With a new year underway, commercial real estate services firm Cushman & Wakefield, Inc. this week hosted a webinar examining New Jersey's economic progress, office and industrial real estate conditions, and capital markets performance. Presenters included Gualberto "Gil" Medina, executive managing director, New Jersey; Ken McCarthy, chief economist, New York Area Research; and Gary Gabriel, executive vice president, Metropolitan Area Capital Markets Group.
McCarthy opened the discussion with an overview of the economy on a national scale. "The word that best characterizes the economy through most of 2012 and into 2013 is 'uncertainty,'" he said. "We are uncertain about conditions in the financial markets, the ongoing Fiscal Cliff discussion in Washington, the regulatory climate and with the debt situation in Europe. All of these issues are prompting consumers and businesses to remain cautious and risk adverse. So while we are now 13 quarters into the recovery that began in late 2009, this is the slowest recovery on record."
That said, he noted that tangible improvements in the fundamental factors that impact economic growth show that the foundation is being built to support a stronger, faster recovery once the fog of uncertainty clears. "Consumers and businesses nationwide are in better shape," he said. "They have less debt and more money to spend, but they are holding back until they become more confident.
"For the real estate sector, this means that space users have money to spend, but they are not committing unless it is absolutely necessary," McCarthy added. "The good news is that the lack of new construction over the past several years has constrained supply. Therefore, as employment growth accelerates, the market will improve rather quickly."
McCarthy noted that Cushman & Wakefield anticipates that promise of improvement will begin to show itself in the latter part of 2013 and gain further momentum in 2014.
THE NEW JERSEY ECONOMY
Unfortunately, within this national context, New Jersey's economy continues to underperform, according to Medina. "If the Garden State economy were a novel, it would be Dickens' 'Great Expectations,'" he noted. "During the 1990s, we experienced a period of significant economic and job growth here. However, if we compare it to the first decade of this millennium we see a very different picture.
"Even before the recession, job growth was anemic at best," he continued. "Today, we have gained back only one quarter of the jobs lost in the downturn, while the nation has gained back half. Our unemployment rate is 9.6 percent (the highest in almost 30 years), as compared to the national 7.8 percent. Whether or not the state's employment growth rate is above the national average, and its unemployment rate is below it, has been a traditional measure of the state?s success. Using that metric, it appears that New Jersey is going to lag behind for several years to come."
Medina noted that New Jersey's economic strength plays out very specifically and clearly in the state's commercial real estate market. "We house the nation's fourth largest office market and its third largest industrial market in terms of inventory," he said. "Therefore, it is not surprising to see that commercial real estate has not performed well. Leasing volume is sluggish, and we continue to see little to no rent growth and negative space absorption."
However, there are reasons for optimism, according to Medina. "Ambrose Bierce, the American newspaperman and writer, said that 'optimism is the doctrine or belief that everything is beautiful, including what is ugly,'" he noted. "Yes, there has been a lot of ugly, but there also is reason for hoping that 2013 will be a better year than 2012. In addition to the trend lines Ken mentioned related to business profitability and lower household debt burdens, New Jersey is beginning to get public policy right for the first time in many years. There is a broad consensus between Democrat and Republican leadership that improving the business climate here is a priority."
Gabriel added that New Jersey's historical appeal for both tenants and investors remains unchanged. "The adage that it's all about location, location, location holds a great deal of truth, and New Jersey offers the best of that," he said.
Still, following substantial growth in industrial sales volume in 2010 and 2011, 2012 proved to be a flat year, with $590 million in activity highlighted by one large portfolio trade. "Very little Class A industrial product is entering the market," he said. "And when owners cannot get product to buy, they are not apt to part with their portfolio 'jewels.' Investors are finding that if they want to break into New Jersey with high-quality product they have to build it. Add to that the fact that very little big box space remains available north of Turnpike Exit 7, and a number of institutional and regional buyers are moving in that direction."
Despite lackluster leasing performance, investor demand for the right kind of office property remains relatively healthy as well, according to Gabriel. "$1.2 million in office trades closed in 2012, which we would call decent volume," he said. "Still, the market is choppy in terms of what investors are seeking. A core transaction may trade at a cap rate in the sevens for $208 per square foot, where a value-add asset may trade in the nines for $48 per square foot."
Gabriel noted that current fundamentals in the leasing markets present a hurdle with some investors. "We have to overcome what things look like on paper," he said. "Really, New Jersey is the ultimate contrarian play. We are coming back. We are the best location. We have a pro-business government. It has taken time to turn the ship around, but we are confident that the right leadership and the continued diversity in our tenant base will drive our economy forward."