EAST RUTHERFORD, NJ-The overall New Jersey commercial real estate market, while still somewhat colorless, is moving slowly toward an economic upgrade, according to locally based Cushman & Wakefield Inc.’s mid-year research findings. Northern New Jersey’s fundamentals remain stronger than those in the state’s central counties heading into the second half of the year; the industrial sector appears to be gaining ground.

“While minimal decreases in the unemployment rate and a small uptick in net job gain are relatively minor, the changing climate illustrates preliminary signs of stabilization that could trend toward recovery,” says Gil Medina, executive managing director for the commercial real estate services firm’s New Jersey operations. “We are seeing pockets of improvement throughout the market.”

Office fundamentals remain in flux in the state’s northern counties. The overall vacancy rate, now 16.7%, increased by 0.3% from last quarter yet still represents a 0.3 percentage point year-over-year decline. Average weighted asking rents declined modestly year-over-year (-2.5%) to currently rest at $25.74 per square foot. “Leasing activity is slightly down from last quarter, however, when comparing year-to-date activity from this same time last year to mid-point this year, it represents an approximate increase of 11%,” Medina says. “As of mid year, Northern New Jersey experienced new leases totaling 2.3 million square feet.”

Morris County was home to 2010’s two largest year-to-date leases. The Rockefeller Development Corporation will construct a 325,000-square-foot, build-to-suit North American headquarters facility for BASF in Florham Park. In Parsippany, global specialty pharmaceutical company Watson Pharmaceuticals signed a long-term lease for 148,708 square feet in two buildings at 400 Interpace Pkwy.

“Central New Jersey is more fractured than its northern counterpart and continues to struggle with surplus space,” Medina notes. “The contraction has been fueled by an oversupply of inventory and insufficient demand.” The overall Central New Jersey office vacancy rate, currently 21.8%, increased by 1.1% since second quarter 2009 and by 0.8% from first quarter 2010. The year-over-year overall weighted average asking rent experienced a decline, albeit modest (-3.03%), to $22.71 per square foot; this is the lowest rate recorded since third quarter 1999.

Still, Central New Jersey saw significant progression in new office leasing, with second quarter activity increasing nearly 35% from first quarter 2010. Two of the larger deals occurred within the Princeton submarket. In a consolidation shift, BlackRock Inc. will relocate from 800 Scudders Mill Rd. in Plainsboro to 141,375 square feet at 1 University Square Dr. in West Windsor. In Lawrence Township, engineering firm Parsons Brinckerhoff signed a 43,509-square-foot lease at 2000 Lenox Dr.

“While the economy slowly recovers, the majority of companies currently seeking new space will look for financially feasible deals by securing lower rental rates and flexible lease terms,” Medina says. “At the same time, the recent depreciation of commercial property values continues to place financial pressure on landlords. Until there is a significant upturn in the economy, their regaining financial footing will prove to be challenging.”

During the first six months of 2010, the office investment market statewide proved to be healthier than expected. “Sales activity in Northern New Jersey improved significantly, surpassing totals recorded at this time last year by more than 50%,” Medina says. “Central New Jersey maintained its momentum as well, with 900,000 square feet of investment sales transactions, which is nearly 90% of totals recorded mid-year 2009.”

The most notable sale involved Horizon Blue Cross Blue Shield of New Jersey purchasing 3 Penn Plaza E. in Newark for $145.8 million. Somerset County was home to the top three Central New Jersey transactions during the second quarter. In Bernards Township, the Silverman Group acquired 150 Allen Rd., a 191,319-square-foot, class A property for $17.25 million. In Franklin Township, 220 Davidson Ave. (164,215 square feet) sold to NextBridge Group, and 265 Davidson Ave. (178,000 square feet) sold to Friendwell Property Investment Co.

Construction velocity statewide still lags from previous years. However, MetroTop Plaza II, the much-anticipated, 255,000-square foot, class A office building in Woodbridge recently was completed and remains fully available for lease.