NJ retail review and forecast.

Vacancies in community, neighborhood and regional strip centers that contain more than 130,000 square feet and in retail facilities that lie along major retail corridors continued to decline in 1995 to 7.8 percent. Rents within these markets vary, but in every market asking rents increased 10 to 20 percent.

Several new retailers which entered the state during this time period include Computer City, Crate & Barrel, Sneaker Stadium and BOB's. These stores were able to fill the voids left by Rickel Home Center, as well as locations which were being vacated by several supermarkets, including Acme Foodmarkets and A&P, because the stores no longer fit their current square-footage criteria.

During the year, there was two million square feet of new retail space developed. The largest of these projects include a Kmart and ShopRite anchored center on Route 9 in Marlboro; a ShopRite anchored center on Route 206 in Hillsborough; and Wal Mart anchored centers in Washington Township and West Windsor.

The instability that began to permeate the retail industry during the last quarter of 1995 will continue to carry over into 1996. Retailing giants which fueled the growth of New Jersey's retail development such as Jamesway, Caldor, Bradlees, and Kmart, and to a lesser extent, Petrie Stores and Shoetown, will begin to close locations throughout the state, leaving large blocks of stores available. These locations will not be re-let by the new retailers which are entering the State, such as Wal Mart and Target, because the store dimensions and square footage do not fit the prototype needed. Since very few retailers can fill these big boxes, this will lead to an increase in the overall vacancy rate that may not be absorbed for several years.

We will also continue to see major supermarkets vacate locations with less than 40,000 square feet, as they relocate to modern full-service stores of 50,000 to 65,000 square feet. Vacancy rates will rise above 10 percent, with strong competition evolving among developers seeking to attract the few big-box retailers that will be left.

Major highway locations will still be in demand, especially in buildings which can be divided into units of 10,000 to 35,000 square feet. Vacancy rates in these locations will remain low, with rents stabilizing at current levels. While we expect turnover in tenancy to occur along the Route 17 corridor in Paramus, there is enough demand to fill the voids and maintain rental rates of $20 to $25 per square foot, which will remain among the highest in the State. Along Route 22 in Springfield and Union, the addition of Computer City, BOB's and Linens 'N Things, along with the delivery of Sports Authority in the first quarter of 1996 and the start of construction of Price Club and Home Depot, will further strengthen this area, leading to increased rents.

In Princeton/Lawrenceville, Eatontown and the Hanovers, we do not foresee any significant turnover, since many of the retail projects in these areas tend to be newer, with the retailers experiencing strong sales volumes.

The rise in vacancy rates will not diminish the continued development of retail centers throughout the state. There are over three million square feet of new projects approved which have lease commitments from anchor tenants and are ready to commence development in 1996. Some projects which had lease commitments from Caldor and Kmart are on hold, but many of these projects are well-located and will attract either Target or Wal Mart as the anchor. The largest of these new projects are a 400,000+ square-foot center in Piscataway, a 650,000 square-foot Wal Mart and Home Depot anchored center in Phillipsburg, and a 400,000+ square-foot center on Route 22 in North Plainfield. This does not include the million square feet which will be developed in Elizabeth, just off the Turnpike.

The new projects will be developed by national development companies that have the capital resources required to start these projects. Many lenders who were bullish on retail development at the beginning of 1995 have begun to re-evaluate their criteria as we head into 1996. Lenders will seek a higher percentage of preleased space to financially stable retailers, as well as require more equity on the part of the borrower. However, the demand to place more dollars into real estate in 1996 could force interest rates to lower for strategically-located strong-tenanted centers.

John Orrico Senior Vice President/District Manager Grubb & Ellis New Jersey