What was previously considered a “soft patch” in the U.S. economy is now indicative of a long-term economic realignment, as previously reported in the past quarter. A reversal of economic indicators, the downgrading of the U.S. credit rating, the debt ceiling debate, the European debt crisis, and market uncertainty are the cause of a decrease in consumer and business confidence across the board, both nationally and in New Jersey. The result is a continued slow recovery in the job market as corporations continue to build cash reserves, further delaying hiring, equipment purchases and real estate expansions.
The situation in New Jersey mirrors that of the national picture. The overall real estate market in New Jersey remains weak, although there was a significant shift to direct leasing of Class A space versus the previous subleasing activity. However, the reductions in labor and space needs have led subleases to play an important role in the local market — tenants are leveraging their subleased spaces to negotiate better financial terms when renewing their leases.
Vacancy Rates
Vacancy rates continued to climb, with Class A office space coming in at 16.4 percent, a 0.2 percent increase from the second quarter.
The Class B office space vacancy rate rose to 15.4 percent, continuing an unabated increase since 2006, when the vacancy rate was 9.9 percent.
Class A Office
CresaPartners has noted a major shift in leasing activity from subleases to direct leases. This shift was indicated by a positive net absorption for direct space of 265,000 square feet, which reversed the 464,000 square feet of negative absorption seen in the second quarter. Conversely, sublet space saw a negative net absorption of 431,000 square feet, reversing the 354,000 square feet of positive absorption the company reported in the second quarter.
Renewal activity increased significantly, as evidenced by a 1 million- square-foot reduction in direct space being marketed, which resulted in 265,000 square feet of positive net absorption.
With a minimal amount of sublease activity, the discount for subleases increased from 20.3 percent to 22.5 percent, driving the average rental rate down from $26.65 in the second quarter to $26.52 in the third quarter.
Class B Office
Class B office space fared the worst in the third quarter, continuing its three-year decline in net absorption, with a negative absorption of 193,000 square feet. Since late 2008, Class B office space has seen an average negative net absorption of 200,000 square feet per quarter.
Asking rents for direct leases increased slightly to $21.43, which is inconsistent with the trend in the market.
What This Means for the Tenant
Reductions in labor and space needs have led tenants to use sublease space as leverage in the negotiation process in order to improve financial terms, particularly for renewals. Landlords have become more willing to make concessions in order to retain tenants, while tenants are able to avoid relocation costs and maintain flexibility with short-term renewals.
— Tom Giannone and Ron Ganter, co-managing principals with the New Jersey office of CresaPartners.