The Northeast region, including New York, New Jersey, Pennsylvania and Connecticut's Gold Coast, is experiencing a surging real estate market. Kenneth M. Krasnow, managing director of New York-based Cushman & Wakefield's Connecticut and Westchester offices, notes that individuals who have been in the real estate business for the past 25 years say they have not experienced better times. "Demand is at an all-time high, primarily due to new media, telecom, and financial services industries that are fueling a lot of growth as well as spreading the wealth," he says.
"It's a hot real estate market," echoes J. Michael Dow, president and CEO of New York-based CRESA Partners. "It's better than good. All of the vacancies left by the disruption of the financial services industry in the early-1990s have been filled. If you're looking for space, it's a pain in the neck, and many tenants must make compromises on the size and configuration of space."
Mark Yeager, president of the commercial group for Florham Park, N.J.-based Gale & Wentworth, adds that such market diversification continues to be a key to the Greater New York metropolitan area, including Fairfield County in Connecticut, through New York's five boroughs and on south to New Jersey and Pennsylvania.
"The area as a whole continues to thrive based on overall national and regional economic conditions," says Yeager. "Its diverse tenant base is fueling different types of space demands from industries such as financial services, technology, telecommunications, consumer products and pharmaceuticals. All of these industries are healthy and expanding, which drives the need for space and keeps the balance between supply and demand at appropriate levels."
Consider Jersey City, N.J., for instance, located across the Hudson River from Manhattan. Thanks to projects such as Cranford, N.J.-based Mack-Cali Realty Corp.'s Harborside Financial Center, with 2 million sq. ft. and plans for an additional 4 million sq. ft., and The Lefrak Organization's 400-acre "Gold Coast" mini-city, Jersey City has become a satellite of Manhattan.
Edward Cortese, a spokesman for Lefrak, says companies in New York are no longer looking at New Jersey the way they might have 10 or 20 years ago. "A six-minute PATH [Port Authority Trans-Hudson] ride from downtown is no longer seen as unacceptable," he states. "The Hudson River is no longer seen as dividing two states. Instead, it is becoming something that unites a region, like the Thames in London, the Seine in Paris or the Tiber in Rome."
The labor force and technology in this area have almost become more important than location and economics. Because the labor force is tight, companies are moving into areas they might have passed on previously.
A new trend is evident in this area. According to a year-end real estate report by the Research Consulting Services Group of Cushman & Wakefield of Connecticut Inc., Fairfield County underwent a dot.com explosion this year as more than 25% of all office leases were signed by Internet, technology and telecommunications companies.
"The old axiom in real estate used to be that the most desirable buildings had 'location, location, location.' That's changed this year in Fairfield County," says Krasnow. "The new real estate mandate is that an office building must have 'bandwidth, bandwidth, bandwidth.' Telecommunications and electronics needs of tenants are driving the market more than location. It's quite a change, but the reality is that a building with good technology and a mediocre location will command more interest than a building with mediocre technology and agood location."
In addition, the Northeast real estate market is not experiencing a large amount of new speculative construction. Since supply is limited and economic and real estate fundamentals are strong, demand continues to be high, analysts say. The vibrant economy in New York, New Jersey, Pennsylvania and Connecticut, is also benefiting other sectors.
Retail also continues to be strong in the Northeast, says Faith Hope Consolo, vice chairman of Garrick-Aug Associates in New York. "The Northeast is always a trendsetter," she says. "Every other market follows. Last year, retail returns were up across the board - about 15% due to short supply and high demand. The international retailer has come into the Northeast and is stronger than ever. In the past eight months, there have been more than 50 deals from companies all over Europe either entering the market or expanding."
New York continues to be a retail mecca, she adds, but the problem is that there is little retail space available. "Most space has a dozen offers, and deals are being structured on a 10- to 15-year basis with annual increases," she says. "It's exciting because there is so much demand, and many new retail districts have come online. Westchester, Connecticut and New Jersey, were once considered secondary markets but now they are thought of as primary. It seems what is good in Manhattan is good in Long Island, Connecticut and New Jersey."
