A Tale of Two Cities
As Manhattan has gone, Jersey City has followed. The sixth borough now faces a tough fight to attract clients who are suddenly cost-conscious.

By Evelyn Lee
12/29/2008


JERSEY CITY ? The state?s commercial real estate experts are divided over which way the wind will blow over the Hudson waterfront?s office market: Some predict more New York-based tenants will relocate across the Hudson in order to cut costs, but others expect real estate decisions to take a backseat as companies devote more attention to keeping their businesses afloat.

The Wall Street fallout has loomed large over the Jersey City office market, which has some 20 million square feet of space and the largest concentration of financial services firms in the state, said David Houston, president of Colliers Houston, a Teaneck-based commercial real estate brokerage firm. In the last downturn, from 1999 to 2001, financial institutions were just another victim, but ?in this recession, they?re one of the focuses,? Houston said. ?They seem to have the most troubles.?

While many firms have remained in New York despite skyrocketing office rents, that may change as companies feel increasing pressure to reduce expenses, said Sean Brady, a senior director at the East Rutherford office of Cushman & Wakefield. ?If corporations and private companies are going to look to lower their overhead, I think now we?re going to see more activity coming from New York than in the past.?

An office tenant nearing the end of a 10-year lease currently pays a rental rate of up to $50 a square foot for Class-A office space in midtown Manhattan, Brady said, but if that tenant were to enter into a new lease, rents for comparable space in midtown could reach $150 per square foot.

Class-A asking rents on the Hudson waterfront ? which includes Jersey City, Hoboken and Weehawken ? averaged $30 a square foot during the third quarter of 2008, according to real estate services firm Grubb & Ellis. By contrast, in Manhattan, asking rents per square foot were $95 in midtown and $60 downtown, the firm said.

Manhattan office tenants may also be more inclined to move to Jersey City because landlords are offering larger concession packages, including lower rents, more months of free rent and increased work allowances ? money for tenants to put toward the cost of building or renovating new office space, Brady said. The relatively small work allowances landlords had offered in the past were one reason why more New York office tenants didn?t cross the river, since companies would have had to pay high construction costs for their new space, he said.

At the same time, the cooling of Manhattan?s once-blazing office market over the past year could have repercussions for Jersey City, real estate experts said. ?The Jersey City waterfront office market and the Manhattan market travel together,? said Jamie LeFrak, managing director of LeFrak Organization, a New York-based real estate developer that owns 5.5 million square feet of office space on the Jersey waterfront. ?If there?s a softening of rents in Manhattan, there should be corresponding softening of rents in Jersey City.?

The recession has caused all of New Jersey?s office markets to soften, and Jersey City ? with 12.2 million square feet of Class A office space ? will see its own share of space put up for sublease, Brady said. Insurance giant AIG, financial services firm Merrill Lynch and investment bank Lehman Brothers ? all casualties of the financial crisis ?occupy more than 900,000 square feet of space at the 1.2 million-square-foot 101 Hudson St., according to Cushman & Wakefield Research Services of East Rutherford. Mack-Cali Realty Corp., which owns the building, declined comment for this story.

?It?s a shoe that the real estate community is expecting to drop,? Brady said. ?At some point in time, those units of space very well may get put on the market, and it will have a dramatic impact on the marketplace.?

But Jersey City may not necessarily see any substantial increase in the amount of available sublease space, said Dan Frowirth, director of real estate for the Jersey City Economic Development Corp. Lehman Brothers, for example, had informed him two months ago that it intends to keep its 409,300-square-foot space at Hartz Mountain?s 70 Hudson St., he said.

Also, New York-based firms may decide to sublease space in Manhattan, rather than in Jersey City, Frowirth said. ?Even if some of the financial corporations decide to give up space, they could end up giving up more expensive space in New York, and save money by keeping space here,? he said.

And cost-cutting measures by companies don?t necessarily translate into a wave of relocations, brokers said. Rent costs make up only a small percentage of a company?s operating expenses, so lower rates alone are not enough to convince a firm to leave New York, Houston said. ?You?ve got to have a better business reason than that,? he said. ?It really comes down to where you can be more competitive hiring people and where can you get better productivity.?

Even if a firm was considering moving out of Manhattan, the high cost of relocation and the risk of losing employees could be obstacles, said Stephen Jenco, client services manager at the Fairfield office of Grubb & Ellis. Also, ?a real estate relocation is a big decision, and it?s also something that?s time-consuming,? Jenco said. ?You also tend to lose focus of your business operations when you start ? looking at real estate decisions.? That may drive companies to renew in Manhattan on a short-term basis, he said.

While firms are beginning to put sublease space on the market in Manhattan, no large blocks of new sublease space have yet become available in Jersey City, according to Jenco. LeFrak said he is not expecting any sizable vacancy at the firm?s Jersey City properties until June 2010, when health care provider Cigna is expected to vacate 92,000 square feet of space at 499 Washington Boulevard, a 547,795 square-foot office tower owned by the company.

It?s too early to assess the impact of the financial crisis on Jersey City?s office market, which has seen its vacancy rate rise slightly over the past year, to 7.8 percent, Houston said. In the last recession, a lot of space was not put up for sublease until a few years later, between 2003 and 2005. ?Whatever?s going to happen, you?re not going to see it for a while,? Houston said.

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