North Jersey gains from tight N.Y. office market

Tuesday, February 13, 2007
By KEVIN G. DeMARRAIS -- The Record

As goes New York, so goes North Jersey's commercial real estate market.

And that's good news west of the Hudson River because demand for office space in Manhattan is exceeding the supply, and the overflow is ending up in Bergen and Hudson counties.

"I'm not saying that we won't perform well unless New York does, but our performance benefits when New York tightens," said Matt Dolly, director of research and marketing at GVA Williams New Jersey in Parsippany.

Thanks to a strong fourth quarter, after nine months of reduced activity, the outlook was positive for the office market heading into 2007, Dolly said. "It seems like some of the spillover from New York City is starting to happen."

That is expected to start showing up in rental rates, said William Hanson, president of NAI James E. Hanson in Hackensack.

"Leasing prices in North Jersey haven't changed dramatically," Hanson said. "But prices have been going up in New York only the last six months, and that should help the market over here. It's not a great market, but if you want office space, it's not a bad market."

The retail market is strong as well, said Andrew Merin, vice chairman of Cushman & Wakefield Inc.'s Metropolitan Area Capital Markets Group.

Retail properties are "among the most sought-after in the Garden State," Merin said. "Vacancies remain in the low single digits, and consumer spending has helped retailer performance."

Last year produced mixed results in the region.

In Bergen County, the commercial vacancy rate rose to 18.93 percent by the fourth quarter from 17.01 percent 12 months earlier, according to the GVA Williams market report.

Even so, the asking rent for Class A space -- the most modern, technologically advanced facilities -- also rose, to $25.60 per square foot from $24.57 in the fourth quarter of 2005.

The vacancy rate also climbed in Passaic County, to 23.14 percent from 20.25, but the average rental slipped to $21.21 from $21.76.

But those prices are bargains compared with rates in Manhattan, where prime space is going for more than $60 a foot in midtown and around $40 in lower Manhattan.

That's basically a matter of supply and demand, as well as pressure from Real Estate Investment Trusts, or REITs, industry insiders say.

"The market is being largely driven by investments," Hanson said. "It's still a good place to invest money."

REITs are buying "everything in sight," said Ron Bar-Nadav, associate director of Studley Inc. in Rochelle Park. "Hedge funds are pushing REITs to buy more. They're sitting on too much money, buying product for more than it would be worth."

They can do so knowing the tight market means they can charge premium rents.

Even without the REITS, "the New York commercial real estate market is very robust, and that is going to define our economy in 2007," said Gil Medina, executive managing director at Cushman & Wakefield's New Jersey office.

"The New Jersey economy is being influenced by two different forces, pushing in different directions," Medina said. "Job growth has not been very robust; in fact it's been pretty weak. So on one hand, the state economy has been sluggish."

What growth the state has had has been in such fields as leisure, hospitality, arts and entertainment, accommodations and food, health and education, he said. "That growth is not in areas that would populate commercial buildings," and that hurts the real estate market.

"On the other hand, the economy of New York City, operating under a whole different set of rules, has really been robust. Because northern New Jersey is so much integrated into the regional economy, impacted so much by New York City's economy, it, more than any other part of the state, is in the throes of these conflicting forces."

The first beneficiary is the New Jersey waterfront, especially Jersey City, which is often called the sixth borough of New York City, Dolly said. "It's just another stop of the PATH."

With Manhattan vacancy rates at their lowest in five years, Merrill Lynch and Citigroup led the movement across the river.

Of the six leases for more than 100,000 square feet signed in New Jersey in the fourth quarter of 2006, four were along the Hudson, including Citigroup's subleasing of 365,000 square feet at Newport Office Center in Jersey City.

In addition, Deutsche Bank decided to consolidate operations from locations throughout the metropolitan area, renewing for 90,000 square feet and expanding by another 191,920 square feet there, Cushman & Wakefield reported.

But there was also movement elsewhere in North Jersey, including Newark. Overall vacancy rates there have dropped below 11 percent, helped by the law firm Gibbons, Del Deo, Dolan, Griffinger & Vecchione taking over 111,828 square feet previously occupied by the FBI.

Among other big transactions was Travelport -- formerly Cendant Travel Distribution Services -- moving within the Parsippany market by leasing 120,000 square feet at Morris Corporate Center III. And Passaic County got a boost when Hoffmann-La Roche expanded its presence in Clifton by leasing 72,838 square feet on Broad Street.

E-mail: demarrais@northjersey.com