The upgraded lobby at 7 Sylvan Way in Parsippany — Courtesy: Mack-Cali Realty Corp.
By Joshua Burd
After a lackluster end to 2017, executives with Mack-Cali Realty Corp. say leasing activity is poised for a rebound in its Hudson waterfront and suburban office buildings.
That was among the key takeaways early this month in the company’s first-quarter earnings call. At the time, Mack-Cali said it was in negotiations with existing tenants in Jersey City and Hoboken about potential renewals and expansions that, if completed, would equate to roughly 100,000 square feet of net absorption.
In its main suburban portfolio — which includes buildings in Parsippany, Red Bank, Short Hills and Metropark — the real estate investment trust was negotiating with both existing tenants and potential new users that could result in another 100,000 square feet of net absorption.
Mack-Cali executives pointed to one very important common thread.
“The market seems to be reacting very well to our capital plans,” CEO Michael DeMarco said during the May 3 call with analysts. “Tenants seem to like the buildings more, and we’re getting much higher receptivity than we did before.”
Those capital plans include a high-profile overhaul of Mack-Cali’s flagship Harborside complex in Jersey City, where it’s spending some $75 million to modernize buildings 1, 2 and 3 and creating a new pedestrian retail promenade along the Hudson River. That project is well underway, DeMarco said, while the REIT is also completing $50 million in upgrades to lobbies, fitness centers, restaurants and other amenities at its top suburban properties.
The investments have coincided with an effort to engage and renew tenants whose leases are set to expire in 2019 or 2020. Both DeMarco and Nick Hilton, Mack-Cali’s executive vice president of leasing, said those efforts have yielded a positive response on the waterfront, while the landlord was in “active negotiations” with prospects totaling more than 700,000 square feet.
If those deals were to close, Hilton said, they would result in more than 540,000 square feet of net absorption. He added that more than half of the requirements came from users outside the so-called FIRE sector, which refers to financial services, insurance and real estate — in a sign of how the Hudson waterfront has evolved from its days as Wall Street West.
“Overall, our approach to these capital projects is to have a holistic view across our portfolio and phase these improvements in prior to large lease expirations,” Hilton said. “This has greatly enhanced our ability to retain existing and attract new tenants.”
The uptick has signaled a turnaround from what was a down year for New Jersey’s office market, at least when it came to large deals. Mack-Cali was also grappling with several large lease expirations on the waterfront, including AIG vacating about 271,000 square feet at 101 Hudson on April 30 and Wiley giving back about 46,000 square feet at 111 River St. in Hoboken.
But the REIT is seeing large blocks of demand from users in the pharmaceutical, technology, consumer products and other sectors, DeMarco said. That has allowed him to be “cautiously” optimistic about the prospects for 2018 and the potential to fill spaces left by AIG, Wiley, Allergan and others — even if tenants are taking longer to make decisions than in years past.
All told, the company leased 265,885 square feet of office space in Q1. Mack-Cali said it ended the quarter about 85 percent leased in its core portfolio, while rental rates in those buildings had grown by 5.1 percent on a cash basis.
“To date we’re seeing a great deal more interest in the waterfront and in the suburbs than we did in 2017,” DeMarco said. “There’s been no increase in concessions and rental rates are easily accepted for the deals that we’re doing.”
Those efforts come as Mack-Cali continues to sell what it deems to be noncore buildings within its once-vast office portfolio. DeMarco said the REIT completed property sales totaling $232 million in Q1 and expects to complete additional dispositions of $170 million by year-end.
About half of that value is tied to two properties: the former Pearson Education headquarters property at One Lake St. in Upper Saddle River — which is slated for redevelopment and is under contract to sell to Toll Bros. for about $44 million — and 650 From Road in Paramus. Overall, the company is winding down its three-year-old plan to right-size its portfolio and focus on core markets along the waterfront and top-performing suburbs.