Jerry Fennelly, president of NAI Fennelly.

The coronavirus pandemic has wreaked havoc on all aspects of the economy, and the commercial real estate market was no exception. Jerry Fennelly, president of Hamilton-based commercial real estate firm NAI Fennelly, notes in his June, 2020, market report that what was on track to be a spectacular year for the economy has been derailed by COVID-19.

“With demand shifting overnight due to the pandemic,” Fennelly writes, “Princeton saw an increase in work-from-home (WFH), a surge of temporary and even permanent job loss, and the demise of certain companies that could not withstand this sudden change; in essence, companies that were already on the edge due to nearly 100 percent consumer internet disruption.”

He notes that while demand for office space in the Princeton region slightly outpaced demand in 2019, 22 percent of new leases were rethought or put on hold as the pandemic bore down on the state. Additionally, he writes, “over 550,000 square feet of direct or sublet space was placed on the market between March and July, mostly on Route 1.”

One notable departure was the Los Angeles-headquartered, multinational engineering firm AECOM, which had been the sole tenant at 510 Carnegie Center. The company left the 234,000-square-foot, five-story office building in favor of a more decentralized and work-from-home-oriented model, a move Fennelly anticipates other businesses may emulate. “Working from home and decentralization will be implemented as COVID-19 strategies by multiple companies in Princeton and throughout the Northeast where the COVID-19 and social unrest were the greatest.”

But, Fennelly adds, the news isn’t all bad for the Princeton market, which still benefits from its location midway between New York City and Philadelphia: “Princeton may see the benefit as a safe, accessible location in the middle of the megalopolis with over 1 million workforce population available in a 45-minute drive. Princeton’s office economy is positioned to stay strong due to its central location between New York and Philadelphia and robust transportation in roads and trains connecting these two major metropolitan urban centers with the ability to attract the highly educated and talented diversified workforce (49 percent of the working population in Mercer County have a masters or PhDs).

“This migration of talented, educated workforce may bring some portion of businesses to Princeton from urban areas, and complemented by consistent international migration of pharmaceutical companies and existing corporate headquarters, will continue to solidify Princeton’s economic strength.”

Current circumstances notwithstanding, Princeton remains a “Research Knowledge Center,” Fennelly says, competing with the likes of Cambridge, Massachusetts, Silicon Valley and San Diego, California, and Shenzhen, China, for research talent. In the first half of 2020 the average office lease was 16 percent larger than the year prior, and 62 percent of growth came from the bio sector, followed by the medical sector at 21 percent, business and government at 6 percent each, and IT and sports at 5 percent, according to Fennelly’s report.

Reflected in these figures are several notable transactions.

Biopharma/Pharmaceutical/Chemical: Bristol-Myers Squibb, whose $72 billion acquisition of Celgene was finalized late last year, leased a total of 155,000 square feet of Class A space at 7 and 9 Roszel Road in West Windsor.

Additionally, two Chinese companies added space in central New Jersey. CSPC Pharmaceuticals leased 29,406 square feet of space formerly occupied by FMC Corporation at Princeton South Corporate Center in Ewing, and WuXi Biologics leased 65,758 square feet on Clarke Drive in Cranbury (U.S. 1, July 8). Otsuka, a Japanese pharmaceutical company, added nearly 19,000 square feet to its existing space at 506 Carnegie Center.

Geistlich, a pharmaceutical company based in Switzerland, also chose the Princeton area for its expansion to North America, leasing 11,000 SF at 902 Carnegie Center. The company, founded in 1851 as a glue manufacturer, is now a leader in regenerative dentistry.

Agile Therapeutics nearly doubled its space, moving from 7,000 square feet on Poor Farm Road in Princeton to 13,000 square feet at 2000 Lenox Drive in Lawrence. The women’s healthcare company, whose stock was recently added to the Russell 2000 and Russell 3000 indexes, is working on a form of hormonal birth control delivered via weekly patch. The product, known as Twirla, was approved by the FDA in February, at which point the company announced plans to hire a sales team to begin marketing the drug.

Sandoz’ 75,000 space on College Road West went on the market in June.

But the news was not all positive for pharmaceutical companies. Sandoz, based at 100 College Road West, put its 75,000 square feet of Class A space there on the market in June. The firm has been engaged in a protracted legal battle with pharmaceutical manufacturing company Amgen, who sued Sandoz for patent infringement over Sandoz’ drug Erelzi. Erelzi, approved by the FDA in 2016 for use in certain types of arthritis, ankylosing spondylitis, and psoriasis, is a biosimilar version of Amgen’s product Embrel. On July 1, a federal appeals court upheld a district court ruling against Sandoz, which had argued that the patents in question were invalid.

Medical: Fennelly notes that despite a new emphasis on telemedicine due to the pandemic, the medical industry still showed strong growth in the first half of 2020. “Growth in the medical industry showed good results despite shelter in place orders,” the report says. “There is an accelerating telemedicine strategy in most medical and psychiatry practices. For the medical practices, it was required for a doctor to stay connected for 15 minutes by video to collect insurance payment. Innovations in medicine are no longer just pharmaceutical but are now technological with remote medical apps for online medical care with the ability to monitor diabetic and coronary tracking (telemedicine).”

But medical practices are still adding to their physical spaces. “Medical continues to go into new high identity locations with Capital Health leading the expansion charge by opening two locations, one in downtown Princeton and one in Lawrenceville, each for 7,000 square feet,” Fennelly writes. “This complements a total dominance strategy of Capital Health completing its new 70,000 square foot medical arts building in Bordentown and its recent purchase of a 55,000-square-foot hospital at 280 Middletown Boulevard in Langhorne, PA. Capital Health’s acquisition strategy continues with the purchase of Medical Associates of Hamilton and subsequent 5,000-square-foot relocation to shadow the new Walmart on Nottingham Way in Hamilton.”

