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Bouncing back: Office market stages notable rebound

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Matthew Dolly, director of research, New Jersey, Transwestern.
Matthew Dolly, director of research, New Jersey, Transwestern. - ()

After getting bruised and battered for a few quarters, the office market has rocketed back of late.

More than 500,000 square feet of positive net absorption was recorded during the second quarter of 2018, the highest level since the first quarter of 2017.

“This helped to recover much of the losses that occurred during 2018’s first quarter,” said Matthew Dolly, New Jersey research director for commercial real estate firm Transwestern.

A growing job market, along with state economic incentives helped to propel the results, he said.

“The state unemployment rate as of May 2018 was 4.4 percent, a 10-year low,” Dolly noted in a recent market snapshot. “An increase of 12,000 jobs in professional and business services during the past 12 months boded well for the office market, which generally takes some time to react to positive economic news.”

Some North Jersey commercial tenants — including Ralph Lauren Corp., Mars-Wrigley Confectionary, and Konica Minolta —inked leases after they received tax incentives through the Grow New Jersey Assistance Program.

Another recipient was Integra LifeSciences Corp., which signed a lease for a space at 1100 Campus Road in Princeton formerly occupied by Novo Nordisk, while Israel-based Teva Pharmaceuticals announced plans to move its North American headquarters from North Wales, Pa. to Parsippany-Troy Hills after the state Economic Development Authority approved Grow New Jersey performance-based tax credits.

For most companies, location is “the primary search criteria for office space,” but amenities and services are essential too, according to Dolly.

“At 581 Main St. in Woodbridge, Plymouth Rock Insurance signed a lease for space recently vacated by the New Jersey Turnpike Authority,” he said, adding owner Mack-Cali’s plans to modernize the facility and improve amenities was an added enticement.

More demand, higher rents

Quarterly increases in most submarkets pushed office rents 40 cents higher, to $26.84 per square foot, “the third-highest level all time and 11 percent higher than five years ago,” Dolly said.

He added: “Feeding off the success of property improvements in a transit-oriented downtown urban center, average asking rents in Newark exceeded $30 per square foot for only the second time since 2001. Strong quarterly and year-over-year increases occurred in the Parsippany submarket and the Union/Parkway Corridor, as landlords who have seen increased leasing activity after making improvements have begun to increase asking rents.”

By region, North Jersey’s 70 percent quarter-over-quarter gain edged out activity in Central Jersey, which rose 60 percent, according to the second quarter CBRE office market report.

CBRE analysts called this “the return of large transactions” as five leases of more than 125,000 square feet — including Polo Ralph Lauren’s relocation from Lyndhurst to ON3 in Nutley, the site of the former Hoffman La Roche campus, where Polo took 255,000 square feet. Many analysts skip over South Jersey, which Otteau Group President Jeffrey Otteau said “has experienced marginal activity.”

Year to date by valuation, Morris County has been the state’s most active market, with $237 million in volume. It was followed by the Somerset/Middlesex market at $145 million, and Bergen/Passaic at $90 million.

“If the numbers hold up throughout the second half of the year, it will be the first time since 2012 that Morris County has recorded the highest sales volume in the New Jersey office market,” according to CBRE.

Some companies are leaving New York and either moving or expanding into New Jersey office buildings because of more space and lower costs, said Cushman & Wakefield Executive Managing Director Curtis Foster.

“More companies, including life-sciences ones, want modernized space that lends itself to a creative, collaborative workforce,” Foster said. “As companies invest more in tenant improvements and amenities in Class A space — mainly to attract and retain talented employees — more of them are signing for longer lease terms.”

Accounting firms, which are expanding their menu of services and taking on more employees, are also boosting demand for office space, he added.

“With many millennial employees, accounting firms are also sensitive to amenity trends, Foster said.

“These kinds of firms are looking for places that have a lot of activities within a walkable distance, like Morristown, Parsippany and Newark,” he said.

But the local office market won’t be affected by every trend. Foster doesn’t expect the “co-working” wave — short-term, customized work-space leases that enable business tenants to determine the most appropriate workplace strategy without a long-term obligation — to have an outsized impact in New Jersey.

“It’s a big disruptor in a major urban area like Manhattan, and it could have an effect in places like Jersey City or Newark,” Foster noted. “But I don’t see much of a mass co-working expansion in suburban areas.”

He added: “The state offers an educated workforce, and even with rising lease rates, New Jersey is still less expensive than New York City. The relatively high corporate, personal and other taxes may spur some companies to leave, but that’s part of the business cycle. I don’t think that’ll make a big dent in New Jersey’s office market, so I’m not nervous.”

Otteau is just a bit less upbeat.

“Things have improved, but compared to what?” he mused. “New Jersey’s office vacancy rate is about 11.9 percent, which is down from a high of 14 percent [around the end of 2012].”

Historically, a vacancy rate of more than 8 percent indicates an unbalanced market, he noted.

“The good news is that due to the recent increase in demand, occupancy in New Jersey’s office buildings is on pace to increase by 3 million square feet by year end,” Otteau said. “So you could say that we’ve turned the corner. But how long will it last?”

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