Pharmaceutical Sector Dominates Suburban New Jersey Relocation Activity
By many measures, 2015 was Northern New Jersey’s best year for its office market in quite some time. Tenants leased 11.7 million square feet, the strongest annual activity since 2003. Business confidence improved and companies showed a growing willingness to invest in their workforce and workplace. The number of larger leases dropped off a bit in 2015, though, as many of the largest space searches were fulfilled and fewer quality space options remained in some of the most sought after areas. Tenants have no shortage of options in much of Morris County and Newark, but steady leasing in Metropark and Jersey City’s waterfront has pushed availability below 15 percent. Smaller and mid-sized tenants can still find space in these locations, but there are far fewer big blocks of quality space remaining.
There were fewer larger leases in 2015, but tenants were very mobile: relocations outnumbered renewals by two to one with 12 firms opting to move and six renewing. An analysis of larger leases (deals over 40,000 square feet) signed since 2009 shows that larger tenants renewed slightly less than 50 percent of the time (81 firms moved and 75 renewed). From a supply perspective, market conditions have been ideal for relocations during the last several years. Tenants have had ample opportunity to combine and consolidate operations while also upgrading the quality of their space. Landlords as well as the New Jersey Economic Development Authority have given major businesses added cause to take on the disruption of moving. A changing set of incentives (most recently Grow NJ) have been routinely deployed to complete larger leases.
It is no surprise that much of the movement can be attributed to the merger and acquisition/spinoff activity in the chemicals/pharmaceutical sector. Chemical and pharmaceutical firms have accounted for more than 20 of the 85 relocations since 2009, and relocations outnumbered renewals by more than three to one in this restructuring sector.
Chemical/pharmaceutical firms displayed the flight to quality seen in many other markets — in many cases moving to newly constructed or renovated properties. In many U.S. markets, employers pursuing a younger workforce have shifted their operations to the urban core. The suburban to urban exodus has not been as prevalent in Northern New Jersey, particularly when it comes to leasing by pharmaceutical firms. They may have opted for office buildings with more “urban” features such as proximity to mass transit, housing and retail but drug companies such as Zoetis and GlaxoSmithKline have overwhelmingly kept their operations in suburban office parks. Tenants were often able to go just a few miles to improve quality, a testament to the number of options they had to consider. Some companies moved within the same town or even within the same office park.
There have been exceptions. Much of the recent activity in Jersey City’s waterfront has been due a resurgence of Manhattan banks and financial services companies moving some of their operations to Jersey City’s waterfront. Within New Jersey, Pearson Education moved from Upper Saddle River to Hoboken, and New York Life is shifting workers from Parsippany to Jersey City. In general, very few New Jersey employers are basing site selection solely on the need to recruit millennials. The ability to upgrade the quality of their space and location, achieve efficiency and capture very generous incentives has been a bigger driver of relocations. Other industries, including the legal sector, have made moves from urban locations to suburban settings. While Connell Foley re-opened an office in Newark a few other law firms moved out of Newark to newer buildings in suburban locations.
The list of significant “net gains” (companies that are entirely new to the market) is very short. California-based Allergan, for example, expanded into Bridgewater in 2012. The maker of Botox was the subject of a tug of war between Valeant and Pfizer with the local company ultimately coming out on top. Nearly all relocations from other states involved a company moving across the Hudson from Manhattan, from Westchester County or nearby Pennsylvania. Tenant relocations have substantial long-term implications for landlords — some properties that lost their anchor tenant several years ago still stand vacant today. Considering that the bulk of big block space requirements have been fulfilled, and those businesses moving into New Jersey are going almost exclusively to Jersey City or Hoboken, landlords trying to induce larger tenants to make a move will have to be even more aggressive to compete in 2016.
— By Keith DeCoster, Director of U.S. Real Estate Analytics, Savills Studley. This article originally appeared in the March/April 2016 issue of Northeast Real Estate Business magazine.