The comments below have been excerpted from the latest edition of real estate broker Jerry Fennelly’s Princeton office space report:
The economy is growing in the Princeton area, and the pharmaceutical industry plays an important role in that growth. Princeton is a center of “bio” innovation, a little city that can help change the world. Princeton is fueled by high GDP and large immigration from countries such as India and China, making it a welcoming area for companies to establish their headquarters for pharmaceutical research and generic drug manufacturing. This industry is supported by five colleges/universities, which supply a newly trained and available workforce.
The Princeton office economy in 2017 grew across the board, producing 768,532 square feet of corporate growth (down from 2016’s 1 million feet of growth,) lowering the vacancy by 1 percent from the same time last year. This shows promise for a trend of lowering vacancy, but there are signs of change that may affect Princeton’s long term demand:
1. Cambridge, Massachusetts. This is one of the biggest competing cities to attract pharma and other technologies. Cambridge has announced Bristol-Myers Squibb is occupying a new 400,000-square-foot research and development building moving from Hopewell. Schire Pharmaceuticals is building a 380,000-square-foot R&D facility in Cambridge.
Cambridge has MIT and Harvard, which have research budgets that are 10 times larger than Princeton University. Number one reason companies are going to Boston: it is easier to attract the educated millennial workforce.
2. Tightening of Immigration. New Jersey has been one of the leading immigration states in the country. In the U.S. foreign born workers fill 31 percent of the office buildings, construction, and maintenance positions. New Jersey is considered one of the top H1B worker visa states in the U.S. The other four are California, Illinois, New York, and Texas.
3. Population Shift. Baby Boomers and Generation X population comprise 140 million strong in the U.S. As Baby Boomers are retiring the housing and community needs must change to focus primarily on millennials. Princeton has to address this need for new communities, new housing stock enabling smaller homes, entertainment, and easy access to mass transportation (rail) all in one place. The problem of over-congested schools will be remedied by a slowdown of immigration and slower population growth. Bringing young talent that is highly educated in engineering, computer coding, and bioresearch should be the focus over the next decade.
4. Digital Disruption. Technology has already made it easier to work remotely, decreasing the demand for office space. Work at home is becoming more and more popular with wider corporate acceptance. Artificial Intelligence will further impact this trend over the next 20 years as the workforce ages, creating a shortage of workers and forcing machines to do jobs that people used to do.
2017 was a year of uncertainty for the greater Princeton market; a new president, looming tax overhaul, increasing healthcare costs, and concerns over globalization. Caution in the marketplace made the average size transaction lower to 6,900 square feet versus the last three-year average of 8,000 square feet.
But unemployment is 4 percent, hourly wages rose 2.5 percent, and job growth averaged more than 200,000 jobs per month nationally. These factors, complemented by the new federal tax plan, help set up a stronger year for office demand in 2018. The tax plan will reduce the corporate tax. The real trick is to attract and retain the population of millennials who left the area, venturing off to major cities like New York, Boston, and Philadelphia. Eventually some of these ex-Princetonians will marry, have kids, and evaluate the cost of living in confined and expensive large cities.
This demographic, which is the largest single population, with an age of 18 to 36, represents 79 million people whose needs are different from Generation X and the Baby Boomers, particularly when it comes to housing. New smaller housing stock, intertwined with technological amenities, adjacent retail, mass transportation, and sports facilities will attract this population back to Princeton. New Jersey is one of the most expensive states to live in, but still less than cities such as New York, Boston, and Philadelphia.
Bristol-Myers Squibb’s new construction (600,000 square feet) and previous Church & Dwight relocation (250,000 new construction square feet in 2014) caused 777 Scudders Mill Road (750,000 square feet vacant) and 100 and 101 Thanet Circle (110,000 square feet vacant) into a lender receivership. This has left a significant hangover of office space produced by large corporations building new office buildings. These buildings will be sold at discount and leased at moderate rents, keeping a cap on rent growth, which has averaged 1.5 percent over the last 10 years.
The greater Princeton area will have vacancies of 17 percent or greater for the next 12 months. We anticipate demand in the first half of 2018 to be approximately 500,000 square feet of growth. The future is strong for the greater Princeton office market due to the 75-year history of being the research power center for laser, photonics, and biology for many of the world’s largest global brands.
Over the next 12 months Princeton should continue to experience an average growth of 800,000 square feet of office expansion, offset by consolidation and relocation movements (for 2018 an estimated 250,000 square feet).
Jerry Fennelly is president of Hamilton-based NAI Fennelly. For the full report visit www.fennnelly.com.