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PARSIPPANY, NJ-Tenants continue to search for bargain-rate deals in the Northern and Central New Jersey office market, according to FirstService Williams’ Q3 report. Availability in the 10-county region has hit 23.9%, the highest recorded level since the end of 2003.

In response, many landlords have either reduced asking rents or listed lease rates as negotiable, says Matt Dolly, managing director, research and marketing for FirstService Williams’ office here. However, he points out that some landlords are not in a position to cut their leasing prices.

“For those who have invested in their buildings over the past four to five years, it doesn’t make sense to undercut their rent because they are not going to get the money they need to support the buildings,” Dolly tells GlobeSt.com.

Asking rents posted their fourth consecutive quarterly decline and currently stand at $23.90 per square foot, about a 4% drop from the same time a year ago. As a proportion of the total market, sublease space decreased slightly to 20.1% for the quarter and was down from 21.3% at the end of September 2008.

Tenants, meanwhile, are on the prowl for the best deal, but not just in dollar terms. “Tenants are looking for flexibility,” Dolly states. “The economics are important. They may do a five- to seven-year deal, but they are also looking for an out clause. They want to have that flexibility.”

Active user groups include data centers; medical enterprises; insurance firms; biotech, life sciences and pharmaceutical companies. “Law firms are reshuffling, so they might be downsizing but they are still out in the market looking for space,” Dolly says. “Unfortunately it’s not incremental demand–it’s same size or down-sizing–and that’s not going to improve market conditions. Luckily, in New Jersey, we have several different industries and it doesn’t depend on one. So the market usually doesn’t tank because of one industry. We are very well-balanced here.”

Smaller deals, in the range of 10,000 to 30,000 square feet, dominate the marketplace, Dolly says. “There were six new deals throughout the 10-county region for 40,000 feet,” he details. “That is not too many for a 160-million-square-foot market.” The largest deal transacted in Q3 was Otsuka America Pharmaceutical Inc.’s 67,531-square-foot lease at 1 University Square in Princeton, a transaction FirstService Williams brokered.

Renewals and extensions are commonplace, as tenants seek to take advantage of their bargaining position, Dolly adds. In some cases, they are previewing space well in advance of their current lease expiration in order to put pressure on the landlord to renew their contract early, he says.

Looking at the broader picture, mixed signals abound. New Jersey’s private sector added new jobs in both July and August. Plus, a survey conducted by New Jersey-based consulting firm OI Partners-Gateway International in September reported that 40% of all employers in the state planned to re-hire employees that they had to lay off due to the recession.

Yet the unemployment rate in New Jersey rose to 9.7% in August from July’s 9.3%, matching the August national unemployment rate. And it is that rising unemployment number that is perhaps keeping the state’s office market from hitting the bottom so it can gradually recover.

“Once the unemployment rate starts going down and the job market improves, then space needs are assessed and commercial real estate improves,” Dolly says. “But if we are still seeing increased unemployment and not a lot of increases in jobs, I couldn’t say it’s rock bottom right now.” It also means a continuation of heated negotiations between landlords and tenants.

Dolly adds that FirstService Williams’ brokers have said there are not a lot of deals queued up for 2010. “Transactions that are being completed now were in the pipeline from 2008-09,” he says. “We are hoping to see an increase of what is coming into the pipeline going forward. But right now, it doesn’t look promising. We are fairly optimistic. Our guys are doing well, considering market conditions. I would guess we would see improving conditions in the second quarter.”

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