At long last, there are a few nice words being said about New Jersey’s industrial real estate market. The market that has struggled with high vacancy rates over the past 18 months has, according to the latest report by Edison-based realty firm Cushman & Wakefield, showed renewed progress in the first half of 2010.
Whether the shift can be traced to more realistic landlord expectations, the state’s generally solid commercial core, or anything else is not yet known. What is encouraging, according to the report, is that central New Jersey recorded 3.5 million square feet of new industrial lease deals — roughly equivalent to the numbers from one year prior — so far this year. That’s encouraging because before this latest look at the industrial submarket, each quarterly look over since the end of 2008 have shown declining occupancy.
Cushman & Wakefield’s industrial brokers closed 1.1 million square feet of new industrial leases around the state this year, the largest in the central New Jersey market being Suite K Value Added Services Inc.’s 178,502-square-foot lease at 120 Herrod Boulevard in South Brunswick.
All is not glitter for central New Jersey, however. The Exit 7A submarket, the industrial and warehouse cluster surrounding the New Jersey Turnpike exit in Hamilton, near Robbinsville, remains badly wounded. A recent snapshot of the submarket by the Wall Street Journal highlights a 905,000-square-foot warehouse in Robbinsville that has sat dormant since October, 2007, when Principal Global Investors acquired it for $58 million.
A building frenzy last decade attempted to cash in on a boom of warehouse activity here, leaving a glut of space no one wants now that the market has bellied up. The boom-to-bust event echoes what happened to Princeton’s office market in the early 1990s, when development outpaced occupancy and developers were left with a sea of empty offices and buildings up and down Route 1.
According to the Wall Street Journal and real estate data firm CoStar Group Inc., a full 48 percent of the 7.2 million square feet of warehouse space near Exit 7A is vacant, with an average three-year down time. WSJ also states that asking rents in this submarket have dropped as much as 40 percent since the golden days of a half-decade ago.
CB Richard Ellis, a commercial real estate firm with several offices in the state, including one at 700 Alexander Park, has found that the Exit 8A submarket in Cranbury is 17-percent vacant. Believe it or not, this is good news, considering that several reports from the end of 2009 listed a roughly 20-percent vacancy rate here.
The key to the industrial market’s slow recovery has been euphemistically called “flexibility” in regards to landlords and rents. What that means is that landlords, though notoriously mum on what their commercial rents are these days, have had to offer incentives such as low rent and increased services in order to stay afloat.
“In this climate, industrial property owners and their brokers really need to be aggressive to get deals done,” says Stan Danzig, executive director at Cushman & Wakefield’s East Rutherford office. “We all have become more creative, more responsive and more realistic. This approach is paying off, because more deals are beginning to come together.”
According to Cushman & Wakefield’s report, landlords are asking an average rental rate of $5.92 per square foot for New Jersey industrial product. This is 54 cents less per square foot since last summer, but only 10 cents per square foot less than first-quarter 2010 averages.
The overall vacancy rate is about 11 percent, half a percentage point higher than the national warehouse vacancy average. New Jersey’s industrial footprint is big-box distribution, and as retail ebbs and flows back toward normalcy, central New Jersey is expected to reap the benefits.
Now that University Square, the long-dormant office building at the juncture of Route 1 and Alexander Road, is actually occupied — Axis Insurance moved in in June and Otsuka Pharmaceuticals is just about ready to move in from 100 Overlook Center — there are no fully empty office buildings in the Princeton market. And, according to a recent report by NAI Fennelly, a Hamilton-based commercial real estate firm, the Princeton office market is less vacant — by one-quarter percent — than a year ago.
While a quarter percent might not sound like growth, it at least is not recession, and now that companies have settled after a period of shedding excess office space in the recession’s wake, the market is holding steady.
This is not to suggest that all is rosy. the service business sector, particularly financial, has left gouges in the Princeton-area office market. Bank of America shed 35,000 square feet of office space when it downsized last year; and even though Blackrock is planning to move from Scudders Mill Road in Plainsboro to University Square at Route 1 and Alexander Road (rather than to Philadelphia, which was a strong possibility for a while), it will lose roughly half its office footprint here and leave open 350,000 square feet at its Plainsboro building, where it is the only tenant.
