A State Fights to Regain Its Edge

EAST BRUNSWICK, NJ-From major corporate relocations to an improving economy, signs are pointing to increased activity in New Jersey’s office market. I spoke with Joseph Sarno, EVP of CB Richard Ellis, about the state of the office market in New Jersey.

GlobeSt.com: How much relocation are you seeing?

JOSEPH SARNO: I can tell you what we’re doing for our customers, and it’s indicative of the market in general. We have some national corporate clients, and most of them are consolidating and reducing their footprint. CBRE just redid its New York City headquarters location. I don’t know if they reduced their square footage, but they certainly made the space more efficient, altering workspace allocations. Ten years ago everyone had a private office. Now the amount of personal space an employee gets is typically much less than it was many years ago. This is not just in the real estate industry—we’re seeing it across the board. There are fundamental changes going on in the way companies occupy space.

GlobeSt.com: Is there increasing urbanization?

SARNO: The trend is toward urban locations. Companies are looking harder at urban redevelopment locations as opposed to adding to the suburban sprawl. A lot of that is promoted by the state of New Jersey, certainly in the Tri-State area, where the state governmental organizations are trying to redevelop areas that have transit in place, to revitalize central business districts. But I have examples of companies that looked at it very hard but, at the end of the day, ended up staying in the suburbs. The jury is still out, but the incentives are there for companies to relocate to urban settings.

GlobeSt.com: What kinds of incentives?

SARNO: The biggest one is the Urban Transit Hub Tax Credit. Soon we’ll have our first announcement of a company taking advantage of that. The program has been in existence close to three years and has gone through a number of iterations. Its sole purpose is to encourage urban development in areas designated for redevelopment. That includes New Brunswick, which has not been able to do it; Newark, which is on the verge of getting its first urban hub tax credit tenant; the Jersey City waterfront; Camden; and Trenton. A lot of companies have tried to figure it out, but to date no company has been able to take advantage of it. They just haven’t had the right tenant to come along and avail themselves of the incentive program.

GlobeSt.com: What type of tenant can?

SARNO: Certainly, it has to be a large tenant. It has to have a minimum capital investment, so it’s geared for corporate headquarters relocations within the state of New Jersey.

GlobeSt.com: Is everyone clamoring for class A space or is there demand for lesser locations?
SARNO: The rents, absent a few pockets, have been softening. The concession packages are greater. Two things are going on: Tenants have been restructuring and redoing their leases. The other is that tenants have seen this as an opportunity for a flight to quality. We have a lot of tenants that are in B- buildings who, for a marginal increase or the same amount of money, can move into an A- or B+ property.

Also, over the past two years, companies have done so much more without adding anybody. In 2008, they cut head count; that’s how they saved money and remained profitable. Now that the economy is turning, these companies’ resources are so stretched that if they pick up a couple of accounts or get more business, they absolutely have to look at increasing their staff. We’re seeing an immediate reaction to the uptick in the economy. When activity picks up they have to add people, so they need to add space. It’s not an all-out blitz, but there are certainly more encouraging signs weekly that this is taking place.

GlobeSt.com: So what happens to the class B and lesser spaces?

SARNO: Certainly in New Jersey, some of the more distressed, clearly obsolete, poorly located buildings I see wiped out and redeveloped. Look at what happened in lower Manhattan in the wake of 9/11. Space that was vacant for a number of years has been converted to residential. The lower Manhattan market has some issues with vacancy and pricing, but that example will carry over to New Jersey and the other states.

GlobeSt.com: What else are you seeing?

SARNO: Number one is that we refer to the waterfront of Jersey City as the sixth borough of Manhattan. That market has already bottomed out and is on the uptick. There are very limited blocks of large space and not a lot of options for a tenant looking to rent space there. There are still development sites that could be brought on line, but those are several years out. Pricing is beginning to rise, concessions are beginning to drop. It’s all about supply and demand, and supply is dwindling. That’s a good sign. Everyone is hoping that the trickle effect will begin to affect other markets. Northern New Jersey is a very healthy market. The Meadowlands is something of a weak market.

Central New Jersey is something of a mixed bag. You have 1 million square feet of vacancy in Metropark in just four buildings. Certainly that’s a hub and one of the best locations in Central Jersey. We’re telling people Metropark is on sale. The waterfront has already gone past tightening. We’re going to start seeing transactions close and these markets will begin to firm up a bit.

GlobeSt.com: What about the southern portion of the state?

SARNO: In Monmouth and Ocean counties, you have three major projects that will probably not remain as office. The Middletown/Lincroft Road building will probably end up a residential site. That former Avaya office building of 300,000 square feet will probably disappear. The Red Hill Road building, a vacant asset of about 265,000 feet that was taken back by the lender a couple of years ago? My understanding is it will become something other than an office building. And then you’ve got the biggest white elephant of all in Holmdel, the 2-million-square foot former Bell Labs building. My contention is that it will never be an office building. The most the town of Holmdel can hope for is a mixed-use building with some retail, residential and maybe some professional offices. The days of the large corporate tenants plopping down in 1 million or 2 million square feet are over because all of these companies have found out the hard way that they didn’t have an exit strategy. So the buildings have sat.

GlobeSt.com: But doesn’t that make the industry smarter?

SARNO: One hundred percent. It’s healthy.

GlobeSt.com: So New Jersey is back to good health?

SARNO: It’s tough to buy into that statement. We’re on our way to being competitive. The measures are being taken by the state and by the corporations that live here. There’s a combination of things going on that will enable New Jersey to regain some of its competitive advantage. I say that hesitantly, but there are pockets of indications that this is happening.  I’m confident that it’s going to continue in that direction.