Lee: Office being converted
to residential space
SADDLE BROOK, NJ – Office leasing lost what sparse momentum it had gained thus far in 2012 during the third quarter, CBRE New Jersey is reporting – and the flight-to-quality trend swooned as well. The office vacancy rate rose slightly to 21.3%.
Flight-to-quality has been an underlying market trend throughout the post-recession period: Last year, Class A leasing accounted for 70.2% of all activity, according to CBRE. In Q3, however, only 57% of leases were for Class A space.
“In the third quarter, overall leasing reached the lowest level since the second quarter of 2009” when the economy was in crisis, CBRE’s Jeff Hipschman tells GlobeSt.com.
For the first half of the year, there was positive net absorption of office space in both reporting periods. In the third quarter, there was negative net absorption of 453,366 square feet, according to CBRE.
In its new report, the real estate firm described this as a “seesaw performance between positive and negative momentum, as aging office space continues to be a drag on the availability rate.” New Jersey’s market is rife with 20-40 year-old suburban office buildings, many of them fully vacant for more than a year.
“The on-going economic uncertainty has undermined positive momentum in the NJ office market,” said Hipschman, a senior managing director. He predicted that resolution of tax policies and establishment of “economic clarity” at the federal level will soon bring about improved demand for Jersey office space.
“Increased economic activity will lead to adaptive re-use of antiquated properties, further improving overall market fundamentals,” he added.
David Opper, also of the Saddle Brook office of CBRE, said some examples of adaptive re-use are already in the works: “Select developers are starting to convert legacy properties to different uses, such as multifamily residences,” he noted.
He mentioned the planned conversion of 1 Executive Drive in Fort Leeto multi-family housing and also the recent announcement that 450 Harmon Meadow Boulevard will be converted from office to residential use.
“We certainly expect this trend will continue and ultimately absorb much of the outdated space,” Opper said.
Y-to-date leasing velocity totals 4.13 million square feet in New Jersey, a 21.8% decline from last year. In the third quarter, renewals accounted for 53% of all activity, driven in part by PSE&G’s 825,000-sq.-ft. renewed commitment in Newark. There were only two new lease transactions greater than 50,000 sq. ft.: Hatch Mott MacDonald’s 82,092-square-foot lease at 111 Wood Avenue South in Iselin, and K12, Inc.’s 56,322-square-foot deal at 570 Broad Street in Newark.
The waterfront remained, as ever, the highest-priced submarket with rents averaging $33.29 per square foot. Palisades was second, at $27.96 per square foot. The Parkway Corridor posted the highest leasing velocity in the third quarter with 149,188 square feet of leases, followed by Western I-80’s 133,630 square feet, and Route 287/78 Interchange’s 119,041 square feet.
Declining steadily since 2009, the amount of sublet space is at its lowest level in 12 years. Currently standing at four million sq. ft., it makes up 2.6% of the state’s overall availability. Factors that have affected the amount of sublet space include leasing, withdrawal of space, and expirations.