NJ waterfront loses its competitive edge -Rents aren't low enough to lure businesses from NY

By Joe Cavaluzzi
January 17, 2010 5:59 AM
NY Crains


A TOUGH SELL: New Jersey is an overflow market in an era when there is no overflow.

World Financial Center eyes face-lift to stay competitive

The recession and a shrinking gap between office rents in New Jersey and downtown New York combined to make 2009 the slowest year for leasing activity along the New Jersey waterfront in two years. Despite price cuts of more than 15% off asking rents, extensive free build-outs of space, and up to six months of free rent, 710,000 square feet more space came onto the market than was leased through the first nine months of last year. That compares with positive absorption of 226,000 square feet during the same period in 2008, according to Grubb & Ellis Co.

The recession gets most of the blame, of course, but a significant dulling of New Jersey's pricing edge in its eternal battle with downtown Manhattan also took its toll. Along the Jersey waterfront, average asking rents ended the third quarter at $32.84, down 15.4% from year-earlier levels, according to Cushman & Wakefield Inc. An even steeper drop on the Hudson's eastern banks, however, allowed downtown Manhattan landlords to slash the rent gap between the markets to $6 per square foot, half of what it was a year earlier.

Given Manhattan's advantages in terms of everything from prestige to transit links, the difference of $6 a square foot may seem too puny a reason for many tenants to make the jump to New Jersey.

?For the most part, the big incentives that will draw somebody across the river really are coming from the state,? says Philip Lipper, senior managing director of Studley in New Jersey.

He cites the deal in October under which Depository Trust & Clearing Corp. agreed to move 1,600 staffers from lower Manhattan into 415,000 square feet at Jersey City's Newport Office Center with the aid of $86 million in state incentives.

The lack of traffic across the river, combined with consolidations by financial companies?the primary source of activity along the waterfront?pushed Class A vacancy rates in Jersey City to 11.3% in the third quarter, up from 8% a year earlier. Even worse, 51% of the 2,273,000 square feet on the market was cheap sublease space, up from 44% a year earlier, adding to downward pressure on rents.

AVAILABLE BLOCKS
Among the big blocks hitting the market in the third quarter alone were 132,000 square feet that MetLife gave up at 2 Montgomery St. and 127,800 square feet vacated by the Royal Bank of Scotland at 499 Washington Blvd

Some of the news was good, however. Savvis Inc., an Internet infrastructure outsourcing company, expanded its data center at 1919 Park Ave. in Weehawken, adding 209,000 square feet. And thanks to the huge, incentive-driven Depository Trust lease, the final quarter of the year was the first three-month period out of four in which more space was leased than was added to the market, according to preliminary figures from Grubb & Ellis.

Some are hoping that deal will boost the market's mood.

?If you're a large tenant, this is a golden opportunity,? says Jonathan Adelsberg, co-chair of the commercial leasing practice at Herrick Feinstein.

Others note that the quality gap between Jersey and downtown Manhattan is bigger than ever. Most of the office buildings on the Hudson's western banks went up in the 1980s and 1990s and offer large floor plates with clear, unobstructed views of the sort that are relatively rare in downtown Manhattan. What's more, 80% of the Jersey waterfront market is made up of Class A space, and thousands of reasonably priced housing units have been built in recent years along the Hudson-Bergen Light Rail Line.

?When companies move to Jersey City, they move into a better mousetrap,? says Frank Gunsberg, executive managing director of FirstService Williams in New Jersey and a broker active on both sides of the Hudson for 44 years. Still, he concedes that New Jersey is an even harder sale to make in this economy.

?I talk to tenants all the time about moving out of Manhattan and saving money, and some of them are so strapped they'd love to do it, but they feel it would hurt their business,? Mr. Gunsberg says.

Even more basically, New Jersey is a classic overflow market in an era when there simply isn't any.

?To put it in perspective, Jersey City still has cheaper rent as an incentive, but it becomes a question of which companies are expanding,? says Steven Jenco, head of research at Grubb & Ellis in Fairfield, N.J. ?Not many, and that's been the story in New Jersey for the last couple of years.?