New York The Empire State, which is recording phenomenal economic growth, leads the real estate pack in the Northeast. Final 1999 data from the State Department of Labor shows that New York's private sector employment grew by 2.9%. This percentage is the fastest rate of growth in 15 years and the most significant economic expansion, compared with the national average, in 42 years, economists say. The state created 199,500 private sector jobs in 1999, its best showing in 15 years.
New York has had a good run in the past couple of years, in part from general economic conditions, low unemployment rates and increased productivity, says Alan L. Stein of New York-based Rockefeller Group.
"New York has been aided by the great success of financial markets," says Stein. "Traditionally, there has been a great concentration of banks and financial institutions in the area and their success and annual record profits have contributed to the strong real estate market. At the same time, New York is not seeing any major spec development. Everything that is going up has significant pre-let space."
The Rockefeller Group and New York-based Morgan Stanley Dean Witter & Co. are developing the 1 million sq. ft. Morgan Stanley Dean Witter Plaza building at 745 Seventh Ave. in Manhattan.
"With regard to supply, I don't think we're going to see a rush of spec construction entering the market primarily because it's a long-lead business, and there is a long lag between conception and delivery," says Stein.
Even so, new office development is warranted in Midtown Manhattan to help meet the demand that has characterized the market over the past six years, according to Insignia/ESG's January Office Market Report. The resurgence of the financial services industry, coupled with the explosive growth of high-tech companies, has left the downtown market in near perfect supply and demand equilibrium.
"One of the hottest stories of the previous year has been the explosion of leasing activity in the market south of midtown," says Robert L. Freedman, board vice chairman at New York-based GVA Williams Real Estate Co. "In five years, the area has seen vacancy rates drop from 15% to 5%. In that time, average asking rents have risen from $22.84 per sq. ft. to $33.95 per sq. ft.
"The driving force has been the activity of Internet and telecommunications companies that are flush with investment capital," continues Freedman. "Furthermore, many corporations have implemented sophisticated strategies, which optimize current space while simultaneously reducing future requirements."
John J. Bader, vice president of business development at New York-based IntelliSpace Inc., says that many developers are renovating older buildings with the latest in technology to attract tenants.
"Cities in the Northeast in particular have concentrations of old buildings," he says. "The garment district and south of midtown in New York are full of buildings from the first half of the century. Owners are now looking to bring some of those buildings up to speed with cutting-edge technology. New York is a hotbed for new media and Internet companies that are snapping up space at record rates."
Office buildings are not the only real estate undergoing renovation. One of the largest condominium renovation projects in the country is now under way in the Northeast. Located in the East Bronx, Parkchester South Condominiums was built in the late-1930s by New York-based Metropolitan Life Insurance Co. as moderate-income rental housing. The condos are now being renovated under the leadership of The Community Preservation Corp. (CPC), a private, not-for-profit lending consortium composed of 94 banks and insurance companies.
"New York has a very tight housing market, and there are estimates that there is a shortage of between 150,000 and 250,000 residential units," says Michael Lappin, president of CPC. "There is an enormous lack of housing in this major metropolitan center, and that may be a problem if the area and economy continue to grow."
New Jersey Not to be outdone, the Garden State continues to show impressive strength in terms of real estate supply and demand dynamics, according to Insignia/ESG's Office Market Report. Fourth-quarter 1999 capped off one of the best years in leasing activity in nearly five years as more firms continued to expand or relocate to the state. Insignia/ESG reports that strong demand has captured the attention of developers, who have completed more than 2 million sq. ft. of office space during the quarter.
Leasing more than doubled from 5.17 million sq. ft. in third-quarter 1999 to 11.11 million sq. ft. in the fourth quarter. Available office space in New Jersey dropped from 17.53 million sq. ft. in the third quarter to 16.88 million sq. ft. in the fourth quarter even as developers added more than eight new buildings to the state's office building inventory.
Raymond T. Cirz, CEO of Integra Realty Resources in New York, says that New Jersey continues to be a high-profile corporate location, particularly for pharmaceutical and technological companies that are drawn to the educated labor supply and the proximity to New York.
