Ever since the 2008 Great Recession, Northern New Jersey's suburban office sale market has been subjected to an erroneous, broad, brush depiction as a single market in decline when, in reality, there are several distinct components to it, many of which are performing quite well. Specifically, Northern New Jersey is a “market of submarkets,” each with its own separate dynamics – tenant industry concentrations, corporate campuses, locational strengths, demographic profiles and amenity base.
For instance, the Princeton submarket remains a very healthy market with continued rent growth, vacancy rates consistently below 12 percent and some built-to-suit and speculative construction 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 should best be judged based on its competitive positioning. In most cases, a trophy asset can only truly be compared to other trophy assets which are usually outside of the immediate area.
Much of the negative perception surrounding 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 who 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 investor can purchase a property at a low enough basis to be able to make substantial improvements in the building and then re-lease space at competitive rents. We’ve seen several buyers in the Norther New Jersey market do this successfully, most notable Marcus Partners, Onyx Equities, Vision Real Estate, Prism Capital, Bergman Real Estate and Lincoln Properties Group, to name a few. And 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.
And aside from these groups, there are several regional private owners that are purchasing more core-plus office assets to take advantage of the comparatively attractive yields in this sector. For instance, most of the core plus office product in this region is trading at cap rates between 7.5 and 9 percent, which seems like a bargain when compared to other sectors – industrial and apartment properties are generally trading between 4.5 to 5.5 percent, while retail is slightly higher at between six and seven 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 repurposed 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 greater, 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 stable, and, most important of late, interest 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 is a managing director in HFF’s New Jersey office. With more than 20 years of commercial real estate experience in the New York Metropolitan region, he specializes in investment advisory in New Jersey, New York and Connecticut. During the course of his career, Mr. O’Hearn has been involved in more than $20 billion of office, industrial, retail, multi-housing and land sales.
Mr. O’Hearn joined the firm in March 2010. Prior to HFF, he was the director of Cushman & Wakefield’s (C&W) Capital Markets Group and Client Solutions Group (Pfizer Account). He began his professional career at C&W’s New York World Headquarters as an accountant before transferring to the East Rutherford, New Jersey, office to focus on financial consulting and business development. In 1998, Mr. O’Hearn left the firm to work in the Capital Advisors Group of Insignia/ESG. Mr. O’Hearn rejoined C&W in 2001 as a senior analyst in the Capital Markets Group, supporting the suburban metropolitan New York team.
Originally appeared in Northeast Real Estate Business.