The pharmaceutical industry’s seismic shifts also have had their effects in the past year. Pfizer’s blockbuster buy-up of Wyeth and its subsequent departure from South Brunswick — not to mention the exodus of Pfizer-owned Fort Dodge Animal Health from Monmouth Junction — has left a question mark on more than 400,000 square feet of office space. Bristol-Myers Squibb’s downsizing has left nearly 150,000 square feet up in the air at Nassau Park and in Montgomery.
However, the eventual move of Otsuka to University Square does add 100,000 square feet of occupancy back to the rolls, and Integra LifeSciences has added at 21,000-square-foot office area at 103 Morgan Lane, according to Fennelly.
Gerard Fennelly says the vacancy rate of the Princeton office market has been higher than 21 percent for four-and-a-half-years, due to limited development. Corporations have been placing inventory on the market for the last 30 months as developers waiting for lending markets to open. And while overall rents have by an average of 5 to 10 percent in that time (particularly in Class B and C properties) landlords have been able to maintain a steady, if not great market.
Some general findings from the Fennelly report:
Route 1. The vacancy rate here is 16.82 percent, down 1 percent from same time last year. Rents have dropped 5 to 10 percent on average, ranging from $19 to $32.50 per square foot.
Downtown Princeton. Venture capitalists, hedge fund investors, smaller law firms, and Princeton University have made the downtown market steady and uncommonly strong.
Retail and office sales prices have surpassed $450 per square foot in a market enjoying a mere 7.7 percent vacancy rate. Average rents range from $20 to $42 per square foot.
Route 206. High traffic and a 2009 lease by Johnson & Johnson that adds 200,000 square feet of occupied office space to 23 Orchard Road has kept this submarket strong. Average rents range from $17 to $22.50 per square foot.
Ewing and Lawrenceville. The vacancy rate has risen moderately, to 25.18 percent, due to corporate shrinking (such as Bank of America’s 350,000 square feet of space on Scotch Road). Rents average $14 to $27 per square foot.
Cranbury. Like the industrial market near Exit 8A, Cranbury’s office market remains badly hurt by the recession and the exodus of companies who had just recently clamored to do business here. The vacancy rate is nearly 28 percent, as it has been for about three years, with most of this vacancy in space caused by the evaporated lab market.
Hope, however, exists at 1249 Cranbury South River Road, where 100,000 square feet of lab space is now available. Biotech companies, associations, sales offices, medical practices, and company headquarters could benefit from this location, as well as average rents of $17.50 to $25 per square foot.
Hamilton/Routes 195 & 130. Vacancy rates have dropped below 17 percent. Average rents range from $17 to $22 per square foot.
The vacancy rate along central New Jersey’s four largest shopping corridors escalated for the fourth consecutive year and now is nearly 10 percent, due to numerous store closures along Route 35 in the north, according to a recent report by R.J. Brunelli, a commercial real estate firm based in Old Bridge.
However, the Route 1 market has tempered these effects, as retail remains steady (if suffering) in the Princeton-to-New Brunswick corridor.
Although it continues to be hamstrung by a large number of dark big-boxes, the 30-mile section stretching from Woodbridge to Trenton has seen vacancy rates drop from 9.5 percent to 9.4 percent from a year ago, according to the report. While steady (and one of the few retail areas not to see a rise in vacancy in the past year or so) this same stretch at the beginning of last decade was less than 2 percent vacant.
According to the report, the decline in vacancies was fueled by three big-box absorptions in the southern end of the corridor: PC Richard’s takeover of the former Circuit City at Lawrenceville Center, Home Goods’ lease for the former Linens ‘N Things at Nassau Park, and HHGregg’s lease for the former Filene’s Basement at Mercer Mall.
Collectively, the nine lingering big-box vacancies accounted for 501,052 square feet (63.4 percent) of the roadway’s vacancies, led by the 157,800-square-foot Great Indoors and 100,000-square-foot Levitz stores in Woodbridge.