As the economic downturn continues to impact real estate, a new paradigm has been established for assessing office leasing markets, particularly in the state of New Jersey, according to a white paper that was recently issued by CB Richard Ellis (CBRE).
Concluding that commercial real estate will not return to what has historically been normative in New Jersey, the paper helps define this new context for commercial real estate, or the ‘new normal,’ CBRE says.
‘The bottom line is that the New Jersey commercial real estate (CRE) marketplace is being re-segmented and redefined, with new rules and trends being established, creating what we have termed the 'new normal,'" says Kevin Welsh, first vice president at CBRE.
This new normal, the paper finds, can be traced back to a structural shift in supply and demand dynamics and a change in tenant profiles, including a ‘flight to quality’ and a slow migration of larger corporate tenants out of the state.
More specifically, because New Jersey's economy is more diversified now than in past down cycles, there has been an influx in smaller, growth-oriented companies to the state, which has shifted the size of the space requirements demanded by this new, smaller-sized tenant base.
As a result, 64% of all tenants in New Jersey occupy 10,000 square feet or less, while only 10% of all tenants occupy 50,000 square feet or more, which has created a discrepancy in availability rates for each tenant class. CBRE says. Consequently, there remains a large discrepancy in supply and demand ratios based on tenant size, which will continue to expand until the oversupply of older, larger-footprint properties is addressed through adaptive re-use or other measures.
In addition, because of the depressed market, there has been an increase in the number of tenants that are looking to take advantage of lower rental rates for more modern work environments.
This trend toward state-of-the-art work environments, which include efficient space configurations, location and mass transportation, technology, building systems, aesthetics and architecture, amenities and sustainable environments, at more affordable price points than in the past, have impacted availability rates and New Jersey's leasing market overall. For example, based on a comparison of the performance of modern properties and the overall market, there has been an annual increase of 145% from 2004 to the end of 2008, with modern properties clearly outperforming the market.
Despite the fact that leasing velocity at the end of last year was 51% below the average of the prior four years, with renewals accounting for 41% of all activity (as compared to historic renewal levels of 24%) and the continued divide between pricing expectations of tenants and owners, which is at a historic high, there are still pockets of opportunities available in this marketplace, CBRE finds.
Urban centers such as New Brunswick, Newark, Hoboken and Jersey City will receive significant attention, as both business and government focus on further developing these mass transit-serviced urban centers, and as incentives such as the Urban Transit Hub Tax Credit continue to entice tenants to these areas.
SOURCE: CB Richard Ellis