Northern and Central NJ office market prospers.

The Northern and Central New Jersey office market experienced one of its strongest years in recent history in 1996. With more than 140 million square feet of inventory, the area has been characterized by low vacancy rates and high levels of activity. As a result, year-end absorption totaled nearly 2.6 million square feet.

Numerous company expansions and relocations within the market led to the fifth consecutive year of increased demand, and the market's highest level since 1990. Availabilities decreased by 4.1 million square feet, and the overall office vacancy rate ended the year at 16.4 percent, the lowest level in more than a decade.

This activity has sparked an increase in effective rental rates, as well as considerable reductions in concessions and workletters. A substantial increase in asking rental rates is expected during 1997.

The majority of activity in 1996 involved Class A properties, resulting in a significant decline in available space in that sector. And, with positive trends expected to continue, secondary buildings are likely to command a larger share of market activity in the coming year.

Renovations of buildings in prime locations will also increase.

The pharmaceutical industry generated a significant portion of the year's activity, including two of the top five lease transactions. The most significant lease involved Hoescht Celanese which pre-leased a 207,727-square-foot office building in Somerset County now under construction and scheduled for completion in early 1997.

During 1996, construction reached 737,451 square feet, its highest level in more than three years, including three office buildings started as speculative projects. This trend results from user demands for modem, technologically sophisticated facilities. One of the largest speculative projects involves a 240,000 square-foot facility currently under construction in the Somerset 78 corridor, where the Class A vacancy rate was just 7.3 percent at year-end.

During 1997, additional construction is expected in the state's premier office markets including the Hudson County Waterfront, Princeton and Parsippany submarkets. Land sites in the region are regaining value as existing product becomes increasingly scarce.

Investor purchases in Northern and Central New Jersey rose to 9 million square feet in 1996, with an additional 2.3 million square feet of transactions pending completion. Combined, these total nearly $1 billion in sales activity for the year. Institutional investment accounted for more than 61 percent of the activity. The largest investor acquisition during 1996 involved the Cranford-based Cali Realty Corporation's purchase of the 1.8 million square-foot Harbor-side Financial Center in Jersey City.

We expect 1997 to be characterized by continued strong growth in the region as many of the large pending transactions reach completion and construction projects poised for ground breaking commence. In addition to increased activity, we expect continued upward pressure in pricing, particularly in certain market areas. All signs are positive for a very active coming year.

Industrial Market

Following a healthy 1995, the Northern and Central New Jersey industrial market experienced stable market activity, an increase in new construction, and its highest rental rates of the decade. At the same time, the market saw a significant rise in supply, as companies continued to re-evaluate their industrial strategies in the region.

The trend toward efficiency and profit maximization has led to a consolidation of facilities within the warehouse industry. Several large blocks of space have become available including 11 blocks greater than 300,000 square feet. Among them, Procter & Gamble Co. returned 610,000 square feet to the market when it consolidated and relocated its New Jersey operations to out-of-state.

The demand for modem warehouse space and high-tech facilities has resulted in stepped-up construction activity. This includes three million square feet, a 17 percent increase over last year. One of the most prevalent trends in New Jersey's industrial market is toward speculative construction, which accounted for 64 percent of the total. In addition, the market has witnessed significant customized build-to-suit facilities for such companies as Playmobil and Amway.

The high-tech niche also performed very well during 1996. Supply remained low, and market activity topped three million square feet, driven by several companies relocating to and expanding within the area including MSNBC, Anadigics and Federal Express. In one of the most significant high-tech sales, Gale & Wentworth purchased 299 Webro Road in Parsippany. The firm subsequently leased 146,400 square feet there to PNY Electronics on a long-term basis.

Institutional interest for industrial product continues to grow as REITs and pension fund advisors attempt to capitalize on the long-term potential in the region. One of the largest transaction of the year occurred when AMB, a Boston-based pension fund advisor, purchased the 670,000 square-foot former Phelps-Dodge facility at 169 Docks Comer Road in South Brunswick. Activity is expected to remain strong in this segment during 1997, as investors continue to expand their presence in the market.

Another trend, the outsourcing of warehouse management, has become increasingly common in the Northern and Central New Jersey marketplace. The drive toward efficiency has prompted companies to focus more on their core business, helping third party logistics companies to expand their presence. In one of the largest transactions m 1996, Exel Logistics, serving as a public warehouser for BASF, leased 419,000 square feet at 155 Raritan Center Parkway in Edison.

During 1997, we expect these positive trends to continue. And, despite the overall supply increases, the Northern and Central New Jersey industrial market has the momentum necessary for it to begin to stabilize.