Positive indicators point up the continuing recovery of Northern New Jersey's investment real estate market: steadily though slowly -- via increased leasing and sales activity buttressed by an improving economy, Governor Christie Whitman's avowedly pro-business administration and the unmeasurable stimulus of personal income-tax reductions.
Last year saw the creation of more than 65,000 new jobs -- primarily in the service sector as manufacturing work continued to shrink. Unemployment remains a full percentage point higher than the national average. Though 1994 was the decade's best year in terms of overall economic performance, according to the state's Council of Economic Advisors, growth is predicted to slow slightly this year.
That picture produced a consequent decline in available space in both office and industrial buildings. In North Jersey -- comprising Bergen, Hudson, Passaic, Essex, Morris, Union, Somerset, Middlesex and Mercer counties -- overall office vacancy rates have finally dropped below 20%.
Various reports place regional vacancies in the 17% to 19% range depending on measuring criteria in a market estimated at upwards of 130 million sq. ft. -- half that volume located in Bergen, Essex and Morris counties. Edward S. Gordon of New Jersey (ESG/NJ) puts the vacancy rate at 16.9%, and last year's aggregate leasing activity at 7.5 million sq. ft.
Despite such brisk brokerage transactions, positive net absorption totaled approximately 530,000 sq. ft., reports ESG/NJ, in a market still experiencing downsizing, consolidations and buildings being ceded to lenders though in lesser numbers.
Only Hudson, Essex, Middlesex and Mercer had positive net absorption -- less space at year end. Overall vacancies involve some 25 million sq. ft. of all types, sizes and quality.
Declining availability, particularly in large blocks of Class-A office facilities, has resulted in a firming of rental rates, now averaging $19.25 per sq. ft., and fewer concessions.
North Jersey is poised to achieve even greater levels of leasing velocity and investment sales, predicts Thomas V. Bermingham, ESG/NJ executive director. "Historically, whenever Manhattan real estate has been strong, like it is now, we've been able to piggy-back that success," he explains. "Large blocks are increasingly difficult to procure in Manhattan, so many tenants will look across the Hudson River to satisfy their space requirements."
That trend is evident in demand patterns, says Bermingham, as the recovery broadens and companies look for the advantages of a New Jersey location. "Likewise, a significant increase in property sales should develop as investors enter the market before prices advance to 1980s levels."
Brian Chester, partner in Krauser, Welsh & Cirz (KW&C), a Morristown-based national appraisal/consulting firm, affirms that premise, reporting three recent sales of quality office projects in Morris County. The largest was Park Avenue in Florham Park, a two-building complex of 550,100 sq. ft., then 92% occupied.
On behalf of a client, J.P. Morgan purchased the four-year-old Class-A property from Gale & Wentworth, the developer, and its joint venture partner, Copley Real Estate Advisors, for $84 million, or $153 per sq. ft., according to Chester.
Gale & Wentworth, notes the KW&C partner, also was involved in the purchase of Lexington Gardens, a 136,166 sq. ft. quality office building in Morris Township, from Mellon Bank for $5.5 million, or approximately $40 per sq. ft. The buyers intend to spend another $4 million to $4.5 million for tenant fitup in the building only 8% occupied since 1988.
Late last year, according to Chester, SJP Properties sold Morris Corporate Center III in Parsippany to a joint venture involving Equitable Real Estate for $68 million, or $131 per sq. ft. The five-year-old building's 519,000 sq. ft. was 95% leased. The KW&C partner observes that $65 million of the proceeds represented a takeout of existing debt and an additional $3 million for working capital.
"Transfers of lower-quality office projects still occur, but at significantly lower unit prices in a market with a continuing shortage of better quality Class-A space," adds Chester.
"In real estate, there has been a division developing in the past five years," explains Terence Tener, MAI, director of national appraisal services in New York-based Koeppel Tener Real Estate Services Inc. (KTR). "Growth has become far more selective in the '90s." He states that the 1980s real estate market was represented by an almost "cowboy" mass of investors. They did not have the knowledge, wisdom or sophistication to make decisions prudently. This is not the case in the 1990s, however, as he feels that because we learned from the '80s, the real estate market is now supported by more sophisticated investors that view investments with a sophisticated eye and are looking for sophisticated advisers. "Growth is becoming unbalanced toward trophy properties. Class-B and -C properties probably will not experience the same amount of growth."
Despite that tightening, The Mack Co., Rochelle Park, a strong national owner/developer of commercial facilities, plans no new projects as it nurtures its 17 million sq. ft. portfolio, 5 million sq. ft. representing office buildings.
"The Mack perspective is very positive, with our highest occupancies in 10 years -- a vacancy of less than 3%, a remarkable figure considering today's conditions," explains Jeffrey M. Schotz, Mack's leasing/marketing director.
"We continue to score an extremely high tenant-retention rate -- a major key to our success," says Schotz, "and since our rollover is well within control, there will be no significant exposure over the near term. All Mack project locations are showing positive absorption, albeit slowly but steadily."
