Tenant Negotiating Power, Flexible Work Routines Prevail in Central/Northern New Jersey Office Market

by Taylor Williams

By David Simon, SIOR, COO, NAI DiLeo-Bram

Having recently surpassed the one-year mark since COVID-19 reached the United States, we can now better assess the pandemic’s impact on our local office market. Reviewing a year of data and market activity helps paint a more detailed picture of where things stand currently and may be headed.

The overall direct vacancy rate for the combined counties of Essex, Middlesex, Morris, Somerset and Union New Jersey has risen 120 basis points since the start of the pandemic to 12.7 percent. Much of the space becoming vacant or available is higher-quality product; in fact the Class A direct vacancy rate has risen 180 basis points during the pandemic and is currently 17 percent.

David Simon, NAI DiLeo-Bram

David Simon, NAI DiLeo-Bram

As a result, tenants looking in this segment of the market have a broad selection of high-quality office product. Sublet space has followed a similar trend to that of direct space, marking a 70 basis point increase since the start of the pandemic. More than 1.1 million square feet of Class A sublease product has become available during this period.

Notwithstanding the statistics above, our firm recently completed over 28,000 square feet of office leases in Middlesex County, at 100 Metroplex Drive in Edison and 90 Woodbridge Center Drive in Woodbridge. These transactions illustrate the fact that owners of well-located, Class A properties with amenities and excellent management services will continue to attract and retain tenants.

With tenants having their choice of Class A product, less quality space is being absorbed in different ways. One way building owners have been addressing the reduced demand for office product is by initiating more redevelopment and conversions of office properties to other uses including medical, self-storage and residential. Particularly, with tremendous demand and supply constraints in the industrial sector, we anticipate seeing more office properties redeveloped to accommodate warehouse users.

Additionally, we have seen significant demand from user-purchasers for small to mid-sized office buildings. Due to the pandemic, many companies want to be located in properties where they fully control their surrounding environment and can better protect their employees.  Along these lines, we recently sold 654 Springfield Avenue in Berkeley Heights to a medical group that is using one floor of the building for its practice; and 120 Mountain Avenue in Springfield to a company that will be utilizing the entire building.

For traditional office users that are actively looking for space, it has become quite common to negotiate shorter-term leases with multiple options. Occupiers continue to prefer flexibility in their leases even as vaccination rates increase and public health restrictions relax.

Many firms we represent have stated that as a result of COVID-19, their employees have become accustomed to the flexibility that working remotely offers. The pandemic fostered innovations that have allowed for smaller footprints with increased efficiency. In effect, technological advances are enabling occupiers to reduce overhead in the form of lower rent via smaller space requirements.

Rental rates continue to reflect the growing sentiment of a tenant’s market. Overall gross asking rents have declined from the start of the pandemic by 48 cents per square foot., a disruption to what had been an upward trend the last few years. This impact occurs, again most noticeably, in Class A product, where gross asking rates declined by 53 cents per square foot.

Prior to the pandemic, Class A product had been reporting a three-year trend of increasing rental rates.  This shift suggests that tenants will be able to negotiate favorable terms for the foreseeable future, especially those willing to commit to longer lease terms. Only time will tell if rental rates will continue to decrease, but given the popularity of working from home, there is no reason to believe occupiers will revert to pre-pandemic space standards and requirements.

New Jersey’s unemployment figures have plateaued, for the most part, following the generational highs at the onset of the pandemic. At the end of February, New Jersey recorded a preliminary seasonally adjusted unemployment rate of 7.8 percent.

The lower numbers are encouraging, but with the trend tied to national and global factors, we are cautiously optimistic that as the workforce is inoculated, the unemployment rate will continue to decrease.

The combination of premium space availability, along with reduced rental rates and sustainable unemployment numbers, could lead to increased leasing activity in the market as the pandemic eases and a more familiar life resumes.

— This article first appeared in the March/April 2021 issue of Northeast Real Estate Business magazine. 

You may also like