Mack-Cali Realty Corp. and its Roseland Residential Trust subsidiary recently opened Signature Place, a 197-unit apartment community at the site of a former office building in Morris Plains. The 75,000-square-foot office building at 250 Johnson Road in Morris Plains (bottom right) had sat vacant for several years, prompting Mack-Cali Realty Corp. to raze the property in 2015. — Photo by Peter Dant Photography / Inset courtesy: Mack-Cali Realty Corp.
By Joshua Burd
Slowly but surely, developers have begun to chip away at one of New Jersey’s most chronic issues when it comes to commercial real estate — the abundance of obsolete, aging office buildings that are no longer considered usable by modern standards.
Owners and investors have razed or repurposed nearly a dozen such buildings in the state in recent years, seeking to replace them with more in-demand and lucrative uses such as industrial, residential, hospitality and health care. Several others are now moving through the pipeline, providing additional hope for local tax rolls and owners of so-called white elephants.
“How the towns view ratables is always impactful,” said Tim Greiner, an office broker and executive managing director with JLL. For many municipalities, he said entertaining redevelopment can be a question of how badly they need new tax revenue and other pressures, such as court-ordered requirements to zone for new affordable housing.
For instance, Mack-Cali Realty Corp. recently opened a new high-end apartment complex in Morris Plains, replacing what had been a long-vacant office building off Route 10. In Cranbury, the Sudler Cos. has all but completed two new distribution centers at the former site of a 25-year-old office complex, while it’s now planning a similar conversion in Piscataway.
Other owners are expected to follow suit: In a recent first-quarter market report, JLL removed about 1.7 million square feet of office space from the inventory as a result of properties that are “on the road to being razed or converted to alternative uses.” That helped vacancy in northern and central New Jersey dip below 24 percent for the first time since early 2009, according to the firm’s research, from nearly 25 percent a year earlier.
Those sites include two buildings totaling nearly 290,000 square feet at 1515 Route 10 in Parsippany, which Stanbery Development LLC plans to demolish to make way for a new mixed-use project. Also included is 540 Broad St., the former Verizon tower in Newark, where developers are converting more than 300,000 square feet of office space into new apartments.
“Highest and best use is shaped by two things: market demand and the long-terms needs of a community,” said John Saraceno, co-founder and managing principal of Onyx Equites LLC “(The) question is: What operators are willing to take on the lift to repurpose a property? There are significant, upfront soft costs and a multitude of public approvals required to change the use of and repurpose a property.”
Onyx, a Woodbridge-based firm, recently unveiled plans to raze an obsolete, 1960s office building in Mahwah and redevelop the site as a new 120,000-squarefoot distribution center.
With demolition slated to begin this month, the project at 440 Franklin Turnpike will transform a long-undervalued site in northern Bergen County, offering first-generation space to operators looking to reach the northern New Jersey and southern New York trade areas.
Such projects hinge on “the willingness and agility of local officials to stay ahead of market trends,” Saraceno said, a sentiment shared by other developers. In Morris Plains, Mack-Cali’s development team hailed the cooperation of Mayor Frank Druetzler and the governing body as it opened the new 197-unit, luxury apartment community known as Signature Place.
Located at 250 Johnson Road, the site was previously home to a long-vacant, 75,000-square-foot office building. Veteran developer Carl Goldberg, who served as a consultant to Mack-Cali and its Roseland Residential subsidiary, said the borough accepted that the complex stood little chance of being leased to another office tenant and that it had become a drain on the borough’s tax rolls, following several tax appeals.
The municipality also seized an opportunity to help satisfy its court-ordered affordable housing obligations, Goldberg said, noting that Signature Place includes 30 units designated for low- and moderate-income residents.
“Think of all the positive things they achieved,” said Goldberg, founder and managing member of Canoe Brook Associates. “Why and how did they achieve them? They achieved them because Mayor Druetzler … is somewhat unique, in the sense that he is capable of sorting through this whole matrix of options and understanding, along with the people on his governing body, that this was positive for every stakeholder.”
