Colliers Sees Flight to Quality in Office, Industrial

PARSIPPANY, NJ—Brisk demand for class-A office and industrial space is characterizing third quarter activity in the Northern and Central New Jersey markets, according to the latest surveys by Colliers International.

It was the strongest quarter of leasing activity in 2015, with expansions and renewals fueling the market, particularly in the pharmaceutical industry, John Obeid, senior director, research, for Colliers New Jersey, tells GlobeSt.com exclusively.

As in recent quarters, there was a continued flight to quality among both office and industrial tenants, and a significant uptick in transactions exceeding 100,000 square feet.

"For office, that flight to quality has to do with boosting a company's image and retaining employees," Obeid says. "Companies are looking for talent, so these class A buildings are really valuable to companies looking for space. It takes more to compete and establish that environment for their employees. We're also talking about collaboration, and modern class-A space can foster that, with open spaces. The Millennials make up such a large part of the working class, and they're looking for that modern, collaborative space in class A buildings."

In the office market, Northern and Central New Jersey registered 5.3 million square feet of total leasing activity in the third quarter, up 32 percent from 4.0 million square feet last quarter and more than double the 2.6 million square feet from a year ago.

"The flight to quality is cyclical, but we do see it going on for a few quarters until class A space starts to get tight and landlords are going to start increasing the premiums," Obeid says.

On the industrial side, industrial tenants like class A space because of high ceilings and good column spacing, Obeid says.

"Class A space is newer construction, and has ceiling heights of at least 24 feet or more," he says. "These tenants like this space because the higher the ceiling the more product they can store. You see a lot of this activity in Central New Jersey."

Although the 9.5 million square feet of third quarter industrial leasing activity in Northern and Central New Jersey was down 12.9 percent from 10.9 million square feet the previous quarter, it was still up 40 percent from the 6.8 million square feet recorded a year ago, and 10.2 percent above the ten-year quarterly average. In addition, the year-to-date leasing total of 31.8 million square feet already exceeds the 2014 full-year total of 29.9 million square feet, on pace to reach the highest totals since 2012-2013, which each registered 39 million square feet.

At 12.3 million square feet, year-to-date office leasing activity in 2015 already exceeds the 2014 full-year total of 10.5 million square feet. As a result, at 1.9 million square feet, total net absorption remained positive for the fifth consecutive quarter, up from 1.4 million square feet in the second quarter and up from 0.6 million square feet sf a year ago.

Increased office leasing activity further reduced the third quarter availability rate to 20.5 percent, down 60 basis points (bps) from 21.1 percent the previous quarter — the first time it dipped below 21.0 percent since the first quarter of 2010 — and down 110 bps from 21.6 percent year-over-year.

Furthermore, overall third quarter asking rents for Northern and Central New Jersey office space reached their five-year high of $25.24 per square foot, up from $25.02 per square foot the previous quarter and $24.93 per square foot year-over-year, with rents holding steady near the $25 mark for the fourth consecutive quarter.

"As a result of rising rental rates, many tenants completed transactions earlier than they may have done in the recent past," says David A. Simon, SIOR, Colliers' executive managing director for New Jersey. "Within the class A segment of the office market, we witnessed even higher demand for buildings that were located within a three-mile radius of a commuter rail line. These properties were able to generate average rental rates 13 percent higher than class A properties outside of this radius, proving that tenants will pay more if they feel that the property's quality, amenities, and location will help them attract and retain the best talent possible."

In the industrial sector, warehouse construction continues to expand south and west, into Burlington County, NJ, and Pennsylvania's Lehigh Valley, Obeid says.

"You see big box warehouses go down there just because they need the space, and into the Lehigh Valley, we see a lot of the 500,000-plus square foot users, just because they have the space," he says. "It's good news for the industrial side that all the spec properties that are being built in Central New Jersey are being leased. Everyone has been looking to see if all this new construction is going to add to the available inventory, and while some does, most of it has been leased."

Overall third quarter asking rents for warehouse space — the predominant subset of all industrial property types — in Northern and Central New Jersey reached $5.68 per square foot, up slightly from $5.60 per square foot the previous quarter and $5.46 per square foot year-over-year. Third quarter asking rents were also up 15 percent from the five-year low in 2011, with no signs of weakening.