First quarter results point to further growth for NJ.

The first three months of 2005 brought encouragement to New Jersey's office real estate market, according to Christopher Kinum, executive managing director of Cushman & Wakefield of New Jersey, Inc. Still, concerns continue to delay what industry professionals would consider a true recovery.

In the following Q&A interview, Kinum and three senior brokerage professionals from Cushman & Wakefield's New Jersey offices in East Rutherford, Parsippany and Iselin weigh in on the state of real estate. They include Robert Donnelly, executive vice president, Parsippany office; Joseph Sarno, senior director, Iselin office; and Jeffrey Heller, executive director, East Rutherford office.

What positive signs have you seen through the first few months of the year?

Kinum: More general activity in the marketplace, stabilizing absorption and vacancy rates, and noticeable pockets of improvement reflect that the market continues to hold its own. The unemployment picture in New Jersey is very positive, at 4.4 percent in February compared to the national average of 5.4 percent. In general, we are seeing more shoppers in the marketplace, but whether or when they will become buyers or tenants remains to be seen.

What factors are holding them back?

Kinum: The continued uncertainty surrounding oil and oil prices continues to be on corporations' minds, whether or not the commodity directly impacts their bottom line. They are hesitant to make decisions with the general volatility in the domestic and global communities.

What tenant groups are most active?

Sarno: Activity today is being driven by the financial services, insurance companies, and, certainly, the biotech and pharmaceutical industries. Technology tenants, which have been a staple for New Jersey, remain under the radar. If they rebound at all, we could see a big turnaround year.

Has activity changed commensurate with improving economy?

Sarno: Recently, we have observed a significant--and important--shift in corporate thinking. During the past several years, the soft market has prompted many tenants to renew leases rather than commit capital to relocate to a different space (for many large corporations, the cost to move an operation often exceeds $100 per square foot).

Management is beginning to embrace the savings they can achieve on a long-term basis by relocating to more efficient space. A prime example involves Citistreet, which has recently taken occupancy of 147,000 square feet at 400 Atrium Drive in Franklin Township this spring. The lease, which was one of the largest signed in the state last year, secured a long-term presence at one of the finest Class A buildings in the Franklin Township submarket--at an extremely attractive rental rate.

Where are New Jersey's office hot spots?

Heller: The Route 24 Corridor is excelling. The region from Short Hills through Florham Park has vacancy rates in the single digits--cut in half from one year ago. Advance Realty Group's Park Place in Florham Park is an excellent case study within this market. The 350,000-square-foot Class A corporate campus went from 30 percent occupied at the beginning of 2004 to 95 percent leased today. Other marquis deals in the market over the past 12 months have been BASF, Maersk, Daiichi Pharmaceuticals, Odyssey Pharma and Altana Pharmaceuticals. Further, investor interest is evolving commensurate with the market, with a growing list of institutional players including JP, Reckson and Wells buying properties.

Additionally, the Princeton market, which currently enjoys a single digit Class A vacancy rate, remains active with two speculative projects under construction totaling more than 480,000 square feet. Currently, Princeton is the only submarket in northern central New Jersey to have spec construction.

Which areas continue to struggle?

Heller: The Route 78 Corridor has been one of the State's underachievers. It had experienced very little leasing velocity, with the notable exception of Citigroup's 817,000-square-foot commitment at Warren Corporate Center last year. Yet moving into 2005, we are seeing signs of life on the corridor. Activity at Class A properties like Bridgewater Crossing in Bridgewater, for example, has increased markedly. And based on the fact that most large blocks along Route 24 and in Parsippany are being absorbed, activity naturally will increase along Route 78.

Citigroup's lease seems to have paved the way for other large leasing activity ...

Donnelly: Major 2004 deals like the Citigroup lease and BASF's commitment to 250,000 square feet in Morris County have led the way to the early successes of 2005. The largest lease thus far involved Cadbury Schweppes, which committed to 134,000 square feet of headquarters space in Parsippany.

In Jersey City, Societe Generale-French Bank and IXIS North America have subleased and leased 92,000 square feet and 71,500 square feet, respectively. Two other large deals have closed in Warren Township, with Verizon Wireless taking 64,000 square feet and Cordis Corporation taking 45,800 square feet. These deals certainly help the market. We expect several other, unnamed tenants to execute major transactions that will further improve the picture during the coming months.

Looking forward, what will the rest of 2005 bring for the office market?

Heller: Through 2005, I don't foresee any major shift but do anticipate slow, steady economic improvement, which will lead to job creation and ultimately space absorption. Recent corporate commitments to the State such as Verizon, Sanofi Aventis and Citigroup will continue to stabilize the market and diversify the State's business base.

Donnelly: Certainly, conditions are becoming healthier. Quality space is disappearing quickly, and rental rates are beginning to move a bit. With some of the area's largest availabilities being absorbed, there will be fewer opportunities for major transactions in the near-term. However, BASF's former headquarters' facility in Mount Olive still represents a great opportunity for a single user to acquire more than 500,000 square feet of high-end office space in Northern New Jersey.

Our hope is that during 2005 the employment picture will improve and cause the job growth needed to spur more leasing activity and velocity--particularly in the mid-level range, which traditionally has driven this market.

Sarno: Improvements in Central New Jersey are worth watching. The region ended 2004 with positive absorption for the first time in many years, and nearly 575,000 square feet of space was absorbed in the first quarter of 2005 alone.

Considering how well the New Jersey real estate industry performed last year despite the lack of a rebound within the technology sector, things bode well for 2005. We certainly have a more robust pipeline of business than at the end of the first quarter last year.

Kinum: Perspective is important. New Jersey is doing better than other areas of the country, and the positive signs of economic recovery and job growth are very real. As such, we realistically hope that vacancy rates will decrease and rents will escalate through the remainder of the year.