NJ office market responds to changing demands

Real Estate Weekly, April 20, 1994 by Ronald M. Mahr

Office vacancy rates in New Jersey average between 15 and 20 percent, showing little overall change from vacancy rates reported one year ago. Although vacancy rates remained stable, the market experienced many changes in the past twelve months that are not reflected in vacancy statistics. Two of the most dramatic changes in 1993 and early 1994 are the purchase of buildings by users and building upgrades performed by owners.

Low interest rates and favorable prices contributed to a recent increase in building purchases by users. Deflated market selling prices have made it possible for some users to cut their building overhead by as much as 50 percent by purchasing, rather than renting a building. Some users occupy entire buildings, others occupy partial space and lease the remainder of the building. In 1993, Weichert Commercial negotiated the sale of a 12,000 square-foot West Orange office building, to a law firm, and helped secure financing for the purchase. Other transactions included a 10,000 square-foot building in Summit sold to a doctor for his medical practice, and the sale of a 26,000 square foot building in Morristown to a copying service. In Chatham Township, the 18,000 square-foot former Summit Bank Loan Administration was sold to a prominent law firm and in Millburn, the 26,000 square-foot former Berkeley Federal Savings Bank building was sold to Killam Associates, an engineering firm.

Properties owned by banks and insurance companies continue to represent a strong portion of the office buildings sold in 1993 and 1994. Users can often obtain bank owned buildings at below replacement costs and benefit from monthly payments than can be substantially lower than previous rents. The increase in user ownership does not necessarily change vacancy rates, because additional space is not absorbed, but it does reflect a trend in the marketplace that will continue as more users purchase office buildings during 1994.

A wide range of desirable office buildings are still available and I expect to see more user purchases in 1994. Weichert Commercial is currently marketing over 75 office buildings representing 1 million square feet of space in Bergen, Essex, Middlesex, Monmouth, Morris, Passaic, Somerset, Union and Warren counties. The buildings vary in size and price and can be a good investment for many users. Eventually, as more buildings are pur-new computers, telephone lines and fax machines are added. "Smart buildings," or facilities with updated systems will garner higher rents and lease more quickly than outdated facilities.

At Weichert Commercial, we have chased, we will see a gradual decline in vacancy rates throughout New Jersey. Remember, there have been virtually no new office buildings built in New Jersey for the past five years. It's still a buyer's market, but that will all change as the economy continues to grow even at a modest 45% per year.

Another trend in the office market is upgrading Class B space to make it more competitive. A drop in lease rates has prompted many tenants to upgrade from Class B to Class A space, resulting in a shortage of "A" space and a glut of "B" and "C" space on the market. In order to compete, some owners of "B" buildings are wisely upgrading their space with renovations that range from new paint and carpets to complete renovations. One example is the former Fireman's Fund Headquarters, a 150,000 square-foot building located on Route 10 in Parsippany. A $10 million upgrade is currently underway, including a new glass facade, atrium entrance and updated interior. The building has a great location and the renovation will make this a desirable building in Morris County, where vacancy rates are high but Class A space is in short supply.

In addition to cosmetic changes, many buildings are being overhauled with new electrical, communication and HVAC systems. Tenants demand facilities that accommodate today's office equipment and can be adapted as witnessed a decrease in the amount of vacant office buildings available for sale or lease, which demonstrates a strengthening in the market. The supply of Class A office buildings has been decreasing as users buy and lease this space. Renovation projects will help balance the market by decreasing "B" space and increasing the amount of "A" space available. There are still good deals in the market, and users and tenants should evaluate their current space and needs and determine if it would be advantageous to purchase a building or upgrade to better space. I predict that buying or leasing a building in 1994 will be like getting it wholesale, while in 1995, the same buildings will be sold and leased at retail prices.