Sab Russo, a broker with Mercer Oaks Realty, has seen the greater Princeton real estate market rise and fall several times over his nearly 30 years in the business. Not that anyone can predict the cycles, but he believes it’s worth understanding the broader trends of the market and thinking about whether the current boom will continue, or if the market is headed for another downturn.
Russo will speak at the MidJersey Chamber of Commerce’s breakfast forum on commercial real estate trends in central New Jersey on Thursday, October 23, from 8 to 10 a.m. at the Mountain View Golf Course at 890 Bear Tavern Road in Ewing. Other panelists include Jerry Fennelly of NAI Fennelly and David Lodato of the Credit Union of New Jersey. Tickets are $25 for members, $35 for nonmembers. For more information visit www.midjerseychamber.org or call 609-989-9960.
Russo, who grew up in Princeton, has seen a number of booms and busts over the years. His father, also named Sabatino, had his own real estate career and did business under several company names including International Office Centers. Russo got into the business in 1985 after graduating from Ithaca College with a degree in political science and economics. His first job with CBRE dealt with territory all over the state, but he soon decided to specialize in the Route 1 corridor.
In the Reagan era, money was easy to come by, and there was a great expansion in office space. “It went from 3.5 million square feet in the early 1980s to close to 8 or 9 million by the end of the ’80s,” he says. “This included much of the early phases of Carnegie Center and Forrestal Center. This was all spec development.” Many of the loans were secured with the only collateral being the property under development, under the faulty assumption that prices would continue to increase.
That market came down hard in the early 1990s, and took many financial institutions down with it. Banks and savings and loans that had invested heavily in the office market went out of business.
“Most of the banks had huge exposure to commercial real estate,” Russo says. “Since the market was so overbuilt, you had huge vacancies, upwards of 40 percent in 1990. There was huge downward pressure on rents.” Properties that were once worth $150 a square foot were sold for $30 or $40 a foot.
When borrowers defaulted on their loans, the banks repossessed the now devalued properties, causing an enormous financial mess that took years to clean up. “It was a bust on the worst possible terms,” Russo recalls.
There are similarities between then and now, but with several important differences. With interest rates at historic lows, investors are looking for investments that will pay some interest. “Money needs to find yield, and investors are not finding it in the traditional safe havens,” Russo says. “So money tends to find its way to riskier assets, like commercial real estate.”
Russo says he sees an influx of money into the real estate market beginning to drive up values. “It’s hard to say where that’s going to end up,” he says. “It certainly shows some early indications of being a bubble. But most of the construction so far has been built to suit. We haven’t seen very much speculative development. This is probably going to change because the market is tightening for top-shelf space.”
The only recent speculative project was Hilton Realty’s 88,000 square-foot building at 301 Carnegie Center, now mostly leased.
With the overall economy doing well, Russo says, companies are buying more office space in order to expand. The corporate expansions are providing more jobs and driving further economic growth.
“Earlier this year I would have been a little less optimistic, but the market has experienced a tremendous amount of absorption,” he says. “I’ve been predicting a tightening of class-A space. In fact, that does seem to be coming true, and I think the values are going to continue to rise and rents are going to start to go up dramatically. It really depends on what the demand cycle looks like next year.”
Russo expects to see more speculative development if the stock market stays good. However, even if speculative building begins, he sees several differences between this market and the boom of the 1980s, and the subprime lending boom that wrecked the residential real estate market.
For one thing, credit, despite being cheap, is a bit tighter this time around. Lenders are requiring either 40 to 50 percent equity, or 50 to 60 percent pre-leasing before signing off on a project.
“We could be fine,” Russo says. “But one thing’s for certain: these cycles tend to last seven or eight years. Just looking at the rhythms of the market, we’re looking at some sort of an adjustment in 2018. I would think it’s not going to be as harsh as the last one — at least I certainly hope so.”