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ELMWOOD PARK, NJ-A strong recovery cycle between 2003 and 2007, coupled with the absence of runaway building during the period, positioned the office sector to withstand the current downturn. But according to Marcus & Millichap’s just-released 2009 National Office Report, this will not prevent a sharp rise in vacancies in 2009 as the most extreme job losses in recent history impact the economy.

The beginning of the year will be especially challenging for operators in the Garden State, as more than 70% of all completions are scheduled to come online during the first half, says Michael Fasano, regional director of the New Jersey office.

Despite the inventory growth and slackening demand, the report indicates there will be some pockets of strength, such as Northern New Jersey’s Waterfront submarket. Tenants including law firms, insurance companies and boutique investment firms will target the area due to its more affordable rents than neighboring Manhattan.

Elsewhere, fundamentals will continue to be resilient in Princeton, where a concentration of service-oriented businesses and the university’s medical center buoy demand for space. In Somerset County, as much as 25% of the vacant square footage on the market this year will be discounted sublease space, driving down rents for most properties.

Revenue uncertainty, particularly in outlying Northern New Jersey submarkets, will slow sales activity in 2009. With fewer institutional investors active in the market, cap rates for top-tier office assets are projected to rise into the low- to mid-8% range this year.

The report also finds that proximity to employers in Hudson County and New York City, as well as Northern New Jersey’s affluent suburbs, will underpin stable tenant demand for class B space in lower Bergen County, drawing buyers seeking safer investments.

To this point, Massey Knakal managing director Landon McGaw, tells GlobeSt.com, “as a prediction based upon the current volatility within the financial sector, investors on all fronts can look towards the Hudson County real estate market as an ideal alternative to the stock market and other security-based investments.”

In Central and Southern New Jersey, buyers are expected to focus on research and development sites as owner-users try to free up cash via sale-leaseback deals. Additionally, higher and still-rising cap rates should attract investors, particularly to smaller office assets with solid tenant rosters.

According to the report, look for employers to cut payrolls by 102,000 workers, or 2.5%, in 2009. Of those losses, 47,400 office using jobs will be shed, a 4.9% reduction. Statewide, 1.1 million square feet of office space is projected to come online this year; 764,000 square feet was added in 2008.

Northern New Jersey’s inventory is expected to expand by 450,000 square feet, while Central New Jersey will see an additional 650,000 square feet. There will be no significant deliveries in Southern New Jersey, Fasano says. Meanwhile, declining space demand will lead to rent cuts. Asking rents are projected to fall 2.6% to $24.74 per square foot this year, while effective rents will recede 4.8% to $20.64 per square foot.

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