By Joshua Burd
New Jersey’s commercial real estate market was as dynamic as ever in 2017, thanks in large part to the health of the industrial and multifamily sectors. But we also saw developers and investors adapt to critical changes and challenges in the retail and office sectors.
INDUSTRIAL: THE NEW DARLING
For anyone who hadn’t already noticed, 2017 served as the unmistakable coming-out party for New Jersey’s warehouse and distribution market.
The sector had seen sustained, impressive demand over the past several years, as e-commerce players, logistics firms and other users continued to absorb new big-box space. But this was the year in which industrial buildings became the new darling of investors, who could not ignore the surging rental rates that came along with that activity.
According to JLL, average asking rental rates for northern and central New Jersey industrial space rose $0.75 per square foot, or 11.5 percent, to $7.09 per square foot during the 12-month period ending in September. In the Meadowlands and other submarkets providing so-called last-mile distribution points around Manhattan, rents have eclipsed double digits.
That growth has put Garden State industrial space squarely on the radar of investors over the past year. In the third quarter, for instance, the average price per square foot for industrial sales in the region was $81.66, according to NAI James E. Hanson, up by $11.84 from Q2.
The competition for industrial deals — and the lack of opportunities — has in turn caused investors to look outside the core markets around northern New Jersey. In mid-November, NAI Hanson said the rising costs to enter the state’s easternmost markets has caused “a continued western and southern shift in demand and, subsequently, investment.”
That competition has also translated to the banking sector. Joseph Orefice, Investors Bank’s head of CRE lending, said significant investment sales are still few and far between, relative to the pool of institutions seeking to provide loans. The same is true for new development opportunities, he said, so the bank has sought to gain a foothold by helping owners refinance.
“The macroeconomics of it are so good that they should have no shortage of lenders looking to suit them,” Orefice said, later adding: “It’s a pretty exciting arena. If you’re in New Jersey, I would say it’s probably the best category we’ve seen.”
The market is also providing an opportunity for those who can be creative in finding new development sites. Jon Leifer, director of acquisitions for Case Real Estate Capital, said the demand and rental rates are high enough “that the economics of intensive redevelopment projects are really starting to make sense.”
“Even the guys who don’t bid for that high-cube, Class A space are swallowing hard and they’re ponying up to pay rents that they would have never contemplated paying 18 months ago,” Leifer said. “And that causes a number of business opportunities if you’re looking at buying or lending against transitional properties that have some lease rollover in the next couple of years — or if there are opportunities somehow to buy out tenants that don’t do anything actively for a building’s appeal.”
He said there is “a flood of money that has spilled into the market,” even for redevelopment projects that come with greater risk. For instance, the Rochelle Park-based firm is engaged in redevelopment projects such as a retail-to-industrial conversion just a few miles outside Port Newark-Elizabeth.
In such cases, being a local player can go a long way in winning a deal.
RETAIL: ADJUSTING TO A NEW REALITY
Sweeping changes have been underway in retail for several years now, but 2017 served as a wakeup call to anyone who may have been in denial.
Published reports say more than 5,000 brick-and-mortar stores nationwide had closed this year ahead of the holiday shopping period, including iconic names such as Macy’s, Sears, RadioShack and dozens of others. The trend has not spared New Jersey, even with its consumer spending power and enviable population density.
But as longtime operators close their doors, other new players are stepping in. Like other top markets, the state has seen the continued rise of tenants focused on food, entertainment, health and wellness and other services that can’t be ordered online. That has pushed owners to take on additional risk when it comes to sectors like entertainment.
“In the multitenant space, landlords are taking on tenants they wouldn’t have taken on previously, because we just don’t know who is going to shake out in this entertainment space as a market leader,” said Karly Iacono, associate director with Marcus & Millichap’s National Retail Group. “So it’s a lot of trial and error right now.”
