In 2014, Christopher Jerjian took what he calls a “plain vanilla suburban office park” and turned it into a success story.
Jerjian, co-founder and manager of Ibis Plaza Office Suites in Hamilton, said his company needed to reinvent itself due to a sharp shift in the demand and use of traditional office space.
“Being in a suburban office just wasn’t cutting it,” said Jerjian, whose company’s properties were down to 50 percent vacancy between 2012 and 2014. “Office is not a great investment. It has become laggard and remains laggard and Class B and C space has really taken a hit.
“We knew the same old ways were not going to work in the future. We carved out a different niche based on what we were hearing from tenants over the years. I was going to my partners and saying, ‘We have to do something; office is dead.’”
According to some industry insiders, Jerjian is not exaggerating.
The slow death of the suburban office has been fueled in part by a shift in technology and work preferences. Yet the changing dynamics have created opportunities for the reuse of such properties.
“The perfect storm against suburban office properties in New Jersey began brewing several years before the stock market crash of 2008,” said Arthur Linfante, managing director at Livingston-based Integra Realty Resources Northern New Jersey. “Prior to 2008, changes in technology, globalization, population shifts to more urban locations and the effects of the millennial workforce preferences were already in place. The crash of 2008 accelerated the shift.”
Now, an estimated 75 percent of the state’s office space is becoming “functionally obsolete,” he said.
A shift in demographics and location preferences are also contributors, Linfante said, with many folks moving east along train lines and away from suburban office locations.
“This is mainly a suburban office market challenge,” he said. “However, those communities that are more densely populated located in areas with higher incomes and closer to town centers and train stations are faring better. Other more rural markets or areas further away from highways and mass transit are having difficulties.”
Examples of some high-profile, long-vacant office properties include BASF’s vacated digs in Mount Olive and a onetime Sony Electronics building in Park Ridge.
“From a valuation perspective, these abandoned offices have become one of the more interesting appraisal assignments over the past few years,” Linfante said. “The abundance of empty office properties have seen an increase in appraisers being asked to collaborate with engineers and architects to come up with property-repositioning strategies. In the end, it’s all about the economics of the plan.”
Michael McGuinness, president of NAIOP New Jersey, said developers have three options in dealing with white elephant office properties.
“[You can] use an architect and figure out how to re-inhabit that building, or you can basically replace the building and knock it down, or you can just knock it down and convert it into a park or a parking lot,” McGuinness said. “In many cases it’s a combination of all three. We are going through the pain of morphing into the next phase of the office. We’re trying to figure it out. That’s why the architects are some of the most important players.”
Enter Dana Nalbantian, principal for global design company Gensler, which takes vacant properties and redesigns their footprints for modern use.
“In New Jersey we have a lot of vintage, empty properties designed back in the ’80s for single tenants like AT&T and these properties have sat empty for many years,” Nalbantian said.
Center 78 in Warren is one such development, which Gensler worked on with Normandy Real Estate Partners.
“We were able to subdivide this large single-tenanted building footprint into a multitenanted space,” Nalbantian said. “We redesigned the lobby and brought in amenities like food and beverage and health and wellness. They were 30 percent leased before it was built. You can take a building with good bones and bring it speed to market if you refresh it and amenitize it.”
Gensler is currently working on a number of office repurposing projects, including the Hoffman-LaRoche redevelopment in Nutley/Clifton and The Rockefeller Group’s 110 Park Ave. project at The Green at Florham Park.
Nalbantian said today’s office tenants are looking to collaborate with landlords.
“When our tenants are looking for a place they are looking for a balance of ‘me’ space and ‘we’ space,” she said. “Tenants are looking for landlords who will participate in this. Tenants are looking for more innovative landlords.”
Leor Hemo, founder and managing principal of Marlton-based Vantage Real Estate Services, said an imbalance of incentives can be disruptive to the region’s commercial real estate market.
“The recent incentive packages awarded to large users in the South Jersey market in order to relocate to Camden has presented some challenges to the owners of office properties,” Hemo said. “So far this has not disrupted the entire market, but it has presented some challenges to property owners.”
Office buildings in Marlton and Mount Laurel are performing well due to their close proximity to major arteries, he said, but secondary and tertiary locations further away are slower to lease.
“Burlington County’s office vacancy rate is at approximately 8.3 percent, while in Camden County it’s hovering around 24 percent,” Hemo said. “Most property owners we work with are being creative and forward-thinking with their approach. Some will repurpose their space as needed, while others will invest capital making the space more attractive to tenants by delivering open floor plans and upgraded amenities like gyms and collaborative lobbies.”
Linfante has seen office-property owners selling or giving their properties back to lenders and moving on, while other owners are getting creative to take advantage of market opportunities.
“In many instances, properties are being acquired through auction or foreclosure for pennies on the dollar,” he said. “This allows investors to carry the property until a redevelopment or repositioning opportunity presents itself. Others are demolishing the buildings to make way for a residential or mixed-use development.”
Investors are also purchasing office properties with significant vacancies, leasing them up to “stabilization” and selling them off, while more modern buildings are being gutted and repositioned, Linfante said.
“These undesirable office buildings are becoming more marketable by changing their appearance, layout and amenity package,” he said. “Exterior walls are being modernized and interiors are being made over by bringing private offices to the interior and creating collaborative work spaces.”
Jerjian said market trends and structural changes compelled the company to shift from leasing long-term conventional office space to offering smaller, shorter-term office space that can be rented by the hour, day, week or longer spans.
“It kind of evolved,” he said. “This is how you can revive and reinvent the suburban office property. Traditionally, office investors are not tenant-centric and asking tenants what they want and what they need. It’s really common sense.”
The repurposing of Jerjian’s Hamilton property has resulted in a fully leased asset.
“The Ibis formula has transformed an old and tired office building into a functional, attractive and profitable investment,” Jerjian said. “This formula can easily be duplicated to transform and brand other office buildings suffering from constant turnover and high vacancy rates.”
But in the end, it all comes down to economics.
“Whatever redevelopment or repositioning is proposed, investors require adequate returns,” Linfante said. “Through working with planners and engineers, the expertise of the real estate appraiser will provide an answer to what will work and how will it work. Our discipline requires us to understand markets and market demand.”