A growing number of New York City-based firms have considered short-term office space in the suburbs, in an effort to reduce density, keep employees closer to home and reduce their reliance on mass transit. The movement has provided landlords and brokers with a chance to showcase New Jersey’s growing stock of revamped and rejuvenated office buildings.
By Joshua Burd
The world of economic development was understandably quiet in March and April. But Jose Lozano, the CEO and president of Choose New Jersey, said that began to change as spring turned to summer, as businesses weighed how to move forward amid the pandemic.
“By the end of May and June, I think there was a general consensus among leaders in the real estate market that COVID was not going anywhere,” Lozano said. “And we saw a huge flurry of activity, folks starting to inquire and getting a sense of what the inventory was and what the world was looking like in New Jersey — the cost and the size, and availability.”
Lozano spoke in early August during a virtual roundtable hosted by the business attraction agency, highlighting a trend that seemed a possibility at the start of the health crisis and may now be coming to fruition: A growing number of New York City-based firms are seeking satellite locations in the suburbs, albeit at shorter lease terms, in an effort to reduce density at the office, keep employees closer to home and reduce their reliance on mass transit.
The movement has helped owners and brokers bide their time as they mull the long-term future of the physical workplace. In the interim, insiders say it’s a chance to showcase New Jersey’s growing stock of revamped and rejuvenated office buildings.
“I think you’re actually going to see a spike in rental rates because of a flight to quality that’s been ongoing for years to attract talent,” said Tim Greiner, a broker and executive managing director in JLL’s New Jersey office. “It’s now not only to attract talent, but to make them feel safe in their environment. So I think those owners that are forward-thinking, that have great sites or great buildings that are under renovation are going to do really well.”
Speaking during the Aug. 4 program, Greiner said his team has seen financial services firms “lead the way in terms of creating outposts in New Jersey.” JLL at the time was negotiating a 25,000-square-foot sublease in Short Hills with a firm that was based in Lower Manhattan, he said, along with another deal in which a hedge fund was taking space in Bridgewater.
“What’s in common with a couple of these transactions is that they seem to be short-term, temporary office commitments, predominantly close to (the homes of executives) who don’t want to commute into the city,” Greiner said, noting that the deals have ranged from one to three years in length.
It remains to be seen if those firms become longer-term occupants in New Jersey. John Saraceno, managing principal of Onyx Equities, said the post-COVID office shift could take longer to play out than what occurred after the Sept. 11 terrorist attacks. Without a vaccine and with building occupancy still limited, “clearly we’re going to be talking about this in March of 2021 as we did in March of 2020 when we shut down.”
But he noted that “the big companies learned a lot in 9/11.”
“One of the things they learned is that those that ran out of New York and went to the suburbs, either to live or to work, two years later were being economically punished to try to get back in,” Saraceno said, “because the reality was their employee base and their recruitment was still better in an urban environment than it was in a suburban environment.”
He also balked at the idea that new college graduates will want to start their career in a suburban office park, as opposed to the city. He pointed to Facebook’s recently signed, 730,000-square-foot lease at Manhattan’s iconic Farley Building, despite allowing employees to work from home through next July.
Still, the so-called hub-and-spoke model could equate to a more permanent trend. Greiner said some of New Jersey’s young professionals had already started to drift from the city, even before the pandemic, with an eye toward raising families and sending their children to school.
“My gut is those folks had a mindset that they were ready to move anyhow,” he said. “If the talent continues to migrate west into the suburbs, then employers will follow.”
He noted that Newark could also thrive in the current marketplace, given its accessibility by car and its connectivity to Manhattan. But New Jersey’s suburbs are perhaps equally well-positioned. The state has a growing number of office buildings that have gone through significant renovations over past five to 10 years, he said. According to JLL research, substantially improved properties have leased at rents that are 20 percent higher, with vacancy rates that are 4 percentage points lower.
“It shows that our aging suburban asset class, where invested in, will get rewarded. Companies want to be there,” said Greiner, who is based in JLL’s Parsippany office. “We have clients who are enacting that (hub-and-spoke model) right now and see suburban New Jersey as a great place to have outposts to attract labor — their existing labor pool who doesn’t want to commute and future labor sources — so I do think suburban New Jersey is poised to do well in the next few months and the next few years.”
To Saraceno, one of the state’s top value-add investors in the office sector, that makes it all the more important to continue upgrading an inventory that is 30 to 40 years old. With tenants’ growing focus on cleanliness, wellness and air quality, “obsolescence is going to be exacerbated” in the Garden State.
“That’s one of the wonderful outgrowths of what’s going to happen here,” he said. “It’s going to force everybody to elevate their game and I think that’s a good thing for the state — and that will lead to that hub-and-spoke concept really taking hold.
“And there will be a decentralization. New York will still be the anchor, but we’re going to have a lot of benefits as that spoke mentality continues to be expanded in the state … If we do this right and we continue to offer product that allows New York companies and their employees to want to be here — and we can offer them a safe, secure and enjoyable experience — they’re going to come.”
In the meantime, the need for flexibility is also forcing another pivot by some landlords. According to Robert Donnelly Jr., a broker and executive managing director with Cushman & Wakefield, the concept of a one- or two-year lease was previously the domain of co-working and shared office space providers, but that has changed in the post-COVID environment.
“Landlords are now coming down into their space and saying, ‘Hey, I’ll do a two-year or three-year lease right now just to get us over the bubble here,” said Donnelly, who is based in C&W’s Morristown office. “Co-working is going to be under pressure because landlords are now competing with them when they didn’t necessarily want to directly before.”
For the purposes of business attraction, Lozano said the prospect of luring a company to New Jersey on a temporary basis can at least provide an opening that the state didn’t have before.
“From a Choose New Jersey perspective, if I can convince a company to be here for two or three years on a sublease, I think at the end of the three years it will be very difficult for them to make a huge wholesale shift or a significant shift back into city,” Lozano said. “Especially if they’re going from Morristown or Summit, somewhere west of New York, I think it will be extremely difficult. So I’ll take the short-term with the hopes that a lot of those are converted and remain as more long-term ones.”
Greiner even sees an opportunity for new development, as companies that are mulling a move to New Jersey “are going to look to those assets and owners who can deliver a higher-quality building,” he said. The need for modern HVAC systems and other health-oriented features is all but certain at this point, even though other post-COVID design concepts are still being honed.
Christopher Paladino, president of New Brunswick Development Corp., noted that collaborative spaces may be modified but will “have a really great future, because people in startup companies could have always worked from home, and that didn’t work.” Entrepreneurs want and need to be in settings that have shared laboratories or so-called maker space, as Devco plans to include in large mixed-use projects in both New Brunswick and Jersey City.
He added that Devco and its design partners are spending more time on outdoor spaces.
“That’s the one place where people do feel safe, and people are starting to get used to it, so how can we create meeting spaces that are maybe something you can use nine months of the year or 10 months of the year?” Paladino said, pointing to radiant floors, fans and other climate control features. “So we are going through some design changes and creating a number of additional outdoor spaces that are more than a place to have lunch.”