Page 16 - Issue 45 Sept2020

14 SEPTEMBER 2020
THE BEST OF THE BEST
In a region where more than half
of the office buildings were built before 1990, so-called Class A space
may no longer signify the highest tier of the market.
Such is the case in northern and central New Jersey, as confirmed
in a recent study by JLL. The real estate services firm found that some two-thirds of the buildings that are categorized as Class A have not been significantly renovated during their lifespan, drawing a major distinction between those assets and those that have seen major capital improvements.
The latter group, which JLL has carved out as “Premier Class A” properties, boasts vacancy rates that are 4 percentage points lower than in Class A buildings that have not been substantially upgraded. What’s more, Premier Class A buildings commanded rents that were $34.68 per square foot at the time of the study, nearly 20 percent higher than their Class A peers.
“I think that probably opened a lot of eyes when you remove those older buildings that are kind of weighing on the market,” said Steve Jenco, JLL’s vice president for suburban tristate research. “That’s been the story in our market for the past several years now and the numbers
really don’t tell the story, because we have a market that was mostly developed in the 1980s.”
Tim Greiner, an executive managing director with the firm, said the analysis was borne out of two recent transactions that showed the disparity among Class A buildings. In one case, JLL was representing Sax LLP in its search for a new headquarters, as the accounting firm sought a high-quality, upgraded building in Morris County with abundant amenities and strong ownership.
The selection was unexpectedly limited — at least, for a market with so much availability.
“We really couldn’t find a 40,000-foot block that they loved, other than a handful of options,” Greiner said. “And it really made me think that these 30 percent vacancy numbers just don’t really tell a story.”
The resulting study found that Premier Class A space totals nearly 39.4 million square feet in northern and central New Jersey, accounting for less than 40 percent of the overall Class A office stock. Vacancy in the highest-end segment of the market was 18.1 percent, JLL said, versus 22 percent in other Class A buildings.
Perhaps most staggering were
the results in Parsippany, where Premier Class A vacancy was only
11.5 percent. In all other Class A buildings in the submarket, vacancy totaled 31.5 percent.
“We put some pretty hard criteria about what defines renovations because there could be some gray
areas there,” Jenco said. “If you update a lobby, does that count as
a renovation? Well, not really. There’s got
to be more to
it than that, so you really have to dive in to say
what buildings have really been extensively renovated.”
The numbers reaffirm the advantage gained by landlords who make a major investment, the kind that goes beyond simply cosmetic enhancements. According to Greiner and Jenco, that includes new amenity spaces, updated infrastructure and expanded outdoor spaces.
The investments have proved fruitful, as nearly 70 percent of leases greater than 50,000 square feet signed during the past year were concentrated in Premier Class A buildings, JLL found.
“We’ve had the conversation with a lot of potential investors in northern
New Jersey over the past couple months and they all get it,” Greiner said. “Once you put the data in front of them, it opens their eyes that maybe New Jersey is a place where you should invest in suburban office space.”
Tenants will undoubtedly be drawn to newly built or renovated buildings in the wake of COVID-19, especially those with upgraded HVAC systems with enhanced fresh air intake and modern filtration systems, JLL said. The firm also pointed to features such as touchless elevator controls, ultraviolet cleaning systems and other improvements that will make tenants feel safe.
“Even before the health and safety question, hot and cold issues are
the biggest tenant complaint,” Greiner said, noting that more modern buildings have more energy- efficient and more controllable HVAC systems. Tenants have always inquired about the age of the system when considering a new building, but are now asking more nuanced questions about filtration, airflow and other issues that could impact the spread of the virus.
“There’s a lot of questions, but what we’re hearing from our tenants is that they’re concerned,” he said, later adding: “I think it’s going to be something that really gets addressed over the next six to nine months.”
Steve Jenco
In the meantime, the need for flexibility is also forcing another pivot by some landlords. According to Robert Donnelly Jr., a broker and executive managing director with
landlords are now competing with them when they didn’t necessarily want to directly before.”
For the purposes of business attraction, Lozano said the prospect of luring a company to New Jersey on a temporary basis can at least provide an opening that the state didn’t have before.
“From a Choose New Jersey perspective, if I can convince a company to be here for two or
three years on a sublease, I think
at the end of the three years it will be very difficult for them to make a huge wholesale shift or a significant shift back into city,” Lozano said. “Especially if they’re going from Morristown or Summit, somewhere west of New York, I think it will be extremely difficult. So I’ll take the short-term with the hopes that a lot of those are converted and remain as more long-term ones.”
Greiner even sees an opportunity
for new development, as companies that are mulling a move to New Jersey “are going to look to those assets and owners who can deliver a higher-quality building,” he said. The need for modern HVAC systems and other health-oriented features is all but certain at this point, even though other post-COVID design concepts are still being honed.
Christopher Paladino, president of New Brunswick Development Corp., noted that collaborative spaces may be modified but will “have a really great future, because people in startup companies could have always worked from home, and that didn’t work.” Entrepreneurs want and need to be in settings that have shared laboratories or so-called maker space, as Devco plans to include in large mixed-use projects in both New Brunswick and Jersey City.
He added that Devco and its design partners are spending more time on outdoor spaces.
“That’s the one place where people do feel safe, and people are starting to get used to it, so how can we create meeting spaces
that are maybe something you can use nine months of
the year or 10
months of the
year?” Paladino
said, pointing
to radiant
floors, fans and other climate control features. “So we are going through some design changes and creating a number of additional outdoor spaces that are more than a place to have lunch.” RE
Robert Donnelly Jr.
Cushman & Wakefield, the concept of a one- or two-year lease was previously the domain of co-working
and shared office space providers, but
that has changed in the post-COVID environment.
“Landlords are now coming down into their space and saying, ‘Hey, I’ll do a two-year or three-year lease right now just to get us over the bubble here,” said Donnelly, who is based in C&W’s Morristown office. “Co-working is going to be under pressure because
Christopher Paladino