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These articles were prepared for the May 10, 2006 issue of U.S. 1 Newspaper. All rights reserved.
Space Race or Space Glut?
Princeton’s last experience with a building boom was followed by a bust, comparable to a game of musical chairs where the same child is left standing time after time. From its completion in 1991, Crossroads Corporate Center was famously unoccupied. Standing sentinel on Route 1, just north of I-295 with access from a back road near the Department of Motor Vehicles, it remained vacant for six years.
Now three big projects are in various stages of completion. One is built and two are well under way, but meanwhile the market for office space has softened. Softened is a euphemism, actually, because some say it is worse than soft. "It’s flat," says David Knights of Picus Associates at the Forrestal Center, which hosts the most recently competed building.
Pull up your chairs to watch this contest. When the music stops, which building will be left empty?
The list of competitors starts at the Forrestal Center, where the Patrinely Group has finished a five-story, 166,900 square-foot building at 1100 Campus Road, accessible from Scudders Mill Road. It is called Princeton Corporate Campus at the Forrestal Center. The Houston-based Patrinely organization has a good track record at the Forrestal Center, because its previous buildings on College Road West earned a tidy profit for everyone involved. The Patrinely strategy is "Build and Sell."
But the Campus Road building has stood empty since its completion date last October.
If you go south on Route 1 to just before MarketFair, Hilton Realty is finishing a 136,000 square-foot Class A building at Carnegie Center West (the MarketFair side of Route 1). Like the Patrinely Group, Hilton Realty is a private company. It is owned by the George Sands family, known in Princeton as the principal donor for the new Princeton Public Library building, and it is also the Nassau Street-based landlord for 7 million square feet of office, retail, and residential space. The Hilton strategy is "Build or Buy – and Hold."
Driving back north on Route 1 to the Alexander Road overpass you will see, looming over the highway, a humongous building. At 313,000 square feet, it is bigger than the first two put together. Reckson Associates is developing this property, which accesses Route 1 from Alexander Road.
Reckson owns more than 20 million square feet of Class A properties in the tri-state area and though it began as a family firm, it is now publicly-traded real estate investment trust (REIT). "The absolute shocker to the system is Reckson’s building – it is bigger by itself than the two other buildings put together," says Knights. It also has the advantage of deep pockets. "Reckson is not a developer that is going to go away."
So three new five-story buildings, all on Route 1, all with the fabled Princeton zip code, will come into the Princeton market in one calendar year.
"The trick is, there is only so much demand for absolute Class A properties and yes, there are three buildings," says Matt Malatich of Hilton Realty. "But each has its distinguishing factors."
What critical factors will make one building successful but perhaps leave another building empty?
If a large tenant needs 130,000 square feet, or needs to be north of Princeton, the Patrinely choice would be obvious.
Patrinely’s 1100 Campus Road, the first of several planned buildings there, is made of clad and precast stone and granite. The smallest unit is on the first floor, 5,000 square feet, and that floor also has 8,000 and 10,000-foot spaces, plus a fitness center and cafe. The top three floors have 36,000 square feet. "It is not our intention to have 25-30 tenants in a building like this, but we could," says Tom Bermingham, Patrinely’s senior vice president of the northeast region.
Cost: $36.50 per square foot, plus electricity.
Founded in 1984 by Dean Patrinely, who had worked with the well-known developer Gerald Hines, Patrinely is a privately held firm that focuses on build-to-suit projects. Based in Houston, Texas, it has a portfolio valued at about $1 billion in residential and commercial development. In addition to the Forrestal Center project, others are underway in Phoenix, Tampa, Miami, and Bethesda.
Patrinely’s philosophy: to develop buildings and sell them. For instance, it built 225,000 square feet at College Road West and cashed out with an early sale to Miami-based New Valley Corporation for $54 million in 2003. It was resold two years later to a Swiss-based investment group for $71.5 million or $317 per foot, one of the highest prices paid in the Princeton market. The larger of two buildings here is the North American headquarters of Novo Nordisk, and another major tenant is American Re.
For Patrinely’s Campus Road project, the financial partner is San Antonio-based United Services Automobile Association. It was designed by Terry Steelman, a former Hillier Architect who is now with Ballinger in Philadelphia, and built by Driscoll Construction.
"We felt the Princeton market was underserved for Class A office space, because nothing had been built in the last five years, so we purchased property for a five-building 800,000 square foot campus," says Bermingham. A 1973 Boston College graduate, he is the son of RCA’s general counsel who managed RCA’s merger with General Electric.
"Contrarian in view, but still very bullish on Princeton, we decided to go ahead with the project, totally on spec."
