NJ office and industrial markets will grow with regional economy.

Conditions in New Jersey's office and industrial real estate markets continue to reflect the state's strong economy, with unprecedented demand, low vacancy rates and significant amounts of new, quality product coming on-line. More than 13 million square feet of of office space was leased during 1999, a 33.6 percent increase from year-end 1998. And in the industrial sector, 26 million square feet of leasing and 5.4 million square feet in user sales accounted for 31 .4 million square feet of total activity, a 25.7 percent gain from yearend 1998. As we head into 2000, the commercial real estate outlook remains positive.

Office Outlook

The New Jersey office market has been on the upswing since 1993, and healthy demand continues without signs of wavering. When will it end? Real estate and business professionals alike have been asking this question for years. Yet the bottom line remains that in a market as well managed as this one, activity can be positive indefinitely, even if it does not continue at a break-neck pace.

One of the most unique aspects of our current situation is that we do not have a threat of over-supply. Developers today need "real money" in order to build. In the late 1980's, lenders often awarded loans based on the future value of a property. However, the banks and financial institutions, having learned from their past mistakes, have assumed a conservative stance even in light of the booming market. The estimated 3.7 million square feet of office space currently under construction is spread throughout the state, with concentrated pockets on the Hudson County Waterfront and I-287/78 corridor. And as long as development requires substantial amounts of equity, the market will remain balanced.

Most experts would agree that the biggest "news" in the New Jersey suburban office market has been the powerful emergence of Jersey City. Demand in the Hudson County Waterfront has been unparalleled during the past 12 months, and the momentum continues. The best illustration is LeFrak's Newport Office Center. The 567,000 square-foot Newport Office Center III was 100 percent leased within 10 months of its ground-breaking. And Insurance Service Offices (ISO) preleased 392,000 square feet of the 785,000 square-foot Newport Office Center IV even before steel arrived on the job.

Elsewhere in the state, vacancy rates remain low across the board. Financial services tenants, technology firms and pharmaceutical companies continue to be among the most active players in the market when it comes to leasing activity. Their demand for top-quality space has driven pricing near to the $30 per square foot range. As a result, Class B space has experienced aggressive leasing as well as closing rental rates. Even the lowest end of the market has had a healthy boost in value.

On the investment side, the dominance of REITs has slowed, and we are seeing more new buyers funded through pension funds and investors pulling together various capital sources. With fewer active players in the market, the competition for properties has diminished to an extent. Yet real estate sales remain impressive, and those investors seeking new acquisitions continue to bid aggressively, keeping prices elevated for both Class A and B properties.

What will the Year 2000 bring to the New Jersey office market? Skeptics may contend that in this cyclical industry, all good things must come to an end. However, those of us who recognize the positive benefits of today's conservative approach would say that the outlook remains positive in light of current activity levels and the well-gauged progress of new development.

Industrial Outlook

On the industrial side, real estate experts are also seeing historically high activity levels. A shortage of large properties that can service the needs of users looking for quality space in the state have resulted in something approaching 10 million square feet of requirements from the burgeoning Exit 8A submarket into Pennsylvania's Lehigh Valley:

At the end of the 1999, approximately 20 warehouse/distribution projects are awaiting approvals from town planning boards in the Exit 8A market alone. The largest development awaiting approval is Heller Construction's 3.9 million square-foot speculative complex off Ridge Road in South Brunswick. As a result of this tremendous growth, demand has started to shift to other nearby areas, such as Sayreville to the north and Hamilton Township to the south.

To provide for more quality space, obsolete industrial facilities across the state continue to be renovated and converted into office/high-tech space. A prime example is Cambridge Hanover's plan to renovate the S.B. Thomas English Muffin bakery on Riverview Drive in Totowa into high-tech space. In Parsippany, Wellsford Commercial Property Trust is transforming the former Estee Candy warehouse into a 250,000 square-foot, Class A office building.

From an investment perspective, the most significant development in the industrial arena was Keystone Property Trust's $300 million acquisition of 28 warehouse "Big Box" properties from Reckson Morris. Tenants such as Nestle, Coca-Cola and McCormick Spices are part of the acquired portfolio. The Pennsylvania-based REIT acquired 6.1 million square feet of space and 111 vacant acres throughout the state. The firm now controls 6.5 million square feet and 370 acres of land statewide, making it the largest public industrial warehouse landlord in New Jersey.

Shifts within the corporate world are also influencing the future of New Jersey's industrial market. Maersk's $800 million acquisition of Sea-Land Services - which formed the largest shipping line in the world - will expand the entity's second largest port in the U.S., located at Port Newark in Elizabeth. Maersk will begin to operate a new, 350-acre joint terminal in 2003 - greatly increasing container capacity for the region as more ships will be docking at the facility. The merger will strengthen the port's presence as a major Northeast cargo hub. In addition, The Port Authority will conduct a major dredging project. As a result, major warehousers, logistical firms and other industrial companies should remain entrenched in the region for years to come.

Ultimately, current developments within the industrial sector all contribute to a highly positive outlook for New Jersey's industrial market well into the next decade. Parts of Central New Jersey, in particular, will continue to shine, defined by impressive levels of new construction to meet the region's unprecedented, growing demand.