LITTLE FALLS, NJ-Rick Marchisio is co-founder, president andprincipal of Lee & Associates’ New Jersey operations. As a realestate professional with over 23 years of experience, Marchisio,along with co-founder Brian Lynch, opened the firm’s Garden Statebranch in early 2009. He sat down with GlobeSt.com recently todiscuss the state of the market and his outlook for the yearahead.

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GlobeSt.com: How does thestate of commercial real estate compare to one yearago?

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Marchisio: The state of the New Jerseycommercial real estate market has improved considerably compared tothis time last year, but the term improved must be put into properperspective. One year ago from today the market was utterlylifeless. The market 12 months ago most closely resembled the yearfollowing 9/11. With this as a backdrop, one can certainly say thatthings have improved. Deals are happening, most prevalentlyon the industrial side, but the office sector is beginning toimprove as well. Certain sectors of the investment market aredoing well. Retail is another story.

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Following any down market, the first businesses to emerge andseek space are the more entrepreneurial, privately heldfirms. They have a business need, and the business needovershadows the fear the negative perception of the economy. Thesefirms are willing to gamble that we’re hit bottom, and we’re on theupswing. Over the past year many companies are afraid to make amove fearing that the market may still be deteriorating.

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The true test of recovery in the market is when prospectiveusers of space or real estate investors begin competing forbuildings. When that happens, someone is going to win, and someoneis going to lose. That’s the only thing that creates velocity, andmakes the market move in a significant way. That’s happening now,and it’s taken a few would-be purchasers and tenants by surprise.Our recommendation is that if you find a good deal, take it.Sometimes trying to make a good deal into an even better deal canblow up in your face. The other major difference from one yearago today is credit. There are banks that are lending,particularly to companies looking to own and occupybuildings.

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GlobeSt.com: What do New Jersey rents looklike?

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Marchisio: New Jersey rents are all over themap. In the office sector it’s fair to say that in across the boardrents could be down as much as 15% to 25% depending on the market.Absorption in the third quarter was negative by almost 900,000square feet. Although the average asking rental in New Jersey issomewhere in the low to mid twenty dollar range, the deal strikeprice is way below the asking price. We just made a mid-sizedoffice deal, meaning less than 20,000 square feet, in a class Bbuilding in the Morris County marketplace. The rents started in the$15 per square foot range, with modest increases over the term ofthe lease. We’re talking gross numbers, not net. The landlord alsospent a fair amount of money on improvements to put the tenant intothe space as well.

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The market is a grind, but it’s improving. While the thirdquarter of 2010 showed negative absorption, the first two quartersin the Northern New Jersey office market saw positive absorption. Idon’t think the negative number in the third quarter is worthy ofany headlines just yet. If we go another one or two negativeabsorption quarters beyond this one, we could very well beexperiencing an unfortunate trend. So, for now, two out of threeisn’t bad.

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The overarching theme in the office sector seems to beshort-term solutions. Companies are still being very cautiousbefore making long-term decisions. In addition, they don’t want toincur the cost of a move, or the business disruption associatedwith moving. All they really want to do is hunker down and keep thebusiness churning. Eventually, these companies will be faced withmaking long-term decisions. After a while the band-aides start tofall off.

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On the industrial side the picture is a bit rosier, at least inthe small and mid sized range. The big box market is still verysoft. Most recently we were representing a tenant looking for300,000 square feet in the Exit 8A marketplace. Running a search ofbuildings with minimum ceiling heights of 30-foot clear we showedthe prospect 14 buildings. If we searched ceiling heights down to24-foot clear the list would have grown exponentially. Actualdeal rents at 8A today are 25% to 40% lower than they were at theirhigh point. What was once a $4.50 NNN deal in the big box market isnow a $3.25 to $3.50 deal. For second-generation buildings of24-foot clear heights, deal prices fall below $3 per squarefoot.

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As mentioned before, the small market (up to 25,000 square feet)and the midsized market (up to 100,000 square feet) are doing okay.Rents are down, but velocity is decent. There were a few deals donein Port Elizabeth for modern buildings. The rents were in the $6.50range, but these rents were significantly less than the owners werehoping for. I expect that in 2011 we will see a fairly large uptickin port activity and port-related industrial properties will be thebeneficiary.

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GlobeSt.com: Are building sales beginning to pickup?

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Marchisio: Building sales to user/occupantpurchasers are definitely picking up. With pricing levels at muchlower levels, owning as opposed to renting makes a big differencefor the entrepreneurial business owner. The recent availability ofcapital for these type purchases has made things happen in thisarena. Companies with good credit are seeing loan to value ofbetween 75/25 and 70/30 from conventional banks and insurancecompanies. Because of these two factors, properly priced product,and a receptive lending market, buildings are selling. In fact,well-priced product in both the office and industrial asset classesare attracting multiple offers and creating competition.

