New Jersey Office Market Enjoys Hottest Quarter in Recent History

Q3 Corporate Relocations Driven by Demand for Class A Space

According to new research from Cushman & Wakefield, large corporate relocations -- driven mainly by state incentives and steady yet modest employment gains -- propelled Northern and Central New Jersey into one of their best quarters of office leasing in recent history as vacant space tightened markedly in some market segments and particularly for Class A space.

"At 1.8 million square feet, the third quarter of 2016 boasted the highest amount of square footage absorbed in any one quarter in the Garden State in the past fifteen years," said Andrew Judd, Cushman & Wakefield's New Jersey Market Leader. "The last two quarters combined have produced slightly more than 2.8 million square feet (SF) of net occupancy gains, as vacancy has fallen by 140 basis points (BPS) since the first quarter. The demand for quality, Class A space throughout the market was evident during the third quarter, as all of the occupancy gains were concentrated within Class A product."

The overall 3Q office vacancy rate (17.4%) was at its lowest point since year-end 2007, with Northern and Central New Jersey both having seen declines in available space since the close of 2014. During 3Q, the Meadowlands, Route 10/24 Corridor, Princeton/Route 1 Corridor, Monmouth County, and the Upper 287 submarkets each exceeded 100,000 SF of net absorption due to robust demand. Of these submarkets, Route 10/24 (-670 basis points), Monmouth County (-360 basis points), Upper 287 Corridor (-310 basis points), and the Meadowlands (-250 basis points) recorded the most substantial improvements for vacancy rates.

Meanwhile, Class A space tightened, pushing vacancy rates to recent lows in the Meadowlands (13.4%), Route 10/24 (21.9%), and Princeton/Route 1 (7.5%). The vacancy rate would have been even lower if not for the additions of large blocks of space that became available in the Hudson Waterfront and Parsippany markets, as well as Valeant placing a 310,000-square-foot sublease on the market at Somerset Corporate Center in Bridgewater.

Leasing activity for 3Q exceeded 3.1 MSF, the second highest quarterly total since prior to the recession, trailing only the 3.8 MSF recorded in Q2 2015. More than 77.0% of the Q3 2016 deal volume was concentrated in Class A product, as large corporations executed major relocations within the Garden State to upgrade their space, due largely to state incentives. Of the 23 transactions of 25,000 SF or greater, which were completed during the quarter, 60.8% received state incentives, totaling more than $315 million. Of the seven new leases greater than 100,000 SF, five included tax breaks from the state.

"Northern and Central New Jersey experienced one of its strongest quarters of office leasing since the Great Recession, and is poised to finish 2016 with its highest annual net absorption totals even if the market stalls somewhat during the fourth quarter," Judd said. "There are a handful of notable leases in the pipeline set to close before year end, which should help offset some large dispositions on the horizon in both Parsippany and Princeton/Route 1. State incentives will continue to drive the larger corporate transactions and we anticipate a continued flight-to-quality, specifically within more up-to-date office buildings, to continue into next year."

The largest new closed office leases of 3Q 2016 included:


• Allergan's 431,495-SF lease at 5 Giralda Farms in Madison, which will allow the pharmaceutical company to consolidate its space around New Jersey.
• iCIMS took 350,000 SF at Bell Works in Holmdel and will consolidate its Monmouth County locations to the newly-renovated campus on Crawfords Corner Road.
• Mallinckrodt Pharmaceuticals took more than 230,000 SF at Somerset Financial Center on Route 206 in Bedminster and will spend $80 million to renovate the campus as it consolidates its specialty brands groups to the new address.
• Ernst & Young leased 168,156 SF at Waterfront Corporate Center II in Hoboken.
• Horizon Blue Cross Blue Shield completed a 142,029-SF lease at Princeton Place at Hopewell.
Meanwhile, a handful of large renewals were executed during the quarter by companies such as Mizuho Bank, Deutsche Bank, Qualcomm, and Marsh & McLennan.

There were five submarkets which recorded greater than 250,000 SF of new leasing activity during the third quarter: Route 10/24 (505,000 SF), I-78 Corridor (448,000 SF), Hudson Waterfront (429,000 SF), Monmouth County (416,000 SF), and Princeton/Route 1 (283,000 SF). Meanwhile, both the Meadowlands and Upper 287 Corridor exceeded 145,000 SF of transaction volume in that time. The pharmaceutical/life sciences, computer services/information technology, and manufacturing and insurance industries led the way in terms of industry sectors leasing space for the quarter. Year-to-date the market has reached its second highest total for leasing activity since 2009 trailing only last year's aggregate at this time. Since 2016 began, office deals in excess of 100,000 SF have accounted for 34.7% of the recorded leasing volume.

"Asking rents in the more prominent submarkets are projected to ascend further into next year as quality space tightens and the local economy continues on its modest upswing," said Jason Price, Cushman & Wakefield's Research Director, Tri-State Suburbs. "However, cautious optimism remains due in part to the upcoming election and global economic uncertainties."

Price also noted that asking rents as a whole ticked higher during 3Q to $26.62 per square foot (PSF). While some market segments experienced slight declines in their average asking rental rates due to high priced spaces leasing up, thereby removing some higher-priced product from available inventory, some other submarkets recorded increases due to landlords responding to tightening market conditions. Class A rents in Northern New Jersey reached $31.78 PSF at the close of 3Q, a 5.8% increase from a year ago. Central New Jersey's Class A average dipped slightly by 2.0% in that time to $27.81 PSF, due in large part to the aforementioned high-priced space leasing up in areas such as the I-78 Corridor and Princeton/Route 1. The Hudson Waterfront remained the highest priced submarket in the state with Class A direct rents averaging $40.53 per square.