Northeast Real Estate Business

MAY 2018

Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.

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Page 27 of 44 Northeast Real Estate Business • May 2018 • 23 M A R K E T H I G H L I G H T: N E W J E R S E Y Since the 2008 recession, the sub- urban office sale market of Northern New Jersey has been subjected to an erroneous, broad-brush depiction as a single market in decline when, in reality, there are several distinct com- ponents, many of which are perform- ing quite well. Northern New Jersey is a "market of submarkets," each with its own separate dynamics — tenant industry concentrations, corporate campuses, locational strengths, demo- graphic profiles and amenity base. For instance, the Princeton submar- ket remains very healthy with contin- ued rent growth, vacancy rates con- sistently below 12 percent and some build-to-suit and speculative construc- tion activity. Additionally, downtown Morristown has become an extremely tight submarket with a very limited amount of available Class A space. Furthermore, within each submarket, a property is best be judged based on its competitive positioning. In most cases, a trophy asset can only truly be com- pared to other trophy assets, which are usually outside of the immediate area. Much of the negative perception sur- rounding the suburban office market is due to the abundance of product that was built in the 1970s and 1980s and has yet to be significantly upgraded. This dated commodity space, typically with above-average vacancy, has acted as a drag on the market. However, we've noticed that landlords that have proactively invested in their properties to keep them modern and competitive have fared relatively well. This leads us to one sector of the office market that is seeing liquidity — the opportunistic acquisition. This value proposition works when an in- vestor can purchase a property at a low enough basis to be able to make substantial improvements in the build- ing and then re-lease space at competi- tive rents. We've seen several buyers in the Northern New Jersey market do this successfully, most notably Marcus Partners, Onyx Equities, Vision Real Estate, Prism Capital, Bergman Real Estate and Lincoln Properties Group, to name a few. More recently, we sold an office property in Rockaway, New Jersey, to Northbridge Capital out of Canada, and they plan to re-invest in the property and enhance the value. Aside from these groups, there are several regional private owners that are purchasing more core-plus office assets to take advantage of the com- paratively attractive yields in this sec- tor. For instance, most of the core-plus office product in this region is trading at cap rates between 7.5 and 9 per- cent, which seems like a bargain when compared to other sectors; industrial and apartment properties are gener- ally trading between 4.5 to 5.5 percent, while retail is slightly higher, between 6 and 7 percent. It's this spread in yield, in addition to the abundance of investment capital that has been raised, that has the office sector being given more consideration these days. Additionally, some office properties are being successfully re- purposed to alternative uses such as apartments, warehousing or mixed- use developments. In addition to opportunistic, value- add and core-plus office investors, there is still a strong market for single- tenant, long-term leased properties. For office buildings with investment- grade tenants on leases of 15 years or longer, capitalization rates have dipped below 5.5 percent, and per- square-foot pricing has achieved well over $400. Of course the investment activity in all of these sectors is reliant on the overall economy remaining sta- ble, and, most important of late, inter- est rates/cost of borrowing remaining in check, but the Northern New Jersey office market remains a very viable market where above-market yields are being obtained. Kevin O'Hearn Managing Director, HFF LOOKING BEYOND THE HEADLINES IN NORTHERN NEW JERSEY'S OFFICE SECTOR The spread in yield and the abundance of investment capital have led to the office sector being given more consideration these days.

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