Iacono, an investment sales broker, said those market forces have translated to her practice in a major way. Investors remain bullish on New Jersey retail, she said, but they are at least looking for properties with longer remaining lease terms, better credit and more certainty for stability.
“Now they’re looking — just based on the turmoil in the retail market — a little deeper into who that tenant is and what their business might look like in 10 years,” Iacono said. “So there’s a greater analysis on who the tenants are.
“Some investors are trying to get that perceived stability through understanding the tenant and going really just for the investment grade or the very large companies. Another group is looking much more at the underlying real estate and looking for location security.”
RESIDENTIAL: CONTINUED GROWTH
Despite perhaps being overshadowed by the industrial sector in 2017, the state’s multifamily industry turned in another healthy year for both long-term owners and investors.
Newly built luxury properties along the waterfront were leased at an impressive clip. Buildings such as Jersey City Urby, a new 69-story tower on the Hudson waterfront, had leased nearly all of its 762 apartments by late November within just eight months of opening, while renters also responded to new developments in the less glamorous Journal Square section of the city.
The leasing velocity was seen across northern New Jersey.
For the 12-month period ending in September, vacancy fell 10 basis points to 4 percent, even as developers delivered 6,300 new units in the region, according to Marcus & Millichap. The firm did predict an uptick in vacancy as thousands of additional units come online, but rent growth was expected to continue heading into 2018.
Through Q3, average effective rents had climbed 4 percent year over year to $1,815 per month, Marcus & Millichap found. That has coincided with continued confidence by investors in the ability to achieve returns in New the state.
Jose Cruz, who leads HFF’s capital markets practice in New Jersey, said capital was coming from a wide range of sources: foreign investors, private equity and institutional buyers.
“We’re definitely seeing more demand and we’re seeing rent growth projections still out there,” Cruz, a senior managing director with HFF, said during the recent New Jersey Apartment Summit. He added that “one thing that has come into focus recently in the last six to nine months” is the demand for Class B and C suburban apartments that provide value-add opportunity, along with properties that can be deemed workforce housing.
In fact, he said, workforce housing has seen rent growth of 4.8 percent over the previous 12 months, compared with 4.2 percent for value-add Class B properties. For Class A properties, average rents have grown 1.9 percent.
OFFICE: STATUS QUO
After a year of rather high-profile deals in 2016 — including everyone from Allergan in Madison to EY in Hoboken — New Jersey’s office market proved to be far less flashy in 2017.
Instead, the year was marked by the more low-key flight to quality and continued efforts by tenants to consolidate their footprints. Increasingly, landlords and new investors have moved to attract those users by sprucing up suburban office buildings with renovated common spaces and new amenities.
Many of those opportunities have stemmed from a decision by Mack-Cali Realty Corp. to cut away at its once-sprawling suburban office portfolio in the state. The real estate giant sold an additional several million square feet of office space in 2017, including large portfolios in Bergen and Burlington counties.
OTHER HIGHLIGHTS
ATLANTIC CITY: The embattled resort town had perhaps its best string of good news in recent memory. Heading into the spring, a group led by Hard Rock International emerged to acquire the shuttered Trump Taj Mahal and spend hundreds of millions of dollars to transform the property. Then, in mid-April, AC Devco broke ground on the $220 million Gateway project, which will be home to new facilities for both South Jersey Industries and Stockton University.
AMAZON: The internet giant’s run of blockbuster news touched the Garden State as much as any other state, from the acquisition of Whole Foods Market to the solicitation for the company’s second headquarters. When it came to the latter, Newark emerged among several New Jersey municipalities that had thrown its hat into the ring, winning the official endorsement of Gov. Chris Christie earlier this fall.
INCENTIVES: For all of the ups and downs across the market, the state’s powerful business incentives continued to be a driving force. Most notably, the Grow New Jersey program is poised to drive more than a million square feet of tenants to the former Hoffmann-LaRoche campus in northern New Jersey, which is being repositioned by Prism Capital Partners.