One advantage for Campus Road is its design flexibility, because it is column free. "Our columns are on the exterior and on the central spine, so no columns interfere with layout and design. Buildings that are more square will have columns piercing the slab and running through the center," says Bermingham. For instance, the Hilton building has columns at 40-foot intervals.
Who might want a clear vista and an open floor plan, with not many closed-door offices? Financial services firms, trading operations, sales firms, pharmaceutical companies, and software designers, says Bermingham. "We are having a good amount of activity, and two proposals are under consideration."
Other competitive advantages: good parking (four cars per 1,000 square feet) and a site large enough to allow for companies to expand.
The price is lower than space in downtown Princeton, higher than older buildings at the Carnegie Center, and about equal to values in Bergen County. But as Bermingham points out, Bergen County has no new buildings.
Historically markets like Princeton have acted as a pressure valve market, because when prices go higher in New York, companies move to Princeton. "Midtown is as costly and tight as it has been for a decade and a half, more than $100 per square foot," says Bermingham. "In my experience, Princeton attracts companies that are there now and need to expand, or those coming from New York or Philadelphia. Certainly it is less costly for employees and there is less turnover than in north Jersey, The area in Bergen/Morris counties has a more New York-centric attitude."
The New Jersey economy has not been as robust in terms of creating jobs as might have been hoped, which has kept significant amounts of space open, says Bermingham. "As property ages, it slips in class, and now there is a large amount of Class B space on the market."
"Patrinely was finished last October, and it had a six to nine month advantage in terms of being able to show finished product. In ordinary times it could have capitalized on that and have an advantage," says Knights, who represents the Forrestal Center. "But the lack of demand for office space has eroded that advantage for Patrinely. The other two are catching up."
Carnegie 902 is a five-story Class A structure with 136,000 square feet of office space. Rental cost: $35 per square foot plus electricity and heating costs.
"Location and quality is the pitch on this," says Matt Malatich, who recently came to Hilton Realty from marketing the American Metro Center for Preferred Real Estate Investments. "Our mechanicals are state of the art, and we have access to Route 1 from Meadow Road, Alexander Road, and Carnegie Center Boulevard."
Other advantages: Covered parking, proximity to restaurants and shops, and willingness to divide the building for tenants who need 5,000 to 15,000 feet. "What will make us unusual is that with a brand new Class A building, we are willing to split floors in two or four tenants per floor," says Hilton Realty’s Mark Hill. The first floor could accommodate offices from 4,612 square feet to 7,400 square feet.
Another deal maker might be the basement. Basement? Few Class A buildings come with basements, but they are useful for storing files. Space underground will rent for just $10 or less than a third of the swanky space. "Some of our tenants in other buildings may have filing and storage requirements, and the humidity-controlled basement can free up the more expensive office space. It is more costly to construct but is an amenity," says Malatich. The design also allows the landlord to stow mechanical systems underground, thus saving space on the first floor.
George Sands has been a developer since 1952, and now his son Jeffrey is in the business as well. George Sands began by buying farms and building housing developments and apartments in Montgomery, East Windsor, and Hamilton. Research Park took a decade to build, starting in the mid 1960s, and the first tenants were Educational Testing Service and the Gallup Poll. The small retail strip near Research Park grew into a Buxton ice cream store at Montgomery Center (now Friendly’s) and then into shopping centers on Route 206 and in the Windsors.
The first Class A buildings were two acquired in 1999 near Philadelphia, flanking the Pennsylvania Turnpike. Other Class A acquisitions were 821 Alexander, 4301 Route South, plus 101 and 104 Interchange Plaza, located at Exit 8A, where the firm is seeking approvals for a 60,000 square foot building.
Hilton bought the Carnegie Center property, complete with architectural designs and approvals, from Advance Realty Group. Unlike the Patrinely firm, Hilton Realty does not "build to sell." It operates on a conservative investment model. "We like multi tenant assets, five solid tenants rather than one building with one tenant," says Hill. "We buy or build the best building that can possibly be built, fill it with the best tenants, and own it forever."
Hilton now owns seven million square feet of real estate, including office, retail, and apartments. Though the firm has 16 people in the Princeton office, it has 115 nationally, including facilities and apartment managers and leasing brokers. Robert Parry, who is doing the Carnegie Center job, is one of three project managers who do the general contracting. Fletcher Thompson of East Brunswick did the design, which Malatich describes as having "a ton of glass on the outside and a two-story atrium lobby with four entry doors."
As for leasing activity, "I have talked to quite a few existing tenants about expansion to 902 and have gone into second and third meetings," says Hill.
