With companies becoming more efficient with less space and the outlook on employment growth remaining dismal, New Jersey's commercial real estate sector will face increased vacancy rates for nearly a decade, an industry expert said.
"No one out there is saying, 'Tomorrow, I need 300,000 square feet of space,' " said Robert Burchell, co-director of the Center for Urban Policy Research at the Rutgers University Edward J. Bloustein School of Planning and Public Policy. "The reality is people have gotten used to getting along with less space, and there are fewer people in the business now. If that's what the demand side is like, then people in the supply side for space are finding it very tough."
According to a June report by the East Brunswick-based Otteau Valuation Group Inc., vacancy rates in New Jersey's commercial sector have steadily risen since the first quarter of 2011, resulting in a current negative net absorption of 1.9 million square feet between January and June 2012. The state's office sector is on pace for 2.9 million square feet of vacant space in 2012, according to the report.
Burchell said the number of people entering the labor market each year is steadily outpacing increases in payrolls, which has been the biggest factor for rising vacancy in the office market.
"When you're down on jobs, you're high on space — and when you're high on space, you're not going to build new space," Burchell said. "There'll be niche markets where someone is tied into a particular area for some reason, and as a result of that, they'll have enough demand within their own company or allied group that they'll build new space. But while it may be more prestigious space, it will still be less space than before."
But Burchell noted that leasing activity in select urban and suburban office markets — like Hoboken, Jersey City and Montclair — will remain strong, partially due to their proximity to New York City and available Urban Transit Hub and Grow New Jersey tax incentives from the state.
Burchell said the best barometer for trends in New Jersey's office market is the vacancy rate in New York, and "no one in New York is saying the market is back or close to being back."
"People in New Jersey are saying the comeback is coming, but I think two decades from now, people will be saying, 'We've gotten along on 50 percent less office space than we ever needed before,' " Burchell said. "No matter what we do or what job reports come out, we're not going to get back to where we were in 2008 until 2022 … because businesses have found a way to get along without people's services, so they're not spending a significant amount of money on increasing their space."