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After two consecutive quarters of improved leasing activity, the New Jersey office market saw a slight increase in total vacant and sublease space in the first quarter of 2008. Although the market is, to some extent, managing to hold its own, continued layoffs and consolidations could make for a rocky year.

Vacancy rates rose slightly from the previous quarter, from 17.56% to 17.79%, but decreased from 17.95% this time last year. The vacancy rate in Northern New Jersey was 16.58%, up from 16.31% last quarter and down from 16.85% in the first quarter of 2007. Central New Jersey continued this trend. The area’s vacancy rate of 19.57% was a slight rise from last quarter’s 19.37% but lower than last year’s 19.58%.

Leasing velocity overall has slowed considerably. Companies have adopted a wait-and-see attitude regarding the economy and are seeking shorter-term deals, a situation that seems unlikely to change in the near future.

Despite the economy, there were several leases signed for more than 40,000 sf during the quarter. AXA Equitable Life Insurance Company took nearly 225,000 sf at the Newport Tower in Jersey City. AXA expects to move more than 800 employees to the new site from New York. Standard Chartered Bank signed a lease for 45,000 sf at Two Gateway Center in Newark. In Morris County, National Exchange Carrier Association extended its lease for 55,000 sf in Whippany.

Sublease opportunities have risen to represent 18.41% of available space, mostly due to layoffs and consolidations. Employers nationally have cut payrolls by about 160,000 in the first three months of 2008, and continued labor cuts are likely to dampen the outlook for the office market. The current sublease numbers represent an increase of nearly 1 percentage point over the fourth quarter of 2007. Sublease space increased in seven of the 10 New Jersey counties researched over the past year.

Average asking rents across the state stand at $25.52 per sf, an increase from both the first quarter 2007 and the fourth quarter 2007. While rents increased in Northern New Jersey to $25.30 from $25.07 last quarter, they decreased slightly in the central parts of the state, to $23.53 from $23.81 in the fourth quarter and $23.98 in the first quarter 2007.

Overall, the uncertainty for the state’s future business climate is causing many tenants to remain in their current spaces, resulting in a dip in leasing velocity. However, tenants staying where they are causes an increase in occupancy in landlords’ portfolios. That, combined with a lack of new construction, has caused rents to rise slightly in the strongest markets. Although the weak employment market is a concern, for the time being, the office market is reasonably stable.

Matt Dolly is director of research and marketing at GVA Williams’s office in Parsippany. He can be reached at [email protected].

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