Hilton Realty Co. LLC, 194 Nassau Street, Suite 21, Princeton 08542; 609-921-6060; fax, 609-921-0939. George H. Sands, senior partner. www.hiltonrealtyco.com
Reckson’s giant building at Route 1 and Alexander Road has five floors, like its competitors, but each floor is 50,000 square feet, compared with 32,000 feet for Patrinely. For now at least, Reckson hopes to lease no less than one floor to a tenant, and it claims to be entertaining a couple of proposals to lease the whole building for a company’s world headquarters.
Like Hilton Realty, Reckson Associates is essentially a family business, even though it is a publicly traded company. Todd Rechler, corporate senior vice president and managing director for New Jersey, is the grandson of the founder and grew up with construction talk at the dinner table. "In the late 1970s my father and uncle developed some of the first fully amenitized office buildings, perhaps on the east coast, certainly on Long Island, with cafeterias and health clubs," says Rechler. "Our goal is to have a premiere building in a premiere location, that has premiere service for our tenants."
He graduated in 1991 from Rhode Island-based Roger Williams University with a double major in business and construction. He and his wife, who is opening a New Jersey division of a charity organization, the Breast Cancer Emergency Fund, have two school-aged children. The Rechler family firm went public as a real estate investment trust. Reckson’s father and uncle have retired, and his brother, Scott, is the CEO of the firm.
University Square has a granite facade (gray tinged with pink) and reflective glass windows, a two-story atrium with a 21-foot ceiling. front and rear entrances, and 1,077 parking spaces spread around the building. The amenities also include a dining facility (promised to be upscale and gourmet) a gym (promised to be state-of-the art with plasma TVs, locker rooms, and saunas), a team room for teleconferencing, four elevators, and a loading dock.
Reckson’s advantages are its dominant location, overlooking Route 1, and its formidable list of amenities. But it does not have a basement or the inclination to lease to smaller tenants, at least right now. "At a later date there could be an opportunity for smaller tenants," says David Simson of GVA Williams in Parsippany. He is marketing the building along with Tom Romano and Steve Tolcash of GVA Williams Buschman on Lenox Drive.
Rental price: Not published, but around $35, or comparable to the competition. Construction is on schedule and delivery is supposed to be by the end of this year.
"If activity is at all indicative of future results, we are overwhelmed and extremely pleased with current marketing efforts," says Simson. "A high profile company from New York City is looking at a major portion of the building along with three prospective tenants within the greater Princeton area. In our opinion, the location is the preeminent site being developed in the greater Princeton area."
Reckson Associates Realty Corp., 51 JFK Parkway, Short Hills, NJ 07078. 973-313-3300; fax, 973-313-3301. Todd Rechler, corporate senior vice president.
At the same time that three new buildings are going up on Route 1, two very big blocks of space have gone on the market – the Technology Center of Princeton (the former Lucent property in Hopewell) and the former Rhodia property in Cranbury – and they will compete with the new Class A space on a price basis.
Even more hazardous to the health of the Route 1 buildings, some say, will be the developments to the south. Right next to I-95 in Ewing Township, Opus East is developing the Atchley tract, which it bought from Bloomberg (see Life in the Fast Lane, page 62).
More imminent: Brandywine Realty is leasing the vacated Lenox building on Lenox Drive and is moving swiftly to build on that property as well. Lenox Drive has excellent access to I-95 and appeals to companies with one foot in Philadelphia.
Milt Charbonneau of Colliers International represented the Lenox Drive owner, Kentucky-based Brown Forman, in the sealed-bid sale of the 90,000 square-foot building to Brandywine for just over $10 million. Lenox will be moving in the next couple of months to Bristol, Pennsylvania. Brandywine’s Steve Jennings is leasing the Lenox Drive property and the two speculative buildings that will be built behind it. Philadelphia-based Ewing Cole is doing the design.
Charbonneau is the son of a realtor who works for the Indianapolis branch of Colliers. He graduated in 1981 from Miami University of Ohio and worked for Colliers in New York before coming to New Jersey, where he works in the Somerset office and also in the new Princeton Forrestal Village office opened last fall by Doug Twyman.
With 1.2 million square feet of new construction, vacancy signs are hanging out in the neighborhoods of all three new buildings. An entire building emptied out when Bloomberg left the Forrestal Center, at least one floor at the Carnegie Center is looking for tenants, and Alexander Road is lined with vacancy signs. "The nay-sayers in our industry might say this proliferation of new product threatens to heighten the vacancy rate and flatten rents," says Twyman. "We prefer to view these events as new opportunities."
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