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Rental rates improving, but South Jersey office market still struggles

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While rental rates in the South Jersey office market have bumped up over the past few quarters, leasing and sales activity will hardly put a dent in the region's expansive vacancies in the year ahead, according to a report by Wolf Commercial Real Estate LLC, in Voorhees.

"We're absorbing about 100,000 square feet of office space a quarter, but there's still 3 million (square feet) left, and we have a long way to go to get there," said Jason Wolf, founder and principal of the firm. "It's obvious the market is a lot more cautious than where it was five years ago, so it will take longer than a year to get through all of the absorption that needs to be done."

But Wolf said a few areas like Mount Laurel, Marlton and Moorestown are performing above expectations, as leasing deals are being completed in the range of $11 to $13 per square foot, compared to between $7 and $9 per square foot when the South Jersey market as a whole "hit a bottom, psychologically, a year ago."

"We went through a period of turmoil when everybody was doing whatever they could to secure a deal. But now the desperation mode is over, and we're finding that people are being more selective," Wolf said. "We're still restructuring lease terms today 15 (percent) to 20 percent below where they were six years ago, but the price points are higher than they were two years ago, which has been driving higher deals."

Wolf said increasing competition for quality office space between 10,000 square feet and 40,000 square feet among traditionally strong South Jersey industry sectors, like health care, law, engineering and insurance, has driven up rental rates and absorption in desirable areas. That strong leasing activity is beginning to drip into struggling locations like Pennsauken and Voorhees, especially as regional health care systems like Cooper University Hospital, Virtua and Lourdes Health System continue to "push down that way for more visibility," Wolf said.

However, even the healthiest commercial districts are struggling to secure tenants for offices that comprise less than 10,000 square feet of space, as small businesses continue to downsize and large companies shutter their satellite locations to combine offices into Princeton, New York or Philadelphia markets, Wolf said.

But in 2013, Wolf said he expects those companies to very slowly start to trickle back into the area, noting a Kansas City-based firm recently reopened an office in Marlton.

"This is one of those markets where jobs are the driving force. The jobs picture looks pretty bleak, and businesses are using every excuse they can find right now to keep their growth slow and steady," Wolf said. "Still, the last three quarters were dominated by lease renewals, and now we're starting to see new deals in the market. I don't see rents doubling in the next year, but I do think we'll continue to see a slow trend upward in rents and leasing activity going forward."

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