NJ investment market getting very competitive.

The Northern New Jersey Office Investment Market, which with over 140 million square feet of space is one of the largest office markets in the country, is now very competitive for both tenants and investors.

The overall vacancy rate statewide is approximately 13 percent, but in prime submarkets it is less than 10 percent. Competition between tenants has intensified as the availability of quality space has dramatically declined. Additionally, there has been a substantial increase in property values over the past 12 months, with fully leased Class A office buildings in prime locations typically selling at prices ranging between $170 and $200 per square foot, which reflects capitalization rates between 8.5 and 9.5 percent. Well leased Class B buildings have been typically selling between $80 and $120 per square foot, with capitalization rates between 9.5 and 10.5 percent.

A significant factor affecting the Northern New Jersey marketplace is that many of the insurance companies have disposed of most of their direct property investments, resulting in a significant reduction in the amount of investment property for sale in the market. Investors are therefore having to become more flexible and creative in respect to their acquisition criteria in order to source opportunities.

With the buoyant investment market, there are now very few opportunities remaining to purchase under-valued real estate. According to an Alexander Summer L.L.C. report, some opportunistic funds that purchased vacant or substantially vacant buildings just two years ago are now selling their fully-leased assets at premium prices and achieving significant profits.

Another significant trend over the past 12 months has been the rush to acquire and redevelop large vacant office buildings. This approach provides a faster, cheaper and less risky way to deliver new product to the marketplace as compared to new construction.

The Northern New Jersey investment market is being dominated by REITs. Out-of-state REITs are now entering New Jersey in a very aggressive manner, adding competition to the state's existing major REITs, such as Mack-Cali and Reckson. The REIT action is targeted towards UPREIT transactions, which provide private sellers with substantial tax advantages. Many of the REITs have also formed development relationships with local developers as a means to source new opportunities, given that existing investments are in short supply.

The opportunistic funds are now adopting higher risk profiles by looking at development, secondary markets and secondary property opportunities. Also, numerous local investors and developers have formed alliances with capital sources to target Class A and Class B opportunities, and those with smaller capital values.

Overseas buyers, who have traditionally not focused on New Jersey, are also now very active in the marketplace. These investors favor Class A buildings with net leases to BBB credit tenants, and in some cases have outbid the REITs. More recently, these overseas buyers have relaxed their investment criteria in order to obtain product.

Pension funds are currently having a tough time competing in the market, however many have adopted a longer term view of investment opportunities and begun to fund speculative development. Many have also become more flexible in the financing of their purchases, considering joint ventures with owners.

Our prediction is that Wall Street money will continue to dominate the market for the foreseeable future, with REITs being the driving force. Given the short supply of product however, the activity will shift to development in the form of alliances with their subsidiary companies. We also expect that the activity will shift to Class B properties and secondary markets, with build-to-suit and speculative development being the center of attention in prime markets. Property values will continue to rise, although at a slower rate, with rental rates rising. The anticipated increase in rental levels will in turn be a significant factor in driving up property values.

Alexander Summer's business philosophy is to focus on clients' needs and to build long term relationships by delivering superior results through responsive service. With offices in Paramus and Morristown, the company covers the office and industrial markets in Northern New Jersey. Alexander Summer provides its clients with the full range of real estate services, including agency brokerage, tenant representation, sales and acquisitions, as well as comprehensive property and asset management services.

Alexander Summer continues to seek and recruit additional dynamic salespeople with both real estate and other diverse backgrounds. For further information, contact Douglas H. Haynes or Mark Twentyman at the company's Morristown office at [phone].