"Aventis, the result of the merger of Rhone-Poulenc and Hoechst AG, for instance, is a positive move because the combined firm took space in three buildings in two different submarkets - Parsippany and Bridgewater," says Cirz. "Even spin-offs can be positive for the market. In its next major move, Lucent Technologies is expected to split into two companies. While the real impact of a Lucent split is unknown at this time, if it parallels the AT&T split, it should be a positive for overall office demand."
Jim Nugent, senior vice president of leasing for Mack-Cali Realty Corp. of Cranford, N.J., adds that the most recent merger in the pharmaceutical industry, SmithKline Beecham and Glaxo Wellcome, will also aid the real estate industry. "There is a strong possibility that the merged companies' worldwide headquarters will be in New Jersey," he says. [New Jersey] is a logical place for them, because many pharmaceutical firms are here, the knowledge base is here and so are a large number of employees."
Pharmaceutical firms are not the only com-panies buoying the real estate market. High-tech is helping too. IDT, an Internet company, leased 484,000 sq. ft. in the former Mutual Benefit Life Building, which was a tremendous shot in the arm to Newark, says Nugent. Other companies are also expanding.
"DLJ Direct, a tenant of ours in Jersey City, is growing so rapidly that it went to Harborside and leased 200,000 sq. ft.," says Nugent. "Exodus, a web-hosting company, has 80,000 sq. ft. in Harborside and has leased another 234,000 sq. ft. at Weehauken. Waterhouse Securities also leased 185,000 sq. ft. at Harborside.
"New Jersey and Connecticut are benefiting from the tightness of the Manhattan office market where the vacancy rate for Class-A space in midtown is 5.4%, with new construction rental rates of $60 per sq. ft. and higher," adds Nugent. "Some have reached $80 to $100 per sq. ft. in some transactions, so the logical place to go is Jersey City where there is an abundance of land, less expensive rents and immediate access to the city."
The Garden State's industrial market is also extremely dynamic, reports Greg Senkevitch, senior vice president at Bedminster, N.J.-based Advance Group.
"There is incredible strength in the industrial market in New Jersey," says Senkevitch. "I think that market, at least in the short term, should stay in balance. We're not seeing a major round of new construction, and we're not seeing any consolidation of facilities or restructuring of distribution requirements for many of the major users. For the time being, it appears the market is going to be in great shape, barring any sudden downturn or foreign upheaval."
Emanuel Stern, president of Secaucus, N.J.-based Hartz Mountain Industries, one of the largest land owners in the Meadowlands, agrees. "At the end of the day, the simple fact is that the economy in the region is really clicking," he says. "Industrial is clicking. People need distribution centers, even with just-in-time inventory. You can't do away with industrial space demand."
Pennsylvania Like its neighbors to the north, Pennsylvania is experiencing an economic boom and a strong real estate industry. Unemployment is at its lowest level in three decades, due to 300,000 new jobs created since 1995.
According to the American Electronics Association, the state ranked eighth in both total technology employment and number of technology firms. Pennsylvania is the second largest bio-pharmaceutical and fifth largest biotechnology employer in the nation. The Commonwealth also ranks in the top 10 in advanced materials production, environmental engineering and technology intensive agribusiness.
Philadelphia, home to a number of prestigious hospitals and universities, is experiencing the greatest private-sector growth in a decade. Services, especially in healthcare and retail-trade sectors, are leading the expansion.
"Pennsylvania's doing extremely well," says David R. Binswanger, president of Philadelphia-based Binswanger Cos. "The economy has been very strong, and we have been conservative with new construction. Without a huge amount of new product coming on line, vacancy rates are lower. The tightness of the market is spurring some new development, but it is being done rationally."
Robert B. Steinhart, president of the local Society of Industrial and Office Real Estate (SIOR) chapter and executive vice president of Phila-delphia-based Colliers Lanard & Axilbund, notes that the region's economy is balanced with educational institutions, distribution corridors, and a diverse base of financial and industrial headquarters. "Developers, including some REITs, were responsible for more than 1 million sq. ft. of industrial space under construction in 1999," he says. "Philadelphia County surprised many by contributing more than 300,000 sq. ft. to the overall supply."
Gregory J. West, executive director and general manager for the Insignia/ESG Philadelphia office, says the performance of Philadelphia's downtown office market was outstanding in 1999. "The CBD had its strongest showing since the early-1980s, ending the year with more than 3 million sq. ft. of leasing activity, a decline in availability of more than 1.6 million sq. ft., an occupancy level of more than 94.4% and rental rates that increased in all classes of space," he says.
