New Jersey's economy is booming and all indications are that it will continue well into the new millennium. Despite predictions that expansion will slow, the vigorous growth now taking place should be sustained. This bodes well for the investment real estate market, now riding the crest of New Jersey'seven-and-a-half-year expansion. The New Jersey Council of Economic Advisors reported in September that at midyear it had revised its original forecast upward for the state's 1999 economic expectations due to a strong economy.
Per capita personal income (CPI), New Jersey's being second highest in the nation surpassed only by Connecticut, will increase by 4.8%, a half percentage point higher than original predictions. Other changes include the gross state product (GSP) rising by 5% instead of 4%; residential construction up from 25,700 units to 35,800 units; and new jobs for 65,000 employees - primarily in the high-tech sector - creating demand for new office, R&D and industrial facilities. Optimism for strong non-residential construction remains high due to the good economy.
Robust leasing and sales dominate the office sector where many if not most new spec buildings are leased before completion and rental rates continue to rise. Expansions and relocations substantially increase space for sublease while upgrades, conversions to office use and repositioning of existing properties hurry to meet demand.
Statistics provided by the New Jersey office of New York-based Cushman & Wakefield (C&W) and New York-based Insignia/ESG indicates current office market new construction ranges from 4 million sq. ft. to 6 million sq. ft. Donald P. Eisen, C& W's metropolitan area executive director, notes that at midyear the northern and central New Jersey office market included just over 18 million sq. ft. of available space, representing a 12.6% vacancy rate. From June 30, 1998 to June 30, 1999, C&W cites rental rates averaged $22.43 per sq. ft. vs. $20.77 per sq. ft. Absorption through midyear measured a negative 455,000 sq. ft.
According to Patrick Murphy, Insignia/ESG executive director, office space exceeded 4.4 million sq. ft. overall at midyear, with volume rising to nearly 4.7 million sq. ft. by Labor Day. The firm, which uses narrower criteria for its surveys, reported negative net leasing at approximately 677,000 sq. ft. for the first eight months. From September 1, 1998 to September 1, 1999, average office rental rates moved up from $22.05 per sq. ft. to $23.70 per sq. ft. and vacancy rates from 11.68% to 12.83%.
"Individual submarkets tell the real rental impact," Murphy explains. "The Chatham/Millburn/Short Hills area leads the state, posting rents of $33.57 per sq. ft. In the Hudson River waterfront, asking rents averaged $28.23 per sq. ft. - a substantial 15% increase over 1998. And in Princeton, where major new office construction is underway after a 12-year hiatus, asking rents average $26.97 per sq. ft., a phenomenal 27% jump from 1998." Murphy attributes the rental increases to strong demand and tenant attraction to new technologically sophisticated buildings.
Unlike past years, says David T. Houston Jr., president of Teaneck-based Colliers Houston & Co., today's well-capitalized developers are cautious, concentrating their new construction in New Jersey's best and strongest submarkets such as the Jersey City waterfront in Hudson County; Parsippany in Morris County; Bridgewater in Somerset; and Princeton in Mercer.
Indications are that the Hudson River waterfront is stronger in terms of new construction volume and large-space demand. Speculative buildings launched without commitments are being fully leased before completion. While it mirrors other active submarkets, it is essentially driven by financial services and insurance firms based in lower Manhattan, which are either relocating or expanding to less expensive space on the river's west bank in Jersey City.
At the Rego Park, N.Y.-based Lefrak Organization's 600-acre, mixed-use Newport community, the third office building - an $80-million, 576,000 sq. ft. structure built on spec and self-financed - will open this fall fully leased. The PaineWebber building, named for its major tenant who took 266,000 sq. ft., will be joined by CIGNA Healthcare and U.S. Trust.
Not losing any momentum, Lefrak broke ground last May for another privately-financed 800,000 sq. ft. speculative office building targeted for completion in September 2000 at a cost exceeding $100 million. Asking rents are expected to be $30 per sq. ft. plus about $1 per sq. ft. for electric.
Last month, Insurance Services Office Inc. (ISO) consolidated five area offices into 395,000 sq. ft. of the building and made it the company's new corporate headquarters. Due to the company's long-term commitment, the developer named the structure the ISO Building.
Hartz Mountain Industries' 90 Hudson St. at Colgate Center, which began construction without any tenant commitments, is now fully leased. American Express, National Discount Brokers and Lord Abbett & Co. will occupy the building when construction is completed this fall. Hartz has recently begun work on the 422,000 sq. ft., 70 Hudson St. building, again, without any lease commitments.
Like many other real estate investment trusts (REITs), Cranford-based Mack-Cali Realty Corp., has switched from acquisitions to development. One project is the $150 million expansion of its 1.9 million sq. ft. Harborside Financial Center on the Jersey City waterfront. The project is a three level, 185,000 sq. ft. office building with a single tenant, Waterhouse Securities. Also, a 350-room hotel is being developed in a joint venture with Hyatt Hotels Corp.
SJP Properties of Parsippany, a Mack-Cali joint-venture partner with 2.2 million sq. ft. of planned office projects in North Jersey submarkets, has also joined the waterfront derby with its purchase of 95 Green St., a 300,000 sq. ft. former loft building once owned by Colgate-Palmolive. The structure is being converted into Class-A office and retail space for a first-quarter 2000 completion.
The 1.2 million sq. ft. of speculative development SJP started last year in Parsippany, Bridgewater and Princeton, is now completed and largely leased. The largest blocks were taken by Merrill Lynch 232,000 sq. ft.; Warner Lambert 115,500 sq. ft.; Household International 110,000 sq. ft.; and Pharmacia & Upjohn 28,000 sq. ft. Also being completed this year by SJP are more than 500,000 sq. ft. of build-to-suit projects for The Prudential Insurance Co. and Ingersoll-Rand.
Florham Park-based Gale & Wentworth LLC, (G&W) one of New Jersey's largest developers and construction managers, completed nearly 1 million sq. ft. of work in the past year. Currently they have two spec office building projects including the 230,000 sq. ft. Somerset Financial Center in Bedminster and the 203,000 sq. ft. Seven Giralda Farms in Madison. G&W also has 165,500 sq. ft. of build-to-suit offices in Princeton and Hanover.
Future plans include three office projects totaling 1.35 million sq. ft. in Bernards Township and Parsippany. Also, State Farm Insurance has a 400,000 sq. ft. build-to-suit underway.
Recently, G&W joined with Tishman Speyer Travelers Real Estate Venture of Manhattan to purchase three office buildings with approximately 1.3 million sq. ft. for $160 million in Prudential's five-building Gateway complex in downtown Newark.
Last year Prudential agreed to sell its Gateway 1 and 3 to The Witkoff Group, a New York investment firm, for $150 million, but Witkoff failed to come up with financing. In 1998, Witkoff paid $78 million for the 738,000 sq. ft. Gateway 2 building, which the seller, the Townsend Group of Towson, Md., had purchased in 1996 for $37.5 million.
Kushner Cos. of Florham Park, a developer of commercial and rental residential properties, has been expanding via acquisitions. It made its first entry into the Newark market with the $10.5 million purchase of the 440,000 sq. ft. former MBL Life Assurance headquarters.
New Jersey's still burgeoning economy should keep the real estate picture bright in the months ahead. But, says Seena Stein, president of Newmark Partners, "Common sense tells us that the market must turn down at some time - but there's precious little sign of that happening so far."