Key to understanding New Jersey lies in its submarkets.
In primary markets such as the Route 78 corridor, Jersey City, and the Edison-Woodbridge corridor (primarily, Metro-Park), demand for office space remains so high that some corporate tenants continue space banking, taking more than they currently need to ensure that they'll have enough when they expand later. Vacancy rates are. maintaining a 6 to 8% range.
But in secondary markets such as the Route 287 corridor -- Franklin, Piscataway and South Plainfield -- and the Route 280 corridor -- Roseland, West Orange, and Hanover--some corporate tenants are starting to put office space back on the market. For the last five years, our clients' requests that we find sub-tenants were few and far between. In the last month alone, our Iselin office has received seven such assignments. The prospective subleases were not huge, but they are conspicuous by their presence. We should note that this softening -- which puts vacancy rates at about 9.4% -- comes against a backdrop of a market that was so hot and tight that it lacked precedent. We currently view the pullbacks as a reduction of heat, rather than an actual cooling off.
Nonetheless, there is a notable difference between the primary and secondary markets. In large part, the secondary markets have fallen victim to the last in/first out phenomenon. They fill up after all the space in the primary markets is taken, and whenever softening occurs, they are the first .to see space returned to the market.
Whatever softening has occurred in the overall statewide market has served only to bring it closer to historical norms, in which vacancy rates are in the range of 9 to 12%. Statewide, the office vacancy rate, 8.3%, is still below norm.
Besides the slight overall softening, there is another factor that appears to be contributing to a lessening of demand and an increase in supply.
In significant and growing numbers, traditional office tenants throughout New Jersey are increasingly taking a tack different from their norm of seeking the Class A towers. They are opting instead for high-tech flex space, a one-size-fits-all hybrid that can meet the office, industrial, storage, light assembly, and research and development needs of businesses. Their reasons are threefold: Class A office space is expensive, it is frequently unavailable at any price, and traditional office build-outs result in tenants paying for common areas, such as shared bathrooms, elevator banks, mechanical rooms and lobbies. High-tech flex buildings -- marked by one or two floors, large windows, manicured grounds and ample parking -- have no common areas and no wasted space. Inside, they offer the high ceilings, heavy floorloads, and loading docks that industrial tenants require, making them all things to all tenants.
Sensing the market shift, developers and owners are making. hundreds of thousands of square feet of high-tech flex space available, both by building new product and by converting old warehouses. In the nine counties that comprise northern and central New Jersey alone, 10 low-rise flex buildings totaling almost 900,000 SF are being built, converted, or planned.
Reasonable people may differ on where New Jersey's overall office market is headed, and even where the various micro-markets will go. The hot-and-tight primary markets appear to be a reflection of an economy that remains fundamentally healthy. And the softening we've seen in the secondary markets is probably a healthy phenomenon, the sign of a longtime unbalanced market correcting itself. Whether it's just a matter of less heat or the start of an actual cooling off will mostly be revealed over the next two quarters. We, along with everyone else in commercial real estate, are watching with a keen eye.