N.J.' s markets are poised for continued, albeit modest, growth

Real Estate Weekly, March 7, 2001 by Eric N. Witmondt

Historically, the real estate market lags the stock markets ups & downs -- typically 9 to 18 months. Needless to say, the stock market had a disastrous year in 2000 and so naturally, history would tell us that the real estate market is headed for trouble, especially northern New Jersey office space, which is so dependent on the prosperity and expansion of New York City, the financial capital of the world.

My slightly contrarian belief is that the New Jersey real estate market is not going to collapse. We will probably not see the rent spikes of approximately 25 -- 40%, especially in northern New Jersey office space, which we witnessed the past 2 years; however, all is not doom and gloom. New Jersey has so many positive things going for it, not least of which is an extremely diverse industry base, anchored by the pharmaceutical industry which employs 43,000 individuals in New Jersey, as well as, the financial services, Bio-Tech, telecommunication and insurance sectors. Additionally, there are currently 26 Fortune 500 Companies with corporate headquarters in the Garden State.

Overall, I think the economy will slow down. Again, history tells us that "cycles" last 7 years on average and we have been in a 9 year up cycle, thus we are due for a down-turn. And, I think it is obvious from the Federal Reserve's actions, they are poised to continue to lower rates, thereby helping to stimulate growth. The good news is that New Jersey has very strong fundamentals and the state's real estate market should withstand the downturn better than most major markets around the country. The one wildcard is the New York City market. Barring a meltdown in the Big Apple, New Jersey should not see major trouble; however, I do share the cautious optimism that is the buzz phrase for 2001.

The industrial and office markets were "red hot" in 2000. In 2000, the New Jersey real estate market, especially the northern New Jersey office market, saw more leasing and sales velocity, especially in larger transactions, than ever before. The pendulum fully swung to the landlords who prospered greatly by seeing vacancy rates decline, rental rates spike, and reduced tenant work letters while property values dramatically increased.

For every large disposition, lease or sale, there were numerous users or investors (many times both) competing, and even bidding for the space. We are talking about New Jersey, not New York City or a CBD like San Francisco, Washington or Chicago.

Spec buildings were built, but primarily they were limited to strategic A+ locations with very strong landlords. Lenders remembered the lessons of the 80's very well. "Build and they would come" certainly was a catch phrase that proved true:

* Global Crossing leased Gale & Wentworth's 203,000 square foot building at Giralda Farms in Madison.

* TYCO leased Blanchard's 150,000 square foot building in Florham Park.

* Affinity Credit Leased Gale & Wentworths 125,000 square foot building at Mountainview in Bernards Township.

* Aventis leased SJP's 340,000 square foot building, then another 640,000 square foot from SJP in Parsippany and Bridgewater, respectively.

* Pharmacia leased 232,000 square feet, also from Gale & Wentworth, in Bedminster.

These were all full building, long-term leases, and the list goes on. The waterfront, commonly referred to as the Gold Coast, or more appropriately now nicknamed the 6th borough referring to the mere accident of geography whereby Jersey City, Weehawken and now Hoboken are physically located in New Jersey, yet exclusively serve New York City office tenants, saw the most action:

* JP Morgan Chase leased 1.2 million square feet with LeFrak at Newport Center -- this is a one building deal.

* Schwab At Harborside with Mack Cali leasing 300,000 square feet.

* Wiley Publishing with SJP leasing 500,000 square feet in Hoboken.

* Goldman Sachs purchased the Colgate Site in Jersey City so it can build millions of square feet for its own account.

The sale market in New Jersey, although slower than in 1999, was very strong -- especially with user purchases, which included:

* DLJ purchasing the former Varityper campus of 308,000 square feet in East Hanover.

* Schering Plough purchasing the former 800,000 square foot Ciba Geigy office and research complex in Summit.

Investor Purchases of Vacant Buildings were rather impressive, as well.

* Advance purchased a portion of the former Exxon Campus for $37 million, which included 345,000 square feet, which will be "stripped down" to the steel and redeveloped. The most amazing aspect, notwithstanding a $110 per square foot price for steel, as there were 100 initial bidders, including Corporations like TYCO and Cendant.

* Gale & Wentworth also purchased 2 Gatehall Drive in Parsippany, which contains 420,000 square feet. Upon closing, the building was leased to Exodus and Key Bank, taking 200,000 square feet and 220,000 square feet respectively.

* WP Commercial, the value creation company, purchased the dormant Estee Candy industrial building in Parsippany and redeveloped the building, again without a tenant and leased the entire building to NY Life on a long-term basis.