But that changed in December when the building's newest owner, Normandy Real Estate Partners, announced a lease to the Massachusetts-based IT firm EMC Corp. The 81,500-square-foot deal was the first payoff at the site for Normandy, which acquired the four-story, 372,000-square-foot property a year earlier and spent $12 million on upgrades like new building systems, renovated common areas and rooftop solar panels.
"The location and the quality of the construction were good, but the building was tired," said Paul H. Teti, a Normandy senior vice president who co-heads its leasing group.
Teti said the Morristown firm bought and redeveloped the ailing property, rebranded as Center 78, as it was slated to be turned over to its lender — the blueprint Normandy is following in other top suburban locales and central business districts in New Jersey. And other developers have taken a similar path in recent years, as the state grapples with a glut of aging and underperforming office space, some of which is still in top submarkets.
"Two issues — the economy and the overbuilding of office — conspired to create a perfect storm of opportunity to buy these office buildings and other assets inexpensively," said Adam Altman, a partner with KABR Real Estate Investments, in Ridgefield Park. Much of the distress in the state's office market started early in the recession, but a "hangover" effect has meant continued opportunities for investors.
North Jersey has more than $3.3 billion worth of distressed commercial property, according to New York-based research firm Real Capital Analytics. Altman said "distress" can come in several forms, such as a landlord's inability to make loan payments because of low occupancy, or because an owner is stretched thin by other assets.
KABR has bought and repositioned several distressed properties here since making a splash in 2009, when it acquired 85 Challenger Road — then a vacant, 235,000-square-foot office building in Ridgefield Park. The asset had been returned to its lender, AIG, after the previous owner failed to find tenants, but KABR renovated the property and quickly drew Samsung America Inc. from its previous headquarters across the street.
The firm has signed several other high-profile tenants since that time, including Office Depot and Apollo Health Street, the health care services firm.
Given the slow pace of economic recovery, convincing tenants to move is no easy task, said Robert Donnelly Jr., an executive vice president at Cushman & Wakefield. The market has trended toward renewals "because many companies don't want to take on that cost to move, unless there's a real reason or motivation for them to do so."
The right motivation may come in the form of high-quality, redeveloped space. Donnelly's firm found larger users have gravitated toward new buildings in the last three years; in total, 73 percent of leasing volume by tenants larger than 50,000 square feet has occurred in office buildings built or renovated since 1990.
"Better companies are looking for good-quality buildings, and they're willing to pay for them," Donnelly said, pointing to 8 Sylvan Way, in Parsippany, which The Hampshire Cos. acquired in 2005 and redeveloped before leasing it to The Medicines Co. He called it "a great story and a great situation, where a company had a need and they found a building that had been significantly improved."
Tenants also are seeking more efficient and flexible space, said Teti, a trend Normandy kept in mind when it acquired and upgraded the Warren building. In extreme cases, tenants use a "hoteling" concept that allows for temporary work stations in the case of employees working from home. But he said more commonly, as with EMC at Center 78, tenants are simply looking to not waste space.
"Just in square footage per employee, the trend has been substantially down," Teti said. "One of the keys to either maintaining occupancy for existing tenants or attracting new tenants to your buildings is having an efficient floor plate, but also being flexible with respect to how you build that space out."
The demand for new, efficient space in core submarkets is driving one of Normandy's other repositioning ventures, at Parsippany's 10 Sylvan Way. The property, part of a four-building New Jersey portfolio acquired last year, is a 120,000-square-foot site that Normandy hopes will entice a single corporate user seeking a headquarters-type location. And despite last year's tepid market, Teti believes such users are out there, especially those looking to improve how their employees use space.
Besides the Parsippany site, Normandy's recent acquisitions also include 1 and 5 Independence Way, in South Brunswick, and 3 Becker Farm Road, in Roseland. The three properties are more suited to "multitenant environments," he said, but they also share the common thread of the firm's other projects: being in strong suburban markets and "for one reason or another, need(ing) some attention and capital."
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