Marcus & Millichap report says New Jersey will keep fishing

Real Estate Weekly, Jan 17, 2001

Marcus & Millichap Real Estate Investment Brokerage Company recently released its Office Research Report or the Northern and Central New Jersey market, which is becoming the office destination for many departing Manhattan companies, according to David Thurston, regional manager.

"Lured by cheaper rents, economic incentives, and large blocks of new 'smart' space, New York City financial firms continued to announce plans to relocate to the Gold Coast," Thurston said. "Since the beginning of 1998, more than two dozen major Manhattan companies have moved some or all of their operations westward. In addition to financial companies, the Garden State's cost advantages have enticed several deeply rooted Manhattan publishing companies."

Following are some of the most significant aspects of the report:

First of all, the region will continue to generate new jobs, but growth will moderate as the labor pool tightens. Employment growth in the region improved to 2% after last year's 1.7%, representing more than 50,000 new jobs. The state's unemployment rate continued downward, hovering at or below the national figure of 4.1%. Growth was concentrated in the services and trade sectors, adding 19,300 and 16,200 new jobs, respectively. Business services recorded the biggest gain within the services industry, as expanding companies continued to outsource business. The five-county Newark metropolitan area led in job growth, with 30% of all new jobs.

According to the report, new development will consist primarily of pre leased projects and build-to-suit properties, as speculative construction is difficult to finance. The robust local economy and a tight Manhattan market have strengthened demand for space, while fueling an array of new developments and renovations. Most of the new construction has been concentrated in Jersey City along the waterfront, while Newark has had numerous properties renovated and repositioned. Chase Manhattan's deal will jump-start Newport Center V and VI, adding more than 1.2 million SF of class "A" product to Jersey City's waterfront. Developers are planning an additional 9 million SF in Hudson county.

Construction will continue into 2001 and will comprise mostly built-to-suit projects and pre-leased developments.

Vacancy rates will fall again in 2001 as demand continues to outpace supply.

Strong demand, fueled by corporate expansions and relocations, resulted in robust absorption in 2000, driving vacancies downward and rents higher. Although lower than 1999's 6.6 million SF, net absorption will reach 2 million SF by the year-end, consistent with 1997 and 1998 levels. Hudson and Morris counties continued to lead this year, absorbing a combined 1.2 million SF. Most of the space leased was in new, class "A" properties. As such, overall class "A" vacancy fell to 8.67%, down from 9.41% in the fourth quarter of 199. Class "A" vacancy was lowest in the Hudson county along the waterfront, in the low single digits. Class "B" and "C" vacancies also fell across the region, to 10.6% and 13.9%, respectively. Class "B" vacancy in Monmouth county dropped more than 2 percentage points to 5.5% as the area remained active.

Strong demand and a lack of any speculative development will force rents slightly higher during the next 12 months. Average annual asking rents edged upward slightly to $23.98 per SF, a bargain compared with Manhattan.

Finally, lower vacancies and rent growth will lure investors, resulting n sales prices climbing 3% higher in 2001. The investment market began the year where it left off at the end of 1999 - active. The first half of 2000 registered 148 transactions, higher than the same period in 1999. The second quarter was especially active, with 68 sales. Many were large-size deals, as the average price was more than $6.2 million, the highest quarterly figure in the past two years. Bergen county's 43 sales were the highest in the region, followed by Monmouth, Morris and Middlesex counties. Passaic county was the least active with six sales, while eight buildings turned over in Hudson county. Velocity was low in Hudson county due primarily to owners' desire to hold on and realize further price appreciation as a result of the heightened interest in the area.