On paper and on the street, New Jersey's commercial real estate market looks to be on an upward trajectory, albeit a slow upward trajectory, with improving fundamentals in a climate of continued uncertainty. Four female brokers from commercial real estate services firm Cushman & Wakefield, Inc. - including Dawn Arrabito (office), Bonni Heller (industrial), Rachel Pittard (industrial) and Nancy Erickson (retail) - recently weighed in on what they are seeing in their respective sectors. In the following Q&A interview, they discuss key Garden State drivers, shifts and projections heading into 2013.
What top drivers are impacting the state's commercial real estate sectors today?
Heller (industrial): The market definitely is improving, but the economy - and its impact on employment and housing, especially - continues to hamper a true industrial recovery. People need incomes and homes in order to buy goods and furnishings. Until the economy picks up, consumer demand for the products contained in New Jersey's warehouses will remain lackluster.
Arrabito (office): For the office market, state incentives are playing a major role in attracting tenants to New Jersey. This is particularly true in our cities, where the Urban Tax Hub credit can be cited as the catalyst for high-profile projects like the new Panasonic headquarters, under development by Matrix and SJP Properties in Newark.
Erickson (retail): Market density and traffic drive today's retail tenants. As such, companies coming into or expanding in New Jersey are targeting highway locations and grocery-anchored centers in highly populated areas. On the other hand, properties situated off the beaten path continue to struggle.
What do you see as your sector's most notable "event" in 2012?
Arrabito (office): My answer again is going to take an urban spin. In November, 744 Broad in Newark traded following a few years without much investor movement in that city. For me, this is exciting because it shows that changes really are happening there. Between stepped-up office investment, development and tenant movement, it is becoming clear that Newark is emerging as a preferred place for business.
Erickson (retail): The growing alternative use of retail space certainly is worth highlighting. Landlords love bringing in non-traditional tenants like urgent care clinics and dentist offices. My team currently is representing three centers for which the owners have asked us to pursue healthcare-type space users.
Pittard (industrial): With lower industrial vacancy rates, confidence in rising rental rates and optimism about consumer activity, speculative big box construction has returned to New Jersey. Five construction projects have broken ground ranging from 200,000 to 878,000 square feet.
How has the landscape changed over the past 18 months?
Erickson (retail): Retail fundamentals remain relatively flat in New Jersey. That said, the disappearance of larger tenants marks a significant change. On the other hand, smaller, largely franchised concepts with requirements of 1,500 to 4,000 square feet are eagerly seeking space. In turn, landlords are becoming more open to filling vacancies with multiple replacement tenants.
Heller (industrial): Industrial developers and owners are looking more closely than ever at maximizing their properties. Some are upgrading and modernizing to improve competitive positioning. Others, with older properties that have become functionally obsolete, are exploring reuse. To that end, we are seeing a real increase in industrial-to-data center and industrial-to-residential conversions in the region.
Arrabito (office): The most dramatic change in the office sector involves its transformation from a tenant-driven market to a landlord-driven market. For the past several years, property owners did everything in their power to secure long-term commitments. Recently, we have been seeing more landlords opting for - and even insisting on - shorter-term deals, with the expectation that within a couple of years they will be able to leverage rising rental rates.
Will the market shift in 2013? If yes, how so? If not, why?
Pittard (industrial): There are shifts in real estate strategy in response to market conditions. At this time, 36' clear class big box space is in short supply in desirable markets like Exit 10 where rent pricing and drayage costs seem to have reached a happy medium for heavy import handlers. In submarkets closer to NYC in-roads, vacancy is currently much higher. Landlords are a little more apt in softer markets to be competitive. Statewide, we've been noticing that demand for operational rail spurs and cold storage exceed supply. These "above standard" features affect occupancy budget expectations. Finally, our firm's National Financial Consulting Group monitors FASB's proposed changes to GAAP accounting regarding the treatment of lease obligations. A spring 2013 redraft will reveal more about how our industry will need to adjust leasing strategy and lease management recommendations.
Erickson (retail): 2013 likely will bring a continuation of current trends in the retail sector. Grocery-anchored properties will do well. Lifestyle centers at one end, and value-oriented and outlet properties at the other end will remain stable. Middle-tier shopping centers and those in secondary locations will struggle. As larger tenants continue to leave the state, we will likely see a growing number of properties reconfigured for smaller requirements.
Arrabito (office): Economic forecasts are telling us not to expect any real change until the end of 2014. The good news is that jobs are being created slowly, and office rents have stabilized. So while we may not see a major upswing, I expect that the office market will hold steady over the next 12 months.