It is a tenant's market in New Jersey

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Although many believe that the economy is starting to pick up, the “wait and see attitude” of many investors and companies still persists in the commercial real estate marketplace. Many are simply waiting for things to get better or waiting to see if, instead, things get much worse.

Frank Gunsberg of First Service Williams says, “The economy is showing signs of picking up, although there have been fits and starts. I'm hopeful that we'll see a rebound by the end of the year and into 2010.”

The seemingly perpetual wait and see attitude is having its way with the New Jersey office market as well. Gunsberg notes that many office tenants are asking for short-term lease renewals and extensions. Whereas, under typical market conditions office leases ranged from 5 to 10 years, tenants are asking for 1 or 2 years.

“They just are not sure what is going to be happening with the economy,” he explains. “People are reluctant to do things even though this is probably one of the best times to jump. Landlords are willing to make concessions they would not normally make. If you have a good balance sheet, you are an extremely desirable tenant.”

Although landlords are handing out more concessions, rental rates depend on several factors.

“It is a case by case, building by building and landlord by landlord situation,” cautions Gunsberg.

Rental rates for Class A space depends on the product and the location. In some areas of New Jersey, rental rates range from the middle to high $20s per square foot, while in other submarkets, rental rates are $35 to $40 per square foot. The same scenario is true for concessions. What and how much depends on the location, the building and the landlord.

“If a market is stressed, and if you press, you are likely to get certain concessions that you may not have seen for many years,” says Gunsberg.

But, Gunsberg remarks that it is imperative to take sublease space into account in today’s distressed market as well.

“If you are going to try to take advantage of the market at its best, you would want to look at sublease opportunities,” he says.

Overall, despite the economic uncertainties plaguing the marketplace, Gunsberg notes that it is an excellent market for tenants right now. And yet a paradox keeps many tenants from seizing opportunities available to them, one Gunsberg hopes they can overcome.

“When tenants see the economy the way that it is, they are not sure how the market will play out and if they will stay in business for the long-term, so they tend to make short-term leases at a time when the market is very much in their favor.”

While bargain deals seem to be becoming the norm, landlords are facing the issue of credit worthy tenants. Figuring out who is a credit worthy tenant is getting harder and harder according to Gunsberg. In turn, the broker also wants to ensure that landlords are not at risk of losing their building when placing a tenant, he adds.

Another effect on the office market is the changing face of many of its major industries. In New Jersey, pharmaceutical and bio-pharma companies have always had a large presence, but recent mergers and acquisitions have taken away jobs, and thus, left more office space on the market. However, Gunsberg does note that the bio-pharma community still does and will continue to have a presence in the state because the market is still an attractive place for small to mid-size incubator bio-pharma companies.

“They all benefit from the quality of what New Jersey has to offer, which is a highly educated populous, many universities and an excellent highway system,” he says. “And even more importantly, it has the companies that are already here. The drug business in particular thrives on one company producing a product and another company marketing that product. When you have close contact with those kinds of companies, it is very meaningful.”

To combat the effects of the downturn, owners are being more creative in order to sell or lease their buildings. Gunsberg is currently marketing a Class A, 110,000-square-foot former bio-pharma building in West Orange that is owned by a partnership between Paragon and Hampshire. The 11-acre campus is zoned hospital; therefore, ownership is targeting medical tenants. They are offering space for sale as a condo or for lease. New Jersey Cardiology Associates recently purchased just under 25,000 square feet, and another deal was recently signed with an undisclosed buyer for 15,000 square feet.

Another such development is a 345,000-square-foot, two-story former research and development building set on 35 acres in Wayne. Gunsberg notes that this facility is also offering space for lease, condo sale or outright purchase.

The same marketing strategy is true for a building that Gunsberg is listing in Franklin Township. The owner is willing to lease, sell space as a condo or outright sell the building. Located on 17 acres, the 135,000-square-foot facility is expandable and has state-of-the art lab facilities.

“Any operations person that has seen this building has said that it has one of the finest lab facilities that they have ever seen. They then recommend the building to management, but the sale or lease still has to pass the board of directors level,” he remarks. “That is very interesting and should tell you something about the state of the market.”

It is telling because the financing debacle is not the only reason people are not buying, they are simply waiting and seeing.

“Right now, corporate America is in a holding pattern,” Gunsberg says.

Gunsberg, like many brokers, are stressing to their clients that now is an excellent time to buy, especially if you are an entrepreneur.

“The projects I mentioned cater to the entrepreneurial owner, whether it is a medical practice or a company that wants to own a building that specifically caters to their needs,” Gunsberg explains. “With interest rates being so low, this is an opportunity to change their business model from constantly being a renter.”

— Stephanie M. Specht

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