Garden State markets stabilizing despite slowing economy

Real Estate Weekly, Jan 24, 2001 by James L. Frank

Despite all the news of a decelerating economy, market indicators continued to trend positive throughout New Jersey's 20 submarkets through the fourth quarter of 2000. Insignia/ESG's Saddle Brook, NJ office concluded some of the largest transactions seen since its inception in 1987 including: Chase Manhattan Bank, Wiley & Sons, Global Crossing and Aventis Pharmaceutical.

Year 2000 leasing activity was up significantly from 1999 by more than six million square feet and the average asking rental rates rose 7.34% over the previous year to $26.85 per square foot. Last year's average unemployment rate for New Jersey of 3.8% matched the lowest annual rate ever set in 1988. The 1999 average was 4.6%. The slowdown in the economy takes us out of a superheated market, which ultimately represents volatility for the New Jersey real estate markets, and will create a more stable atmosphere for tenants and landlords alike.

The statewide average for all property types (Class A, B and C) in year 2000 showed an increase in the availability rate to 12.1%, up from 11.78% from the previous year. However, year 2000's net absorbtion was a negative 1.38 million square feet, a substantial increase over 1999's net absorbtion of negative 640,000 square feet. This leading indicator of the market's health suggests a needed softening, bringing the market supply and demand dynamics into a much needed equilibrium.

The projected activity for 2001 remains strong, with the continued overflow from the tight New York City market; pent-up demand from New Jersey tenants; and specific industry growth from the financial services and pharmaceutical related sectors. Demand from the technology related sector, including telecom, software and telecommunications companies, has slowed after the dramatic absorption levels seen in the first half of 2000.

Tenants see New Jersey's pricing structure, labor pools, affordable housing, highway infrastructure and proximity to New York City as an attractive alternative to soaring NYC costs, often getting new construction at rental rates in the low-$30 to $40 range.

The state's wealth of quality educational institutions will also help keep the availability of qualified labor in the marketplace.

The benefit of a slowing economy is that a well-needed pressure release valve will provide an increase in the labor supply, as well as increasing the availability of quality office space, affording tenants more options at better pricing. As the U.S. economy levels off, the markets in New Jersey should stabilize, providing a platform for a more stable growth environment.

Demand is still outpacing supply, as developers and financiers continue to be both conservative and responsible, insisting on tenant pre-leasing commitments of 30 to 50 percent and avoiding speculative construction.