Northern New Jersey Area Fourth Quarter 2013 Office Market Report

Investors Scour Northern New Jersey for Acquisitions

As Manhattan occupancy and rents climb, operators in Northern New Jersey will begin to benefit from the migration of tenants in search of quality space at lower rates. This year started on a high note as Depository Trust & Clearing Corp. relocated 1,600 workers to Jersey City. Most employment sectors in the six-county northern New Jersey region added jobs in the first six months of the year, and local payrolls have increased in four of the past five quarters. Investors throughout the New York metro are keen on the region’s local office properties due to the area’s strengthening economy. At the end of 2012, sales velocity in northern New Jersey accelerated as investors rushed to close deals prior to an increase in capital gains taxes. At that time, buyers were more likely to meet sellers’ price expectations due to the low interest rates. Since the beginning of the year, however, trading has slowed as owners have chosen to hold onto their assets and benefit from strengthening operations. Buyers, meanwhile, are becoming more cautious and re-evaluating asset prices due to uncertainty surrounding the future of interest rates.

Office investors will remain bullish on Class B/C assets in Northern New Jersey this year. Owners who bought during the height of the market are facing a few hurdles when bringing assets to market. Specifically, sellers seeking to capture prices based on pre-recession rents will be disappointed as banks underwrite deals based on current, lower market rents. A few operators will turn to private capital for recapitalization, while those who must divest will be forced to sell at a discount to avoid a potential default. Opportunistic buyers have re-entered the market to target lower- to mid-tier properties near major highways, seeking to perform significant renovations to attract tenants and boost rent rolls. Overall, cap rates averaged in the high-7 percent range through the past 12 months. The best-in-class properties in Northern New Jersey traded just above a 7.5 percent cap rate, while Class B properties were slightly higher just over 8 percent cap rate.

2013 Annual Office Forecast

• Employment: Total employment will expand with the addition of 30,000 new jobs though out the year. Office-using employment sectors will create 12,000 positions, a 2.5 percent increase. In 2012, payrolls increased 1.6 percent with the 29,700 jobs.
• Construction: Approximately 1.8 million square feet of space will be added this year, representing a 1 percent increase in inventory. In 2012, roughly 440,000 square feet came online.
• Vacancy: By year end, office vacancy will tick up 40 basis points to 20 percent; a 60-basis point increase was recorded in 2012.
• Rents: In 2013, asking rents will increase 0.4 percent to $24.59 per square foot. During the previous year, a 2.9 drop was recorded.