Despite the heartache from losing the bid for Amazon’s second headquarters, New Jersey is undoubtedly in a more competitive position than it was before the selection process began.
The exercise of responding to Amazon’s request for proposals showcased many of New Jersey’s strengths, such as its talented labor pool, access to higher education and vast transportation infrastructure. As we now know, these assets weren’t enough to secure the Amazon campus, leaving state officials and business leaders motivated to work on those areas identified as falling short. But that doesn’t take away from what the state offers both corporate occupiers and institutional investors.
To start, building owners are increasingly investing significant capital to improve and expand New Jersey’s aging supply of office properties. This is music to a tenant’s ears and, as a result, the office market continued its streak of growing occupancy with 302,577 square feet of positive absorption in the fourth quarter, according to Transwestern. Where many of the new leases were signed, landlords committed to substantial capital improvement programs. For the past several years, the best lease-up success stories have come from owners that upgraded their properties to current standards and added amenities preferred by today’s dynamic workforce.
An example is Transwestern’s new home at 170–180 Park Ave. in Florham Park, where ownership began a repositioning process in early 2018. Since then, USI Insurance LLC, one of the world’s largest insurance brokerage and consulting firms, has moved into 35,415 square feet and there is substantial interest in the complex’s remaining space.
Additionally, Mars Wrigley announced it will move to Ironside Newark, a rare project where an obsolete warehouse building is being transformed to office. It has been a much more common redevelopment play in New Jersey over the past few years to transform aging office product to industrial use. This twist in what the market has come to expect solidifies tenants’ desire for newly-renovated office space.
Renovations and upgrades are paying off for landlords. For decades, average asking rents for New Jersey office product remained relatively flat. However, the average asking rent climbed during every quarter of 2018, ending the year at $26.90 per square foot. This rate eclipsed the previous peak from immediately before the 9/11 terrorist attacks and set a new record high for the market. A closer look reveals rents at properties that have recently undergone extensive improvements or are currently under renovation increased by an average of 20 percent during the last five years.
Upgraded properties are also generating significant investor interest and driving up sales prices. Such was the case for the fourth quarter’s largest sale, in which a partnership between Garrison Investment and Onyx Equities sold Country Club Plaza, a 304,000-square-foot, two-building office complex in Paramus, to Premium Capital Resources for $74 million, or $244 per square foot. The seller acquired the buildings in 2016 for $35.2 million and invested $3.2 million in upgrades, increasing occupancy to 97 percent at the time of sale.
From a cultural and generational standpoint, the Amazon pitch highlighted the desire for a balance of urban areas that cater to young talent and suburban neighborhoods that accommodate professionals with families. New Jersey reflects that diversity, with fourth-quarter activity spread throughout downtown and suburban areas. In 2018, investors continued the focus on revitalizing the suburbs by repositioning well-located office buildings. This shift to the suburbs should continue, with the most successful projects being those in areas with walkable, amenity-packed neighborhoods and accessible public transportation.
The greatest challenge facing New Jersey, as in many parts of the country, is spurring economic development in distressed communities. Opportunity Zones have moved to the forefront, as a recent study ranked the state among the top areas for development. This is welcome news, as Opportunity Zones are appealing from an infrastructure and environmental standpoint, while offering a new alternative for investors and giving developers a tax deferral.
While New Jersey has enjoyed an extended expansion and business sentiment is good, concerns exist regarding potential higher costs of doing business in the state. In addition, the critical Grow New Jersey program expires in 2019, and state economic development agencies spent significantly in 2018 while courting Amazon. Revisions have been submitted to help retain the vital incentive programs that attract business and help New Jersey compete for companies like Amazon.
Keeping these programs in place would bode well for the office market going forward and could give the state a stronger chance of winning when the next big opportunity arises.
— By Jim Postell, partner, Transwestern Commercial Services. This article first appeared in the March-April issue of Northeast Real Estate Business magazine.