While the outlook for the 2018 commercial real estate market remains mostly positive, experts agree there are many factors that need to play out before the picture sharpens.
The new federal tax plan, say local industry experts interviewed by NJBIZ, is too new for most to have solidly grasped it. Meanwhile, state incentives proposed by the incoming Murphy administration and uncertainty around interest rates will also impact the sector in ways that are not yet known.
Nevertheless, if 2017 was an indication of where the market is headed and not the high point, growth will be in the forecast this year too, say the experts contacted.
Here’s what they view as the major issues facing the real estate business in the coming year.
President, NAI James E. Hanson (multifamily, office, industrial brokerage)
[Real estate] is very good right now. It’s vibrant, especially in the industrial arena. … The office market is OK. The retail market is OK and the multifamily market in the state has just gone crazy. I don’t see anything that changes any of that, at least in the first half of the year. This has been going on for a while and I expect that, if it isn’t next year or late this year, we’re going to see some sort of slowdown take place. I couldn’t tell you why, but things tend to work in cycles and that has been going on for a long time.
The impact of the tax law is going to be you’re going to have to wait and see. I don’t think everybody knows yet. In the residential development arena, the banks have been a little more strict on what they’re lending on. … I don’t think that’s a bad thing. It keeps things from getting out of hand.
Retail is going through a real change where you’re seeing things get redeveloped that are more entertainment-oriented and that has been going on for a while. But it is something that successful retail is now mindful of.
President and CEO, Levin Management Corp. (retail)
2017 was a very strong year in terms of retail despite some of what was in the news. Looking forward to 2018, I see that continuing. Some of that gets driven by the economy, and if there are drastic impacts in the economy, that will certainly impact [retail]; however, things seem relatively stable. Retailers are stable and expanding, [and] we do see some migration of ecommerce and internet sellers now looking at opening brick and mortar stores, so that is very possible as well.
In some ways, technology and e-commerce has been a threat in a sense to brick and mortar, but in other ways we’ve seen retailers in our portfolio adapting technology to their stores to reach customers. We see that continuing and adding different types of businesses to retail properties: restaurants, gyms and other kinds of activities as well.
There is a smaller universe of retailers looking for stores. There is probably too much retail space right now and you have to adapt those properties. In the future, there is probably going to be less retail space, but maybe that is going to be reworked to secondary space or something else.
Principal and market officer, Bridge Development Partners (industrial)
There is a strong demand for last-mile distribution (the movement of people and goods from a transportation hub to a final delivery destination) and in our business plan, the best way to tackle that is target legacy properties that have been laying around for many years, demolish them and put a brand new building in key market places.
[In 2018], there will be and there are now qualified developers that are going to be competing with us in these projects, but there isn’t going to be a flood because of the challenging nature of the projects.
We’re so supply-constrained because of sites at Exit 8A and north [that] are the challenging properties, [so] you can only bring so much supply. That, in combination with a consistent consumer demand … means I see a strong demand for the infill product and I see a constrained or regulated supply because of the challenge of bringing these products to market.
… There is a strong discipline in lending this time around. As we look forward to 2018 and 2019, we are confident those dynamics are going to provide us with a healthy market.
The 287 corridor, [which] albeit in the past it has been a sluggish market, is coming into its own now because of the available product … [it] has been validated as an extension of the Exit 10 market.
President, Pierson Commercial Real Estate (retail)
I think we’ll see continued activity and strength. A lot of the supermarkets and big boxes that are remaining are being repurposed to entertainment, to gyms, untraditional uses and medical facilities.
The primary corridors are still being looked at by retailers … but you’re seeing more growth in Burlington County and even Burlington itself; Hanover and Cedar Knolls, that corridor. Transit-oriented is certainly in high demand and growing right now.
You’re seeing a lot more retailers getting creative with not just relying on consumers coming to the stores, but outreaching and getting goods to consumers. I think that is one way traditional retailers will try to compete more with e-commerce. You might start seeing some of these retailers look for more warehouse [space] as they adopt e-commerce.
President, Mountain Development (industrial, office, retail)
There has been a very positive progression across all asset types, which means not just companies that need space or need new buildings, but also things [related to] leasing and deals closing. The needs of businesses are so pressing that it forces companies to make decisions and press forward and commit to projects.
Success or activity begets more success and activity. Companies which abandoned older space to move into newer space, abandoned older formats to move into new formats, are going to encourage and embolden companies to move forward. We’re very optimistic that we’ll see more opportunities and transactions getting done.  was a really good year for office and the things that made it a good year are still on the table moving forward.
There seems to be a migration from strict retail to mixed-use retail.
Member, Sills Cummins & Gross PC (law)
With most of the country's aged and crumbling roads, bridges, tunnels and pipes existing in states that are mainly represented by the party out of power, how the current Congress acts on public infrastructure funding will be the ultimate defining moment for whether the Senate and House view the 50 states as "united" states or merely red versus blue states. I predict that centrist and moderate members of Congress in both parties will come together on this issue, perhaps because they're already feeling the heat back home for the worsening divisiveness and gridlock in Washington.
Partner, Fox Rothschild LLP (law)
2018 will be a year of uncertainty in New Jersey real estate as a result of potential changes by the new administration to the Grow NJ program and the effects of the new federal tax bill.
Many of the transactions I’m involved in are dependent on the issuance of Grow NJ grants, as the transactions are not economically feasible without them. A plan to offer Grow NJ grants only to companies relocating to New Jersey will result in a substantial decrease in transactions. Grow NJ incentives must continue to be made available to companies already located in New Jersey to encourage them to modernize and expand their businesses. Otherwise, companies will leave for other states where the costs of modernizing and operating are more affordable.