Further tightening for Class-A office
The Mack executive predicts that by year-end '95 or early '96, further tightening in the Class-A sector will generate considerably better quality in lease transactions. Read that as higher rents.
"We'd like to see a 20% improvement to the low- and mid-$20 range so that deals will not only provide sustenance but profits as well," he says. "That will benefit both tenant and landlord in terms of building services and stable management."
Executives of the Paramus-based Alexander Summer Co., now operating under the The Galbreath Co. aegis since their merger early this year, contend that the rapidly declining inventory of available Class-A office will prompt major corporations seeking large blocks of headquarters-class office to promote the build-to-suit market.
Douglas H. Haynes, executive vice president, The Galbreath Co./Alexander Summer Division, reports that Galbreath has formed a development team with a unit of Japan's Kajima Corp. to explore build-to-suit opportunities at Crystal Lake Park, a wooded 50-acre site off I-280 in West Orange.
"An improving economy and lack of quality space," says Haynes, "makes the development of Crystal Lake Park, atop First Watchung Mountain in West Orange, with panoramic views of Manhattan and North Jersey, a viable option for corporations seeking high-profile quarters." The site is zoned and approved for 900,000 sq. ft. of offices.
The Galbreath/Summer firm has been involved in the sale of several office buildings, representing Mellon Bank in Gale & Wentworth's purchase of the Lexington Gardens complex; representing Connecticut Mutual Life in the sale of the 63,000 sq. ft. Polygon Plaza, Fort Lee; and representing Cigna in the sale of the former Klopman Mills (Burlington Industries) headquarters, 160,000 sq. ft., Rockleigh. The six-building, 800,000 sq. ft. mixed-used Florham Park Business Center on Vreeland Road is a current Cigna marketing assignment.
George Kessel Associates, Bergenfield, is one of the few developers still putting up speculative space in a niche market at the Commercenter/Totowa complex in Totowa, Passaic County, a collection of eight modular/flex buildings.
Two spec structures totaling 35,000 sq. ft. were completed last year, with leases now out for 95% of the space. "Construction has kept pace with leasing," reports partner Jeffrey Kessel. "The strength of the flex product is its versatility, combining a first-class working environment with practical features which satisfy diverse needs for office, warehouse, computer, distribution and executive facilities in one location."
Kessel notes that electronics and communications firms represent a growing source of his business. Commercenter/Totowa tenants include Motorola Paging, Philips Electronics, Ericsson/G.E. and Thomson Electronic Tubes and Devices.
Leasing strong in Princeton
Unusually strong office leasing activity in the Princeton area has resulted in the highest positive net absorption since 1990, reports J. Douglas Petrozzini, vice president, Grubb & Ellis. "This activity is reflected in the rising occupancy levels of Class-A and Class-B space throughout the Princeton market," says Petrozzini. "Major office parks have occupancy levels of approximately 95%."
He expects vacancy rates to drop to the 85% mark in the months ahead. Indicative of the strong leasing pace, according to the Grubb & Ellis executive, was 103 College Road in the Princeton Forrestal Center. The 54,000 sq. ft. building was vacated in December and will be re-leased to a single tenant for spring occupancy.
Brian Sekel, managing director of office and industrial leasing in the New York office of National Realty & Development Corp., is optimistic about the real estate market. "The good news for landlords is that concessions are down and rents are up." He predicts that by mid-April, Baker Waterfront Plaza, an eight-story, 93,000 sq. ft. office building in Hoboken, now about 95% leased, will become 100% leased.
According to Sekel, about 65,000 sq. ft. of leases were closed in early February at National Realty's Middlesex Business Center, a 700,000 sq. ft. mixed-use complex in South Plainfield. The complex has retained an occupancy rate of approximately 90%.
In its most recent office space report, Fennelly Associates puts the Princeton region's overall vacancy rate at nearly 18.4% -- down nearly 4% from a year ago. The majority of the absorption came from companies seeking Class-A space, putting pressure on this sector and reducing availability of premium space to about 15%.
Positive net absorption exceeded 700,000 sq. ft., according to the Fennelly report, driven by demand by smaller companies. Of the 93 transactions tracked, the average size of leased space was 8,100 sq. ft. Continued lively demand this year is expected to push rents upward, now ranging from $18.75 to $21 per sq. ft., averaging $17.20 for the overall market.
Speculative office development remains dormant, but demand grows for build-to-suits. The largest of these was the five-story, 630,000 sq. ft. North American headquarters built by BASF Corp., a chemical industry giant, at the International Trade Center, Mount Olive, relocating 2,000 New Jersey employees by year end.
Tiffany & Co. has contracted to purchase a 40-acre site at the 600-acre Prudential Business Campus, Route 10 and I-287, Parsippany, where it plans to develop a 280,000 sq. ft. customer service center. The project will consolidate several existing New Jersey office and distribution sites into a single larger facility. The campus is owned by Newark-based Prudential Insurance Co. and US WEST Real Estate, Denver.
"I see selective strengthening," states Peter Stork, senior vice president of KTR who runs the New Jersey office. He believes there is still a long way to go before recovery.
