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Job cuts spell bad news for everyone, from the newly unemployed to retailers and, at some point, the owner of the office space companies are leasing. Two thirds of this week’s poll respondents think that the recent rash of job cuts spell doom for the office market. Only a third believe there won’t be much impact on the vacancy rate. New Jersey, unlike, say, Manhattan hasn’t fully felt the hit from the job cuts, and according to Tony Graziano, managing director of Integra Realty Resources—Coastal New Jersey, we may never suffer as much as other regions, although there’s bound to be some fallout. Here is what he has to say:

“Job cuts in office-related industries affect the office market negatively because the demand for office space declines. With less demand and a fixed or increasing supply of space, pricing and lease rates will be forced downward to compete for the remaining employers. The bright side of this equation is that competitive business costs get re-benchmarked lower, which makes locating and operating a business in New Jersey more favorable to the employers.

“Whether or not vacancy rates rise will depend upon the magnitude of the job losses in a particular region. Generally speaking, New Jersey job growth has been relatively anemic year over year since the tech bust in 2001. The majority of job growth in New Jersey has been in the government employment sector (including education), accounting for greater than 60% of new job creation over the past 3 years. Vacancy rates rise when there is a loss in net jobs (more jobs lost than created in a given year). These losses also tend to cycle against the typical term of leases since shedding some employees doesn’t allow a tenant to change their lease obligation until expiration. The technology bust in 2001 caused a vacancy spike that was evident by 2002 and 2003. However, the robust housing market drove absorption of these spaces as mortgage companies, title companies and other housing-related employment growth offset the technology job losses. The short-term problem we face in projecting vacancy into 2009 and 2010 is figuring out what office-sector employer is poised for growth. I predict a near-term rise in vacancy absent some hidden office-sector employers emerging.

“Companies that are cutting back on space include mortgage companies, title companies, engineering companies and development companies. Essentially any company whose growth arc was related to housing is looking to downsize into 2009. Investment houses and brokerage expansions will likely slow into 2009 as parent companies seek to control costs, large telecom companies continue to face competitive pressures and large pharma companies continue to evaluate space options and exit where practical.

“Tenants should be seeking long-term leases at favorable terms right now. Landlords are granting concessions to rated corporate tenants or strong regionals with long lease terms. As a landlord, you can’t look at New Jersey’s economic and competitive landscape and not recognize the need to retain quality tenants. That being said, landlords understand relative relocation costs. So as a tenant, if you occupy a 50,000 sf plate and there are no other plates in the market that are competitive options, your landlord will probably be less willing to negotiate. The laws of supply and demand also apply to space segmentation. If you’re a 6,000 sf tenant, you’ve got a lot of options to negotiate.

“Probably the biggest effect on the New Jersey office market is the market’s poor perception of New Jersey as a corporate headquarters location. We have a highly educated workforce and terrific geographic location near two of the country’s dominant urban business centers in New York and Philadelphia. Other than those two critical ingredients, our competitive marks relative to other areas of the country are woeful. Our cost of living is high, our taxes are high, our regulatory environment is onerous and our state incentives to attract employment are nearly non-existent. Our diversified core workforce in pharmaceuticals and telecommunications has been exiting New Jersey slowly for ten years running. The short-term economic slowdown is much less problematic than the systemic failure of New Jersey to adopt a pro-business agenda to attract major employers and to retain the high value-added office employment that powered New Jersey for the last fifty years.

“The good news is that current rents and purchase options are at less than 70% of replacement cost, so new office construction is not likely anytime soon. This is an excellent time for employers and businesses to secure long-term space in New Jersey at very competitive rates. The bad news is that occupancy costs are typically 10% to 20% of an employer’s expenses, whereas labor is 60% to 75%. Without reducing the cost of living, we face a significant uphill battle in providing cost-competitive labor.”

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