By Joshua Burd
Office tenants in New Jersey are still flocking to new or upgraded buildings, but the ability for landlords to deliver Class A space could be slowed by the loss of state business incentives.
Brokers and other market experts have said as much in recent weeks, following last month’s expiration of the Grow New Jersey tax credit program. The subsidy has often been integral to deals at buildings with large-scale improvements or at high-profile adaptive reuse projects, meaning some owners could now think twice about investing in major renovations.
“I think they are crucial,” said Tim Greiner, an executive managing director with JLL, referring to the incentive programs. “They’re an important part of allowing a tenant to spend the extra money to upgrade, which is allowing landlords to then spend the money to invest in their assets.
“If nobody was moving, you wouldn’t see the investment in our supply and we would have older, beat up buildings that nobody is actually willing to spend the capital to move to,” he added. “So I think it’s a necessary part of our economy, just because it’s so expensive to be here in New Jersey, relative to other states.”
Grow New Jersey lapsed on June 30 after Gov. Phil Murphy and state lawmakers could not agree on legislation for new incentives. The end of the program and the lack of a clear successor has loomed over the commercial real estate market going back to last year, and Greiner believes that “the uncertainty for the past several months has had a negative impact on velocity.”
There is little doubt that tenants have increasingly favored amenity-rich, higher-end buildings. According to JLL, the northern and central New Jersey office market notched more than 692,500 square feet of positive net absorption in Class A buildings during the second quarter, accounting for the largest volume of quarterly absorption in nearly three years.
A large portion of that volume was fueled by activity across several top office locales, including the Newark, Princeton, Route 24 and Interstate 78 submarkets.
“We’re optimistic that good buildings are seeing leasing and seeing good activity,” said Greiner, JLL’s head of agency leasing in New Jersey. “And those owners that invest in their product, that are creating the experience that tenants want for their employees are going to lease.
“Despite the still-elevated vacancy rate, there’s activity. And that activity is almost entirely focused on better, upgraded product.”
The importance of both modern space and tax incentives was on display in one of the largest deals of the second quarter. Genmab, a biotech firm, recently leased 90,000 square feet at the former Bristol-Myers Squibb campus in Plainsboro, whose owner is now slated to add new amenities to further enhance the campus.
The tenant is making the move from West Windsor with the help of a $12.8 million tax credit from the state, which is tied to its pledge to retain 66 jobs and create another 150 over the next three years.
The demand for modern space has gone hand in hand with rent growth. A recent market report by Transwestern Commercial Services found that rents are rising across several top submarkets, pushing New Jersey’s overall average asking rent to a historical peak of $27.22 per square foot.
That has prompted developers to initiate new projects in supply-constrained submarkets, including Hoboken and Morristown.
“Continued demand for high-quality office space is supporting both successful repositioning of existing assets within prime locales and this cycle’s first speculative ground-up office development. These factors are putting upward pressure on overall market rents,” said Matthew McDonough, a managing director in Transwestern’s Florham Park office. “The steady success of the New Jersey commercial real estate market is encouraging investors to move forward with new development plans throughout the state, in both urban and suburban areas.”
Other submarkets may be in need of new construction. Greiner noted that options for large users have become limited in Monmouth County, while Stephen Jenco, JLL’s director of suburban tristate research, noted that Metropark is also supply-constrained.
“Nothing that we’re tracking is under construction, so if you have a large requirement in Metropark, your options are extremely limited,” said Jenco, a vice president with the firm. “So it’s helped rents in the Metropark market.”
Small to midsized deals drive velocity
The flight to quality is not limited to large tenants. JLL reported that smaller-sized transactions chipped away at overall office vacancy in northern and central New Jersey in Q2, noting that availabilities in the market have been slowly but steadily decreasing.
“That’s been the sweet spot … for our market now, not only for this quarter but previous quarters and even when you go back into 2018 as well,” Jenco said.
Cushman & Wakefield came away with similar findings in its Q2 market research, noting that the year-to-date leasing total of 4.1 million square feet is the strongest in three years for northern and central New Jersey.
“Nearly 60 percent of this activity has occurred within Class A properties,” said Jason Price, Cushman & Wakefield’s tristate suburbs research director. “Small and midsize leases continue to propel demand, with 72.6 percent of office activity year-to-date involving deals under 50,000 square feet. The most active industries have included life sciences, technology, legal, health care and educational services.”