By Real Estate NJ
What does the year 2017 have in store for the commercial real estate market?
We can’t say for sure — and we know you can’t either — but we asked some of the industry’s top professionals in New Jersey to give it their best shot. In the process, we’ve tried to bring you a good cross-section of experts from different disciplines.
Here’s what they had to say:
Ron DeLuca, CEO and Principal, R.J. Brunelli & Co. (Old Bridge)
The growing trend of nontraditional uses in retail centers shows no sign of abating. Health clubs continue to expand, while we also see more movement with uses like trampoline centers, such as Urban Air Trampoline; entertainment centers, such as Pinstripes — Bistro, Bocce, and Bowling and Cinemax Theaters; medical facilities such as emergency care and dental centers and even public storage facilities.
New tenants seeking entry or additional penetration into the New Jersey market include Sierra Trading Post, a TJX concept, Metro Diner and such grocery concepts as Food Emporium, Uncle Giuseppe’s Marketplace and Ranch 99. Fast food and quick serve restaurants that are expanding include Checkers in urban settings, Blaze Pizza, Urban Brick Pizza, Chick-Fil-A, Chipotle, Dunkin Donuts, Starbucks and Panera Bread.
Big box tenants anticipated to continue expansion include Cost Plus World Market, Costco, Hobby Lobby, Floor and Décor, Whole Foods and Nordstrom Rack, to name a few.
Other concepts to continue with strong expansion include: 7-Eleven, Dollar Tree, The Max Challenge, DSW, Massage Envy and Pet Supplies Plus.
Significant new developments in construction or planning stage include Chimney Rock Crossing, a roughly 218,000-square-foot project in Bridgewater; Freedom Pointe at Fort Monmouth, a mixed-use project with about 350,000 square feet of retail, plus office, hotel, entertainment and residential; Montgomery Promenade, a multiuse site including 270,000 square feet of retail; and The Shoppes at Middletown, with 340,000 square feet including Cinemax, Pet Supplies Plus and Spirits Unlimited already committed.
Lori Grifa, Partner, Archer & Greiner (Hackensack)
(Editor’s note: This submission was published before the state Supreme Court issued a ruling on affordable housing on Jan. 18.)
The state Supreme Court, which heard oral arguments on the scope of towns’ obligations to provide affordable housing on Nov. 30, 2016, will render a decision. The housing advocates and New Jersey Builders Association argued that the state’s municipalities could not claim an exemption from the obligation to provide affordable housing because there were no valid regulations in place from 1999 to 2015. A number of municipalities and the League of Municipalities, arguing on their behalf, argued it was unfair that they should be held to any obligation while the legal issue was before the courts.
The state Supreme Court will have the final say. The losing side will be very unhappy.
The state Legislature will not fix the problem in 2017, nor will it make any meaningful efforts to do so. There are three reasons for this:
- 2017 is an election year and the entire Legislature is up for grabs. This issue is legally complex and politically volatile. Although it shouldn’t be — who could be against safe and decent housing for people that need it — no incumbent will be prepared to embrace it in an election cycle.
- Writing and passing legislation on an issue this legally complex is hard. Affordable housing has been given constitutional protection by the state Supreme Court and there are 40 years of court decisions to accommodate and reconcile with any new law. If it was easy, it would have been done already.
- The executive branch has offered a strong precedent for inaction. When the governing regulations first expired in 1999, Gov. Christine Todd Whitman took no steps to readopt or revamp them. In 2000, then acting Gov. Donald DiFrancesco stayed the course. Elected in 2002, Gov. James McGreevey did not prioritize this issue and no new regulations were adopted. Gov. Richard Codey finally oversaw the adoption of new regulations in December 2004. Four lawsuits were filed against the 2004 regulations on the day they were adopted. The issue has been up and down in the courts ever since.
In the absence of legislative action, judges will continue to referee the issue on the local level.
William C. Hanson, President, NAI James E. Hanson (Hackensack)
Analyzing the trends that powered 2015-2016’s industrial real estate market provides a glimpse of what 2017’s market will hold. In 2016, due to large, high-profile deals with e-commerce retailers like Amazon, significant demand stimulated extensive new development and repositioning of existing assets across New Jersey, specifically northern and central New Jersey.
This has created a heightened sense of demand and activity in the marketplace. As we look to 2017, we’ll see some potential oversupply as newly constructed and repositioned properties enter the marketplace and the large deals that powered 2016’s high growth begin to slow. I don’t foresee the 2017 industrial market having the same growth as it has enjoyed over the past two years, but it will continue to be a strong sector and industrial space will still be a good commodity in the new year.
