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6C — November 22 - December 12, 2019 — Commercial Office Properties — M id A tlantic
Real Estate Journal
C ommercial O ffice P roperties Upgraded suburban buildings welcome large tenants Property redevelopment attracting wide array of industries
VER VIEW Office-Using Employment Continues to Expand The domes t i c economy showed little evidence of the rapid deterioration that has plagued other markets as the national unemployment rate fell to 3.5% in September. Leading and coincident eco- nomic indicators point to sus- tained, though moderated, growth levels. U.S. payrolls continued to expand monthly at the strongest pace since the 1990s, although skilled and service employment is expand- ing faster than in most other sectors. New Jersey’s unemployment rate continues to drop, falling to 3.2% in August, the third straight month a record low was recorded. The office mar- ket continued to benefit from job growth in the professional and business services and financial sectors. Businesses in New Jersey’s leading indus- tries, such as pharmaceutical and financial services, continue to target locations where they can take advantage of the state’s highly skilled labor force. Concerns remain for some companies about increased labor costs, including the mini- mum wage increase. The New Jersey office mar- ket avoided a summer slow- down and continued to progress at a moderate pace during Q3 2019. Occupancy levels tight- ened for the sixth consecutive quarter, totaling 2.2 million s/f of positive absorption during the past 18 months. The most recent similar growth streak occurred be- tween 2005-2007 when nine consecutive quarters of growth was recorded. During that pe- riod, a much greater total of 8.6 million s/f of office space was absorbed. However, the reces- sion followed, and perhaps the office market grew too fast. Occupancy levels increased in 12 of 21 submarkets during Q3 2019, and 11 of 21 submarkets when compared year-over- year. The Bergen Central, Mor- ristown, Newark/Urban Essex, Princeton andWayne/Paterson markets have experienced continued occupancy growth, while space was returned in the Monmouth East and Rte. O DEMAND Sustained Occupancy Growth
of greater than 5% for five submarkets. Bergen County rents are rising due to strong increases in the Bergen East, Bergen Central and Meadow- lands submarkets. INVESTMENT SALES Single-Tenanted Property Sales Lead Activity Multiple large, class A office property investments high- lighted activity during the quarter, driving the average sale price psf to its highest level since Q3 2016. In a sale/lease- back transaction along the I-78 Corridor in Berkeley Heights, Welltower Inc. paid $519 psf for a 270,000 s/f office complex owned and occupied by Sum- mit Medical Group, who will continue to occupy the campus under a 20-year lease. In eastern Morris Coun- ty, Gulf Islamic Investments LLC acquired 175 Park Ave. in Madison from Hampshire Companies for $426 psf. The property is fully occupied by Realogy Corp. Several other office buildings traded hands in Morris County during the quarter including 1 Gatehall Dr. in Parsippany, 15 Vreeland Rd. in Florham Park and 333 Mount Hope Rd. in Rockaway. OUTLOOK Service is More Important Than Substance As tenants seek relocation options, many businesses are looking for more than just the practical and functional solu- tion, as a greater emphasis is now on employee experience and the surrounding environ- ment. Despite incentive pro- grams in flux, there remains an increased focus from the state government on development in transit centers. However, as the suburbs gain momentum, the newest private investors are seeking to further accommodate tenant needs, providing the conveniences that are available in downtown markets. As for the future of the office market in NJ, sustained slow and steady growth bodes well and may mean the market is better prepared for a poten- tial slowdown, or recession, compared to previous periods of prosperity that resulted in over- building and overexposure to weakening economic conditions. Transwestern is a pri- vately held real estate firm providing agency leasing, tenant advisory, capital markets, asset services and research to owners of com- mercial real estate.
287 South submarkets. VACANCY Diverse Industry Base Exemplified As of Q3 2019, 14.6% of space in office buildings remained vacant, compared to 14.7% the previous quarter and 14.9% during the same quarter a year ago. Leasing was stamped by the State’s diversity of indus- try. Global insurance company Everest Reinsurance commit- ted to two buildings at Warren Corporate Center, an encourag- ing sign that upgraded office campuses are attracting ten- ants back to the suburbs. An- other example of a risk-reward story of a challenging suburban asset occurred when financial firm CIT industries signed a lease for 215,418 s/f in Mor- ristown. CIT was assisted by a $22 million Grow New Jersey tax credit and will relocate from Livingston, NJ, with plans to retain 700 employees and add 137 new positions. The life sciences industry remained active in Princeton as US pharmaceutical com-
pany PTC Therapeutics leased 185,000 s/f at the Bristol-Myers Squibb Campus. Rounding out the top five were two tenants staying in place, as Summit Medical Group sold it’s 270,000 s/f office campus in Berkeley Heights, and consequently signed a long-term lease, while multinational electronics com- pany Samsung renewed its lease of 235,057 s/f in Ridgefield Park. SUPPLY AND DEVELOPMENT Transforming Ahead of Welcoming New Tenants Private investors continue to focus on today’s tenant needs, driving redevelopment and breathing life back into older assets. Ahead of welcoming Ralph Lauren Corporation and Quest Diagnostics, Prism is making tremendous progress at ON3 in Nutley and Clifton, in addition to finalizing proposals for a speculative lab building. For the quarter, minimal new product was delivered to the market while 1.4 million s/f remains under construction.
Sweeping exterior and inte- rior renovations for 340 Mount Kemble Rd. in Morristown, the property where CIT plans to relocate, are expected to be completed by next summer and provide a state-of-the-art workspace with numerous modern amenities. As for new development, nearly 300,000 s/f is expected to be delivered during Q4 2019 and while an additional 1.1 million s/f is anticipated for 2020. The average asking rent for office space increased in 14 of the past 17 quarters and peaked for the third time in the past four quarters. After climbing by $0.36 psf the previous quarter, rents rose again, this time by $0.22, marking the largest six-month increase since the second half of 2015. At $27.44 psf, the average was 2.1% higher than a year ago as 16 of 21 submarkets ex- perienced increases in the past 12 months, including a growth RENTAL RATES Demand Spurring Rent Growth
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