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Job losses are never a positive for the commercial real estate industry. But New Jersey has an added concern–a spate of mergers within its bedrock pharmaceutical sector.”Flat out–job losses hurt the commercial real estate market, because it lowers demand,” says David T. Houston Jr., president of Colliers Houston & Co. in Teaneck. “If people aren’t working, you don’t need office space for them.”

Houston further points out that the impact of employment reductions is not immediately apparent since there is typically a time lag between when job cuts are announced and when space gets put back on the market, an interval that could take up to two to three quarters. Conversely, “when the economy recovers, you don’t go out and lease the space and then hire the people,” he says.

“Not every job loss means a building gets put on the market,” he continues. “But clearly in terms of a long-term trend, this is going to result in, and has resulted in, occupancy rates increasing in New Jersey and it has put pressure on landlords because tenants pretty much have an upper hand right now.”

Gil Medina, executive managing director of Cushman & Wakefield in East Rutherford, reports that the state’s Department of Labor recently revised its job loss numbers for 2008 upward to 85,700 from 63,000. “Before this recession started, we were averaging about 25,000 new jobs a year,” he says. “We’ve been having sluggish employment growth in the state and now we are negative.”

Medina says the state’s unemployment rate typically tracks overall vacancy rates for commercial real estate, meaning both rise and fall in near lockstep. In January, when the jobless rate hit 7.3%, the vacancy rate was over 17%, according to statistics from Cushman & Wakefield. Back in 2000 to 2001, when the unemployment number was under 5%, the vacancy rate stood at 11%.

What’s more, New Jersey has been hit in recent months with a flurry of M&As in its vital pharmaceutical sector. In January, Pfizer Inc. and Madison-based Wyeth announced their proposed union, and then earlier this month, Merck & Co. and Schering Plough Corp. revealed plans to combine in a $41.1-billion deal. In conjunction with those mergers, both Pfizer and Merck said they would embark on workforce reductions.

Moreover, the proposed $46.8-billion takeover of West Coast-based Genentech by Roche would move the combined company’s headquarters from New Jersey to South San Francisco, CA. According to Houston, Roche has announced that 400 jobs will be cut from its Nutley facility, although he expects that move won’t have much of an effect on CRE. “They own that campus, so that is not going to impact the real estate market at all,” he explains. “It means there are going to be some empty desks in Nutley. But I don’t know how many thousands of people work in that complex. There won’t be any space being put on the market. It is being converted purely to research.”

Nevertheless, New Jersey has witnessed a steady erosion of its share of total pharmaceutical employment in the past decade. According to James W. Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, the Garden State’s absolute number of pharma jobs has remained relatively stable at roughly 40,000. What has changed is the percentage of the state’s share of national pharmaceutical employment. “In 1990, we had 20.3% of the nation’s pharma jobs. That’s one out of five,” he relates. “Now it’s down to about 14.7%. A lot of the newer biotech-based research facilities are being built in Cambridge, MA or San Diego, where there are university centers of excellence in the biosciences.”

However, Hughes says the impact of pharmaceutical firm mergers should be negligible on the leasing market since the companies typically own their properties. “They do have some leased footage, but the great majority of their space is proprietary owned,” he says. “The upside of the Merck-Schering Plough merger is that it creates one of the most powerful pharmaceutical companies on the planet and New Jersey is fortunate to have its headquarters here.”

Yet if a company decides to vacate a highly specialized manufacturing facility, that building would mostly be razed because its reuse potential is minimal, Hughes says. In some cases, a former pharma building could become a municipality’s burden. “The town has a big fiscal problem,” he says. “Sometimes these are white elephants.”

Houston says that Pfizer has two empty buildings on the market in Parsippany–an 80,000-square-foot office complex and a manufacturing building of 500,000 square feet. “You have a trickle down effect of if these jobs go–the people who service those companies also need fewer people,” he says. “One lost pharma job lost can cost you two or three other jobs.”

Medina estimates that pharma companies occupy between 30 to 40 million square feet of space in New Jersey. By their very nature, mergers are driven by a need to reduce overhead, which puts such actions in direct opposition to the state’s aim to grow jobs. “Unfortunately, the goals of the private sector are sometimes not consistent with the goals of the public sector,” he says. “It will result in some scaling down of workforce in New Jersey. It’s inevitable. All their jobs won’t be cut here, but New Jersey will experience proportionate job losses and it will have an impact.”

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