Jeffrey L. Heller, Principal and Managing Director, Avison Young New Jersey (Morristown)
The New Jersey commercial real estate market is a tale of two cities. The industrial market is white hot, as demonstrated by positive net absorption (11.7 million square feet) and new speculative construction (9.6 million square feet). The office market, on the other hand, has stagnated with high vacancy rates (15.9 percent) and limited net absorption. These trends are forecast to persist throughout 2017 and new administrations on both the national and local levels will add even more uncertainty to projections.
The New Jersey industrial market is demonstrating the “perfect storm” of limited inventory and strong occupier demand, leading to rental growth. Amazon’s growing presence is the sector’s most significant development and the hottest markets remain the Newark port and Interstate 95 corridor. Meanwhile, the office market is plagued by low employment growth, coupled with a limited number of new companies entering the state and others exiting. Moving forward, older office properties will likely be repositioned to compete and hot spot markets will continue to be the waterfront, Metropark and other quasi-urban transit hubs.
Other sectors are a mixed bag. E-commerce continues to transform the New Jersey retail environment as big box stores, as well as mall and strip center occupiers, reduce their footprints. On the investment sales side, though overall volume has dropped since 2015, retail, multifamily and industrial sales remain robust for local and institutional investors.
Brian Hosey, Regional Manager, Marcus & Millichap (Saddle Brook)
Many owners are listing their properties with us now because they believe the market is topping out. They want to take advantage of the aggressive pricing and get ahead of any uncertainty heading into 2017. I don’t think we’ll see a major downturn or slowdown in commercial real estate in 2017, but I foresee a small correction, especially in the more secondary and tertiary markets, where we might see cap rates expand slightly. I also think we’ll see some slight downward pressure on pricing. The spread between the bid and ask could get wider, as owners price their properties higher than buyers will be willing to offer. Now is a great time to sell, however, because we are seeing very aggressive pricing and a strong lending environment.
I think buyers will continue to take advantage of this lending environment and have opportunities to invest in deals that will yield a better return in New Jersey than in Manhattan or Brooklyn. So we’ll see more buyers and money leaving Brooklyn and heading to the northern New Jersey market in 2017.
Sonny Jumani, Partner and President, Tulfra Realty Co. (Rochelle Park)
From what we’re seeing on the ground, 2017 is shaping up to be a fantastic year. Municipalities around the state are in dire need of higher ratables, improved properties and, particularly with the new administration, a redoubling of efforts on bolstering job creation. We already see major activity in self-storage, medical offices, hospitality and service retail. We are extremely optimistic about the New Year and we will focus on expanding our portfolio with a goal of acquiring $15 million in new land development deals. We think the red hot market will also enable us to sell $30 million of existing, fully rented buildings. Our enormous resources will open up all kinds of opportunities and we look forward to partnering with brokers and owners as well as other members of the real estate community. Get ready!
Jeffrey Otteau, President, Otteau Valuation Group (Matawan)
2017 is shaping up to be another good year for New Jersey’s real estate markets despite the state’s ‘worst in class’ economic performance in 2016. Those real estate sectors that are attached to the new ‘sharing economy,’ like apartments and warehousing, will continue to lead the way in terms of demand growth and pricing power. At the same time, positive momentum in home sales, retail space and office buildings is likely to carry over into the New Year with continuing positive net absorption.
Looking ahead, prospects for relaxing regulatory constraints on the financial industry and lowering corporate tax rates could provide the secret sauce that’s been missing from our economic equation. While this could also lead to rising interest rates, keep in mind that any decision by the Fed to raise rates would be symptomatic of a brightening economic future.
Sectors that are most at risk of a slowdown in 2017 include home sales, due to the prospects of higher interest rates, retail space, as online shopping takes a bigger bite out of consumer spending, and hotel occupancies, due to the accelerating pace of new construction. But any weakening in these sectors will likely be slow in developing, with minimal downside in the year ahead.
Joseph Orefice, Head of CRE Lending Investors Bank (Short Hills)
Investors Bank is forecasting that loan originations over the next 12 months will likely decrease from 2016 levels. While the size of the pie is getting smaller, which means the volume of CRE loans has temporarily peaked, the number of banks competing for financing transactions continues to increase.
A few factors are influencing CRE loan growth in New Jersey. The biggest factor is interest rates, which have recently moved upward. A rising rate environment can impact financing availability and will generally reducing the leverage available. In turn, this can affect the rates of returns and valuations for real estate investors, causing apprehension and reducing the volume of transactions.
A second factor is regulation and its negative effect on institutions. For example, recently many area banks have tightened lending parameters in large part due to concerns of regulators. Again, the financing available now will fall short of lending programs available over the past two years.
The good news for developers is that New Jersey’s real estate market has seen significant stabilization in its retail and office markets, as well as growth in multifamily. The economic forecast appears to be bright and this will translate to positive real estate values in the future. So even with some pressure by regulators and on interest rates, New Jersey’s banks believe in the market, have strong capital positions and want to continue to drive growth through lending.
