By Joshua Burd
No matter the asset class, commercial real estate in New Jersey is changing in a big way.
That was the message of industry leaders earlier this week as some 350 owners, brokers and other professionals gathered for the annual Developer’s Night hosted by IOREBA, or the Industrial and Office Real Estate Brokers Association. The industrial sector is seeing record rental growth and interest from investors, while successful office properties are now evolving from the model that helped build the market more than 30 years ago.
All the while, owners in every asset class are facing potential changes in federal policy.
For instance, rising interest rates could impact construction and acquisition costs in virtually every sector, the panelists said. They also have the potential to impact the returns for would-be sellers, but CBRE capital markets broker Kevin Welsh said the fundamentals in the industrial market and the demand from investors are so strong that he expects sellers to continue to fare well.
“Rent growth in the industrial space is unprecedented,” said Welsh, a senior vice president with CBRE, pointing to the Exit 8A submarket, where rents have grown nearly 20 percent over the past year. “We haven’t seen anything quite like it. … So if interest rates start to inch up, that’s a big mitigating factor and I think it will continue to be.”
He added that there is “an unprecedented amount of capital that wants to buy in industrial, so those two factors alone will certainly keep a lid on cap rates.”
Just as the rise of e-commerce has been one of the biggest reasons for the success of New Jersey’s industrial market, different trends have shaped the other sectors of commercial real estate. Sam Morreale, founder and managing partner of Vision Real Estate Partners, said that being a successful office owner has meant evolving from “more of a real estate executor to almost being a little bit of a psychologist” when it comes to building amenities.
He cited parallels between the traditional layout of academic campuses, which have always had social and collaborative space for its population, and the common areas and amenities in modern office buildings. Office space in New Jersey “needs to be competitive by breaking the paradigm,” Morreale said, pointing to the need for offerings such as connectivity, walking trails and high-end and vibrant food service areas.
He added that “a lot of it has to be put together with the thought of a tenant, as opposed to what the developer thinks is going to look good on the floor when you come through the lobby.”
That approach will appeal to all demographics in the workforce, he said.
“We all focus on millennials, but I think the boomers still want the space to be dynamic as well,” Morreale, whose firm is based in Mountain Lakes, said during the March 27 event. “They don’t want to be treated as less than what the millennials get.”
Todd Anderson of The Hampshire Cos. took it one step further, noting that “the old saying used to be ‘live-work-play,’ and I think we’re in this environment now where you need to have this experiential real estate development.” The Morristown-based firm has taken that approach in one of its current projects, in the Metropark section of Woodbridge, where it is crafting plans for excess property that had been entitled for 750,000 square feet of office space, he said.
“Major Fortune 50 companies would come through on tours and the problem that they wrestled with was that none of the younger folks wanted to be in Metropark,” said Anderson, a principal and executive vice president with Hampshire. “There was no experience there. There was no ‘there’ there, so we dialed it back and said ‘How do we create that experience?’ ”
After a seeking a rezoning with Woodbridge township, the firm now has plans for a mixed-use development that will create a sort of town center in the Metropark office complex. Plans call for a 200-key hotel, 300 units of residential space and about 20,000 square feet of retail.
The IOREBA panel, moderated by Newmark Grubb Knight Frank vice chairman and New Jersey chief operating officer David Simson, even touched on the state’s multifamily building boom. Asked about the prospect of a bubble in the rental housing market, Gus Milano of Hartz Mountain Industries said the sector “has been shockingly strong and we haven’t seen any evidence to date that the New Jersey market is slowing down.”
All of Hartz’s multifamily properties have occupancy in the high 90s, he said, and he pointed to the response at its newest luxury building, a 240-unit tower in the Journal Square section of Jersey City. Only a week after opening, the property had already leased 25 of its units.
It’s why Milano, the president and chief operating officer of the firm, believes demand will continue. If anything, he said, the pace of new supply will be moderated by a slowdown from lenders who now have too many multifamily projects in their portfolio.
“The absorption rate is very high, rents in our market have continued to increase and I think that the good news is that the money from the banks, the primary construction lenders are looking at supply and being very cautious,” Milano said, later adding: “The well capitalized developers who can build through the cycle will tend to do so and will feel very comfortable.”