He hoped other municipalities would see the upside of repurposing obsolete commercial buildings. For many, he said that requires local officials to “overcome their angst and their concern about having additional residential homes, especially rentals, and then having part of that rental component be reserved for income-eligible tenants.”
He also noted that most redevelopment projects that involve residential will require a mixed-use approach, rather than what took place in Morris Plains.
“When you repurpose, it’s not necessarily exclusively residential,” said Goldberg, who also co-chairs the executive committee for the Rutgers Center for Real Estate. “In more cases than not, it’s a mixed-use approach.”
RELATED: For Mack-Cali, Morris Plains project will be a showcase for office-to-residential conversion
Empty buildings have inflated vacancy rates in New Jersey’s office market, even when they’re not seriously considered by prospective tenants.
When it comes to the day-to-day brokerage business, Greiner said adjustments to the inventory are less impactful for tenants that are looking for space in the market. Even for a building that has seemingly outlived its useful life, he said “you’re probably going to call that building, anyhow, if it’s still standing and it has the ability to satisfy your tenant’s requirement.”
But for a landlord or a prospective investor, removing supply is far more meaningful. In a submarket that has vacancy of 20 or 30 percent, reductions in the inventory can improve their position or help their decision-making.
“It helps paint a much brighter picture about the marketplace,” Greiner said. “You might see investors take a deeper dive into a marketplace and maybe even invest because they understand that the competition is now less and the supply side is lower.”
A report last year by Newmark Knight Frank found that more than half of the northern New Jersey office market was built prior to 1990, but also highlighted glimmers of redevelopment. The firm identified nine projects spanning more than 3.9 million square feet that had repurposed or would soon repurpose vacant, antiquated office buildings in secondary locations, consequently removing them from the stock of available space.
Those include 1 Lake St. in Upper Saddle River, the former site of a 475,000-square-foot office building that is now slated for residential development. At the former Mercedes-Benz USA headquarters in Montvale, about 261,000 square feet is coming down as part of a mixed-use project.
NKF found that, for every 2 million square feet of office space that is torn down or converted to another use, availability would decline by about one percentage point in northern New Jersey.
“Adaptive reuse projects such as these are recycling and repositioning land sites, and effectively ‘pruning’ the office inventory, as obsolete buildings are replaced by new office buildings or other land uses such as residential properties,” Mark Russo, NKF’s research manager for New Jersey, wrote in the report. “This pruning is making the market on average newer and less suburban, which in turn is helping to lower availability.
“Over the long term, this trend should improve the overall quality of the inventory in New Jersey and result in greater potential for rent growth.”
In the process, developers are helping to feed the demand for sectors that have been growing or booming in recent years. For instance, both the apartment and industrial markets in New Jersey are thriving, with vacancy hovering around 4 percent in each sector.
And it’s likely that the office buildings are in locations that are among the best in the state, even if those locations are no longer favored by corporate America.
“Because there was so much of that inventory of land 30 and 40 years ago, developers and owners picked off the best properties first,” David Simson, NKF vice chairman and chief operating officer of its New Jersey office, said in an interview last year. That includes “the closest ones to the highway accessibility, to the four-way interchange. Therefore those are the oldest buildings.”
Greiner, meantime, noted that several large office users are or will soon be in the market for new space in New Jersey. Many of them are currently in space that would be considered antiquated and functionally obsolete, prompting them to look at other options, perhaps in transit-oriented markets, that would provide them with a better chance to retain and attract talent.
That raises the likelihood that “you’re going to see more buildings come off of the rolls in the next three to five years, as tenants who are leaving these buildings go to more modern workplaces,” Greiner said. The decision to repurpose such a property can be a function of what’s taking place around the building. Both Greiner and Stephen Jenco, JLL’s vice president and director of suburban tristate research, pointed to the fact that the industrial market is on the rise in and around Piscataway, where Sudler has torn down an office building to make way for a new distribution center.
“You have to look at the neighbors and what’s going on around there,” Jenco said. “And if there are other uses — whether it be residential, retail, medical, industrial — you wonder if the pressure is now on … to say its days are numbered here in terms of being an office building.”