C&W: Space Consolidation Impacts Office, Industrial Sectors

The overall office vacancy rate in Northern New Jersey, now 17%, has increased 0.7% since the first quarter of this year and by 0.8 percentage points from mid-year 2008. In Central New Jersey, the overall vacancy rate registered 20.7% at the close of the second quarter, a 0.4% increase since first quarter 2009, a 0.7% increase since mid-year 2008 and its highest point since year-end 2004.

"Year-to-date, overall net office absorption posted negative totals in nine out of the 11 counties Cushman & Wakefield tracks in the state," Medina says. "Absorption is not expected to show positive numbers as more space is delivered to the market."

"Landlords, eager to negotiate deals, have begun to lower asking rents," Medina notes. "Additionally, the recent onset of 'negotiable' listed asking rents will continue to pan out favorably for tenants, serving as a tremendous bargaining chip in the negotiation of new leases."

New office leasing activity in the state's northern counties is down by nearly 44.0%--or more than 500,000 square feet--since last quarter. Central New Jersey also saw slower new leasing activity. "Large lease commitments have diminished, as evidenced by the lack of significantly sized deals this year," Medina says.

The most noteworthy new deals executed this quarter included Otsuka America Pharmaceutical Inc.'s lease of approximately 67,500 square feet at 1 University Square Dr. in West Windsor. In Bernards Township, Mylan Laboratories secured 53,517 square feet at 110 Allen Rd. in a sublease that will become direct in 2011. In Parsippany, Global Aerospace Inc. leased a full floor, totaling 47,891 square feet, for its US headquarters at 1 Sylvan Way.

According to Medina, renewal activity is far more prevalent than new leasing. "In most cases, office tenants that have re-evaluated their existing cash-flow are strategically opting to stay in place, rather than move and incur hefty moving costs," he said. "Landlords are expected to continue offering more concessions and shorter lease-terms on renewals for as long as the market remains soft."

The state's largest renewal executed this quarter was Bristol Myers Squibb Co.'s 71,724-square-foot commitment at 100 Nassau Park Blvd. in West Windsor. Additionally, IBM opted to maintain its 54,418-square-foot operation at 194 Wood Ave. S. in Edison.

Statewide, no significant office construction completions came online during 2009's second quarter. Only 471,300 square feet in new building currently is underway--all in the central counties. MetroTop Plaza II, a 253,000-square-foot speculative building in Metropark, represents the largest.

The New Jersey office investment market is in severe decline, according to Medina "Investors remain cautious about purchasing property, and banks continue to keep a tight rein on credit," he says. "As a result, year-over-year sales activity took a tremendous dip."

However, even in this shaky market, class A investment activity for the second quarter remained fairly steady. In Roseland, 425 Eagle Rock Ave., a 126,761-square-foot building, traded to Marcon Roseland LLC for an estimated $17.5 million. That property is nearly 90% occupied. Hampshire Global Partners purchased 186 Wood Ave. S. in Edison. The 98,459-square-foot, fully vacant asset traded at $16.1 million. In Ridgefield Park, KABR Real Estate Investment Partners LLC purchased the vacant, 235,057-square-foot property at 85 Challenger Rd. for $10.5 million.

New Jersey's industrial market fundamentals also continue to be hampered by the effects of the economic recession. Yet demand within the port region combined with recent leasing activity in Central New Jersey for big box warehouse/distribution has helped the state's industrial market from shifting into more treacherous waters.

Logistics and shipping businesses helped create solid leasing activity in the second quarter. The most notable transaction involved Lasar Logistics, which took 248,000 square feet at 147 West Manor Way in Washington Township. In South Brunswick, LA Enterprises renewed and expanded to occupy a total of 233,515 square feet at 231 Herrod Blvd. in South Brunswick.

In total, more than 3.2 million square feet of industrial leasing activity occurred during the past three months--a 1.2 million-square-foot increase since the first quarter. "However, year-to-date leasing activity still represents only 60% of the total recorded during the first half of last year," Medina says. "And although activity gained steam during the second quarter, we do not expect that trend to continue and anticipate slower velocity until the end of the year."

The overall industrial vacancy rate for the state has increased to 8.6% from 7.2% at year-end 2008 and 6.9% at mid-year 2008, as companies continue to cut costs by consolidating and delivering additional space to the market. At the end of the second quarter, the direct weighted average asking rental rate registered $6.46 per square foot, which represents a $0.26 per square foot decline from fourth quarter 2008.

"Mirroring office users, industrial tenants--especially those that signed leases at the height of the market--are looking to take advantage of landlord flexibility," Medina tells GlobeSt.com. "Many companies are now restructuring existing leases or renewing prior to lease expiration."

Industrial investment sales dipped markedly from last year, when investors took advantage of market decline in price, and activity likely will remain quiet through the remainder of the year. US Foodservices Inc.'s $15.4 million purchase of 360 South Van Brunt St. in Englewood represents the largest sale of the second quarter.

Since 2006, an average of 3.1 million square feet of new industrial construction has been completed annually, leading to a surplus of space while demand has continued to lose momentum. "The mix of economic stress and lack of investment capital is keeping industrial leasing and construction moderately lower than in previous years," Medina reflects. "This decline primarily will affect the construction-heavy Central New Jersey, where more than 820,000 square feet in new product has been delivered this year."