In addition, the new federal tax laws that cap [state and local tax] deductions and real estate taxes will likely increase the demand for high-end townhomes and for-sale condo units costing less than $1 million with affordable real estate taxes. I also believe many people will move away from home ownership, which will cause an increase in demand for more high-end luxury rental apartments, similar to the project currently being built by Roseland next to the Short Hills Mall.
Managing partner, Vision Real Estate Partners (office)
As far as velocity goes and large tenants in the market, particularly in the Morris County market where we have a large amount of property, [it] is probably going to be a slower year. [For] large tenant expirations and new tenants potentially expanding or coming into the state, [there] doesn’t appear a lot of velocity in 2018. What that does mean, though, is that tenants may be out more towards the end of the year prepping more for 2019 and 2020.
On the smaller tenant side, the 20,000-square-foot and under [buildings], we still think there is going to be activity as of 2018. The Princeton market still has a ton of activity depending on where you’re located and we anticipate that for 2018.
As far as the state goes, everyone is anticipating what will happen the first and second quarter. The biggest thing is the incentive program. Developers and tenants are going to be very keenly focused on that. It will potentially be ineffective in 2018, but I’m sure that towards the end of 2018 there will be some decisions on how the incentive programs may or may not be affected, depending on the new governor and the cabinet.
International director, JLL (industrial)
We are forecasting very similar demand in 2018 [as compared to last year]. It is going to be a question of the supply side and what we have on the supply side to provide to tenants. There are good projects in the pipeline. There are some deliveries in 2018 and a lot more in 2019.
We’re finally at the point with rent growth where redevelopment is going to make a lot more sense than it has in the past and it will pencil out. The challenge is finding the right properties to redevelop.
I think the biggest story [for industrial] in 2018 is going to be urban logistics. There will be multistory infilled development in New York City for industrial this year. And that’s all about last-mile. My view is that it is going to push rents in the Meadowlands up considerably because we’re expecting those projects to be in the upper $20-per-square-foot, triple net, perhaps even $30 in some locations. When you’re looking at $12 or $13 in the Meadowlands, that is going to look awfully inexpensive.
In Eastern Pennsylvania and in Central New Jersey, the big story is really the story of labor availability. As the economy continues to do well, companies are going to be looking very hard at all the data around available labor and that is going to be a determining factor.
First vice president investments, Marcus & Millichap (retail)
The demands for the type of properties we sell — midlevel shopping centers, strip malls, triple net-leased assets — there is still tremendous amount of demand for those assets.
There is money coming out of New York that is more aggressive. For us, that is 1031 exchange money (when a taxpayer may defer recognition of capital gains and related federal income tax liability on the exchange of certain types of property) around the country, especially in net-leased assets. I see  as strong as 2017.
People are nervous about big-box stores because some of those are more challenging to fill. Anything that you can’t buy online but you can buy at a strip mall is still strong and the demand for that product is strong. We haven’t seen any letdown at all.
There is just not enough retail demand to fill spaces. Other uses are coming into the sector that fit into the shopping center box.
Investment sales, National Multi Housing Group associate, Marcus & Millichap (multifamily)
Transactions overall were slightly down across the board, but overall, I see 2018 being a strong year primarily due to the continuing migration of capital coming out of New York. As owners continue to trade out of properties in Manhattan, the Bronx and Queens, Northern New Jersey — specifically places like Essex County and Bergen — are still very attractive because you get greater yields and you have the ability to get bigger scale as well.
The new tax plan has some benefit that will continue to help commercial real estate as a whole, specifically with the deductions. You still have very attractive demographics that are leading. And some counties are even poised for more growth now.
Overall, Manhattan transactional volume is down roughly 50 percent year-over-year. As less multifamily has traded there, one would think we would feel that pullback as well, but we really haven’t. As an alternative to New York, you still can get higher yields in Northern New Jersey while having similar demographics in the more urban areas.
Senior managing director, HFF (debt and equity)
In commercial real estate, with the demand drivers that we have here in the state, I don’t think the tax code is really going to impact us [in 2018].
Every time I try to make predictions about interest rates and where they are going to go and how they’re going to impact things I am always wrong. But, I think most people would agree that rates will be increasing. The Fed announced they would do that, but even Treasury rates, which are the benchmark for most of the fixed-rate financings today — most people would agree that they are probably going to go up. But how that impacts business? I don’t think it really impacts us. There is a lot of liquidity out that wants to, or needs to, be deployed. We have a very strong market and that is where the money wants or needs to go.
Transactional volume will probably be the same or better than 2017 because there is a lot of liquidity in the market.
Senior managing director, HFF (capital markets)
You can only see a few months ahead. You can see 45 days out, maybe 90 if you’re lucky, but we’re bullish. The pipeline is still strong, there is some carryover business, there are some deals that will be well received by the market.
Multifamily and industrial are still high on the list. The office product is a basis play, but there are buyers for it. A little tougher on the retail market.
For me, when I look at the spectrum, the interest rate increases have to be watched. Fifty to 75 basis points is built in, but if it starts to move more than that, people are going to start to wonder what is the next move. And frankly, they don’t even have to physically move, people just have to think they will move to factor that into their underwriting. And if you’re looking at three or four more increases in 2018, that is going to get underwritten and at some point, north of 75 basis points, that starts to have an impact on pricing.