According to Stork, employment levels are still 150,000 jobs below the 1989 employment rate. "The real estate market is still in danger of its momentum dissipating, especially with interest rates on the rise."
Industrial shows tightened market
North Jersey's industrial sector also exhibits considerable vigor evidenced by positive net absorption of nearly 3 million sq. ft., according to Steven L. Fleming, senior vice president/managing officer at CB Commercial's Piscataway office. "The overall vacancy rate for buildings larger than 10,000 sq. ft. finished 1994 at 9.13%," Fleming reports.
"The tighter market has resulted in increased rental rates throughout most submarkets, generally up to 10% higher, with select markets seeing gains of up to 15%," says Fleming, who attributes decreasing vacancies to the lack of new construction and a slowing in the availability rate of second-generation space.
Average asking lease rate per sq. ft. has risen to $5.01, about 30 cents or 6% higher than the rest of the state. Fleming notes that more than 1.8 million sq. ft. of industrial buildings changed hands in the region last year at an average asking price of $45 per sq. ft.
Vacancies in multifamily properties in suburban locales across North Jersey continue their downward trend, dipping into the 3% to 5% range, according to the New Jersey Apartment Association (NJAA).
"Except for isolated projects along the Hudson River waterfront and in Middlesex County, there is virtually no new multifamily construction taking place," reports Nathan Slovin, NJAA executive director. Despite a tightening market, rents have remained relatively stable, notes Slovin, who cites an increase of 2% to 3% in the past year. Based on third-quarter building permit reports, overall residential output may not match 1993's 27,746 state total.
Momentum in retail, hotel picks up
As it has in recent years, the retail sector continues to provide considerable momentum to the construction picture of the real estate equation. Smaller strip centers proliferate and regional complexes upgrade and expand.
KTR's Stork predicts that the service industry will experience growth, but that a lot of the jobs are still temporary ones. However, with the dense population and amount of wealth in the region, he states, "The retail industry is expanding nicely."
Largest of those complexes currently under way are the 500,000 sq. ft. expansion of The Mall at Short Hills, Millburn, currently 1 million sq. ft.; and the 700,000 sq. ft. expansion of Garden State Plaza, Paramus, bringing it to approximately 2 million sq. ft. upon completion.
And 1994 also saw the launching of construction on the initial phase of the $200 million New Jersey Performing Arts Center in downtown Newark, the state's most populous city.
Clifford Simon, managing director of retail leasing at National Realty & Development, sees strength in the retail sector. "There is a high demand for space and space is hard to find, so everyone is driving difficult deals."
National Realty's Old Colony Shopping Center on Grand Street in Jersey City, a 100,000 sq. ft. center anchored by Pathmark supermarket, is an open renewal project that has remained 95% leased.
In Middlesex, National Realty's eight-year-old Hadley Shopping Center is undergoing an expansion project that will bring the center to 273,000 sq. ft. Caldor, a discount department store, is expanding from 18,000 sq. ft. to 108,378 sq. ft. Additionally, a 30,000 sq. ft., 11-screen theater is under construction and is scheduled to open between Memorial Day and July 4, 1995.
"Hotels are becoming a hot item," says KTR's Tener. "The value of the dollar in the international market is making us a reasonable destination for tourists. Also, there are many offshore investors looking for investments."
KTR's Stork agrees with Tener, saying that occupancy is stabilizing and room rates are up. "There is more opportunity to fund hotels now. Many of them are again attractive to lenders."
The industry is becoming more competitive, he says. "Those in the industry are used to paying premiums relative to traditional property types. Where there was no financing available in the past, now conduits are all interested in hotels. This should stimulate some transactions."
Fairfield, N.J.-based Prime Hospitality Corp.[R] suffered greatly during the 1980s, but has emerged successfully, reportedly ranking as the fifth-largest independent hotel management company. As the industry continues its recovery, the company anticipates high returns on new hotel investment. As of February 1995, Prime has entered an agreement in which it will purchase the 50% interest it did not already own in a joint venture controlling 12 AmeriSuites hotels. Under the terms of agreement with ShoLodge Inc., it has agreed to purchase, for $33.5 million, a 126-suite AmeriSuites hotel in Richmond, Va., and ShoLodge's option to acquire a 50% interest in Suites of America Inc., a Prime subsidiary owning 11 AmeriSuites hotels. Prime is currently developing five of its proprietary AmeriSuites all-suite hotels for 1995.
Prime has recently completed several acquisitions, including the 350-room Sheraton Hotel in Hasbrouk Heights, N.J., on Interstate 80, at the interchange of Routes 17 and 46. Prime is implementing an $8.5 million renovation of the hotel. Prime has also acquired the 225-room Sheraton Crossroads Hotel in Mahwah, N.J., at the convergence of the New York Thruway, Interstate 287 and Route 17. Opened in 1988, the hotel is reportedly one of the leading upscale hotels in Bergen County.
While the scars of the recession remain, and the real estate industry has undergone much change, time and economic recovery represent the healing process for the North Jersey region.