John Obeid, left, Colliers International's senior director of research for New Jersey, and David Simon, executive managing director and market leader for New Jersey John Obeid, left, Colliers International’s senior director of research for New Jersey, and David Simon, executive managing director and market leader for New Jersey

PARSIPPANY, NJ—After being robust for several quarters, office leasing “stalled” in the first quarter of 2016, but industrial properties continued to set new records – including rental rate increases that could reach twice the level of previous lease deals, according to research by Colliers International’s John Obeid and David Simon.

“Deals were getting done, but it was the lack of the large transactions that really pushed activity levels lower this quarter,” Obeid, Colliers senior director of research for New Jersey, tells GlobeSt.com exclusively, regarding office. Transactions in excess of 100,000 square feet last year were not replicated in the same quarter this year. “That turned absorption negative for the quarter, but that can be pointed toward to the densification trend. We’re seeing lots of clients relocate into more efficient class A space, and leaving behind some large blocks of class B.”

There was more than 300,000 square feet of positive absorption in class A space, which has been positive in six of the last seven quarter, he says. “We’ve been seeing that for the past several quarters, a flight to quality trend,” he says.

Overall leasing in the market was 2.5 million square feet, the lowest level since the second quarter of 2014, and off 15 percent from the five-year quarterly average of three million square feet, Colliers says. Northern New Jersey remained the bright spot, with leasing activity up 25.7 percent from the prior quarter, fueled by Grow New Jersey tax incentives for companies such as Flight Centre, Ferraro Foods, World Business Lenders, and American Express Global Business Travel, all of which received the incentives to relocate to northern New Jersey.

Live-work-play continues to drive leasing activity in the Hudson Waterfront submarket, Obeid says. “We’ve seen remarkable improvement there over the last several quarters, for several reasons, such as its proximity to New York, the rail lines there, tenants coming into the market,” he says.

Morristown is attracting interest from Millennials because of its “24/7 activity,” and several office buildings convenient to rail service into Manhattan, Obeid says. “Outside of rail, there is activity in the suburbs, such as in Parsippany. There is a good stock of class A space, and it’s priced at a significant discount from its neighboring markets like Morristown.”

The interest in suburban class A properties is also visible on the investment side, says David Simon, Colliers’ executive managing director and New Jersey market leader. “We’re seeing a lot of investors who are looking for value-add opportunities,” he says. “They are willing to be more creative on properties that have a certain degree of vacancy, but where they see the opportunity to invest in the property, upgrade the lobbies, enhance the building, provide additional amenities, and stabilize the asset much quicker than they would have in the past.”

On the industrial side, e-commerce and home-delivered food and beverage companies are driving much of the blazing demand. “Meal subscription” companies like Blue Apron that deliver prepared meals to customers are responsible for some of that uptick, Obeid says.

E-commerce and those food companies like to be in New Jersey, he says, because of the proximity to New York consumers. “FedEx signed three new leases this quarter totaling over a million square feet, and FedEx services both Amazon and Blue Apron,” he says. “You see Fresh Direct trucks all the time, consumers are working more, they don’t have time, and especially the Millennials, in 24/7 areas like Jersey City and Hoboken, it’s just easier to have these meal subscriptions.”

Twelve big-box deals over 300,000 square feet contributed to the record leasing activity of 18.6 million square feet in the quarter, Obeid says. “Availability is down to 8.4 percent, that’s the lowest since we’ve had any historical tracking,” he says, adding that manufacturing is “making a resurgence” in the state, and the New York-New Jersey ports have had increased activity.

Companies that leased industrial space five years ago are going to be surprised by rate increases on lease renewals because of the tight market, Simon points out. Renewal rates are reaching levels from 50 to 100 percent more for companies in this situation, he says. In some cases, this is driving tenants out of New York area industrials into the Meadowlands and other more affordable New Jersey space.

CORRECTION: April 15, 2016, 4:53 p.m.: Because of an editing error, the comments regarding e-commerce companies were incorrectly attributed to David Simon. They were actually made by John Obeid. Also due to an editing error, Simon did not say that rental tenants would experience a “rude shock” when they saw rental rate increases as leases expire. He did say Colliers was helping to educate tenants about market values and lease pricing.