Peter Reinhart, Director, Monmouth University Kislak Real Estate Institute (West Long Branch)
I expect 2017 to be impacted by higher interest rates and the uncertain but potentially positive impact of a White House and Congress controlled by the same party. The industrial sector should continue to do well, as more businesses shift to logistical behavior that supports speedy deliveries to customers. The large amount of CMBS that will need to reset in 2017 may have some impact, but it will not be major. The for-sale residential sector will continue to be challenged to find available land opportunities, while the adaptive reuse of many older structures will continue. The multifamily apartment sector will continue to do well, but likely at a more moderate pace. Cap rates in that sector should level off. Transit-oriented development will continue to do very well. The momentum toward solving the Hudson River crossing problem needs to gain steam and the Port Authority decisions on the Port Authority bus terminal need to be resolved.
If the new president and Congress can agree on an infrastructure investment strategy, there could be significant growth in spending there that should bolster the economy. A wildcard would be the need to close a tunnel if structural concerns become dire.
John Sartor, CEO and President, PS&S (Warren)
Several factors will drive the commercial real estate market in 2017 and beyond. Strong demand
for multifamily housing continues in transit-oriented North Jersey, and cities and TOD communities that have been preparing for residential investment will be rewarded with continued multifamily and mixed-use growth. In South Jersey, we see increased demand for office space, particularly in Gloucester and Burlington Counties. The combination of easy access to Philadelphia and the lack of available land in central and northern New Jersey make that area particularly attractive for commercial growth.
A wide range of adaptive reuse concepts for underutilized suburban office parks will come into play next year. Also, densification of certain corporate office parks will be revealed in 2017.
Commercial retail will follow the urban/town center trends with strategic growth. Industrial growth along the I-95 corridor will continue in 2017. Overall, well capitalized investors will sustain real estate growth in 2017.
Debra Tantleff, Founding Principal, TANTUM Real Estate (Jersey City)
For quite some time now, most conversations about real estate have been defined by migration to large cities. As those markets continue to experience various degrees of saturation, we will see a return to incentives, normalization of leasing velocity and stabilization of rental rates. Growing attention and investment will be focused on replicating the urban experience in secondary markets, particularly in smaller, scalable communities with walkable downtowns and ample access to public transportation.
Additionally, significant affordable housing obligations will put local municipalities in a position where they must embrace the efforts of developers seeking to create dynamic mixed-use and mixed-income redevelopments. Through this perfect storm of market dynamics, timely government mandates and an unyielding desire for urban locales, these “urbanlite” communities stand to be the market’s biggest beneficiaries in 2017.
Kevin Welsh, Senior Vice President, CBRE (Saddle Brook)
There was significant growth in New Jersey office investment sales in 2016, with approximately $2.6 billion in year-to-date sales (as of November 2016) and an additional $200 million projected to take place before the end of the year.
The 2016 sales include 10 property sales greater than $75 million, with five of those being trades of single-tenant buildings that have set records in terms of cap rates in the mid to high 5 percent range and in the sale price range of high $400 per square foot to low $500 per square foot. These single-tenant building trades are reflective of the investor demand for long-term investment-grade leases in the highest-quality buildings, with increasing rental rates creating secured yield and annual appreciation.
We’re also seeing strong investor demand for trophy quality office buildings in urban environments with exceptional mass transit infrastructure and easy access to New York City — specifically, in the Waterfront and Newark.
The recent high-profile trade of Panasonic Corp. of North America’s headquarters in Newark is the perfect example of the single-tenant lease with urban-based investment profile in the highest-quality building.
Looking ahead, the potential of increasing interest rates, as evidenced by the recent 50 basis point increase on the 10-year Treasury since the election, is cause for uncertainty for investors.
However, positive momentum has clearly taken hold since the election, evidenced by the rapid rise in the equities market based on the anticipation of lower taxes, deregulation and much stronger economic growth. This will also likely have a positive impact on the real estate capital markets and the psychology of investors in the first half of 2017.
Kevin Wolfer, CEO and President, Kennedy Funding Financial (Englewood Cliffs)
Change is coming. With the new administration’s promise to ease lending restrictions in 2017, it opens up all kinds of opportunities for real estate borrowers. First, there will be more borrowers looking for loans, so the universe gets larger. With more people in the marketplace, there will be more competition in the lending environment and for that reason, despite an anticipated bump in interest rates, it will most likely keep rates low.
We think that it will still be somewhat challenging to easily secure a commercial real estate loan, as lending requirements will be tougher than they used to be. That bodes well for bridge lenders. Real estate owners and investors will continue to look to private lenders for short-term money — until they can secure more permanent funding. That especially holds true for land since conventional lenders will rarely lend on land. And because we can provide millions faster with less red tape than the others, we think that will continue to make the difference for lenders like Kennedy Funding in the New Year.