Char Fortune Posey, senior managing director and branch manager in the Philadelphia office of Cushman & Wakefield of Pennsylvania Inc., says there are four reasons for such a strong performance: a stable supply and demand for office space; rising rental rates; a boom in residential and hospitality growth; and a highly educated labor pool to support continued corporate growth.
In the Philadelphia CBD, she notes, overall vacancy rates have declined from a high of 15.7% to 11.7% over the past five years, despite some large sublease space that came on the market and a number of corporate mergers and downsizings. At the same time, she notes, rental rates have been inching upward, with the average Class-A rental rates rising about 23% since 1995, from less than $20 per sq. ft. to about $24.50 per sq. ft.
A number of older office products that have been renovated for other uses are contributing to the tight office market in Philadelphia. "The new Ritz-Carlton hotel, which opens in a couple of months is in the former Mellon Bank corporate headquarters, and there are several other Class-B and Class-C office buildings that are being turned into residential," says Binswanger.
"The rest of the state is basically seeing a strong market. Pittsburgh is also doing well, and in Wilkes-Barre and Scranton, things have been strong too," he says. "We're seeing business coming down Route 80, from New Jersey and pushing south and west, which is a real boom for the northern part of the state."
Connecticut Thanks to a strong economy, the real estate market in Connecticut has rebounded from the doldrums of the early-1990s. According to the Connecticut Department of Labor, the state unemployment rate in November was 2.6% - below the national average of 3.8% - and the state gained 23,000 jobs. With a modestly growing local and national economy, the area is positioned to remain healthy during the next decade.
John D. Goodkind, executive managing director of Newmark & Co. Real Estate Inc. in Manhattan, notes that Connecticut's Gold Coast, which includes areas such as Greenwich, Stamford and Westport, has a strong office market. Greenwich, a high-end bedroom community close to the city, is posting rents in the mid- to high-$60s, which has almost doubled in the past two to three years, he says.
"In Stamford there is more space with rents in the mid- to high-$30s, and concessions are a thing of the past," says Goodkind. "Stamford's office inventory is tight, with a 7% vacancy rate and no new building yet. Also, along the Merritt Parkway is rock solid and Westport has a 2% vacancy rate."
New Haven County closed 1999 with tightening vacancy rates, healthy leasing and positive net absorption levels because of the demand for suburban office space. During the year, leasing activity, which totaled more than 720,000 sq. ft., pushed the overall vacancy rate down from 17% in 1998 to 16% at year end.
According to Cushman & Wakefield, Hartford County recorded nearly 1.5 million sq. ft. in lease transactions last year, and the vacancy rate tightened by nearly two percentage points to 14.6%. The improved market and tightening vacancy rates allowed landlords to raise their asking rents. At year end, the direct average rental rates for Class-A space in Hartford County reached $20.87 per sq. ft., a 17% increase since 1996.
Money gets tighter While prospects seem bright for real estate in the Northeast, there are some mitigating factors. George A. Bozzuti, vice president of GMAC Commercial Mortgage in Horsham, Pa., notes that lenders are taking a harder look at loan transactions in the Northeast.
"There's still a lot of cash available for financing, but credit policies have tightened marginally to address increased perceived risk," he says. "There's always a fine line to walk between quality lending and chasing the next deal, and it's time to be paying better attention."
"The only thing we see that might slow it down is if the markets cut the legs out of the new-media industry or interest rates do something dramatic," says Krasnow of Cushman and Wakefield. "Even then, we don't think we'll go back to late-1980s or early-1990s. We just don't have the extra supply."
Ron Bruder, chairman of the Brookhill Group, a New York-based national buyer of environmentally distressed properties, has some doubts about the market as well. "How long can it continue? Remember, oil prices brought about two recessions," he says. "I've been in real estate for 24 years, and it would be nice if the robust economy could continue, but that's not realistic."
Still the majority of commercial real estate professionals in the Northeast say they expect the good times to continue. The reason? Stable capital markets, little overbuilding in the area and a balanced economy.