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MORRISTOWN, NJ-The economic recession has resulted in an increase in availability rates and a drop in asking rates throughout the Northern and Central New Jersey office market. As companies continue to look for ways to reduce operating expenses, the availability rate in the class A market increased by approximately 3% in the second quarter to 23.4 %.

Bad news for Morris County, which houses over 26 million square feet of office inventory and many of the state’s class A office parks. The overall availability rate here rose to 17.6%, from 16.4% in the first quarter and 16.3% one year ago, according to David Simon, COO, Colliers Houston & Co. in Teaneck. That’s compared to the availability rate in Central New Jersey, which rose from 18.3 % in the second quarter of 2008 to 20.7% in Q2 2009, and Northern New Jersey, which jumped from 15.2% to 15.4% over the same time period.

But while the market here houses a healthy number of class A office parks, there also exists an oversupply of outdated product primarily in the class B and C assets, says Robert Donnelly, vice chairman of Cushman & Wakefield, based in Morristown. “There is an effort being made to reposition B and C class assets, but it’s not significant because it’s difficult to finance renovations at this time,” he says.

Compared to Somerset or Hunterdon County, Parsippany and Morristown are also relatively mature office markets because the infrastructure has been in place for significantly longer. “Many of the buildings that are in A locations might be B buildings because they were constructed 20 to 25 years ago,” Donnelly says.

Despite the down times, some deals here are getting done. Saiber LLC leased 56,450 square feet at 18 Columbia Tpk. in Florham Park; Global Aerospace leased 47,891 square feet at 1 Sylvan Way in Parsippany; LG Electronics picked up 20,000 square feet at 1200 Mt. Kemble in Morris Township; and Eisner LLP extended its lease of 12,000 square feet at Florham Park’s 100 Campus Dr.

Not surprisingly, renewal activity continues to be a focus for tenants looking to take advantage of declining rental rates. “Although an argument can be made that it is a good time for a tenant to structure a long-term lease and lock in current rental rates, many tenants are opting to extend on a relatively short-term basis so that they have flexibility and time to adjust based on changing economic conditions,” says Simon.

Concession packages have no doubt been increasing, however, Simon cautions, every transaction is unique based on a number of variables from the tenant’s credit worthiness and the amount of tenant improvements required to lease term and the size of the transaction. In addition, he notes that the financial stability of the landlord and current vacancy rates will factor into the landlord’s response.

Fortunately for Morris County, its economy is extremely diversified and includes large employers in the pharmaceutical, healthcare services and financial services industries, including Atlantic Health Systems, BASF, Bayer, Deloitte & Touche, Johnson & Johnson, Kraft Foods, Novartis, Pfizer Inc., Tiffany & Co., United Parcel Service, Verizon and Wyndham Worldwide

But despite a solid tenant mix, it is not likely that we will see any positive change soon. “Sublease space will continue being placed on the market as companies look for ways to reduce overhead,” says Simon. “Tenants that are new to the market or have less than 12 months on their lease will be able to negotiate favorable terms and conditions. Renewal transactions will also continue to be prevalent since many tenants will not want to spend the time and capital required to relocate.”

Still, as the third largest suburban market in the state, Morris County “is a good place to be if you’re going to settle in New Jersey,” affirms Donnelly. That being said, job losses coupled with high taxes are having a dramatic impact on how businesses view the state. “The corporate tax rate, the property tax rate and the new income tax rate are causing companies to reconsider whether they really need to be here, and if so, in how big of a way?”

For its part, the state has been making efforts to counter its reputation as a business bully. In June, the State Assembly and Senate passed the New Jersey Economic Stimulus Act of 2009, a bill that included several measures supported by commercial real estate organizations in the state, including the Smart Growth Economic Development Coalition and NAIOP-NJ. Gov. Jon Corzine subsequently signed the bill into law in late July.

Specifically, the bill reduces the investment threshold under the Urban Transit Hub Tax Credit and allows for the transfer of those credits and creates a substitute for Revenue Allocation District program to be known as the Economic Redevelopment and Growth Grant. Also included in the bill is an exemption for certain non-residential development from COAH fee obligations.

One area in Morris County that’s held up surprisingly well is downtown Morristown. According to Donnelly, whose office is housed in a 600,000-square-foot, 95%-occupied office complex here, this speaks to a larger trend towards downtown development. “Morristown isn’t necessarily urban, but there’s train service to the city and you can walk to restaurants and other amenities,” he says, adding that there are a host of small cities throughout New Jersey that should benefit from a downtown focus–think New Brunswick.

This bodes well for developments in the Garden State, which, according to Matt Jarmel, principal at Livingston-based Jarmel Kizel Architects, is arguably 100% developed. “The raw land we have in the state, like the Highlands and the Pinelands, is typically protected and you’re left with limited development ability. So growth in the state is going to be very strongly tied to redevelopment opportunities in both urban and existing suburban developed communities,” he says.

The US Census Bureau is predicting an increase of about 50% of the population over the next 40 years, so these communities will need to handle this growth. “We’re going to go from 300 million to 450 million,” Jarmel says, “and the way to deal with this growth is to develop communities where people can live, shop and work all in close proximity.”

From an environmental standpoint, the odds also seem to favor mixed-use development and construction thanks to an increasing number of smart-growth oriented buyers. The combination of residential units with retail, offices and other commercial space within a single building helps create walkable, robust communities that limit sprawl and reduce transportation-related energy costs.

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