Real estate market hinges on governmental success.

A mixed economic picture, increased out-of-state-competition and other challenges face the New Jersey commercial real estate industry as we get ready to enter a new year. How will the market fare in 2007? In the following Q&A interview, Michael McGuinness, executive director of the National Association of Industrial and Office Properties, New Jersey Chapter (NJ-NAIOP), reflects on the industry's current state and the many factors that will influence its performance during the next 12 months.

What are the biggest challenges New Jersey will face in 2007?

Recent reports from economists have painted New Jersey's economic climate gray. This past summer, the Rutgers Bloustein School issued a report that found the state's unique concentrations of technology-based economic specializations (high-paying jobs in the manufacturing and service providing sectors) have started to contract.

Additionally, the unemployment rate in New Jersey recently crept up to the national average, while pharmaceuticals are no longer growing at a desirable rate and high-paying jobs continue to diminish. Amidst these challenges, the Lehigh Valley is marketing itself as "Wall Street West" while Nevada is advertising in New Jersey publications to lure businesses away.

How is the new administration responding?

Governor Corzine has appointed an economic growth czar, Gary Rose, to spearhead efforts to market New Jersey in a better light and to oversee efforts of business attraction and retention through implementation of the Economic Growth Strategy. We are very supportive of the Governor and Gary Rose in their efforts to improve the sagging business climate in New Jersey and make our State more hospitable to business.

A number of major policy proposals and initiatives (i.e., property tax reform, government reform, redevelopment, Brownfields cleanups, COAH and other impact fees) are currently being deliberated that will directly affect our State's ability to grow its economy. The proliferation of land use and business regulations (i.e., soil cleanup standards, stream buffers, and prevailing wage) may chill prospects for business development, if their negative impacts are not tempered. This is a very telling time for our State, and NJ-NAIOP has weighed in on some of these important issues.

Within this context, what's the outlook for the office market?

Although the economy is slowing, it is still growing. In the office sector, rental rates are flat and rents will most likely remain steady for the foresee-able future as there are still some significant vacancies. Nevertheless, landlords are attracting tenants with impressive improvement packages prompting increased movement among an increased number of tenants in the markets. Users are now less inclined to own than rent.

What areas will perform well in the coming year?

Continued growth is expected along the Hudson waterfront and Newark metropolitan region, given the tightening Manhattan market and lure of cheaper space alternatives. Growth is also strong in other central business districts and in the Princeton-Route 1 submarket.

How is the industrial market faring?

On the industrial side, things are hot. Overall, vacancy rates are in the 8.5% range as demand is strong, but product is limited. Most facilities are trading at 15% to 25% above replacement cost. With a continued increase in cargo movement in the Port of New York and New Jersey expected for a number of years as imports from manufacturing facilities offshore in Asia surge, the demand for warehouse distribution facilities will remain strong.

Where is the most industrial activity taking place?

The construction of new product is mainly concentrated in central New Jersey. Nevertheless, savvy developers will continue to find value in repositioning older industrial facilities/ sites into alternative uses. Once again, Middlesex County is leading the entire region in activity with Hudson and Mercer Counties close behind.

What will be the most interesting sector to watch in 2007?

Mixed-use projects are strong and gaining in popularity as a result of both market forces and government policies that are aimed at conserving open space and reducing traffic congestion. People look for greater convenience and reduced car dependence. Multifamily and retail investments are both hot with rent growth in the former category in the 8% to 10% range over the last 12 months.

Will the investment market continue at its extraordinary current pace?

The 2007 "Emerging Trends in Real Estate" that was released in October 2006 by PricewaterhouseCoopers LLP and ULI highlighted a number of findings relating to the investment market, including: (1) Investors will need to rely on asset management skills to boost leasing and rents in the absence of cap rate compression; (2) Capital will continue to pour into real estate markets, but at more restrained volumes due to lower return expectations; (3) Transaction levels are becoming less frenzied as pricing favors sellers over buyers; (4) Lenders will tighten underwriting standards.

Looking ahead, what does New Jersey need to do to keep commercial real estate on track?

The future health of commercial real estate in New Jersey seriously depends on how successful government, at all levels, is in competing with never-ending competition from other states, cutting expenses, improving transportation infrastructure, and supporting land use patterns that promote economic growth that is appropriate to each region and produce jobs. Only in this way can our state secure its economic future.