By Joshua Burd
Office vacancy in northern and central New Jersey continued upward in early 2023, driven by a slowdown in leasing and large blocks of space flooding the market, even as high-end buildings remained a draw for tenants seeking a more modern work environment.
A new report by JLL said as much, finding that the vacancy rate rose to nearly 26 percent from 24.5 percent at year-end 2022. Much of that movement was fueled by more than 1.8 million square feet of negative net absorption, or a decrease in overall occupied space in the market — especially in areas like the Hudson waterfront — as consolidations forced users to reduce their footprint or put their space up for sublease.
On the flip side, JLL pointed to continued signs of a flight to quality, highlighted by Sanofi’s 260,000-square-foot lease at SJP Properties’ to-be-built M Station West building in Morristown. The pharmaceutical company is set to move its operations from Bridgewater in phases during late 2024 and early 2025, joining Deloitte LLP at the Morris Street property.
“The first three months of 2023 were overshadowed by macroeconomic uncertainties, which provided headwinds to office demand,” JLL wrote in its Q1 Office Insight report. “Despite the turbulent conditions, newly constructed or recently renovated buildings will remain on the radar screen of tenants with large space requirements. This was evidenced during Q1, as nearly 70 percent of leases greater than 10,000 (square feet) were signed in such assets.
“With higher-end buildings grabbing the majority of leasing market share, landlords will need to upgrade their assets to a level above their peers.”
The JLL report’s other takeaways are as follows:
- Direct asking rent in Q1 rose to $30.45 per square foot.
- Sublease vacancy ended the quarter at just under 8.5 million square feet, with sublease asking rent at $27.79 per square foot.
- More than 95 percent of the negative absorption during Q1 was attributed to new direct and sublet availabilities in the Class A market, where the vacancy rate climbed nearly two percentage points from 2022 to 29.2 percent.
- With more than 1 million square feet of negative net absorption, the Hudson waterfront housed the largest volume of negative absorption in the state during Q1. That was fueled by several corporate vacancies at 480 Washington Blvd. in Jersey City, which saw 491,830 square feet of direct space hit the market in early 2023.
Separate research by Cushman & Wakefield found that office vacancy in New Jersey increased for the third consecutive quarter, reporting a rate of 21.2 percent, also due to large blocks of sublease space coming available. As of Q1, the available sublease space accounted for 4.6 percent of the office inventory, double the amount from early 2020, prior to the pandemic.
Cushman, meantime, noted that leasing slowed during Q1 to 2.1 million square feet, while adding that tour activity remained brisk, suggesting an uptick in demand during the second half of 2023. Employers continue to show sustained demand for new, high-quality space, even as they navigate hybrid work schedules, with a focus on centrally located markets near a growing suburban workforce and amenities that can appeal to their teams.
“Despite the increase in office vacancies, we are still seeing a flight-to-quality trend with continued demand for new, financially stabilized, top-tier offices in centrally located markets with best-in-class amenities,” said Todd Elfand, a C&W managing director. “Looking ahead, the office market is expected to continue its slow recovery as employers navigate the new normal of hybrid work arrangements.”