Commercial Real Estate Outlook: Economic Hurdles of 2011 Followed by Slow Growth In 2012

Cushman & Wakefield of New Jersey, Inc.
One Meadowlands Plaza
East Rutherford, New Jersey 07073

Media Contact: Evelyn Weiss Francisco: evelyn@caryl.com, (201) 796-7788 www.twitter.com/carylcomm

Commercial Real Estate Outlook: Economic Hurdles of 2011 Followed by Slow Growth In 2012
Webinar hosted by Cushman & Wakefield offers in-depth New Jersey Review and Forecast

EAST RUTHERFORD, N.J., Feb. 13, 2012 – Commercial real estate services firm Cushman & Wakefield, Inc. hosted a webinar examining the current state of New Jersey’s commercial real estate market and the national, regional, and state trends driving the market. Participants were Ken McCarthy, managing director, New York Area Research; Gil Medina, executive managing director, New Jersey; and Andrew Merin, vice chairman, Metropolitan Area Capital Markets Group. Some excerpts:

At the end of 2011 and moving into 2012, what is New Jersey’s overview from the standpoint of the economy and commercial real estate?

Medina: “Last year was a challenging one in which we faced significant hurdles relating to the economy, all of which made businesses and consumers more cautious. The high price of gasoline, the acrimonious debt ceiling debate in the US, downgrades of sovereign debt in the US and Europe, the European debt crisis and the Tsunami in Japan all inflicted damage to the global economy. And yet, the US and New Jersey economies held up, with the US generating 1.9 million net jobs and New Jersey creating almost 40,000 jobs, the best performance for the state since 2000. Layoffs have declined and corporate profits are up, which should lead to falling unemployment.”

McCarthy: “The job loss in New Jersey has largely mirrored the national trend, impacted as it was by natural and man-made disasters, Europe’s debt crisis, and more. But the recovery, from a jobs standpoint, has been much more sluggish than the national trend. We do think New Jersey will begin to accelerate and match national growth more closely. It’s just going to take a while.”

In terms of the real estate market’s improvement, what is the prognosis?

McCarthy: “The state’s real estate market reflects, for now, the sluggish job growth. For example, there was an office vacancy increase of just 0.6 percent in Northern New Jersey in 2011 to 17.9 percent. And while the vacancy rate actually dropped in Central New Jersey by 1.4 points, the rate is still high at 19.8 percent. Overall, we do expect vacancy rates to continue to fall as employment picks up, however.”

In terms of sectors, how are offices faring?

Medina: “Office leasing in the Northern counties remained steady throughout 2011, with 5.4 million square feet of activity compared to 4.3 million square feet in 2010. Office leasing in Central New Jersey topped 3.9 million square feet, exceeding 2010 numbers by 43.4%.

McCarthy: “Those figures, however, reflect the struggles of the region’s suburban submarkets in contrast to success in certain urban areas, particularly the Hudson waterfront. The latter submarket has an overall vacancy rate of just 6.5 percent, and the direct average asking rent is $33.54 per square foot. Several less productive regions weigh down the entire market.”

Medina: “To put our state’s real estate market in perspective, it is the fourth largest office market in the U.S. after Midtown Manhattan, Chicago and Houston, and larger than Dallas, Los Angeles, Lower Manhattan, Boston, Atlanta, and Washington, D.C. Our real estate constitutes a very important component of the state’s economic infrastructure.”

Describe the industrial market in terms of size, trends, current activity….

Medina: “New Jersey is the third largest industrial market after Southern California and Chicago (in a virtual tie for second with Chicago). Northern and Central New Jersey combined saw 23.4 million square feet of leasing activity in 2011, an 83.2 percent increase from 2010, dropping the vacancy rate 1.6 percent to 9.6 percent and ranking among the greatest rate increases among U.S. markets.

Merin: “The substantially increased activity in the industrial sector should see current vacancies begin to fill up. That, in turn, should attract investment dollars to a sector that has seen under-investment during the economic downturn.”

McCarthy: “Positive momentum in the industrial market has been particularly fueled by leasing activity in warehousing and distribution. In such submarkets as the Meadowlands, the port region, the lower I-287 corridor, and Exit 7A and 8A along the New Jersey Turnpike, logistics vacancies fell between two and five percent. That’s the market and product type that performed best in 2011, and that’s likely to be the case in 2012.”

What is the overall trend in investment in commercial real estate in New Jersey, particularly office?

Merin: “Because of the chaos we saw in the second half of 2011, including the European debt crisis, investors were looking for safety in their investments. “In the first half of the year, a great deal of product came to market, and by the second half, people had either made their decisions or were scared off. What’s interesting is that 31 office buildings were sold in New Jersey in 2010 for a total value of $1.3 billion. In 2011, just 14 office buildings were sold, but the total value was almost $1.5 billion.”

Who’s buying in this market and what are they buying?

Merin: “Focusing particularly on the office sector, we’ve seen a wide range of buyers, particularly for ‘core’ assets in CBD locations. There is ‘core,’ and there is everything else. Large class A deals dominate—87 percent of the 2011 volume was represented by just six transactions with an average per-square-foot price of $322. Value-add transactions will keep rents near cyclical lows, at least for the short- to intermediate term, impacting pricing for properties that do come to market. Tenant activity is starting to pick up, but net effective rents for all property types remain under pressure, especially in the suburban markets. We’re also seeing distressed assets finally beginning to come to market.”

What are your predictions for the months and years ahead?

McCarthy: “There will continue to be uncertainty for the next six to 12 months, as Europe’s debt crisis remains unresolved and budget deficits continue to be an issue in this country. Economic and real estate fundamentals remain healthy, but there won’t be substantial improvement in performance until we know that the larger issues are resolved.”

Medina: “New Jersey’s fundamentals continue to improve, setting this market up for a full comeback by 2015. Proximity to New York City gives New Jersey an advantage over other states, and we expect to see strong signs of growth in the next few years. New Jersey still has advantages in terms of wealth, demographics, and population density—U.S. Census Bureau data for 2010 indicates that New Jersey continues to lead all states in population density, and with 1,196 people per square mile, the state’s population is considered to be 100 percent metropolitan because of proximity to and interaction with urban and town centers. New Jersey’s population density is greater than Japan’s, India’s, and the People’s Republic of China.”

Why is population density important?

Medina: “Scale matters because it allows producers to save on the costs of supplying goods and services. The basic concept of ‘agglomeration economies’ is that production is facilitated when there is a clustering of economic activity.”

In general, then, how will 2012 play out?

McCarthy: “Overall, 2011 was a year of disruption—a strong start followed by natural and man-made disasters that slowed expansion to a crawl. There were some positive signs at year-end, however. We’re calling 2012 ‘the year of government deleveraging,’ with uncertainty over taxes, regulations, finances, politics, and the European crisis continuing to dominate the outlook. That makes everyone cautious—businesses, households, investors. Our view is that growth is likely to remain sluggish, but the second half of 2012 is likely to be better than the first half.

###

The presentation can be downloaded at: https://caryl.webex.com/caryl/lsr.php?AT=dw&SP=MC&rID=8261017&rKey=14373cacd8f02024.

To view the recorded Webex session, please install NBR2 Player first. The link to the installation file is: https://go.webex.com/client/T26L/nbr2player.msi