400 and 600 Atrium Drive in Somerset — Courtesy: EverWest Real Estate Investors
By Joshua Burd
Developers are on track to remove nearly 9 million square feet of obsolete office space in New Jersey, as they repurpose the sites with in-demand uses such as industrial and apartments.
Those are among the findings of new research by CBRE. As the report noted, the pandemic has only worsened the prospects for owners of dated, less functional office space, but developers seem increasingly willing to convert and seize new opportunities for those properties.
CBRE tracked more than 8.6 million square feet of office conversions in the pipeline in the state. That includes 4.4 million square feet slated to become residential space, 2.3 million square feet for industrial projects and 340,000 square feet mixed-used developments.
“Even as updated, well-located and highly amenitized buildings remain attractive, a growing collection of commodity office space holds less appeal and faces steep competition for future tenancy,” CBRE’s Brian Klimas and Nicole LaRusso wrote in the report. “Many owners of these lesser office buildings have begun to reassess the highest and best use of their assets, taking note that other classes of real estate — industrial, residential, life sciences — are seeing increased demand amid the pandemic.”
According to the firm, much of the repurposing is clustered in more affluent parts of the state with proximity to interstate highways, such as the area around interstates 287 and 78 and suburban Essex and eastern Morris County. The report cited projects such as the conversion of the Lanidex East site in Parsippany, which has been approved for 600 residential units, and 400 and 600 Atrium Drive in the Somerset section of Franklin, which are slated to become a two-building, 426,000 industrial campus.
The trend comes as office demand remains below well pre-pandemic levels and as more sublease space has hit the market this year, according to CBRE. That has fueled a spike in the availability rate in New Jersey to 24.6 percent as of midyear, the highest level since the 2008 financial crisis.
Those office tenants that have been in the market over the past 18 months are leaning toward newer or substantially updated properties with a long list of amenities, such as Somerset Development’s Bell Works campus in Holmdel or Prism Capital Partners’ ON3 complex in Nutley and Clifton.
All the while, the surge in e-commerce and continued demand for luxury apartments in New Jersey has caused a spike in land prices for both asset classes, the report said, making redevelopment an increasingly viable option.
“A robust trend of office repurposing can potentially do for the suburban New Jersey market what it did for Lower Manhattan after 9/11 and for Westchester County over the past 10 years, where significant office conversions helped reduce the vacancy rate and increased average asking rent in both markets,” the report’s authors wrote. “CBRE expects the flight to quality trend to continue in the (New Jersey) office market, leading more office owners with outdated office assets to pursue repurposing over the next few years.”