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GlobeSt.com: What are cap rates like, or has thatbeen establish yet?

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Marchisio: Because of the amount of capitalchasing quality real estate, cap rates have not risen too greatly,even in a less than stellar economic environment. Industrial caprates are between 7.5% and 9%, depending on quality of asset andlocation. Theoretically, office cap rates are between 8% and 10%,if you can find a building that’s trading.

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Interestingly, in this recent downturn, many owners of officeand industrial property have turned to multi-family residential asthe investment of choice. Those cap rates are running 4.5% forquality assets to 6 for lesser type product. Multifamilyresidential is popular now because you can ride the market. Theshort-term nature of the leases is what makes this asset typeattractive. You can drop or raise your rents as needed.

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The issue facing owners of commercial owners today is trying tostructure deals that start out low today to entice a tenant, butincrease the rent over the term of the lease so over time you makeyour money back. Tenants today want low rents at the start, andthey also want to lock in at low rates over the long term. Youcan’t blame them, but it makes it very difficult for the owner ofthe building to ever get their heads above water.

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GlobeSt.com: Are you seeing distressed sales startto mount? Is it still mainly note sales?

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Marchisio: We are seeing some distressedproduct coming to the market, but not in any great quantity. Mostof the product we are seeing is of poor quality, in secondary andthird tier locations, hence the distressed nature of the property.With all the issues facing our state, the Northern New Jerseymarketplace is still a great place to invest in and own commercialreal estate.

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Therefore, the better product doesn’t usually becomedistressed. The owner either gets it rented, sells it orsomeone comes along and buys the debt before the bank winds up withit. So, yes, I would say the majority of the transactions are notesales as opposed to distressed sales. We will see what 2011 brings.My guess is that banks and owners will work closely together toensure a softer landing come 2012.

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GlobeSt.com: What do you think 2011 holds in termsof leasing, sales and, finally, distressedassets?

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Marchisio: 2011 will be an improvement over2010. The office sector will recover most slowly, as users ofoffice space have learned to make due with smaller work forces.This is not a phenomenon of just the last couple of yearshowever.

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Businesses began operating in a leaner fashion just after 9/11and they haven’t changed the practice since. I see this practicecontinuing for years to come, so the recovery in the office sectorwill be slow. That said, medical office space should lead the wayin 2011 and beyond. We believe that owning medical office buildingsis a safer play. These buildings are more costly to fit out, butover the long term doctors don’t typically move. Out patientcenters and surgery centers and wellness clinics are becoming moreprevalent as well.

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Industrial will see significant improvement, with certainindustry sectors like food, and lower-end imports such asfurniture, clothing and electronics heading the pack. Just think ofall the sorts of products you find at stores like Target, Kohl’sand Home Goods to name a few. I’ve been in some pretty fancy homesfurnished by Home Goods. Industrial uses related to medical willprosper as well. Interestingly, warehousing companies employ morepeople that they used to.

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Years ago, there was a school of thought that believedautomation would replace people in the industrial sector. This hasnot turned out to be so in many cases. Although manufacturing hasleft the state of New Jersey, assembly, pick and pack andfulfillment services have prospered. Today’s modern warehouseemploys many more people than it did 10 years ago.

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Retail will remain sluggish, and when it comes to foreclosures,I believe they will be common in this sector. Mom-and-pop infillstores are struggling and going out of business. These are thesmaller stores that typically pay the highest rents in a center.Even though a shopping center may be one third infill, the rentspaid by the smaller stores may comprise half the centers revenuebecause the per square foot cost is so much higher. Just becausethe nationally known, larger stores are still occupying the centerdoesn’t mean the center is healthy. The national retailers arealmost always paying the lowest price per square foot.

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All in all, 2011 will see improvement, and cautious optimismwill be the theme. Industrial vacancy rates should fall and rentalrates should rise. Office vacancy rates and rental rates willremain unchanged through 2011. The good news is many businessesshould decide to make long-term decisions. I believe we will seethe flight to quality in the office sector continue, as businessmove from class B buildings to A buildings. Unfortunately, thiswon’t do much for the vacancy rates around New Jersey, but itshould bode will for some of the state’s class A office buildings.This will cause owners of B product to upgrade their buildings inan attempt to maintain occupancy levels. On the investment side,industrial, residential and medical will be the investment ofchoice.

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