Small and Mid-Sized Leases Lead Activity

PARSIPPANY, NJ-The office market has been the most problematic real estate sector in New Jersey in recent years, and the current statistics reflect a generally static condition, according to one report. Some highlights from the latest market report authored by Matt Dolly, director of research for GVA Williams New Jersey, based here:

To begin with, the vacancy rate for the Northern and Central New Jersey office market remained virtually unchanged at 17.94% from Q1 to Q2 of this year. "Many tenants aren't finding any compelling reason to move--they're staying in place and signing short-term renewals," Dolly says. As far as sublease space, however, the availability represents 15.2% of overall vacant space, the lowest level in nearly six years. And average asking rents for the region decreased slightly during the first quarter.

The results come against a backdrop of concerns exist as the state's unemployment rate rose to 5.1%, surpassing the national rate for the first time in 36 months. Still, "there is nearly 6 million sf of large tenant demand currently in the market, providing for optimism in the second half of 2006," Dolly says. And investment sales activity continues to reflect very competitive initial capitalization rates and increasing prices on a per sf basis, according to the report.

As far as year-to-year numbers from Q2 2005 to Q2 2006, they indicate that North Jersey's vacancy increased marginally from 16.18% to 16.99%, according to Dolly. Central Jersey's vacancy also rose slightly, from 19.1% to 19.51%. Overall asking rents decreased from $24.18 to $24.13. North Jersey's increase in average asking rents from $24.39 to $24.53 was more than offset by Central Jersey's decline from $23.84 to $23.47.

And in general, "despite the perception of strong demand, the office market remains statistically sluggish," according to Dolly. "Small, mid-sized leases lead activity. The pipeline of activity in the market provides for optimistic second half of 2006. Concerns remain amid unemployment levels, lack of office job growth, potential M&A activity, corporate downsizing and interest rates.

"The New Jersey office market looks to benefit from high-priced, vastly tightening New York City market," he observes. "Many tenants are staying in place by signing short-term renewals because they are finding no compelling reason to move, and tenants are keeping a watchful eye on the new state budget.

"Due to high oil prices, tenants are now seeking areas and properties with access to public transportation," he continues. "A trend also exists where smaller tenants looking at properties are losing out when a larger tenant looks at the same property. Smaller tenants may need to act more quickly to avoid being boxed out."

Where's demand coming from? "Demand drivers include data centers, law firms, the life sciences industry and hospitals/healthcare," Dolly says. Finally, "rising tenant improvement costs due to an increase in construction expenses may eventually lead to higher asking rents, especially in class A buildings," he concludes.