“In order to stay relevant to patients, medical practices are seeking new and easily accessible locations with new state-of-the-art patient experiences,” Fennelly notes. This is reflected in Capital Health’s new office in Princeton, which will be at 300 Witherspoon Street, the former home of the Princeton Packet that has been vacant for some years. The building was acquired by Helena May in 2016 for $2.26 million, and Capital Health will occupy 7,000 square feet there beginning in January, 2021.

Internet/Software/Electronic & Fiber: “This category experienced 19,531 square feet of growth in the first half of 2020,” Fennelly writes, but “software development and AI companies’ demand for office space may be slower due to the accelerated work-from-home and the lack of the need to have office space except to build company culture.”

Frauscher Sensor Technology, an Austrian-based laser technology company with its North American headquarters at 300 Carnegie Center, leased 3,969 square feet at 21 Roszel Road in West Windsor.

Education/Government/Non-Profit: “This category grew by 47,894 SF in the first half of 2020,” Fennelly reports. “The General Services Administration (GSA) was the most active with three transactions: the FAA relocating from Mercer Airport for 10,000 square feet in Ewing, the Marshal Service leasing 8,000 square feet in Robbinsville, and the GSA leasing 5,312 square feet in South Brunswick at 5 Independence Way.”

Also of note is Princeton University’s acquisition of 600-619 Alexander Road, of which it will occupy 16,000 square feet.

But in general, Fennelly notes, “nonprofits struggled under the pandemic as their fundraising strategies went virtual leading to lowering revenue.”

Investment Properties: Though interest rates are low, a pandemic is not the easiest time to invest in real estate, Fennelly reports. “Investors saw the opportunity of low interest rates (2 to 3 percent) if they could get lenders to loan into real estate. Tenants in all categories went into survival mode, deferring rent payments for three to four months, causing financial institutions to stop lending into office and medical real estate in some cases.”

Nonetheless, there were six sales of medical office buildings. The 1.2 million square foot former Bristol-Myers Squibb campus in Hopewell sold for $31,250,000, and 23 Orchard Road in Skillman, a 225,000-square-foot office building, sold for $8.6 million. “These two sales were considered distress value sales,” the report notes.

145 Witherspoon Street in Princeton sold to an investor for $2.3 million.

Windsor Corporate Center, a 297,000-square-foot multi-tenanted office building 75 percent leased in East Windsor, sold to SFA in Moorestown for $26 million. 4250 Route 1, a 40,000-square-foot multi-tenanted single-story office building sold for $5.35 million, and the new owner-occupant, Advantage Voice & Data, brings the building to 100 percent occupied. 145 Witherspoon Street, a 7,600 SF multi-tenanted leased office building near downtown Princeton, sold to an investor for $2.3 million.

Fennelly predicts that demand will remain high “in the medical office field near major medical centers, while traditional offices may see lower demand and potentially lowering rents with increased capital expenses. This lowering effect will happen in secondary or remote locations resulting in a decrease of values as demand goes to newer primary locations or work-from-home strategies.”

What remains to be seen is whether the trend toward working from home will persist beyond COVID-19. Fennelly notes: “These strategies were implemented over 28 years ago with a small percentage (8-10 percent) of the workforce utilizing this approach prior to COVID-19. Overnight, work-from-home increased to 100 percent, leading to an immediate downsizing reaction of companies and placing of over 550,000 square feet of office space onto the market between May and June.

“What will be the amount of office workforce that continues to work from home after COVID-19? Estimates are that 20 to 30 percent of people will work from home one or two days per week, and companies will implement staggered shifts of specific teams bringing employees into larger, more socially distant workspaces two to three times a week.

Uncertainties notwithstanding, Fennelly is optimistic that companies will continue to see Princeton as an appealing location.

“This decade, from 2010 to 2019, millennials were the sought-after employee displacing the Baby Boomers. The millennials sought urban city living, life without a car, 24-hour environments fueled by the increased need to be closely connected to digital, young, educated talent. Well, age does a funny thing. The millennials, who top out at 39 years old, who originally delayed marriage and kids, now may have a spouse and child living in an urban area in a small, expensive 700-square-foot apartment amongst 8 million people in a crowded city such as New York or even Philadelphia.

“There has been a trend over the last 36 months of migration out of urban areas into coastal suburbs. The pandemic has accelerated this trend with New Jersey seeing the benefit. Suburban sprawl, open areas complemented with ease of transportation by car or train, is now more desirable. According to Zillow and Redfin, both are reporting surges in single family home sales in smaller cities or towns in New Jersey. The companies keeping their employees happy and safe will also follow the workforce, albeit fragmented, with multiple strategies to minimize risk.

“Companies and financing from across the globe are coming to Princeton to invest in and compete in biotechnologies, Artificial Intelligence (AI), laser and supercomputing technologies. The continued challenge will be to attract, recruit, and retain a diverse population of highly skilled bio scientists, molecular scientists, gene therapy scientists, photonic engineers, and computational researchers. Why will Princeton benefit?

“Low cost compared to cities. The average office rent in New York City is $70 per square foot while centrally located Princeton is $27 per square foot.

“Four colleges, four hospitals, numerous dedicated research facilities and think tanks make over 40 percent of the working population with MBAs or PhDs servicing the dominant pharma, medical, and education organizations that make Princeton their home.

“The greater Princeton area is a global bio, photonics research region and will have vacancies of 19 percent or greater for the next 12 months. We anticipate demand in the second half of 2020 to be approximately 300,000 square feet of office 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 pharmaceutical brands.”

NAI Fennelly, 200A Whitehead Road #222, Hamilton 08619. 609-520-0061.

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