Anticipating growth in the NJ office market.

As the New Year begins, New Jersey's office leasing market continues to show the same steady, but limited, growth experienced throughout the last 24 months.

The overall vacancy rate for Northern and Central New Jersey, which hovered near 19 percent at year-end 2004, has registered no change since last year at this time.

The one main difference is that we have enjoyed economic growth, some three to four percent, and the Federal Reserve has projected the same rate of slow progress through 2005.

Within this context, the New Jersey office market has performed reasonably well. Although average asking rentals have not increased, they have stabilized and rest at $25.24. Additionally, the sublet market has diminished. Several companies, including Aventis, have back-filled space they had made available. A number of subleases also have contributed to the absorption of indirect availabilities. In general, this is good news for the competitive market because there is less lower-priced sublease space available. The downside is that some of the remaining space is running out of term, which places pressure for the landlords who must shoulder the resulting lack of income.

Economic growth has not yet resulted in a huge number of new jobs in New Jersey, yet we did see some white-collar job creation in 2004. The resulting increased activity among tenants reflected strongly in Morris County, where eight lease deals in excess of 50,000 square feet and more than 2 million square feet in leasing occurred during the year. BASF trimmed its space requirements yet remained within the county, leasing nearly 250,000 square feet in Florham Park and Rockaway. Daiichi Pharmaceutical Corporation leased 141,000 square feet, and Maersk leased 115,000 square feet at the Giralda Farms complex in Madison.

Supporting this activity, migration to metropolitan centers such as Newark and Jersey City waned in 2004 as compared to recent years, with tenants and investors showing a preference to relocate and seek assets in suburban regions. This trend also contributed to a strong leasing year in Central New Jersey, thanks largely to Citigroup's 817,000-square-foot lease in Warren Township. The company, which received a $52 million grant from the states' Business Employment Incentive Program (BEIP), will relocate 1,600 employees from Manhattan and is expected to create an additional 650 jobs here.

Looking ahead, New Jersey's core tenant groups will continue to drive the health of the office leasing market. Our state benefits from its established position as one of the nation's leading life sciences hubs.

Yet while biotech and pharmaceutical firms are among the most desirable tenants, they do face a unique set of challenges. As a case in point, with the $3 billion drug Vioxx being pulled off the market, Merck will not show growth in the coming year. Still, a constant stream of promising new drugs is coming out of other established and up-and-coming companies.

Our life sciences tenant base will fluctuate in the near term, with companies like Bayer Environmental Science and Yamanouchi Pharma America announcing their relocations out of state.

Still, New Jersey's tremendous labor pool continues to attract new life sciences players.

Additionally, the state government has taken a much stronger position to retain the companies that are here. We expect out-of-state demand to continue unabated in 2005. This will have a positive impact on New Jersey's traditional pharma corridor, from Princeton up through the center of the state.

The service industry, including law, accounting and other firms, remain New Jersey's secondary tenant core. This sector continues to experience health and will provide consistency in the market through 2005. The telecom core, which has contracted considerably during the past five years, still constitutes a reasonably strong part of our tenant base as well.

Currently, no new office construction is underway in Northern New Jersey, and just two projects totaling 180,000 square feet are underway in the Central part of the state.

Despite a number of approved projects, we do not expect many construction starts in 2005--unless significant pre-lease commitments fall into place. In the long term, this conservative approach will enable a faster and healthier recovery.

At the same time, we do expect several corporate-owned campuses to grow significantly larger in the near future. In Hopewell, Merrill Lynch is currently in negotiations with township officials to rezone an additional 200 acres to build another one million square feet of office space on its 440-acre campus, and

Janssen Pharmaceutica is eyeing an additional 800,000 square feet of new office space on its Bear Mountain Road facility in Ewing Township.

Major commitments from these and other tenants reflect the bottom line that New Jersey is a great place to do business. Companies located here benefit from strong population growth, an outstanding labor base, and desirable accessibility and infrastructure.

We anticipate that 2005 will be a year of growth for the New Jersey office market, punctuated by continued demand from companies seeking to establish and expand in one of the northeast's most attractive business environments.

CHRISTOPHER KINUM, EXECUTIVE

MANAGING DIRECTOR

CUSHMAN & WAKEFIELD, NJ