In spite of ongoing concerns in the credit markets, retail properties in Bergen, Essex, Hudson, Morris, Passaic and Union counties are performing well and will post strong performance over the near term. A consistently steady level of retailer demand will maintain vacancy around 4% this year. Indeed, six of the area's seven submarkets currently sport vacancy rates less than 5%.
With space availability limited, owners are implementing healthy rent increases and could increase rents nearly 4% annually as long as current supply-and-demand fundamentals persist. On the supply side, completions are expected to rise this year, compared with 2006, but the square footage to be added will increase retail inventory only 1%.
Looking ahead, the planning pipeline is not extensive, ensuring that future completions will be gradual and in line with long-term demand trends. Given the difficulties inherent in bringing new projects to fruition, some areas of the market may lack sufficient retail space.
So far in 2007, developers have completed 278,000 sf of retail, consisting primarily of buildings measuring 40,000 feet or less. The largest project to come online thus far in 2007 has been the 120,000-sf Riverfront Center in Clifton. Within the planning pipeline, 2.7 million sf is projected for Bergen and Essex counties. Construction is expected to begin on the $1-billion Centuria mixed-use project near the George Washington Bridge in Fort Lee. Plans call for 126,000 sf of retail, a 240-room hotel, 800 residences and office. By year's end, developers are on track to deliver 900,000 feet of retail in the six-county Northern New Jersey market. Last year, by contrast, 700,000 sf was completed.
Limited availability persists across the northern New Jersey market. According to preliminary estimates for the third quarter, the vacancy rate of 4.2% was 30 basis points less than in the same period one year ago. Neighborhood/community-center vacancy reached an estimated 3.4% at the end of Q3, a 40-basis-point decline from one year ago. Leasing velocity and volume is accelerating, which will help to maintain vacancy near its current level in the near term. Significant recent lease signings include a 41,000-sf commitment at the Harmon Cove Outlet Center in Secaucus.
In Northern New Jersey, Q3 asking rents were up 3.9% year over year, to $27.71 per foot and 2.5% thus far in 2007. A 3.9% year-over-year increase in effective rents to $25.91 per foot was also recorded in that timeframe, including a 2.7% advance in the first nine months of this year.
With a 5.8% gain in effective rents since the third quarter of last year, the North Morris County submarket is outperforming the entire Northern New Jersey market. Concessions are minimal throughout the area, especially in the North Morris submarket; concessions there are currently equal to 5.8% of asking rents. An improvement in vacancy and a respectable pace of effective rent growth supported a 4.6% increase in gross revenue during the 12-month period ending in the third quarter. In the corresponding period ended a year ago, gross revenue rose 3.4%.
Turning to the sales market, investors continue to display a high amount of interest in local properties, especially single-tenant assets. Properties such as restaurants and freestanding single-tenant buildings leased to national and local tenants remain in demand, although price appreciation has tapered off a bit recently.
In the long term, the value of such assets will continue to appreciate faster than the rate of inflation, given the region's high land costs and the difficulties associated with new construction. In the multi-tenant segment, a recent slowdown in sales of strip centers may linger as owners of the market's best properties elect to hold rather than sell, though recent adjustments in the debt markets may encourage more listings. Buyer demand for larger properties, meanwhile, appears to be increasing, and parties that can put a lot of cash in deals will be able to close deals relatively easily.
Michael Fasano is the regional manager in the Elmwood Park, NJ office of Marcus & Millichap Real Estate Investment Services.
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