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NJ industrial and office markets are best in years.

The Society of Industrial and Office Realtors (SIOR) New Jersey Chapter has reported that the demand for industrial space in New Jersey has shown continual improvement since the uptrend started in the summer of 1993.

Office building vacancies also continue to decline in all areas. These moderate growth trends are anticipated to continue through 1997 due to continued economic expansion within New Jersey, and new construction is expected to accelerate for the first time in many years.

SIOR-NJ Chapter President Sam Farmer, executive vice president of Feist & Feist Realty Corp., moderated the annual press conference to debut SIOR's 1997 national market guide entitled Comparative Statistics of Industrial and Office Real Estate Markets. The guide gives a comprehensive analysis of industrial and office space activity in 1996 for more than 129 market areas in the USA, Canada and Mexico, and a forecast for 1997.

The report shows that industrial and office markets of the United States have passed through one of the most trying periods in their economic history. The worst of the pervasive vacancy problems that drove down property values and re-aligned the entire industry are now a thing of the past, the report concludes. Construction activity is starting to gather momentum in many areas throughout the nation. Commercial office buildings are easily capturing the highest share of real estate investment dollars, about 35 percent of recorded sales.

New Jersey Market Conditions

The overall vacancy in New Jersey at the end of 1996 was 8.2 percent for industrial, vs. 9 percent last year, and 16 percent for office vs. 16.3 percent last year. These compare to a nationwide 7.1 percent for industrial and 11.6 percent office. The importance of the New Jersey industrial market was stressed. The Northern New Jersey industrial market alone is the largest of all market areas in the USA, Canada, and Mexico, having about 1.5 billion square feet of total inventory.

New Jersey comprises 18 percent of the nation's inventory, so when the state inhales or exhales, the nation takes notice. The near one percent decrease in vacancy percentage represents 15 million square feet becoming occupied, which is the entire size of the Austin, Texas industrial inventory.

Industrials Continue Improvement

David T. Houston, Jr., SIOR, president of Colliers Houston & Co. of Teaneck, NJ, reported that Central New Jersey's Mercer, Monmouth, Somerset and Middlesex Counties continue to absorb most of the new industrial construction in the state, mostly very large distribution buildings. Due to the lack of land in the northern counties, Central Jersey will continue to experience the largest expansion of jobs, housing, industrial and commercial space in the future, he predicted.

Houston noted that adding 180,000 jobs in New Jersey since 1992 has helped fill the empty space, but said future improvement will not be so dramatic. The inventory of industrial buildings in New Jersey is becoming aged and most good buildings have already been picked; the remaining space being of lesser quality, he said. Houston predicted that the cost for smaller space will rise sharply in the coming months, and large warehouses will become scarce.

Roy Lucas, SIOR, senior vice president of James E. Hanson Co. of Hackensack, called the Northern New Jersey industrial market the "home of no growth." He disclosed that Northern New Jersey industrial vacancies had dropped to 8.5 percent, almost a one percent drop since last year, and the "bargains" are gone. While manufacturing continues its slow decline, the trend to rehab older facilities continues, especially into retail uses. Rental rates generally are $5.25 per square foot per year net, with sale prices around $50 per square foot, and predicted to rise very modestly in 1997.

With almost no new speculative construction a shortage of large warehouse-type buildings will soon emerge. Lucas urged the Port Authority and New Jersey to promptly complete the dredging of the Port Newark area harbors, which are critical to many industries in New Jersey.

Jeffrey Licht, SIOR, from the Mertz Corporation of Mt. Laurel, noted continued improvement in Southern New Jersey industrials, with vacancy down to 4 percent from the previous year's 5 percent. Over 800,000 square feet was built and one million square feet absorbed, and the motto for 1997 has become, "Build it and they will come," he said. A total of 1.5 million square feet is planned to rise this year and tax-free bonds are in progress for the 600 acre 5.7 million square-foot South Jersey Food Distribution Center. Prices now range from $3.25 to $4.75 net, and sales of quality buildings rose through the $30 per square foot barrier.

Offices Continue to Rally

Frank Clancey, senior vice president of George Mintz & Co. of Morristown, noted the strength of New Jersey office economy is evident, as over 100 buildings were sold last year for over $100 million to pension funds, Wall Street, and REITs. While 14 million square feet remains vacant in Northern New Jersey out of 83 million square feet total, but this 17 percent vacancy, down from 23 percent the previous year, is the first time vacancy has been below 20 percent since 1990.

Class A buildings dropped from 16 to 13 percent vacancy, and Class B buildings from 25 to 20 percent. Quality building rents in some areas have risen to $25 to $28 per square foot per year gross, with a $15 to $20 per square foot work letter, and rent concessions are almost history. The AT&T breakup led many to believe that much space would hit the market, but AT&T and Lucent Tech, its spinoff, had their most active year since 1983, renewing and leasing 2.2 million square feet of offices in New Jersey.

Developers with approvals and permits ready to go will be the success stories in 1997, and the corporate restructuring trend will continue, notably in telecommunications and pharmaceuticals, Clancey said. He summarized the market strength by noting. "The difference between a terrorist and a suburban office developer is that you can negotiate with a terrorist."

William Cariste, SIOR, partner of JGT of Woodbridge, in reviewing the office market in Central New Jersey, noted that 1996 saw 3.4 million square feet of office space absorbed, which was triple the 1996 rate. Overall vacancy ended at 13 percent, down a full six percentage points from last year. Class A buildings ended the year below 10 percent vacancy, and markets with very low vacancy rates (under 6 percent) include the Interstate 78 Somerset area, Monmouth County, Princeton, and Short Hills.

There are few big blocks of space left, which will put upward pressure on rental rates this year, Cariste predicted. Asking rents already are exceeding $20 per square foot per year gross, up $1.50 from 1995; work letters dropped from $20 per square foot to $10 to $15; and few rent concessions are being granted. Quality building prices are being driven up by the large amount of money from REITs and other institutional investors shopping to buy office properties, but new construction with borrowed funds will be impossible without substantial pre-leasing to reduce the lender risk, he concluded.

South Jersey office space vacancies fell to 19.8 percent, a modest improvement over last year's 20 percent, reported Stephen Segal, SIOR, president of Stephen M. Se-gal, Inc., of Lawrenceville. Class A vacancy dropped from 16.7 percent last year to 10.4 percent, but Class B vacancy remains stubbornly high at 21.5 percent. Absorption was 400,000 square foot, with Class A rents averaging $21.50 per square foot and Class B building rents averaging $17.75.
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Title Annotation:New Jersey
Publication:Real Estate Weekly
Date:Feb 26, 1997
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