By Dan Loughlin, David Knee & Marta Villa
New Jersey’s real estate market remained fundamentally strong at year-end 2016 and appears poised to retain its vitality in the coming year. Urban and suburban transit hub markets should remain a bright spot within the state’s slowing office market in 2017, while New Jersey’s industrial sector is in the midst of the greatest burst of construction since 2014. A significant influx of national retailers to transit-oriented locations, traditional downtowns and even college campuses has positively impacted the state’s retail market.
The outlook remains positive for Northern and Central New Jersey’s urban and suburban transit hubs, including Hoboken/Jersey City, Metropark, Morristown, Newark, New Brunswick, Princeton and Summit. Persistent demand for office space in amenity-rich, mass transit-centric areas, combined with the lack of speculative construction, has pushed vacancy rates down to the teens. This contrasts with the state’s suburban vacancy rate, which has stubbornly remained around 30.0 percent.
While the banking/financial services and pharmaceutical/life sciences sectors have historically accounted for a large portion of Northern and Central New Jersey office demand, information/technology companies are expected to generate significant activity in 2017. The high-tech sector accounted for one quarter of leasing activity in 2016, up from 20.0 percent of transactions three years ago.
Proximity to Manhattan and a skilled workforce replenished by graduates from the state’s many universities will help keep New Jersey on the radar of information/technology tenants.
With more than one-half of the 160.0-million-square-foot Northern and Central New Jersey office market developed during the 1980s and an overall vacancy rate ranging near 25.0 percent for more than five years, empty buildings will be targeted for demolition to make way for new projects or converted to alternative uses in 2017. For example, many office buildings were razed or retrofitted during the past few years to meet the needs of multi-family residential or medical users. In traditional industrial markets such as Exit 8A and the Meadowlands, outdated office buildings are in the cross-hairs of developers looking to construct new warehouses to accommodate demand.
Industrial vacancy rates have reached all-time lows, and developers continue to break ground on new sites to meet swelling demand. At year-end 2016, 6.9 million square feet of industrial product was under construction and is slated for delivery in 2017. With supply remaining historically constrained, more developers are expected to break ground, which should establish 2017 as the best year for new construction this cycle. New Jersey’s previous cyclical high water mark was reached in 2014 with 8.0 million square feet of new construction.
Average asking rental rates for Class A and B industrial product have grown significantly during the past two years as tenants were forced to compete for available spaces. With record low vacancy rates and strong, ongoing tenant demand, robust rental rate appreciation is expected through 2017. Since 2015, Class A asking rental rates for industrial product have increased nearly 30.0 percent; this trend will continue during the next 12 months as supply and demand dynamics remain materially similar to the past two years.
In 2016, nine separate industrial transactions greater than 500,000 square feet were completed, accounting for more than 6.3 million square feet of leasing activity and net absorption. E-commerce companies and related last-mile operations represented 51.7 percent of all big-box leasing activity in the state in 2016, a trend which is expected to continue during the next 12 months.
Absorption gains driven by big-box requirements will continue to be concentrated near logistically favorable locations along the New Jersey Turnpike, especially within Central New Jersey.
Northern New Jersey’s dense population has created a stable occupancy in retail shopping centers and free-standing properties. Retailers want to capture that consumer base and continue to find ways to bring their goods and services to market. The state’s retail sector recorded a vacancy rate of 5.1 percent in the third quarter of 2016, down from 5.3 percent in the second quarter, according to CoStar.
Retail easily complements other uses and asset classes. In urban areas, retail is typically at grade beneath residential units or office space; retail can also front and enhance large industrial properties. The urban mixed-use sector continues to thrive in transit-oriented locations, traditional downtowns such as Westfield and Summit, and even on college campuses. Retailers and developers continue to seek out opportunities in urban markets such as Newark, where traditionally suburban tenants have started to enter the market.
While online retailing will continue to increase in 2017, online retailing accounts for only about 8.0 percent of total U.S. retail sales expenditures.
Online retailers are now creating brick and mortar stores to serve as showrooms for their offsite fulfillment. Existing brick and mortar retailers continue to find ways to use the internet to attract and sell to their customers. Going “omnichannel,” by integrating sales and operations between bricks and clicks, is both a challenge and an opportunity for these tenants.
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