.

Koeppel Tener's senior vice president Johnson identifies 14 office buildings that are available for sale in northern and central New Jersey. "The majority are Class-A, and six are Class-A stabilized which are at least 90% occupied. Asking prices range from $125 to $180 per sq. ft. We're seeing a lot of interest in those buildings. In fact, three already have serious offers that will close this year."

Also active in the Morris County market is The Galbreath Co./Alexander Summer Division, LLC, with offices in Paramus and Morristown. The newly combined firm is the result of a merger announced at the beginning of the year between the New Jersey firm of Alexander Summer Co. and The Galbreath Co., a Columbus, Ohio-based organization.

Doug H. Haynes, executive vice president of Galbreath/Summer, explains, "As a regional company that did most of its business in New Jersey we felt that with the changing environment in the corporate world, which is where a lot of our business is, that the merger would give us greater access to a larger market, more clients, greater exposure and a bigger brand name."

The firm is currently handling 500,000 sq. ft. of institutional assets in Bergen County for Connecticut Mutual Life Insurance and over 1 million sq. ft. for Cigna Investments. "That part of our business has been good," explains Haynes. "We are still working on properties that are coming back to lenders."

In Morris County this summer, Galbreath/Summer negotiated the sale of two buildings totaling over 125,000 sq. ft. in the Florham Park Business Center at Vreeland Road. The Troy Corporation purchased 6 and 8 Vreeland Road for over $4 million from Cigna. Troy is expanding its headquarters from its facilities in East Hanover.

In another deal in Ocean County, Astor Chocolate Co., a South Jersey firm, purchased a 125,000 sq. ft. industrial building at 651 New Hampshire Avenue for $2.5 million from Connecticut Mutual Life. Galbreath/Summer represented the seller.

"Last year was a very good year and I think generally 1995 will not be as good," warns Haynes. "Vacancy rates are dropping and we do have fewer concessions. But generally the market has stabilized and has started to rise." At the 850,000 sq. ft., six-building Florham Park Business Center - where the Troy deal took place - Haynes says that prices are rising. "We have enough activity on these office buildings to at least lease or sell them over twice. These are some of the last large blocks in the Morris County area that are available."

Counties report activity

In the past year, Brian F. Sekel, managing director of commercial leasing for National Realty & Development Corp., Purchase, N.Y., also has seen steady leasing activity at their projects in Middlesex, Monmouth, Ocean and Hudson counties.

At Middlesex Business Center in South Plainfield, Kimoto Inc. has joined the roster, and two other tenants extended their leases. Kimoto leased 6,000 sq. ft. of office/distribution space in a relocation move from Edison. Perkin Elmer Corp. extended its 13,328 sq. ft. lease, and Mori Seiki renewed its 9,104 sq. ft. lease.

Five new leases were signed at Baker Waterfront Plaza at 2 Hoboken Place in Hoboken. The leases totaled nearly 23,000 sq. ft. of office space. The new tenants are the U.S. Postal Service, Genesis Systems Inc., S.A. Cafe Inc., Iron Mountain Record Storage Inc. and Terry & Chassman. These new leases have pushed the occupancy level at the 93,000 sq. ft., eight-story Baker Waterfront Plaza up to 95%, reports Sekel.

Greater Princeton vacancy drops

The Greater Princeton office market has seen its overall vacancy rate drop to 16.3% in the second quarter compared with 17.1% last year, according to Cushman & Wakefield.

"That market is very, very much on the upswing," adds Cohen. "There have been a number of substantial deals made in the second quarter. For example, Nycomed, a division of Sterling Drugs, leased 75,000 sq. ft. at 101 Carnegie Center.

In another major deal, the Italian-based pharmaceutical firm Bracco signed two major leases for two of its divisions at Princeton Forrestal Center. Bracco Diagnostics signed a 55,300 sq. ft. lease at 107 College Road and Bracco Research signed a 22,975 sq. ft. lease at 305 College Road East to be used as lab space.

The 1,750-acre Princeton Forrestal Center, Princeton University's mixed-use project in Plainsboro, has experienced "a lot lower vacancy than it was a year ago," says marketing director David H. Knights. Another large deal that closed earlier this year involved an expansion by Merrill Lynch of 100,000 sq. ft. at 500 College Road. Merrill Lynchnow occupies 1.2 million sq.. ft. in the park.

Rhone-Poulenc, a French pharmaceutical and chemical company, took the entire 54,000 sq.. ft. building at 103 College Road. "The building was empty as of the end of January and fully occupied by March 15th," explains Knights. "They're a new entry to Forrestal with a strong presence in nearby Middlesex County."

In the cases of Bracco and Rhone-Poulenc, Knights explains that this was "the first time in a number of years where there were new names coming into the Princeton market with considerable size requirements."

Another major project under way at Forrestal is a full-service retirement community, which has been in the planning and approval stages since 1993. Massachusetts-based Continuum Care Corp. is building this three-phased project on a 45-acre site over a period of five years. The first phase broke ground in September and entails the construction of a nursing home, an 83-bed assisted living center facility and community medical center, all under one roof. Construction is expected to be completed by mid-1996.

Plans for the second phase include 192 independent living units in a five-story building and 101 homes. Knights explains that residents will "be able to move into this age-restricted community and then move through the various levels of health-care and living facilities."

Positive outlook includes all markets

Jeff Shotz, director of leasing for The Mack Co. based in Rochelle Park, says 1995 has been one of Mack's most active years. He believes that: "For the most part, all of the markets are showing very good positive signs of improvement, some more than others. But it's safe to say that every one of these submarkets has shown positive gains recently."

The Mack Co.'s office portfolio includes 6 million sq. ft. of Class-A space in Paramus, Woodbridge, Parsippany, Wayne, Montvale, Short Hills and Bridgewater. And in the Parsippany area, Shotz compares leasing activity to "a house on fire." He adds that, "Upper Saddle River and Mahwah are also very active."

"The industrial market is also improving, continues Shotz. "We've had a terrific year. In fact, we've had more activity from the industrial side than the office side, perhaps because we don't have much office left. Demand for warehouse, in particular, is very, very strong. We're very optimistic both industrially and office wise."

Shotz likens what has been happening in the various submarkets in recent years to a roller coaster -activity goes up and down and just keeps moving."

"Some markets have a farther distance to travel toward stabilization," believes Shotz. But he is optimistic that this trend will continue, and that "we will get to a point where the tenant and the landlord can both live happily ever after."

Dora Johnson is a Tinton Falls, N.J.-based freelance writer. She was formerly the editor of Northeast/New England Real Estate News.