If second quarter reports from three different commercial real estate brokers are a representative sample, then the central New Jersey office market has turned the corner and can begin to look back at the Great Recession. Excerpts are printed below.
Jerry Fennelly of NAI Fennelly, 500 Alexander Park, Princeton:
The values of commercial real estate have stabilized and are starting to rebound from the lows of 2009-’10. This is complemented by low interest rates, lowering vacancy rates, and an increase in the volume of U.S. commercial property deals. Despite a recent rise in short-term rates, the continued rise in value should remain through the next several quarters.
Investment acquisitions include the sale of Princeton Pike Corporate Center in Lawrenceville (800,000 square feet), which sold for $151 per square foot, with a 15 percent vacancy or an 8 percent capitalization rate on existing income. The upside is the approved land capacity of 150,000 square feet of office buildings. The Bank of America building in Hopewell (1.8 million square feet) sold for $200 per square foot. There is giveback of space equaling 300,000 square feet over the next three years.
The other comparable that closed was the sale of 7-9 Roszel Road, a 300,000 square-foot office building adjacent to Carnegie Center that sold for $293 per square foot, or a 7.5 to 8 percent capitalization rate. This building was sold with a 10-year lease but has risk because one main tenant was subleasing 72,000 square feet of space.
These three sales demonstrate the trend that well-located office buildings and/or high-end office buildings are achieving values approaching pre-recessionary levels. The other building sale in the first half was 600-619 Alexander Road in West Windsor, a Class B building with 10 percent vacancy. The sale price was $102 per square foot — $9.792 million, or a 10 percent capitalization rate.
What does this all add up to? Class A spaces — institutional quality real estate with great highway locations — are achieving values that are approaching 90 to 95 percent of replacement value. Secondary product, Class B, is staying lower with opportunistic returns.
This illustrates a movement of money into real estate. It seems there is an increase in companies buying buildings, using a combination of low interest rates and reduced risk of vacancy establishing the floor of values roughly 10 to 20 percent below the highs of 2007. This establishment of pricing levels is setting up appreciation, and yes, there will be an increase in interest rates. This will help the lenders who need to increase the bottom line and aggressively open the lending window.
The economy is showing positive signs for the greater Princeton office market, with an overall vacancy rate slightly lowering to 18.16 percent. There are areas already experiencing rent growth, including downtown Princeton (vacancy 8.52 percent) and Route 1 Class A office space (vacancy 15 percent).
Despite this positive Class A outlook the rest of the market, which encompasses a large majority of office space — Class B and C office space — is still experiencing a lowering of rents and increasing need for tenant and general building improvements. This is a critical concept: 65 percent of the office market was built in the 1980s and ’90s, with many buildings reaching the 20 or 30-year mark. This in turn forces owners to upgrade major infrastructure such as lobbies, mechanical systems, and roofs, or face continued difficulty leasing their product.
To put this into realistic monetary terms, this will add $15 to $20 per square foot to the cost of a building plus interior tenant improvements of $25 to $40 per square foot. This is driving a bit of a conundrum as it is becoming an expensive venture to lease an empty 20 to 30-year-old building. Owners are forced to either accept this and invest into their assets, or sell and move out of ownership.
Buildings sold: 100 Franklin Corner Road, 27,000 square feet, $3.645 million or $135 per square foot.
279 Princeton-Hightstown Road, 42,000 square feet, $2.73 million or $65 per square foot. (Innovo Pharmacy has purchased this building, which originally housed PA Technology.)
Lambert Drive, 25,000 square feet, $5.9 million or $236 per square foot.
396 Whitehorse Road, 5,000 square feet, $575,000 or $115 per square foot.
Conclusion. The greater Princeton office market is poised for a long, healthy recovery 40 months after the end of the recent “great recession.” New startups are opening, there is a flight of the wealthy from China, and new technologies are coming along aided by research at Princeton University (for example, cybernetics, combining biology and technology.) The pain we felt over the last five years will be declining by the day, though the trajectory of recovery is far more subtle than the dramatic curve that drove the initial recession. A reality of a fully robust economy is still several years away.
Cassidy Turley, Chatham, second quarter office market snapshot for the northern and central New Jersey markets: Overall, both markets posted growth and seem to be benefiting from the increase in consumer confidence, which is crucial to the recovery effort. New Jersey is also experiencing gains in employment and a reduction in the overall unemployment rate, which stood at 8.6 percent in May, following six months of growth.
The central New Jersey office market reported an impressive 622,408 square feet of positive absorption in the second quarter. The vacancy rate dropped to 16.5 percent from a historical high of 17.1 percent in the first quarter. Asking rates were down slightly to $23.45 per square foot from $23.74 in the previous quarter. Healthcare and pharmaceutical tenants led most of the market activity with the Princeton area submarket boasting 369,944 square feet of positive absorption in the second quarter.
Looking forward, landlords will need to focus on renovating current space as tenants increasingly demand more efficient floor plans and shared workstations to encourage employee collaboration. On a positive note, concession packages from landlords seem to have stabilized.
“This quarter showed encouraging growth in the northern and central NJ office markets, and this increase in activity reflects the improving local economy,” says Raymond Trevisan, managing director, Cassidy Turley.
Bussel Realty Corp., Edison: The firm announced it closed more than 50 leasing and sales transactions during the second quarter of 2013, completing more than 1,486,000 square feet of office, industrial, and retail commercial real estate deals in New Jersey.
“We had a tremendous quarter in terms of sales and leasing activity, assisting our clients achieve their real estate goals and objectives,” said President Steve Bussel.
Notable transactions completed during the quarter included the sale of 461 Ridge Road, South Brunswick, a 146,750 square foot distribution facility, to GDB International.