After being transformed by a building boom that lasted much of the decade, New Jersey’s commercial real estate industry stood on the doorstep of a recession by 1987. And within two years, the nationwide downturn was under way, leaving the market with an oversupply that would only be filled by reliable job growth over the next several years.
Nearly a quarter-century after the start of a prior recession, Garden State developers are now trying to fight through another challenge. But industry leaders and experts say the solution to the market’s woes may be more complex than it was two decades ago.
New Jersey’s office sector surged in the 1980s after federal tax legislation that “was God’s gift to the industry,” said James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University. The 1981 measure cut depreciation periods from 40 to 15 years, among other benefits, inviting development in a state that had a highly educated work force and blank canvas of suburban property.
But despite a law five years later that reversed many of the tax changes, developers said rampant lending caused the market to become oversupplied by the end of the 1980s.
“The demand was off, and it wasn’t so much because of a bad economy,” said Jeffrey M. Schotz, executive vice president for SJP Properties, in Parsippany. “It was purely a case of too much building, and that obviously meant an impact, in the short term, on our business.”
By 1990, Hughes said, 80 percent of the state’s office space had been built in the previous decade. But economic growth through the mid-’90s helped demand catch up to supply.
Insiders say the recession left New Jersey with far fewer developers, usually those with deeper pockets and less debt. Mack-Cali Realty Corp. CEO Mitchell Hersh said the “era of the equity (real estate investment trust) emerged” around 1993, “where access to public capital markets in the form of debt and equity allowed deleveraging to occur.”
As an example, Hersh pointed to his firm, created in 1997 through a merger between the Mack Co., a strong private company that “(was) not pressured by over leverage,” with the smaller public corporation Cali Realty.
The late 1990s and early 2000s featured several key periods for New Jersey’s real estate industry, including a building boom along the Hudson waterfront. The submarket had more than 20 million square feet of inventory by 2004, nearly doubling its total from just six years earlier, according to data provided by brokerage firm Cushman & Wakefield.
“If you go there today, you don’t recognize it” from 20 years earlier, said Christopher J. Paladino, president of the nonprofit New Brunswick Development Corp. “The amount of development that’s gone on at the waterfront from 1987 to now is just extraordinary.”
The period also included the rise of the Internet and the so-called dot-com bubble. When the bubble burst in the early 2000s, Schotz said, the state’s office market took a hit, but was able to recover through subsequent job growth.
But the latter half of the 2000s brought a downturn unlike anything ever seen by the current generation of developers. The recession brought on by the housing bubble, the effects of which remain today, has been especially tough on New Jersey’s commercial real estate sector — companies are still reluctant to hire, making it all the more difficult to fill the state’s supply of office space.
And more than ever before, the job recovery has been affected by globalization and uncertainty over foreign markets. That is among the newest challenges for the real estate industry, said Richard Johnson, senior vice president at Matrix Development Group, in Cranbury.
“In a state that has as diverse an employment base as we have, we’re still struggling with 9.6 percent unemployment,” Johnson said. “That shows you how difficult and complex the problem is.”
Peter Reinhart, director of Monmouth University’s Kislak Real Estate Institute and a Garden State development attorney for four decades, said the legacy of the problem and its complexity already has taken shape.
“We’re coming out of it, and what was sort of the truism was proved true once again — the stronger, deeper-pocketed owners and developers are coming out surviving and able to take advantage of opportunities,” Reinhart said. “The other thing we learned is that too much debt is not a good thing.”
State officials have tried to jump-start New Jersey’s real estate industry in recent years, especially through large-scale incentives like the Urban Transit Hub tax credit program. The $1.5 billion program, enacted in 2008, awards major tax breaks to developers and companies that make large capital investments and strengthen the employment base in nine cities. That’s helped spur development during the recession in transportation centers like Newark and Jersey City. And in New Brunswick, Devco has used the Urban Transit Hub tax credits and a host of other incentives to finance more than $280 million worth of new development during the recession.
“In good times … you’ll see more true private-sector development happen” in New Brunswick, Paladino said. “During bad times, we kind of seize the moment, and take whatever is the subsidy de jure, and then really find a way to leverage that to do projects that we might not have been able to do in good times.”