Poor prognosis for N.J. office market

<i>Aside from Jersey City, northern region seen as 'flat as a pancake'</i>

Thwarted by corporate defections to the Sun Belt, the highest property tax rate in the country and lackluster economic growth, office vacancy rates in northern New Jersey remain high — and rental asking prices remain stunted.

In addition, except for Jersey City (which is mopping up overflow from Manhattan), the prognosis for the rest of northern New Jersey is another year of lackluster performance.

“The office market is flat as a pancake,” said David Houston, the president of Colliers Houston, a commercial real estate consultancy in Teaneck, N.J.

Overall, 32 million square feet of office space remains available in northern New Jersey, and the overall vacancy rate sits at about 12 percent, similar to where it stood in 1992. The statewide vacancy rate for Class A space is even higher, at 18 percent.

Much of the state’s office space is sprinkled throughout suburban office parks that mushroomed throughout the region in the ’80s, when New Jersey’s economy was humming. Rents for those types of spaces in northern New Jersey have been hovering in the mid- to upper $20s per square foot. Rents are higher in Jersey City, in the mid-$30s per square foot.

The rents for space in downtown Newark have remained the same as the suburbs.

Research from Colliers Houston estimates that New Jersey would have to cut its unemployment rate, currently at 4.3 percent, by 3 percent in order to fill its vacant office space.

Brokers aren’t holding their breath, particularly since the jobs that are being created aren’t in fields that require much office leasing. Currently, most office buildings in New Jersey are occupied by financial services firms and pharmaceutical companies; telecommunications firms, once a sizeable presence, are no longer significant leasers.

About 80 percent of new jobs in northern New Jersey are either retail or government jobs, according to the Colliers Houston analysis.

At 18 percent, New Jersey’s Class A commercial vacancy rate is 6 percent higher than the national average, said James Hughes, dean of the Bloustein School of Planning and Public Policy at Rutgers University.

Brokers say vacancy rates are high because many prospective companies are turned off by the isolation, sterility and heavy traffic of suburban office parks, a type of development that saw 140 million square feet built in the ’80s.

“No one will move their people here,” Hughes said. “The rest of the country has seen the office vacancy rate going down.”

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While state leaders have been debating tax relief for commercial property owners, experts say these efforts might only temporarily stem the tide of white-collar defections instead of addressing more fundamental economic issues.

Some suburban markets have been doing better than others: Office space located along metro rail lines have fared marginally better. Mitchell Hersh, CEO of Mack-Cali Realty Corporation, a real estate investment trust that controls 23 million square feet of office space throughout New Jersey, said Morris, Union and Bergen counties, along with the Jersey City waterfront, have healthy markets with comparatively lower vacancy rates.

Indeed, Houston Colliers said it recently brokered a deal in Westfield in Union County that will see a financial services firm pay $45 per square foot. Houston said interest in commercial space in Westfield, Summit and Ridgewood was keen, and that each of these communities has a limited amount of office space.

When it comes to office development, the challenges facing the pharmaceutical industry are impacting building in some areas.

Hersh said the Princeton area and Somerset County, home to many pharmaceutical companies, are lagging in growth of commercial space.

“The pharmaceutical industry has not expanded as rapidly. The growth has been slow,” said Hersh.

If there is one bright spot on New Jersey’s commercial space landscape, it’s Jersey City. Yet — after years of building — no new commercial construction is presently officially planned. Goldman Sachs, which built the state’s tallest building, an office tower on Jersey City’s waterfront, said it plans to fill the remainder of the building by the end of the this year.

There had been concerns that the investment banking colossus was having trouble filling the space.

The company received approval in July to build a second tower, a $560 million, 30-story office building that would house employees from New York. A Goldman Sachs spokeswoman said the company has not made a final decision on the project.

Another area where the picture looks bright for development is Parsippany, New Jersey’s third biggest office market, which appears to be strong enough to support speculative office projects with no tenants lined up in advance (see this month’s New Jersey in brief).

Still, while brokers foresee lean times ahead for some parts of the state, many remain upbeat about an eventual turnaround for their state’s commercial market.

“The one thing that can benefit New Jersey is spillover from Manhattan,” said Hughes. “At some point companies see a doubling of the rents in Manhattan and will have no choice but to relocate.”