The northern New Jersey real estate market is limping through the murkiest economy in a decade. Occupancy rates across all property classes waned in 2002. Retrenching businesses dumped space on to a swelling sublease market, and prices for Class-A office space have softened.
The region has two particular trouble spots: an overbuilt multifamily market in Newark and a flood of new office towers to the east, along the Hudson River. “The market isn't as bad as the tenants think it is, or as good as the landlords think it is,” says CB Richard Ellis leasing broker Bill Waxman.
What the Garden State has going for it is geography. Perfectly situated to serve two of the nation's biggest cities, Philadelphia and New York, New Jersey continues to attract industrial development. With its many transportation hubs, ports and eponymous turnpike, northern New Jersey is the most mechanized industrial corridor in the nation.
Given its strategic location, industrial developers are building more warehouses on a speculative basis in central and northern New Jersey. The industrial vacancy rate for northern New Jersey (Hudson, Essex, Morris, Passaic, Bergen, Union and Somerset counties) registered 8% at the end of the third quarter of 2002. The national industrial vacancy rate was 11% for the same time period, reports CB Richard Ellis.
“There's little room to build, and you have an outstanding network of roads and shipping routes,” says Stan Danzig, executive director of the East Rutherford, N.J., office of New York-based Cushman & Wakefield. “This has been a very healthy and stable market.”
Cushman & Wakefield reports that 4.7 million sq. ft. of industrial space was leased in the Meadowlands in 2002, making it the most active submarket in northern New Jersey. High demand for industrial space has helped maintain pricing. But south of the Meadowlands, pricing for industrial space has slipped, according to Danzig.
Within the past two years, Danzig has negotiated five major build-to-suit industrial projects in the northern New Jersey area. Lately, development activity has been migrating north from central New Jersey, building newer industrial facilities closer to New York City. And much of this development is speculative, with developers seeking to either sell the properties outright or seek out tenants.
Northern New Jersey already is the nation's third-largest industrial hub after Los Angeles and Chicago, which helps explain developers' confidence in speculative warehouse projects. Orix Real Estate Equities, for example, will soon break ground on a 368,112 sq. ft. facility in Carlstadt, N.J., while Keystone Property Trust is building two spec buildings with a combined 525,000 sq. ft. of leasable space in Jersey City.
The Orix development — the Meadowlands Distribution Center — was chosen for its proximity to New York City. Other spec projects are in the works for northern New Jersey as well, according to Danzig.
While the industrial sector seems to be absorbing new capacity, the same is not true in the office market. The Gold Coast, which stretches north from Hoboken to the Jersey City shore, experienced a flurry of building activity in 2002, capping a three-year construction boom by developers trying to lure tenants from Manhattan.
A total of 3.2 million sq. ft. of new office space was completed last year. Cushman & Wakefield reports that 75% of that space was absorbed, but overall vacancy tripled during the year. Lehman Brothers, Knight Securities, Equiserve and Charles Schwab are now marketing over 100,000 sq. ft. of sublease space.
In Jersey City, the Goldman Sachs Tower — which will be the second-tallest office building in New Jersey — is nearing completion, along with two other office buildings to the north. But Goldman Sachs already has announced that it will only be using a fraction of the building's 1.5 million sq. ft. of space.
Goldman isn't the only firm that has rethought expansion across the river. “This Gold Coast area is extremely soft, since only a trickle of New York City tenants are moving in,” says Norman Baker, executive managing director at the Saddle Brook, N.J., office of New York-based Insignia/ESG.
For example, Cranford, N.J.-based Mack-Cali Realty Corp's 650,000 sq. ft. building will hit the market with only half the building leased to UBS Paine Webber. This new supply will collide with a deep glut of sublease space on the waterfront. Insignia/ESG data shows that at the end of 2002, a staggering 79% of all available space on the Gold Coast market was sublease.
The woes of the Gold Coast parallel those of the lower Manhattan market, which also is suffering from the downsizing of the financial services industry, says Mitchell Hersh, CEO of Mack-Cali, one of the biggest New Jersey developers. The REIT owns and manages over 29 million sq. ft. of Class-A office space in the northeast, much of it in New Jersey.
Right now, Mack-Cali has two new towers under construction in Jersey City. “The market here and the market in Manhattan are inextricably linked,” Hersh says. With lower Manhattan's vacancy rate near the high teens, however, this relationship has become less rewarding.
West of Jersey City, Baker sees little office development. At the close of 2002, the northern New Jersey vacancy rate registered 18.25%, according to Insignia/ESG.
Overall, the Northern New Jersey multifamily market has held up, despite the area's loss of almost 200,000 manufacturing and service sector jobs in 2002, according to Marcus & Millichap.
Even so, the state's 5.5% unemployment rate is below the national average of 5.8%. And northern New Jersey's population base — the densest in the United States — makes for a strong rental market. The multifamily vacancy rate was 4.5% at year-end 2002, less than half the national average of 10%, according to Boston-based Torto Wheaton Research.
But within the region there are some problem areas. “Newark and Jersey City tend to be overbuilt, and vacancy is a bit higher in these cities than the rest of the market,” says Gleb Nechayev, an economist with Torto Wheaton. Columbus, Ohio-based Danter Co., a multifamily research firm, reports that Newark's apartment vacancy measured 5.8% as of December 2002.
Still, Newark officials expect roughly 7,000 new apartment units to be built over the next seven years. One of the biggest multifamily projects will be Matrix Development Corp.'s $250 million mixed-use project near the Passaic River. When completed in the next few years, the project will add several hundred new rental units to the Newark market.
