Jerry Fennelly is a veteran observer of, and participant in, the Route 1 corridor’s commercial real estate market. His firm, NAI Fennelly, has been buying and selling properties in the area for more than 30 years. Few people keep a closer watch on real estate transactions in the area, and his quarterly reports provide an insider’s view of the market.
In his latest market report, which analyzes 2016 as a whole, Fennelly says the greater Princeton area saw impressive growth over the last year:
The greater Princeton area experienced over 1 million square feet of growth in 2016 with 62 percent of this expansion in the pharmaceutical sector — BMS, Janssen, Sun Pharma, Oncobiologics, Advaxis, and Premier Analytical. Other business sectors were experiencing changing operating patterns for office space.
“Work in Place” (home) and “Restack and Refresh” (companies redoing their 1980s HQ and densifying) has led to a downward trend in the average growth per transaction overall since 2008, now three times smaller or 6,000 square feet. Essentially, these trends evolved over 25 years sequentially following technology to mobile office utilization in combination with work from home arrangements, trends that are strongly entrenched today.
Notable movement in the business category was Blue Cross Blue Shield leasing 140,000 square feet at the Bank of America location in Hopewell and Caliper Corporation leasing 24,000 square feet at 500 Alexander Park, which caused the 48,000-square-foot multi-tenanted office building to be sold to an investor.
The internet, software, and electronics category showed anemic demand with eight out of approximate 201 overall lease transactions or 4.4 percent of the growth. Medical grew by 56,787 square feet for the final stages of the relocation of two major hospitals and repositioning of medical consumer areas. Hospitals are seeking ways to decentralize on specific profit centers, such as adult day care and 24-hour urgent care facilities and bringing more practices into each hospital by buying practices to increase their brand and grow their client base.
Service/Business/Legal/Finance: Consumer-based businesses did expand in 2016 including Blue Cross Blue Shield, Wellcare, Cenlar Bank, Gallagher Benefits, Farmers Insurance, and Crown Cruise — basically insurance, financial, and travel services that are servicing the aging Baby Boomers who are retiring or trying to figure how to pay for retirement.
Disruption may occur in this category, especially in the millennial sector; new suppliers are entering the market, focused on millennials, offering a less expensive way to do things, which may begin to sway a large market share of business. Caliper and Speizle Architects relocated to spaces that offer New Workplace 360 Design office and furniture. Out of 96 transactions in this category, 69 transactions had some form of expansion and 27 of the lease transactions either moved into smaller space or equal to what they occupied before.
BioPharma/Pharmaceutical/Chemical: Pharmaceutical companies completed 58 of the 184 new lease transactions or 62 percent of the growth, equating to approximately 528,000 square feet of new growth in this category for 2016. BMS, Janssen, Princeton University, Evotech, PMV Pharma, Evenus, Liposene, Luye Pharma, Acadia Pharmaceuticals, Sun Pharma, Oncobiologics, Advaxis, and Premier Technology led the expansion during good times to raise money in the private equity, venture capital, and public markets.
BMS leased the balance of Nassau park, 139,000 square feet; Janssen leased 39,000 square feet at the Bank of America site in Hopewell; Sun Pharma bought 2 Independence Way, a 112,000-square-foot office building in South Brunswick; Fardoz Pharmaceuticals purchased 69 Princeton-Hightstown Road, a 50,000-square-foot facility; and Aurobindo is building a new 576,000-square-foot office/lab/drug manufacturing building in East Windsor.
Medical: Growth in the medical industry showed good results with the changing need for certain types of practices. RWJ Barnabas opened its new 24 hour emergency center by the Hamilton train station with Walgreens pharmacy in the facility. Virtua added two new 24-hour emergency centers, one in Robbinsville (2,400 square feet) on Route 130 and a new center in East Windsor (6,000 square feet).
Internet/Software/Electronic & Fiber: This category experienced 55,000 square feet of growth. Internet, electronic, and software companies such as Kovid Group (startup) and IT Echelon leased space, while Masterex and Atlas Systems purchased buildings for their individual business operations.
Education/Government/Non-Profit: The education/government category is seeing expansion in satellite services, moving closer to the customer of traditional services, such as ES Academy leasing 4,000 square feet for a nursing school at the corner of Whitehead Road and Route 1 in Lawrenceville. Princeton University leased 30,000 square feet expanding its incubation businesses in neurosciences, electronics, and engineering.
The combination of five colleges — Princeton University, Rider University, The College of NJ, Mercer County Community College, and Thomas Edison College — are facing a cultural transition to deliver a greater sector of their educational learning options through remote access, using video and internet to increase enrollment, and potentially to drive down cost of infrastructure.
Government demand has been remained stationary, back filling excess office space in state-owned buildings.
Investment Analysis: The investor market viewed the Princeton office market favorably in 2016. A Korean-led money fund purchased 800 Scudders Mill Road in Plainsboro — 750,000 square feet with a 13-year Novo Nordisk lease. The purchase price reflected $500 per square foot or 4.75 percent return.
Another investment property that sold in the second half is 500 Alexander Park, a 48,000-square -foot, three-story office building built in 1989 sold to a private investor paying $250 per square foot for an 80 percent leased office building that is walkable to the Princeton Junction train station.
The purchase activity in the greater Princeton area has increased with 210,000 square feet of office buildings purchased to create new office/lab buildings. The pharma companies that invested are Sun Pharma (112,000 square feet); Fardoz Pharma (50,000 square feet); and Premier Analytical (23,000 square feet).
Small and medium-sized corporations bought office buildings for discounted pricing based on the fact that they either require specialized facilities or more small companies are viewing office space differently and feel they can predict long-term needs.
The key to factoring long-term need is flexibility of space — companies work in 360 workspaces, plug in/sign on spaces became more efficient and adaptable, no assigned desks or offices. The pending purchase of 3967 Princeton Pike (6,000 square feet for $216 a square foot) by a company who felt they could predict the long-term occupancy levels is a good example of this “foresight” strategy.
A specialized use sale was 1014 Whitehead Road Extension in Ewing, a 20,000-square-foot, single-story office building built in 1990, sold for $87 per square foot. The corporation required its own free standing office building for a behavioral health utilization.
2017 will be the year that investors look at Princeton office market again due to a consistent demand by the pharmaceutical/biotechnology industries, Princeton’s central East Coast location with close proximity to three major airports, three train stops, interstate highways, and a very strong educational presence with a large pool of innovative highly educated professionals and employment hopefuls.