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Pockets of activity in lackluster NJ market.

On the surface, it may appear that New Jersey's office market is at a standstill. However, tenants are continuing to vacate class 'B' space in favor of better quarters. The result is some shoring up of one tier of the market at the other's expense.

Although the level of available office space remains at a fairly constant 25 million square feet or just over 19 percent, there has been a notable shift within the market. Activity in Class A buildings is counterbalanced by a growing amount of Class B and C space coming back onto the market.

For example, in the past 12 months, while 1.1 million square feet of Class A office space was leased, the glut of Class B and C space increased by 1.7 million square feet. The supply of 100,000 square foot and over blocks in. premier quality buildings is dwindling to the point where seven of the state's 21 market segments have none available. Another six market areas have just one such block to offer larger users.

However, prices for this space remain 20 to 30 percent below the rents of the late 1980's and are not rising for a number of reasons. Primarily, there is a large oversupply of B space which could be renovated. Another reason is that larger users will consider a greater number of markets to obtain A product at a reasonable price making it unlikely that markets with a dearth of high quality space could take advantage of the standard laws of supply and demand.

Construction of new space has ground to a virtual halt. In 1992, just 1.2 million square feet of space -- none of it speculative -- came on line, according to our Fall/Winter Gordon Office Market Report. This compares to an average addition to the market of 8.6 million square feet annually during the peak years of 1982 through 1988. It is likely that some build-to-suit construction will result as the last large blocks of A space are absorbed. However, since this is a more costly and time consuming process, it is likely that well located, renovated B space will take a prominent position in the planning process.

According to our statistics, the disparity between markets within the state is quite large with availability rates ranging from below 7 percent in the Route 287/78 interchange market to close to 30 percent in the Waterfront market segment. The Waterfront submarket also captured some major tenants from New York last year, absorbing some 960,000 square feet.

The major stumbling block in the way of the state's office market regaining its previous healthy gains is high unemployment. Until these numbers improve, we can expect the office market pricing to continue its stagnation at current low levels.

Over the long term, however, the picture is brighter for both office and industrial property owners. New Jersey still has one of the lowest corporate tax structures; the highest percentage of college-educated workers; a clear geographic advantage at the center of the Boston/Washington megalopolis; and the continuing strength of some of the state's leading industries such as pharmaceutical, biomedical products, health and home care goods and services and telecommunications.

As the new administration takes charge and its efforts to revitalize the economy develop, we can expect to see changes in the status quo of the state's office markets ... so long commitment to improve our infrastructure is maintained.
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Title Annotation:More Review & Forecast; evaluation of office leasing industry in New Jersey
Author:Bermingham, Thomas V.
Publication:Real Estate Weekly
Date:Feb 2, 1993
Previous Article:Changing the face of real estate.
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