Finance?s bleeding spills into waterfront?s offices
Heavy job losses pound region, but few firms marketing extra space

By Evelyn Lee
8/10/2009

Despite accounting for the largest supply of sublease space in northern and central New Jersey, the overall vacancy rate on the Hudson Waterfront remains one of the lowest, at 11.9 percent.

The job losses that rippled through the financial and insurance services sectors last year are now trickling into the New Jersey office market, as an increasing amount of space is being made available, particularly on the Hudson Waterfront. But some insiders say while companies have excess space to shed, many are choosing to hold their space, rather than put it on the market.

?There has never been such consolidation and contraction of the financial services industry in recent history,? said Jennifer Morrill, a spokeswoman for Jersey City, which has the largest concentration of financial services firms in the state.

New Jersey employed 202,400 people in the financial and insurance sectors in June, down from 211,300 people during the same time a year ago, according to the state Department of Labor and Workforce Development.

?Clearly, with respect to financial services, there will be a period of rebuilding that will probably include less vibrant job growth than in past cycles,? said Mitchell Hersh, chief executive officer of Edison-based Mack-Cali Realty Corp., which owns 4.3 million square feet of office space on the Hudson Waterfront.

?Employment in the state and occupancy of office space are directly related,? said David Houston, president of Colliers Houston & Co., a Teaneck-based commercial real estate brokerage firm, noting that the real estate market usually lags the economy by two or three quarters.

More than 1.7 million square feet in the Hudson Waterfront office submarket ? which, at 18.5 million square feet, is the state?s largest ? was available for sublease in mid-2009, up from 953,565 square feet during the same time a year ago, according to Grubb & Ellis, a commercial real estate services firm.

The waterfront, which includes Jersey City, Hoboken and Weehawken, accounted for the largest supply of sublease space in the northern and central New Jersey office market, the firm said. The vacancy rate in the submarket, however, remains one of the lowest in northern and central New Jersey at 11.9 percent, according to the firm.

Much of the sublease space made available during the second quarter came from financial and insurance services firms, which own or lease about 9.5 million square feet of space in this market, according to Grubb & Ellis. In Jersey City, these included Royal Bank of Scotland shedding 92,000 square feet of space at LeFrak Organization?s 499 Washington Blvd., and Morgan Stanley vacating 108,580 square feet at Mack-Cali?s Harborside Plaza 3.

Still, ?not as much space as we had anticipated has come on the market,? said Matt McDonough, a CB Richard Ellis senior vice president who is marketing 104,250 square feet for sublease at 499 Washington Blvd.; the space, which had been occupied by U.S. Trust, was vacated in June 2008 following the wealth management firm?s acquisition by Bank of America.

But the market does have some substantial blocks of so-called shadow space, or space that?s available, but not publicly marketed, for sublease, said Jeff Kolodkin, a Grubb & Ellis senior vice president who is marketing the Royal Bank of Scotland space.

Based on discussions with firms in the past six months, the major financial and insurance services companies ?have all admitted they?re 10 [percent] to 40 percent above the occupancy rate they would like to have in the New York metropolitan area,? he said.

Firms have held back from shedding excess space, however, because they are ?very concerned about putting any more losses on the books,? he said. If a tenant were to vacate space and put it on the market, that company would need to recognize the potential loss in their books at that time, and set money aside to fund the potential shortfall on the unused space, Kolodkin said.

But if a company was approached by a potential subtenant and then decided to vacate space for a sublease, it would ?not have to carry the economic burden of funding a potential loss for any longer a period of time than necessary,? he said.

Companies aren?t likely to be unloading large amounts of space onto the market in the near future, because of the pressure that would put on their stock shares and stock value, Kolodkin said. ?They?re going to wait until [they] start to show more profit ? [then] they?ll start to shed space little bits at a time.?

Given the amount of sublease space on the market, companies may also ?wait for some of that space that is on the market to go away, and then put space on the market when there?s not as much competition,? he said.

Others, however, contend that contracting companies are not necessarily looking to give up space along the Hudson.

?If you?ve got space in New York where leases are coming due, and you?ve got a long-term commitment in Jersey City, you may opt to keep the Jersey City space rather than sublet in a weak market,? Houston said.

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