NAIOP NJ Michael McGuinness
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Release Date: Monday, January 20, 2014

Media Contact: Evelyn Weiss Francisco (201) 796-7788

Commercial Real Estate 2014 Outlook: On the Upswing, But Room for Improvement

Disparities Remain Between Sectors and Markets

By Michael G. McGuinness, CEO, NAIOP New Jersey

Jan. 20, 2014 – Going into 2014, New Jersey’s commercial real estate industry has clearly improved post-recession, but with disparities from sector to sector and submarket to submarket. Industrial, for example, is hot, with rising rents and significant activity. Urban office is also on the upswing, responding to changing demographics and lifestyles, but the suburban office market continues to struggle. And there are age factors relating to the population, the infrastructure, building stock and what’s termed the “municipal mentality.”

Overall improvement notwithstanding, the marketplace has not reached its full potential. Developers and investors have yet to demonstrate confidence in the projected levels of demand over the next three to five years, due in no small part to uncertainties at the federal level concerning the debt limit, tax policy and other fiscal measures.

One key national trend, however, is increasing international trade spurred by the Panama Canal expansion and, in the tri-state area, raising the Bayonne Bridge to admit the new generation Panamax vessels. That is boosting demand for industrial space near New Jersey’s ports.

At the state level, 2014 will start off with a new legislature and new term for Governor Christie, and while the focus on economic recovery is expected to continue, the agenda has been clouded, at least for the near term, on unrelated controversy and partisan politics. That said, job growth has been on the upswing, especially with the September 2013 passage of the Economic Opportunity Act (EO13), which will certainly energize the growth of small- and medium-sized businesses. That is especially true for non-urban transit center communities and the Southern New Jersey markets that were previously below the qualifying thresholds for incentives.

Two other factors in New Jersey’s favor are the growing trend of “re-shoring,” with manufacturers returning to the U.S. because of rising production costs and quality control issues abroad, as well as simplicity and financial incentives; and the growing production of domestic crude oil and other energy sources, creating more jobs in the refining and energy sectors.

The aftermath of Super Bowl XLVIII on February 2, 2014 stands to benefit commercial real estate, not only from showcasing the region as a destination for investment, but also tied to accelerated investment in upgrades to the state’s aging transportation and logistics infrastructure. Among the projects are the aforementioned Bayonne Bridge project, as well as rebuilding the Pulaski Skyway, improvements to the Goethals Bridge, and micro-grids to harden the power systems.

Regarding the workforce, a key issue is affordability — specifically, the need to provide more affordable housing as a means to attract good paying jobs. Along the same lines, transportation is our life blood, and the stars are finally aligning in New Jersey’s favor in terms of the industrial and supply chain industries. With gas prices stabilizing and perhaps headed below $3 per gallon, the public should support a dedicated user fee/gas tax to provide reliable funding for this critical resource to keep people and goods moving.

In terms of commercial real estate sectors, New Jersey’s industrial market, as mentioned, is strong, with rising rents, significant sales activity and speculative development anticipated for 2014 as inventory dwindles. Indeed, investors are now favoring the U.S. industrial market to the European, Asian and Canadian markets. For New Jersey, vacancies are currently slightly more than 11% overall.

One driving factor is that the modern consumer loves buying things online (e-commerce) and from mobile devices (m-commerce), as evidenced by the fact that e-sales are up 13% over last year. The fact that e-commerce is anticipated to grow at a 9% compound annual rate in the years ahead will make a strong driver for “big boxes” and the next generation of high-ceilinged, advanced technology and labor-intensive distribution centers — such as Amazon’s new facility in Cranbury. New Jersey, in fact, is ideally situated given its proximity to multiple markets, nearness to millions of customers, attractive financial incentives, workforce quality and availability, supporting infrastructure and proximity to UPS and FedEx hubs.

In the office sector, for sub-markets that include urban centers and transit CBDs, the Class A market is tight, with single-digit vacancies in both Jersey City and Newark. A game changer has been rapidly changing demographics evidenced by the 95 million “millennial plus” generation between ages 10 and 32, attracted by the urban, walking, everything-in-one-place lifestyle. This demographic should be the focus of all future public policy formation and decisions, since it has the potential to radically alter the commercial real estate landscape.

Indeed, flexibility, live/work/play environment, easy access, purposeful jobs, economic security and diversity are what motivates this group. Government leaders should clearly be focused on doing what it takes to attract and retain young talented professionals to take root in their communities, as this will make it more attractive for businesses to do the same.

In contrast, the suburban office market has seen better days, partly because of the attraction of urban locations, as well as the fact that suburbia’s historic drivers — the professional, business and financial service industries — have not been seeing significant job gains lately. Add to this the recent trend in corporate downsizings and restructurings, and the result is that New Jersey is still dealing with overall average office vacancies of 20.1% (north), 17.7% (central) and 16.9% (south). Within these three regions, vacancy ranges from a low of 10.5% in Burlington County to as high as 28% in Somerset County.

Those numbers include numerous buildings constructed during the 1970s and 1980s that are now functionally obsolete and vacant. There has been substantial talk about conversions to other uses, notably health care and residential. Some CRE professionals have even joked about converting vacant office buildings into warehouse/distribution centers.

With respect to the obsolete building stock — and municipal mentality — New Jersey needs better tools to facilitate redevelopment and adaptive reuse to help kick-start local economies that are starving for revenues. Liquor license reform and rezoning to encourage mixed-use are two direct ways to energize these communities to be more family- and youth-friendly.

And for offices in general, while private sector job growth continues to increase overall, the amount of office space per worker continues to decrease with growing interest in intelligent buildings and workplaces favoring mobility and collaboration. Nevertheless, vacancies are expected to decrease slightly in 2014. Rents will remain relatively flat in the year ahead, with real growth not occurring until 2015. Leasing activity, which has been on the rise, will continue to accelerate in 2014 with significant growth among smaller users, where hiring is on the rise for the technology, computer services, health care and life science sectors.

On balance, commercial real estate’s short-term picture is a bit brighter than a year ago. But, as mentioned, New Jersey is suffering from an aging crisis – a graying workforce, antiquated transportation and utility infrastructure, and both an obsolescent building stock and municipal mentality. These are big challenges, but ones that with some conviction, courage and cooperation can be met by implementing some practical solutions.


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