By Joshua Burd
Smaller deals are increasingly driving New Jersey’s office market, a new report finds, raising the prospect of unchanged overall vacancy and flat rents in the near term despite an otherwise healthy economy.
The research by CBRE found that leases smaller than 10,000 square feet have been on the upswing since 2013, a trend that is on pace to continue. Through the end of the third quarter, deals of that size had already reached 581 for this year, surpassing the year-end total for 2017 and setting a new high water mark.
Meantime, the real estate services firm said 2017 marked a five-year low in the number of transactions over 50,000 square feet. In contrast with small deal activity, that number is set to decline even further through year-end, meaning large blocks of available space will continue to weigh on the market.
“The combined impact of too many large blocks and not enough large-block demand suggests that the market is likely to see the current availability and rent levels persist,” said Rémy P. deVarenne Jr., a senior vice president with CBRE. “Changing the trajectory of the market will require reducing the oversupply of space and realigning available inventory to better meet the demands of current and future tenants in the market.”
The report by Nicole LaRusso, William Bender and Steve Gardner, who are part of CBRE’s tristate research team, notes that New Jersey office fundamentals have remained largely stable over the past five years despite statewide job growth, a declining unemployment rate and stronger local and national economies. Availability has ranged in a narrow band between 20.5 percent and 21.8 percent, while rent growth of 9.7 percent has been less than half of the 20.7 percent growth rate for the U.S. overall.
This decline in large transactions has led to an overall decrease in total leasing activity in recent years, CBRE said, also noting that many large blocks are outdated and misaligned with the occupiers’ current or future needs, which further exacerbates the problem.
Meantime, the report highlighted an impending shortage of spaces to satisfy smaller tenant requirements in New Jersey. The researchers project that 194 potential new transactions will take place in the fourth quarter of the year, with only 277 currently available blocks of 10,000 square feet or below to accommodate that demand. “Landlords are frequently reluctant to break up larger blocks of space for a variety of reasons and despite an obvious potential solution, small tenants may find themselves facing a dearth of desirable suites in the sizes that they need,” the report said.