On the Waterfront

Sean Ryan is associate editor of Real Estate New Jersey , from which this article is excerpted.

Citco Fund Services is the largest hedge fund administrator in the world. It administers more than 1,700 funds with over $300 billion in assets. And its space at 350 Madison Ave. in Midtown Manhattan was so cramped it had “people sitting on the ceilings,” says Jay Peller, managing director of the firm’s Hedge Fund Services Division. It was time to expand.

“So what did I do?” recalls Peller. “I picked a real estate broker that’s a one-person shop. I spent 14 months with a broker who showed me nothing, taught me nothing. I’ve been dealing with this one—I don’t want to use the word ‘idiot,’ but that is the proper word.”Finally, I did get tired of the lack of progress, and I engaged with Ken Rapp and Ramsey Feher of CB Richard Ellis.”

A deal was ultimately worked out for 70,000 sf of never-occupied space at Harborside Plaza 10, two full floors on the Jersey City waterfront. CBRE represented Citco, while a Jones Lang LaSalle team led by Frank Doyle represented American Financial Realty Trust, the building’s Jenkintown, PA-based owner.

“We negotiated that lease in 23 days,” says Michael Weil, AFRT’s senior vice president, sales and leasing. “The lease negotiation wrapped up on December 28. We’re the sub-landlord—we took over the Charles Schwab lease.

“Then we went immediately to construction, because they’ll be occupying in June, which is also a very, very fast time period,” Weil says.

Citco joins Bank of Montreal, Instanet, Mizuho Bank and Dremen Contrarian Fund in the building, which has 100,000 sf of sublease space left to go. “We used to be called Citco Fund Services New York. I’m getting used to calling it Citco Fund Services Metropolitan Area,” Peller says.

“A lot of people who might have never considered leaving New York are suddenly considering Jersey City as a viable alternative,” Weil says. “The economics of a lease in Jersey City are significantly better than a New York deal. When you consider the options—the PATH train is right there, New York Waterway is right there, you’re minutes from the Holland Tunnel, you’ve got the Jersey Turnpike on the backside—it’s one of those rare locations where people can really come and go from anywhere.”

“Typically it’s Jersey City for standard back office,” says Phil Lipper, corporate managing director in Studley’s Iselin office. “Most downtown tenants have their employee base coming from Staten Island, Brooklyn or New Jersey. Midtown, it’s typically coming from Westchester, Queens and Connecticut. Because commuting patterns are much easier, if someone moves from Downtown to Jersey City, it’s an easy commute.”

“The financial incentives are fantastic in New Jersey,” says David Stifelman, senior director of Cushman & Wakefield of NJ, East Rutherford. “You have the BEIP program. Jersey City has the UEZ. With the combination of the two, the cost is substantially less. The location is easy to get to, even if you live in Long Island. The transportation infrastructure isn’t as good as New York, but it’s just as easy to get to Jersey City from New York than from Midtown to Downtown.”

“The Gold Coast has always been the release valve for Downtown,” Lipper says. “The market wasn’t overheated Downtown, and there was a lot of space available. Little by little that’s all been absorbed, and all of a sudden, because Midtown is so hot, you have a lot of big tenants looking Downtown. We’re very quickly getting to the point where all the big blocks of space Downtown are gone, and that’s going to force people to look across the river.”

“Whether it’s Jersey City or a suburban location, you’ve got a lot of requirements coming out of New York that are business-interruption facilities,” says Bob Martie, senior vice president and regional managing director, Advance Realty Group, Bedminster. “These are still post-Sept. 11 strategic moves.”

While back office users look to Jersey City for its proximity to Manhattan, data centers tend to go further west to get further from Manhattan’s power grid. “A lot of financial service companies have centered themselves in Midtown, which has priced them out of the market,” Stifelman says. “They’ve realized that New Jersey is a place they can house some of these people. A lot of the Midtown workers are already on this side of the river. Plus, it’s 40% to 50% cheaper to operate than Midtown, so there’s a huge cost benefit.”The 10,000- to 20,000-sf tenants are coming over from New York,” Stifelman says. “99% of the ones I ask, they’re from Midtown.”

Financial firms are very attractive to building owners, since they’re creditworthy, stable, can take large blocks of premium space and—as opposed to various other businesses—have no interest in owning real estate. “Most publicly traded tenants don’t want to buy space,” says Lipper. “Wall Street views it as a non-performing asset, so it just doesn’t make sense.”

C&W’s Stifelman mentions that New Jersey’s buildings on the whole are newer than New York’s stock. “Most of the class A space on the Jersey City waterfront is less than 10 years old,” he says, “with relatively big 35,000- to 50,000-sf floor plates, a lot of power, a lot of cooling. The buildings were really designed for back-office operations. I hate to use the phrase pack ‘n’ stack, but you can get very high density on the floors.”

“Most financial services companies are toward the front of the curve on technology,” says Lipper. “They’re certainly the last people that are going to keep old land wiring. They’re going to have higher requirements for technology. It’s not as much class A, as much as what’s on the walls in the particular space they’re in.”

One financial-services tenant moving within New Jersey is commercial mortgage broker Holliday Fenoglio Fowler. Its 4,400-sf at 200 Park Ave. in Florham Park is too small, so it’s moving downstairs to a 7,000-sf space.

“The original lease was a five-year deal with the ability to terminate after three,” says Joseph Garibaldi, HFF’s managing director. “We’re actually subleasing our space to another mortgage-broker firm. We’re moving into a space that has three years and no renewal option. The company subletting in behind us is basically taking it for 14 months; they’ll have to deal with the market at that point. Both companies are growing, not sure what they’ll look like, so let’s lock in for the short term, and see where we are 24 months out.

“On the typical financial services side, I think relocation is purely driven by the target audience, who they’re trying to attract as tenants,” says Garibaldi, who has experience on multiple sides of real estate deals. “You don’t have the foot traffic you used to have 10 or 15 years ago, but nonetheless having an address in Morris County or some of the affluent areas of Somerset County works.”From our standpoint, it was access into Manhattan, because most of our clients were in Manhattan,” he continues. “Being in Florham Park—close to home but able to get to the airport or the city—drove it. This office used to be down in Edison, central to where everyone was located, but they made a decision to move it north.”

As far as the market in general, “we’ve been in a recovery in the past couple years,” Martie says. “We’ve seen a slow but sure decline in vacancies, and with that a corresponding increase in lease terms and concessions. Where the market is still poor—good for the tenants—is B-quality space. The B-tenant who’s looking for 5,000 or 10,000 sf can go out and find 50 buildings to look at. For the A-tenant who’s looking for 100,000 or 300,000 sf the blocks diminish. So at 100,000 sf, in Morris County there’s less than 10. If it’s 200,000 sf you can count them on one hand.”

The looming surge of new office space at the World Trade Center is not a huge problem for the New Jersey market, Lipper suggests. “If you believe most of the rumors, the Freedom Tower’s going to be a state- and Port Authority-building,” he says. “If Larry Silverstein doesn’t have a building designed, it’s certainly not going to be in the ground before winter. Best case, it’ll be in the ground this time next year. It’ll take 18 months just to build the building from there. So you’re four years out.

“At that point, nobody knows what the economy’s going to look like,” Lipper concludes. “But we know you’re not going to build a lot more space on the waterfront, so theoretically the waterfront’s going to be leased up. Most of what was available to build on in the Colgate site is going to be residential.”