A slew of other apartment projects — many of them conversions of office and warehouse buildings — also is on tap for the area. Nechayev anticipates that the market will be in better shape by year's end to absorb the new inventory. “We see a fourth-quarter 2003 improvement in job growth in northern New Jersey, which should help the apartment market. Right now there is a fair amount of new product and little demand, so rents have weakened,” he explains.
Indeed, one apartment owner with apartment holdings along the Gold Coast says that rents are down 15% from 2000 levels. Marshall Tycher, president of high-end apartment firm Roseland Management, controls 4,000 units in northern New Jersey.
“Having a lot of new product on the waterfront has made it very tough lately. Negative job growth in Manhattan, combined with more people applying for mortgages, has really hurt this area of our business,” says Tycher. One-third of his tenants have opted to buy homes rather than rent over the past few years.
In the late 1990s, northern New Jersey's lodging sector was inundated with business generated by Manhattan and Philadelphia. Back then, it was common for Manhattan hoteliers to sell out all of their rooms about 250 nights a year, justifying the addition of new rooms in outlying areas, such as northern New Jersey. Before 9-11, last-minute business travelers and a few brave bargain-hunting tourists filled those rooms across the Hudson. Now, Manhattan hotels are struggling to keep their rooms full, and hotels in northern New Jersey that relied on the overflow business are feeling the pinch.
Between year-end 2001 and 2002, northern New Jersey hotels reported a 7.7% decline in occupancy rates, according to Smith Travel Research. In addition to the lack of Manhattan overflow, area hotels are feeling the effects of reduced corporate travel. Because business travelers make up a large part of the clientele for the northern New Jersey hotels, the market is unlikely to recover until the economy does.
Despite soft spots in hotel, multifamily and office rentals, demand for acquisitions in northern New Jersey remained strong in 2002. Two major properties were sold along the Gold Coast: 10 Exchange Place, a 696,000 sq. ft. office building in Jersey City and the 311,000 sq. ft. Boulevard East building near Weehawken. Bergen County saw the most active sales market in 2002, with 3 million sq. ft. of property trading hands.
According to Cushman & Wakefield sales broker Andy Merin, the most sought-after investments were industrial and retail properties.
“These deals are fairly clean. Most buildings are net leased and they don't require significant subsequent investments,” he says, adding that REITs and pension funds were the most active buyers of industrial property in 2002.
Pockets of northern New Jersey's multifamily market are overbuilt, particularly along the Gold Coast. Merin says that the combination of new units and low interest rates, which have turned renters into homeowners, has raised the multifamily vacancy rate and caused investors to shy away from any property with pronounced lease-up risk.
“Apartments are in bad shape. On the other hand, retail was very successful last year as several grocery-anchored shopping centers traded for very low cap rates around 7% and 8%,” he explains. The bloom may soon be off the rose, however: Merin projects that cap rates on retail properties may edge up into double-digit territory by the end of this year.
On the retail development front, Arlington, Va.-based mall developer Mills Corp. and Mack-Cali announced last month that they will jointly develop a 100-acre retail and entertainment complex in the Meadowlands. The project, named Meadowlands Xanadu, will replace the Continental Airlines Arena. The complex also will feature a Formula One racetrack, minor league baseball stadium and office towers.
The project is part of a $1.3 billion redevelopment plan chosen by the New Jersey Sports and Exposition Authority. Construction on the new complex is set to begin this summer. “We have a very strong industrial and retail deal flow right now, but I'm concerned about the second half of the year,” says Merin, whose near term vacancy outlook across all sectors of real estate is gloomy. “And I'm not predicting any positive absorption until 2005.”
POPULATION:
Metro area: 6.4 million
Source: New Jersey Department of Labor
LARGEST EMPLOYERS:
Aventis Pharmaceuticals, Inc.
11,000 employees
Continental Airlines
8,000 employees
University of Medicine/Dentistry
8,000 employees
Source: InfoUSA
METRO AREA STATS:
Office:
18.3% 4Q 2002
17.3% 4Q 2001
Rent per sq. ft.: $25.71 4Q 2002
Source: Insignia/ESG
Multifamily:
4.5% vacancy 4Q 2002
3.7% vacancy 4Q 2001
Rent per unit: $560 4Q 2002
Source: Torto Wheaton Research and The Danter Co.
Industrial:
8% vacancy 3Q 2002
6.7% vacancy 3Q 2001
Rent per sq. ft.: $5.37 4Q 2002
Source: CB Richard Ellis and Cushman & Wakefield
63.8% occupancy through Dec. 2002
55.9% occupancy through Dec. 2001
Source: Smith Travel Research
Meadowlands Xanadu, a mixed-use development with a 520-room hotel, office towers, baseball stadium and race track
Cost: $1.3 billion
Developer: The Mills Corp. and Mack-Cali Realty Corp.
Completion: Construction begins this summer
Meadowlands Distribution Center, a 368,000 sq. ft. warehouse
Developer: Orix Real Estate Equities
Completion: December 2003
The Highlands at Plaza Square, an 850-unit mixed use development with luxury apartments
Cost: $150 million
Developer: Matrix Development Corp.
Completion: 2007 (estimated)
Goldman Sachs Tower
a 40-story, 1.5 million sq. ft. office tower
Developer: Hines
Completion: March 2004
Keystone Greenville Yards Building 1 & 2, a pair of speculative warehouses with more than 500,000 sq. ft. of combined space in Jersey City
Developer: Keystone Property Trust
Completion: 2004