http://www.nytimes.com/2006/05/03/business/03jersey.html

Signs of an Upturn in New Jersey
New York Times
By ANTOINETTE MARTIN
Published: May 3, 2006

It has been a long, hard climb back to reasonable health for the New Jersey commercial office market since the Sept. 11 attack in New York.

K. Hovnanian is planning this project with 1,300 residential units in Jersey City.

In the weeks after the attack, there was a belief that businesses in Lower Manhattan and elsewhere in New York City might consider moving to New Jersey, and a number of companies offered a flood of space for sublease.

But New Jersey landlords apparently anticipated a much greater need for temporary space than materialized, mistakenly thinking that mass relocation might occur. Then, consolidation and cutbacks by telecommunications and technology companies in 2002 and 2003 emptied out more offices, and a two-year economic slowdown amplified the effect.

It wasn't until the second half of 2005 that the situation began to move in the right direction. The average vacancy rate for office space, which soared to nearly 20 percent from about 14 percent in the six-month period after Sept. 11, stayed at 19 percent or above through last year. For the first quarter of 2006, the rate was 18.4 percent, according to Cushman & Wakefield, a commercial real estate company.

In addition, average annual asking rents for office space rose to $25.18 a square foot in the first quarter of this year, up 55 cents from the preceding quarter, and up $1.04 a square foot from a year earlier, according to CB Richard Ellis, another major company in commercial property. Analysts there termed the higher rents "a sure sign the market is gaining momentum."

Still, Andrew Merin, who is vice chairman of the metropolitan area capital markets group of Cushman & Wakefield, which brokers sales of commercial real estate to investors, summed it up: "It has not been a pretty picture for office space over the last four years, any way you look at it. Things will take a while longer to straighten out."

Mr. Merin said that while his group continued to execute numerous significant deals each year on office properties, it was currently most bullish on multifamily rental properties.

"The amount of capital chasing multifamily assets has reached record levels," he said. "During 2006, we expect to see a renewed focus on urban redevelopment projects as families look to move to more urban areas."

New Jersey commercial office developers uniformly insist that they are bullish on the office market, given the signs of improvement. Speculative office space construction has started up again, with one million square feet under construction around New Jersey, as GVA Williams pointed out in its first-quarter market analysis, and another half-million square feet is planned.

Nevertheless, Hartz Mountain Industries, which helped to build up the state's largest concentration of office space, in Jersey City, decided sometime last year that that riverfront city could not absorb the additional office space it had planned to build and began trying to sell sites to residential developers.

In 2000 to 2005, about seven million square feet of new office space was created in Jersey City, but currently there is not a single project on the drawing board, according to city officials. On the other hand, about 15,000 new apartments are in the construction pipeline.

Without commenting publicly, Hartz sold one of two major downtown sites that it owned to the home-building giant K. Hovnanian just last month. Hovnanian announced it had purchased the site near the Hudson riverfront at 77 Hudson Street for $65 million and would act as a co-developer of the property to create a condominium tower and a rental tower, with a combined 1,300 units.

Hartz has been reported to be near a deal to sell a second Jersey City site to Roseland Properties for a residential project in Jersey City, and it is also known to be trying to sell a site near the Lincoln Tunnel in Weehawken.

A number of big developers of office space have, meanwhile, hedged their bets by opening new divisions that build apartments, or by starting redevelopment projects that include housing and stores along with office space.

SJP Properties of Parsippany, which is known for building high-end office developments around New Jersey, including the two-building Waterfront Corporate Center in Hoboken, seems to be waiting for the right moment to break ground for a third building.

At the same time, SJP's residential division, established in 2004, has moved forward with construction of two condominium towers in Manhattan: one with 250 units at Eighth Avenue and 46th Street, and another at 45 Park Avenue on the site of the former Sheraton Russell. SJP also has a plan to build 68 very-high-end town house condominiums, each with 4,000 square feet of living space, in Peapack, N.J.

Two other office developers have big mixed-use projects in the works. The Matrix Development Group is at work on a $400 million waterfront development in Newark that will create 500 residential units in four towers in addition to a hotel, retail space and a 14-story office building.

The Advance Realty Group is developing a center in adjacent Harrison, planned to include more than 700 residential units next to a new professional soccer stadium, 140,000 square feet of stores and 190,000 square feet of office space.

Mr. Merin predicts a major surge in rental apartment sales in New Jersey, especially along the Hudson. After several slower years, the rental market has been increasing, he said: "Occupancy rates have increased to the low- to-mid 90 percent range in the region."

He also said that "concessions" ? like several months of free rent, or free amenities and upgrades that were being offered at many higher-end buildings while interest rates stayed at record lows and home-buying fever was at high pitch ? are becoming less common.

"As condominium developers become slightly less aggressive with pricing, and interest rates begin to rise," Mr. Merin said, "more people will opt to move into rental apartments, and they will become a better and better investment."